The Experience Economy
I read just about every blog entry from Seth Godin. They are frequent, short, and insightful.
Here is a recent entry
Improving your condiments
It takes a bold and confident cook to serve a naked hot dog. No roll, no kraut, no mustard.
And a movie shown on a bare wall in an empty room is never going to be received as well as one seen in a crowded theater.
It might be bold to put your work into the world unadorned, but it’s probably ineffective.
We know that a placebo works better if it’s handed to you by a doctor in a lab coat, and that the little show the sommelier puts on improves the taste of wine.
The packaging, the service, the environment, the hours, the interactions, the way it feels to tell our friends–these are all the free prize.
This bonus, the extra free prize that doesn’t seem to be the point of the item itself, is often more important than the thing you think you actually make. The single most effective way to improve your impact is to do a better job of providing it.
Sure, a better hot dog is always appreciated. But when you want to increase user satisfaction, don’t forget to offer better mustard.
Seth has a good story. But, it’s illustrative of a general principle of ascending the value chain. Anyone who has a product or service that has the trajectory of commodity should understand this model. Once you have something that is a commodity – and only a commodity – you compete only on price and margins will erode to the cost of production. (Think about desktop PC’s)
Walking the value chain
Here is another example of what Seth is writing about.
Consider a coffee bean. Coffee is a commodity. It is fungible. Traded on the commodity market maybe it goes for $1 per pound. Translated to cup of coffee that’s about 1-2 cents per cup. A commodity cup of coffee is, lets say, 2 cents
Take those commodity coffee beans, package them, brand them, and sell them in a grocery store. Now you have a good. The commodity of coffee beans transformed into a good is now worth about 5-25 cents a cup. Make a cup of coffee at home.
Brew the coffee beans and offer them in a coffee shop. Now you have a service. Transforming a commodity into a good and then into a service might net you 50 cents to $1 a cup of coffee.
Now take that cup of coffee (a service) and put it in a Starbucks or any high end coffee shop. Now you have an experience. The commodity coffee beans transformed to a high-end experience might now fetch $5-$10 per cup of coffee.
Commodity -> Good -> Service -> Experience.
So think about this progression. Take a commodity and transform it from a commodity, to a good, to a service and then an experience. Each step increases the value of the commodity AND the price (increasing margin) you can charge for it. The only reason that a high end coffee shop can charge $5-$10 for a cup of coffee is because they have added a memorable experience of having coffee. They have walked up the value chain.
Starbucks stages an experience. That experience perishes upon its performance. But the value of the experience lingers in the memory – it is memorable by those engaged in the experience. You will be back. In a sense, the lowly coffee bean is merely a prop in a grand performance of the experience of a high-end coffee shop and lavish surroundings. That’s how you compete and make money in a world of increasing undifferentiated commoditization.
If you are old enough to remember Cracker Jack then you know about “Free Prize Inside”. Did you buy Cracker Jack for the candy-coated popcorn or did you buy it for the “Free Prize Inside”. Would you buy Cracker Jack without the Prize?
Getting the Free Prize Inside was the experience that transformed a box of commodity candy-coated popcorn into something that kids would buy. That’s how you make money. It’s the experience. It’s the “Free Prize Inside” that tranforms commodities and creates a differentiation between you and the competitors.
It’s an idea as old as the hills. And it works.