Experience Economy

experience economy

The term Experience Economy was first described in an article published in 1998 by B. Joseph Pine II and James H. Gilmore. In it they described the experience economy as the next economy following the agrarian economy, the industrial economy, and the most recent service economy. This concept had been previously researched by many other authors.

Pine and Gilmore argue that businesses must orchestrate memorable events for their customers, and that memory itself becomes the product – the ‘experience.’ More advanced experience businesses can begin charging for the value of the ‘transformation’ that an experience offers, e.g., as education offerings might do if they were able to participate in the value that is created by the educated individual. This, they argue, is a natural progression in the value added by the business over and above its inputs.

Although the concept of the Experience Economy was born in the business field, it has crossed its frontiers to tourism, architecture, nursing, urban planners and other areas. The Experience Economy is also considered to be the main underpinning for customer experience management (management of all experiences a customer has with a supplier of goods and services, over the duration of their relationship with that supplier). Within the hospitality management academic programs in the US and Europe, Experience Economy is often shortened to Exponomy and is of increasing focus.

This customer behavior in the society has been acknowledged by various authors. An early example is the book of American writer and futurist Alvin Toffler, ‘Future Shock,’ which Pine and Gilmore quote in their work. In 1971, Toffler criticized how ‘economists have great difficulty imagining alternatives to communism and capitalism,’ and how they could only envision the economy in the terms of scarcity of resources. He talked about the upcoming ‘experiential industry,’ in which people in the ‘future,’ would be willing to allocate high percentages of their salaries to live amazing experiences. Later in 1982, Holbrook and Hirschman’s pioneering article ‘The Experiential Aspects of Consumption: Consumer Fantasies, Feelings, and Fun’ in the ‘Journal of Consumer Research,’ discussed emotional experiences linked to products and services. Then in 1992, German sociologist Gerhard Schulze argued for the idea of the ‘experience society’ in his book ‘Erlebnisgesellschaft,’ which was translated into English as ‘The Experience Society’ in 1995. In 1999, it was published at the same time a twin book of ‘The Experience Economy,’ that is ‘The Dream Society’ by Rolf Jensen of the Copenhagen Institute for Futures Studies, containing many of the same ideas.

A core argument is that because of technology, increasing competition,and the increasing expectations of consumers, services today are starting to look like commodities. Products can be placed on a continuum from undifferentiated (referred to as commodities) to highly differentiated. Just as service markets build on goods markets which in turn build on commodity markets, so transformation and experience markets build on these newly commoditized services, e.g. Internet bandwidth, consulting help.

The classification for each stage in the evolution of products is: commodity business charges for undifferentiated products; goods business charges for distinctive, tangible things; service business charges for the activities you perform; experience businesses charge for the feeling customers get by engaging it; and a transformation business charges for the benefit customers (or ‘guests’) receive by spending time there. Proceeding to the next stage more or less requires giving away products at the more commodified level. For instance, to charge for a service such as new car warranties, one must be prepared to give away new cars to replace ‘lemons.’ And to charge for transformations, one must be prepared to risk not being paid for the time one spends working with customers who don’t ‘transform.’ Pine and Gilmore draw on Walt Disney, AOL, Nordstrom, Starbucks, Saturn, Kanye West, IBM and many others as examples.

Pine and Gilmore’s thesis has been criticized as an example of an over-hyped business philosophy arising from or in the dot-com boom and a rising economy in the U.S. that was tolerant of high prices, inflated claims, and no limitations of supply or investment. Detractors contrast it with other service economy theses such as ‘Natural Capitalism,’ in which there is a clear focus on making measurably better use of scarce resources, usually considered to be the basis of economics. They claim service management should stress efficiency more than effectiveness. The thesis has also been criticized from within the fields of tourism, leisure and hospitality studies where theories as to the role of experiences in the economy were already well established, but not acknowledged by Pine and Gilmore. Although continuing to influence business thinking the concept has already been superseded within much service marketing and management literature by the argument that the value of all goods and services are co-created or co-produced through the interaction of consumers and producers. Therefore, at one level of abstraction all consumption can be understood in experiential terms.

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