In Search of the Experience Economy
© B. Joseph Pine II and James H. Gilmore
This article is based on extracts from their new book, The Experience Economy: Work Is Theatre & Every Business a Stage, published in April 1999 by Harvard Business School Press.
It's not the financial part of financial services we have a problem with; its the services. They were fine in the heyday of the service economy (those halcyon days of the 1970s and 1980s), but today theyre no longer enough. Consumers dont want services, financial or otherwise - they want experiences. Consumers dine at theme restaurants such as the Hard Rock Cafe or Planet Hollywood, shop at experiential destinations such as Universal CityWalk in Los Angeles or Beursplien in Rotterdam, and vacation at a Disney theme park or other venues that stage a feast of engaging sensations and dramatic stories for them.
Experiences are a fourth economic offering, as distinct from services as services are from goods, but one that until now has gone largely unrecognised. Theyve always been around, but consumers, businesses and economists lumped them into the service sector with such uneventful activities as dry cleaning, auto repair, telephone access or banking. When a person buys a service, he purchases a set of intangible activities carried out on his behalf. But when he buys an experience, he pays to spend time enjoying a series of memorable events that a company stages as in a theatrical play to engage him in a personal way.
|Experiences have always been at the heart of entertainment, from plays
and concerts to movies and T V shows. Over the past few decades, however,
the number of entertainment options has exploded. Today, the universe has
expanded to encompass a vast array of new kinds of experiences, as new
technologies encourage whole new genres of experience, such as interactive
games, World Wide Web sites, motion-based simulators, 3D movies and virtual
The end result? Just as the service economy commoditised goods, so the emerging experience economy is rapidly commoditising services. Telephone companies sell long distance service solely on price, price, price. Airplanes resemble cattle cars, with a significant number of passengers flying on free awards. Fast food restaurants all stress value pricing. And a price war looms in financial services as first discount and then internet-based brokers constantly drive down commissions, in some cases charging as little as $8 for a service for which a full service broker would charge over $100. The chairman of AmeriTrade Holding Corp, Joe Ricketts, even told Business Week: I can see a time when, for a customer with a certain size margin account, we wont charge commissions. We might even pay a customer, on a per trade basis, to bring the account to us.
Banking Admission Fees?
In the face of rapidly commoditising services, bankers, brokers, insurers and all other manners of financial service providers must figure out how to compete in the experience economy. One key: charging admission. Several years ago First Chicago Bank created a public relations fiasco because it decided customers that used its tellers would pay a fee, while those that used ATMs would receive their service for free. It presented the programme as a cost saving endeavour, encouraging customers to use the cheaper human free distribution channel. Instead, if First Chicago had viewed (and presented) it as an admission fee, then the bank would have designed a compelling experience for which customers gladly paid. After all, consumers are used to paying admission at movies, concerts, nightclubs and sporting events, and now are even paying to get into or enjoy certain activities at shopping malls, retail stores and restaurants. Why not a bank?
OK, thats certain to seem far fetched. But even if you reject for now charging admission out of fear, uncertainty or doubt, it should still be your design criteria. Ask yourself: what would we do differently if we charged admission? This exercise will force you to discover what experience will engage guests in a more powerful way. Bottom line, your experience will never be worth an admission fee until you explore how to stop giving it away for free. And youll never envision educational offerings and other appropriate experiential events in which todays services can be subsumed in order to ward off commoditisation.
Mass Produced Services are Often Poor Experiences
But most financial institutions are so far removed from this level of economic value that they must heed a fundamental principle: the easiest way to turn a service into an experience is to provide poor service - thus creating a memorable encounter of the unpleasant kind. And the surest way to provide poor service is to treat individual clients via rote, impersonal activities that do not vary no matter who they are or what they really need. Customers have received such treatment ever since service providers embraced the very same principles of mass production that manufacturers used to dramatically lower costs. And its become even worse as the forces of commoditisation that hit manufacturing now attack services as well.
But the inverse principle holds true: mass customising a service can be a sure route to staging a positive experience. See the Progressive story on page 7 for an example of one company embracing this principle. Financial companies that wish to enter the experience economy should first get their act together by mass customising their services (see, for example, the story on the Union Bank of Norway, page 8). But what about customising the experience itself? When you customise an experience to make it just right for an individual - providing exactly what he needs right now - you cannot help changing that individual. When you customise an experience you automatically turn it into a transformation, which companies build on top of experiences (youve heard the phrase a life transforming experience), just as they build experiences on top of services. The figure below illustrates each echelon of economic value from commodities to transformations.
The Transformation Economy
With transformations, the economic offering of a company is the individual person or company changed as a result of what the company does. With transformations, the customer is the product! The individual buyer of the transformation essentially says, Change me. The companys economic offering isnt the materials it uses, nor the physical things it makes. Its not the processes it executes, nor the encounters it orchestrates. When a company guides transformations, the offering is the individual. Once the experience economy has run its course, the transformation economy will take over. Then, the basis of success will be in understanding the aspirations of individual consumers and businesses, and guiding them to fully realising those aspirations.
Lets examine how the insurance industry, as just one readily discernible example, will make the transition through successive economies. As seen on page 7, Progressives claims adjustment process shifted the company into the experience economy, because it provides the customer with the time and means to settle his nerves, and the on the spot claims check relieves him of all worry about how hes going to get the situation handled.
|Traditional policy carriers merely insure their policy holders - meaning
clients only secure a payment in the event of a loss. Something happens,
they get money, thats it. The Progressive experience assures its policy
holders - meaning guests secure confidence, encouragement, trust or a feeling
of satisfaction. When something happens, Progressive assures that they not
only get their money, but they feel better about the whole unfortunate situation.
In the transformation economy, even that wont be enough. In addition, carriers will ensure their policy holders - meaning aspirants will secure an actual event, situation or outcome. For example, Skandia of Stockholm, Sweden, introduced an insurance concept that they (still, unfortunately) call Competence Insurance (see page 8). Flowing out of the companys focus on intellectual capital, it aims to eliminate the problem of workers falling behind in the level of competence and knowledge required as their jobs change over time.
Shifting to Higher Echelons of Economic Value
Now, think of your own business. What are the equivalents to insure, assure and ensure for the financial servicesarena in which your company now resides? Its unlikely you will find such simple words to describe the path from services to experiences to transformations - you may even have to invent a word or two - but thinking creatively about new economic offerings that surround your present ones will pay dividends as we move inexorably through the experience to the transformation economy. For example, a firm that currently views itself as being in the business of managing investments - the placement of money in a fund from which profit is expected - should move from amassing commissions on revenues per transaction to gaining fees based on individuals realising such aspirations as attaining college educated kids, well vacationed second homes or meaningful retirements.
Such a firm might think of shifting to higher echelons of economic value in this way: experience - envisioning - the activity of seeing how current investment patterns may turn out in the future; transformation - investiture - the formal consummation of a pre-ordained aspiration.
|Or, it could choose a slightly different route:
experience - environing
- staging the means by which aspirations are discovered;
transformation - attainment - the achievement
of an end aspiration.
Or perhaps a third alternative would better capture the way the firm sees its industry going: experience - advesting (adventure + investing) - an engaging simulation of living through alternative investment scenarios; transformation - envestment (ensure + investment) - a guarantee that investment-paid-for aspirations are in fact attained.
The key insights common to all three of these possibilities are that, one, the higher echelon offerings must be grounded in great service - making investments that pay off well - and two, people do not make financial investments primarily for financial reasons; they wish the investments to pay for other, non monetary, aspirations .
Those firms that shift beyond delivering financial services to staging financial experiences and guiding financial transformations will ward off the commoditisation that threatens service firms everywhere. Those that do not will find themselves subject to the vagaries of a very competitive and ruthless marketplace.
About the Authors
B. Joseph Pine II and James H. Gilmore a re co-founders of Strategic Horizons LLP, PO Box 548, Aurora, OH 44202-0548, USA. Tel: +1 330-405-2886, Fax +1 330-963-4991, Email: pine&gilmore-at-StrategicHorizons.com.
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