The Experience Economy (Updated Edition) Read online

  * THE *

  EXPERIENCE

  ECONOMY

  —— UPDATED EDITION ——

  B. JOSEPH PINE II

  JAMES H. GILMORE

  HARVARD BUSINESS REVIEW PRESS

  Boston, Massachusetts

  Copyright 2011 B. Joseph Pine II and James H. Gilmore

  All rights reserved

  Printed in the United States of America

  10 9 8 7 6 5 4 3 2 1

  No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to [email protected], or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.

  Library of Congress Cataloging-in-Publication Data

  Pine, B. Joseph.

  The experience economy / B. Joseph Pine II, James H. Gilmore.

  p. cm.

  Rev. ed. of: The experience economy : work is theatre & every business a stage. 1999.

  Includes bibliographical references and index.

  ISBN 978-1-4221-6197-5 (alk. paper)

  1. Product management. 2. Marketing. 3. Diversification in industry.

  4. Customer services. I. Gilmore, James H., 1959- II. Title.

  HF5415.15.P56 2011

  658.5'6—dc22

  2010054391

  To the Author and Perfecter of our faith.

  Preview to the Updated Edition:

  Beyond Goods and Services

  Goods and services are no longer enough. That sentence was the reading line (following the book's subtitle) that accompanied the original hardbound edition of The Experience Economy in 1999. Perhaps not enough people read the line, let alone took it to heart. Although the book has since been published in fifteen languages and purchased by more than three hundred thousand people worldwide, the book's thesis has not sufficiently penetrated the minds of enough business leaders (and policy makers) to give full bloom to a truly new—and desperately needed—economic order. Relying on the manufacturing of goods and the delivery of services remains the mindset of too many executives (and politicians), prohibiting the shift to more vibrant enterprises offering experiences (and thus more robust national economies). So let us here be most clear: goods and services are no longer enough to foster economic growth, create new jobs, and maintain economic prosperity. To realize revenue growth and increased employment, the staging of experiences must be pursued as a distinct form of economic output. Indeed, in a world saturated with largely undifferentiated goods and services the greatest opportunity for value creation resides in staging experiences.

  The actions of individual entrepreneurs prove the point. Contrast the success of leading experience innovators over the past twelve years with the failure of rival companies (and whole industries, for that matter) that either missed or ignored our economic message. Take retail. Countless chains have met their demise in this time frame as they insisted on merely merchandising finished goods. Walmart and online sellers ate their lunch. Yet experiences such as Build-A-Bear Workshop flourished. In 1999, founder Maxine Clark had just opened her first bear-making venue. Told by conventional retail experts that launching such an enterprise was foolhardy, Clark drew inspiration from our July/August 1998 Harvard Business Review article, “Welcome to the Experience Economy.” Today, Build-A-Bear profitably operates more than three hundred experience outlets in the United States alone, and almost five hundred worldwide—all venues where consumers mass customize their own plush toy animals within an engaging retail factory experience.

  Similarly, Pleasant Rowland had just opened her first American Girl Place in Chicago in late 1998. From the outset she conceived her American Girl dolls—each themed to a specific period of American history—as only a prop for broader book-reading and character-building experiences. With yet additional American Girl Places in place today, American Girl thrives inside Mattel, which otherwise struggles to revive Barbie and other toys (seen as mere goods by most American girls and boys today). And what store is now the envy of every mall owner and developer? Apple. Why? Customers clearly flock there for not only the goods but also the store experience, with sales per square foot an order of magnitude greater than those of the typical retailer.

  Interestingly enough, Apple studied the hospitality experiences at both Ritz-Carlton and various boutique hotels for design inspiration in creating its revolutionary new retail format. (Gateway had previously attempted selling direct via retail stores, as had Dell with kiosks, but both lacked a rich appreciation for experience design, opting instead to retain typical merchandising footprints.) Thus, experiencing the wares at an Apple Store feels uncannily like bellying up to the bar at a hotel lounge. Apple's in-store Genius Bars, iPod Studios, and classroom amphitheatres bear a remarkable resemblance to the registration areas, concierge desks, and meeting space experiences of better boutique hotels. Moreover, these “design” hotels played a role in changing the competitive landscape in their own industry. Thanks to Bill Kimpton, Ian Schrager, Chip Conley, and other boutique hoteliers, no hotel chain can today afford to merely provide basic service activities and ignore its guests' experiences. From furnishing sociable lobby spaces to providing beds that promise better sleep experiences (credit Schrager for kick-starting innovation in the former, and credit Westin's “Heavenly Bed” for the latter), the hospitality industry now clearly creates new value on the basis of experiences.

  Consider next the Geek Squad. At the time of The Experience Economy's release in 1999, founder Robert Stephens employed fewer than a dozen Special Agents in his 24-hour computer support task torce. Today, thanks to the Geek Squad's acquisition and rollout by Best Buy, more than twenty-four thousand Geek Squad geeks—Special Agents, Double Agents, and (inside Best Buy stores) Counter Intelligence Agents—stage compelling installation and repair experiences worldwide. Perhaps no other company matches the Geek Squad in exemplifying the experience-staging principles we outline in this book, especially the proposition that work is theatre. The thematic costuming integral to the Geek Squad being the Geek Squad (and readily and naively dismissed by other service providers) demonstrates the tangible value—to customers, to employees, and to shareholders—that you can create by boldly treating services as the stage and goods as the props for staging engaging experiences. Think of the number of fragmented service industries—car washes, home decorators, landscapers, laundromats, and educational tutors, to name a few—that would benefit from an enterprise emulating the Geek Squad's experience mindset.

  The economic doldrums in which much of the advanced world found itself after the 2008 financial crisis resulted from a failure to experientially innovate like each of these companies. The Industrial Economy has had its day. The invention and production of new goods once fueled the world's advanced economies. It is today very difficult to invent—and therefore rare to encounter—a truly new good; most differentiation of goods now involves the enhancement or modification of items within existing product categories and not the creation of wholly new categories. (Consumer electronics and medical technology represent two notable exceptions; but consider that when buying these items, customers most value not the goods themselves but the experiences and transformations they enable.) Even when someone invents a truly new good, manufacturers instinctively seek to automate the work required to make it and scale up as soon as possible. Although revenue growth may follow, these manufacturers add few new jobs to the world.

  The Service Economy, too, just
ifiably has faltered. Any growth we saw in true services—government statistics still embed experiences (and transformations) within the service sector—largely came from financial services, and most of that from artificially propping up a world of goods—beginning with automobiles and housing and extending to mall development and other commercial ventures—with increasingly desperate attempts to devise financial instruments that more highly leverage old wealth (in the form of protected classes of assets). All this incessant financing created precious little tangible value. And so, as with the dot-com craze and crash that came before, eventually the bubble burst. What does the world need instead? New wealth generated from the formation of new experience-based enterprises.

  Since the original publication of The Experience Economy, we recognize that the experience thinking we promoted has taken root in three areas. First, experiential marketing applies experience staging to the marketing of goods and services, seeking to be less dependent on traditional media as the means of building demand. Second, the application of experience-staging prowess to operations—in what many call Customer Experience Management (or CEM)—aims to make interactions with customers friendlier, easier, and more convenient. Finally, digital experiences increasingly flourish, using the World Wide Web and other electronic platforms to create new virtual and gaming experiences.

  Each of these experience-focused pursuits has its merits. More goods and services get sold because of experiential marketing; some “customer experiences” are less of a hassle because of CEM; and many bits-based experiences certainly offer capabilities unimaginable in the world of atoms. But true economic progress requires experiences in the form of new economic output, and not only new experiential promotions, customer-experience processes, or the experience-rich potential of new media. The Progression of Economic Value requires new for-fee offerings in which operations are an experience and the experience is the marketing—in either the physical or the virtual realm.

  Opportunities Within the Experience Economy

  Toward this end, four value-creating opportunities stand out. First, concerning goods, more offerings should be mass customized: what is needed is not more production of physical goods but more innovative methods for making those goods. Most manufacturers have ignored the pleas by us (and others) to shift from Mass Production to Mass Customization methods, to replace supply chains with demand chains, to convert raw materials into goods not as speculative inventory but only in response to actual demand. Mass customizing—efficiently serving customers uniquely—means producing only and exactly what individual customers want. Mass customizing any good turns that good automatically into a service; and mass customizing any service turns that service automatically into an experience. In The Experience Economy we devote more than two chapters to framing how best to pursue customized capabilities and offerings. Yet to this day, one cannot, for example, name a single U.S.-made model of automobile available to consumers via mass customization. It's shameful. It's why scores of dealerships have closed, with consumers awaiting new build-a-car experiences.

  In encouraging more mass customization as a means of creating new value, let us call attention to perhaps the most ignored—and yet arguably the most powerful—concept in the entire book, namely the notion of reducing or eliminating customer sacrifice. Customer sacrifice is the gap between what individual customers settle for (in buying mass produced goods and services) and what each wants exactly. Every business would benefit from asking itself, What one dimension of sacrifice, if eliminated, would create the greatest value for customers? Once you have identified that sacrifice, you should pursue solutions to help customers experience less sacrifice.

  Second, concerning services, more companies should direct their employees to act. Organizations that have a service mindset focus solely on what tasks employees do; those with an experience mindset also consider how those tasks are performed and thereby embrace theatre as a model for performance. By and large, despite decades of management literature proffering customer service advice, consumers still endure many miserable encounters. Consider a typical “day in the life” of consumer service interactions—talking to call centers, waiting at convenience store counters, trying to be heard in drive-through lanes, waiting in line at bank teller windows, getting rental cars, riding shuttle buses, enduring air travel, checking out groceries, visiting the mall, paying for gasoline, and so forth. Twelve years ago we characterized the scene as poor service, no service, or self-service. Unfortunately, little has changed. As a result, customers understandably hesitate to pay any premium. Profitability therefore suffers, wages stagnate, and workers disengage—creating a downward spiral to yet more miserable service.

  A huge first step in staging more engaging experiences needs to be taken. As again the Geek Squad exemplifies, companies must recognize that their employees are onstage and therefore need to act in a way that engages their customers. So managers need to give employees roles to play, help them characterize those roles, and especially invest time in rehearsing before placing them on the business stage. When a business is treated as a mere service, hourly workers spend almost no offstage time preparing onstage behaviors. Actors prepare. Better human performances—focusing on the how, and not only the what—turn mundane interactions into engaging encounters. So ask yourself, What acts of theatre would turn our workers' functional activities into memorable events? Here, we devote three chapters to the principle that work is theatre. Wise business leaders champion this new paradigm in their organizations; custodians of the old order fail to see the upside in investing in better workplace acting and seek only to cut head count at every turn.

  Third, concerning experiences, more offerings should find ways to explicitly charge for time. Time is the currency of experiences. Today, some experiential marketing events require an admission fee; some experiential operations contribute to charging a premium for the supported goods and services; and some experiences are accessible only on a subscription basis. Some. It is vital that more experiences in the future be available only by admission, for such holds the key to a full-fledged Experience Economy. What truly makes an experience a distinct economic offering, providing new sources of revenue growth, is requiring customers to explicitly pay for the time they spend in places or events. Many businesses languish today because they still have not asked themselves the fundamental question we posed twelve years ago: what would we do differently if we charged admission? Addressing this question remains most critical; identifying answers, most imperative.

  To assist in finding answers, in this edition of The Experience Economy we add a new framework outlining six ways of charging for time: entry fees, per-event fees, per-period fees, initiation fees, access fees, and membership fees. Descriptions of these alternative ways of charging admission should help businesses conceive of new ways of creating and capturing the experiential value they create. Consider one particular pricing model ripe for such admission-fee innovation: time sharing. Think Netflix. It's no movie rental service, charging for each lent film. Rather, the company charges a monthly fee and subsumes the rental service in a movie-viewing subscription. The same sort of access-based experiences have emerged with corporate jets, recreational vehicles, snow removal equipment, and even designer women's handbags. Automobile ride-sharing programs have also met with some success, but real progress will come only when consumers can access a greater portfolio of vehicles for an assortment of driving needs. Almost any industry would benefit from seeking to differentiate based on for-fee experiences.

  Finally, more experiences should yield transformations. Moreover, these transformations—the fifth and final economic offering in the Progression of Economic Value that begins with commodities—should themselves command a fee in the form of explicitly charging for the demonstrated outcomes that result from the underlying experiences. In other words, companies enabling transformations should charge not merely for time but for the change resulting from that time. They should charge for the ends and not only the
means of life-changing (or company-altering) experiences. We especially challenge enterprises in three industries: those that focus on making people healthy, wealthy, and wise.

  Truly market-based approaches in the healthcare industry would free parties to charge for demonstrated outcomes and not mere attempts to gain such noteworthy ends. Endless debate over health insurance would shift to actual innovation in healthcare, in which people would be charged only for the ongoing ensurance of wellness. Unsuccessful treatments that fail to remedy ailments would not be compensated ( just as one doesn't pay a plumber who fails to fix a leaky sink), and new financial instruments tied to actual performance—perhaps securitizing future earnings streams of successfully treated patients—would necessarily emerge. Similarly, the reward systems in financial institutions would reflect the true results of investment decisions—and then move away from an exclusive spotlight on investments to granting wise counsel on life decisions concerning how best to spend and gift wealth. And colleges and universities, which graduate barely half those who enroll (would we ever tolerate such dismal performance from any other industry?), should focus on the actual educational, personal, and societal outcomes achieved, collecting all or part of the tuition only when those outcomes become clear at graduation and beyond. To do otherwise, in each of these fields, does a disservice to all.

  Do not take our admonition for greater experience innovation to mean that there has not been great progress over the past twelve years toward offering new experiences. Much has indeed emerged, whether because of companies embracing the principles we espoused in the first edition or the natural evolution of competitive advantage as their goods and services become commoditized. But much more needs to follow. This comes as no surprise to us, because we have always viewed the Experience Economy as a long-term structural shift in the very fabric of advanced economies. The forces of creative destruction take time. New forms of economic output do not come automatically. They require individual people and individual enterprises to take action, to abandon old Industrial and Service Economy paradigms in order to introduce new experiences and transformations.