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What is the Experience Economy?

April 29, 2020.

It is now more than 20 years since B. Joseph Pine II and James H. Gilmore, co-founders of Strategic Horizons LLP, first published their book, ‘Welcome to the Experience Economy’.  Given author’s names like ‘B. Joseph Pine II’ and ‘James H. Gilmore’ you’d be right to think that this was a) American with the potential to be b) some kind of crackpot, hippy business thinking.  Depending on your perspective, and quite significantly on what type of business you are in, you may be right.  But I think there are most certainly some learnings for all businesses from their theories, which are worthy of consideration.

Defining the Experience Economy

Although not the first people to write about it, Pine and Gilmore popularised the theory that we are living in a third business epoch through the publication of this book.  They argued that following on from the Agrarian Economy (in which all products and services were based on crop and animal production), the Industrial Economy (based on mass production) and the Service Economy (containing more service companies and fewer manufacturers than in previous decades), developed nations now needed to embrace the Experience Economy.

Put another way, the Experience Economy calls for organisations to progress up the value chain, from ‘commodities’ at the bottom to ‘experiences’ at the top; with ‘transformations’ being an even higher aspiration.  In line with the evolution from the Agrarian to Experience Economies, this has generally developed over modern times.  Here is an explanation of what that progression looks like:

  • commodity business provides raw commodities, usually found in or grown on the ground.
  • goods business produces and provides ‘products’ from fast moving consumer goods such as toothpaste to luxury goods such as yachts.
  • service business provides a service, rather than a product; but often this includes one of some products.
  • An experience business provides an experience – with examples of this shown below.
  • transformation business provides positive changes in people’s lives.

Examples of the Experience Economy

Here are two examples of how coffee and children’s birthday parties have progressed up the chain of economic value.

Coffee – from field to experience

  • Farmers, often in developing countries, grow and harvest coffee beans.  Like barley, rice, pork bellies and oil, these are regarded as commodities because they are fungible.  Coffee beans can cost as little as a dollar per pound when traded.
  • Consumer goods companies buy the beans and convert them into either instant or ground coffee products, which are then sold via a range of retail outlets.  A 100g jar of Nescafe costs around £3.35 compared with a dollar for a whole pound of beans (about 400g).
  • A service company then takes those products and converts them into cups of coffee which it sells as part of a service offering – such as a greasy spoon in a layby, or the WI at a village fete.  At this point, if the cup of coffee costs £2.50, the farmer has received approximately 1p of that…
  • At the top end of the value progression, an experience business also serves cups of coffee, but does so within the kind of setting that also provides a positive experience for the purchaser.  Although the transactional price they pay is for the coffee, perhaps with an accompanying snack, what they are really paying for is the coffee combined with the experience – whether it is the Palm Court at The Ritz in Mayfair, or any of the many Starbucks and Costa outlets across the globe.  This coffee costs up to £3.75 per cup in Starbucks, and more at the Ritz and other exclusive establishments that are all about the experience…

Children’s Birthday Parties – from ingredients to experience

  • In the 1960s, in post-war UK, mothers had the time, skills and necessity to visit their local corner store a few days before their young children’s birthdays and, after they had gone to bed, would spend time lovingly making a birthday cake to surprise them at tea-time on their birthday.  The cost of this was just a few pence for the flour, eggs, milk and butter (commodities), plus a lot of love and a little time to bake it.
  • By the 1970s, as consumer goods companies began to develop alongside the early supermarkets, that same mother would be more likely cut out the work for herself and purchase a ready-made cake for that special tea.
  • Over the next couple of decades, at different speeds in different households, the family birthday tea gradually progressed to the party at home for all the school mates, and then on to the hiring of the village hall, a DJ, finishing with the ceremonial handing out of the goody bags at home time.
  • Today, for those who can afford it, children’s birthday parties are all about experiences.  Swimming Pool, Pool Bar, Build-a-Bear, Escape Room, Trampolining, High Wires, Go-Karting, Laser Tag, Edible Art, Soap Making, Pony Rides, Mad Science, Phonics, Indoor Skiing, Indoor Climbing, Feed the Zoo Animals – you get the picture…. What are these about?  They are about the experience…

And so it is with adults, too.  In 2016 Ikea’s head of sustainability suggested that the world had reached ‘peak stuff’, and there was a collective intake of breath from marketers around the world.  Now we can see how we consumers have reached a point where the allure of owning more stuff in a world beset by problems caused by making more stuff is not only in the descendancy; for many, consumerism is becoming stigmatised.  Meanwhile, like the children and their experiential parties, we grown-ups are increasingly spending our disposable income on priceless memories that we can share forever, not buying stuff. For example, according to environmental lobbyists Hubbub, in 2019 around 30pc of all international flights taken from the UK by women age 20 to 45 and a ‘staggering’ almost 50pc of similar flights taken by young men are for stag and hen dos!

What types of Experiences are there?

Pine and Gilmore identify four forms of experience that organisations use to either add experiential properties to their combination of either goods or services (such as Starbucks and Costa) or as a standalone offering (such as Jump Street and Go Ape) - being Entertainment, Educational, Aesthetic and Escapist.

Entertainment

One person who mastered the use of experience long before anyone dreamed of the Experience Economy was Walt Disney.  Moreover, few have ever bettered the organisation that he created in terms of both customer experience and customer service.  Often as much about Escapism as Entertainment, Disney’s films, franchises and theme parks could not be part of a more cohesive and resonating brand.  From early on, Disney started to refer to his customers as ‘guests’ and in doing so, reset the relationship between his employees and his ‘customers’.  Ask any of the circa 75,000 Disney employees who is responsible for their guests, and they will reply that they own the moment when the guest is in their presence – and their brand underpins and enriches all that they say and do.

Where Entertainment differs as one of these four from Escapism is mainly in the way that the consumer or ‘guest’ interacts with the experience.  In short, entertainment requires the guest to ‘absorb’ the experience of, say, a Disney film or a theme park ride.  And whilst this may provide a form of Escapism, an experience that requires the guest to actively participate, such as an escape room, scuba diving on a wreck and skiing the Aiguille du Midi, requires intense mental and/or physical focus that it literally provides no scope for the mind to wander back into the banalities of everyday life.

Educational

The role of education within the Experience Economy appears in many manifestations – and some may even argue that student fees for universities sit within this sector since, ultimately, it has become a decision as to whether to pay to play….

In the previous section, we mentioned both scuba diving and skiing.  Escapist? Yes, but only when you’ve learnt the skills necessary to do either.  More and more of us are combining education with escapism by learning to drive rally cars, catch huge fish, kayak and sail, write creatively and paint beautifully.  And, of course, the internet is awash with opportunities to learn new skills – whether paid for via webinars and other forms of online courses or using one of the millions of tutorials ranging from how to unblock a toilet to how to gel your eyebrows!  Opportunities for education and improvement are everywhere, and all part of the Experience Economy.

Aesthetic

In essence, this is when a consumer chooses a brand or setting because it provides a sensory-rich environment.  Of course, there is absolutely nothing new in this.  Starbucks and Costa which we have already mentioned are no different to all the other attractive restaurants, cafes and bars which, going back over the centuries, have been able to charge more for their products thanks to appealing architecture, stunning views or fortunate locations.

The difference, perhaps, is that companies today are more likely to create an aesthetic for themselves, rather than inherit or buy into it.  Perhaps a surprising and most effective company that has leveraged an aesthetic appeal is Apple.  Those who have studied Apple’s products and compared them to their nearest competitors invariably find that Apple’s competitors’ products are functionally superior – such as battery life and memory, not to mention cost.

Yet Apple, arguably more than anyone, know how to present and package their products so that consumers adore them.  They are beautifully designed and could not be more elegant or cooler; and their packaging is like cardboard love letters.  As consumers, we cannot measure how this makes us feel, we just know – and we are prepared to spend the extra money.  And that’s how come, in the last three months of 2019, Apple made a profit of $22.2 billion.  That’s nearly two billion dollars in profit each week…

Escapism

Having already mentioned skiing, scuba diving and escape rooms, there is one form of escapism that has grown exponentially in recent years, and too often tipped the balance between Escapism and addiction – and that is computer games.  Enabled by the original development of multiple platforms and then the more recent convergence to phones and tablets, gaming is no longer the preserve of nerdy teenagers.  Around half of the UK’s population now play games online at some point using options ranging from ‘adult only’ Manhunt 2, to chess – not to mention all the Social platforms.

But, of course, the rise of the internet itself has created compelling opportunities for Escapism.  Whatever you might want to watch to escape from the world, whatever you want to watch, is available online right now.  Who’d ever heard of ‘binge-watching’ pre-Netflix?  And in a world where the nature of click-bait is already becoming far less acceptable than some people would like it to be, and where gratification has to be instant or not at all, this form of virtual Escapism seems set to continue and grow.

The Experience Economy for SMEs

As stated at the start of this article, the learnings gained from 20 years of the Experience Economy do not apply to all businesses.  However, for many who pride themselves in driving the best possible Customer Experience, there may well be some benefits to taking some time out of everyday operations to reimagine how the customer interface can be upgraded by placing the customer’s experience at the heart of all you do.  This form of activity does not need to lead to wholesale change. However, there may well be some touch points throughout the path to purchase, and once a customer has come on board, which can be creatively leveraged to provide a better Experience. This can only enhance both conversions and retention – with all of the additional benefits that provides to ambitious businesses.

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