Another look at how toyota integrates product development

Art History Essay

by B. Joseph Pine II and James H. Gilmore

Harvard Business Review Reprint 98407

HarvardBusinessReview JULY– AUGUST 1998

Reprint Number

c.k . Prahalad AND Kenneth Lieberthal

THE END OF CORPORATE IMPERIALISM 98408

Linda hill and Suzy wetlaufer

LEADERSHIP WHEN THERE IS NO ONE TO ASK: AN INTERVIEW WITH ENI’S FRANCO BERNABE

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B. joseph pine I I and James h. Gilmore

WELCOME TO THE EXPERIENCE ECONOMY 98407

Robin Cooper and Robert s. kaplan

THE PROMISE – AND PERIL – OF INTEGRATED COST SYSTEMS

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Thomas h. davenport PUTTING THE ENTERPRISE INTO THE ENTERPRISE SYSTEM

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Nigel Nicholson HOW HARDWIRED IS HUMAN BEHAVIOR? 98406

Regina fazio Maruca HBR CASE STUDY HOW DO YOU MANAGE AN OFF-SITE TEAM? 98405

Durward k . Sobek i i , Jeffrey k. liker, and Allen C. ward

ideas at work ANOTHER LOOK AT HOW TOYOTA INTEGRATES PRODUCT DEVELOPMENT

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Timothy A . Luehrman manager’s tool kit INVESTMENT OPPORTUNITIES AS REAL OPTIONS: GETTING STARTED ON THE NUMBERS

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introduction by richard l . nolan

perspectives CONNECTIVITY AND CONTROL IN THE YEAR 2000 AND BEYOND

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DAVID Warsh BOOKS IN REVIEW WHAT DRIVES THE WEALTH OF NATIONS? 98410

As goods and services become commoditized, the customer experiences that companies

create will matter most.

Welcome to the Experience Economy

By B. Joseph Pine II and

James H. Gilmore

H ow do economies change? The entire history of economic progress can be recapitulated in the four-

stage evolution of the birthday cake. As a vestige of the agrarian economy, mothers made birthday cakes from scratch, mixing farm commodities (flour, sugar, butter, and eggs) that together cost mere dimes. As the goods-based industrial economy advanced, moms paid a dollar or two to Betty Crocker for premixed ingredients. Later, when the service economy took hold, busy parents ordered cakes from the bakery or grocery store, which, at $10 or $15, cost ten times as much as the packaged ingredients. Now, in the time-starved 1990s, parents neither

B. Joseph Pine II and James H. Gilmore are cofounders of Strategic Horizons LLP, based in Cleveland, Ohio. They are coauthors of The Experience Economy: Work Is Theatre and Every Business a Stage, to be published by the Harvard Business School Press in April 1999. They are the authors of “The Four Faces of Mass Customization” (HBR January–February 1997) and can be reached at pine&gilmore@cus- tomization.com.

make the birthday cake nor even throw the party. Instead, they spend $100 or more to “outsource” the entire event to Chuck E. Cheese’s, the Discovery Zone, the Mining Company, or some other business that stages a memorable event for the kids – and often throws in the cake for free. Welcome to the emerging experience economy.

Economists have typically lumped expe- riences in with services, but experiences are a distinct economic offering, as different from services as services are from goods. To- day we can identify and describe this fourth economic offering because consumers un- questionably desire experiences, and more and more businesses are responding by ex- plicitly designing and promoting them. As services, like goods before them, increas- ingly become commoditized – think of long-distance telephone services sold solely on price – experiences have emerged as the next step in what we call the progression of economic value. (See the exhibit “The Pro- gression of Economic Value.”) From now on, leading-edge companies – whether they sell to consumers or businesses – will find

harvard business review July–August 1998 Copyright © 1998 by the President and Fellows of Harvard College. All rights reserved.

https://tomization.com
The Progression of Economic Value

Differentiated

Competitive Position

Undifferentiated

Market Premium Pricing

Make goods

Extract commodities

Stage experiences

Deliver services

welcome to the experience economy

that the next competitive battleground lies in stag- ing experiences.

An experience is not an amorphous construct; it is as real an offering as any service, good, or com- modity. In today’s service economy, many compa- nies simply wrap experiences around their tradi- tional offerings to sell them better. To realize the full benefit of staging experiences, however, busi- nesses must deliberately design engaging experi- ences that command a fee. This transition from selling services to selling experiences will be no easier for established companies to undertake and weather than the last great economic shift, from the industrial to the service economy. Unless com- panies want to be in a commoditized business,

however, they will be compelled to upgrade their offerings to the next stage of economic value.

The question, then, isn’t whether, but when – and how – to enter the emerging experience economy. An early look at the characteristics of experiences and the design principles of pioneering experience stagers suggests how companies can begin to an- swer this question.

Staging Experiences that Sell To appreciate the difference between services and experiences, recall the episode of the old television show Taxi in which Iggy, a usually atrocious (but fun-loving) cab driver, decided to become the best taxi driver in the world. He served sandwiches and drinks, conducted tours of the city, and even sang Frank Sinatra tunes. By engaging passengers in a way that turned an ordinary cab ride into a memo- rable event, Iggy created something else entirely – a distinct economic offering. The experience of riding in his cab was more valuable to his customers than the service of being transported by the cab – and in the TV show, at least, Iggy’s customers hap- pily responded by giving bigger tips. By asking to go around the block again, one patron even paid more for poorer service just to prolong his enjoyment. The service Iggy provided – taxi transportation – was simply the stage for the experience that he was really selling.

An experience occurs when a company intention- ally uses services as the stage, and goods as props, to engage individual customers in a way that creates a memorable event. Commodities are fungible, goods tangible, services intangible, and experiences memorable. (See the chart “Economic Distinc-

Economic Distinctions

Economic Offering Commodities Goods Services Experiences

Economy Agrarian Industrial Service Experience

Economic Function Extract Make Deliver Stage

Nature of Offering Fungible Tangible Intangible Memorable

Key Attribute Natural Standardized Customized Personal

Method of Supply

Stored in bulk Inventoried after production

Delivered on demand

Revealed over a duration

Seller Trader Manufacturer Provider Stager

Buyer Market User Client Guest

Factors of Demand Characteristics Features Benefits Sensations

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welcome to the experience economy

tions.”) Buyers of experiences – we’ll follow the lead of experience-economy pioneer Walt Disney and call them “guests” – value what the company reveals over a duration of time. While prior eco- nomic offerings – commodities, goods, and services – are external to the buyer, experiences are inher- ently personal, existing only in the mind of an indi- vidual who has been engaged on an emotional, physical, intellectual, or even spiritual level. Thus, no two people can have the same experience, be- cause each experience derives from the interaction between the staged event (like a theatrical play) and the individual’s state of mind.

Experiences have always been at the heart of the entertainment business – a fact that Walt Disney and the company he founded have creatively ex- ploited. But today the concept of selling an enter- tainment experience is taking root in businesses far removed from theaters and amuse- ment parks. New technologies, in par- ticular, encourage whole new genres of experience, such as interactive games, Internet chat rooms and multi- experiences is spreading beyond player games, motion-based simula- tors, and virtual reality. The growing processing power required to render ever-more immersive experiences now drives demand for the goods and services of the computer industry. In a speech made at the November 1996 COMDEX computer trade show, Intel chairman Andrew Grove declared, “We need to look at our business as more than simply the building and selling of personal computers. Our business is the delivery of information and lifelike interactive experiences.”

At theme restaurants such as the Hard Rock Cafe, Planet Hollywood, or the House of Blues, the food is just a prop for what’s known as “eatertain- ment.” And stores such as Niketown, Cabella’s, and Recreational Equipment Incorporated draw consumers in by offering fun activities, fascinating displays, and promotional events (sometimes labeled “shoppertainment” or “entertailing”).

But experiences are not exclusively about enter- tainment; companies stage an experience whenever they engage customers in a personal, memorable way. In the travel business, former British Airways chairman Sir Colin Marshall has noted that the “commodity mind-set” is to “think that a business is merely performing a function – in our case, trans- porting people from point A to point B on time and at the lowest possible price.” What British Airways does, according to Sir Colin, is “to go beyond the function and compete on the basis of providing an experience.” (See “Competing on Customer Ser-

vice: An Interview with British Airways’ Sir Colin Marshall,” HBR November–December 1995.) The company uses its base service (the travel itself) as the stage for a distinctive en route experience – one that attempts to transform air travel into a respite from the traveler’s normally frenetic life.

Neither are experiences only for consumer in- dustries. Companies consist of people, and busi- ness-to-business settings also present stages for experiences. For example, a Minneapolis computer- installation and repair company calls itself the Geek Squad. Its “special agents” costume them- selves in white shirts with thin black ties and pocket protectors, carry badges, drive old cars, and turn a humdrum activity into a memorable encounter. Similarly, many companies hire theater troupes – like the St. Louis-based trainers One World Music, facilitators of a program called Synergy through

Today the concept of selling

theaters and theme parks.

Samba – to turn otherwise ordinary meetings into improvisational events that encourage breakthrough thinking.

Business-to-business marketers increasingly cre- ate venues as elaborate as any Disney attraction in which to sell their goods and services. In June 1996, Silicon Graphics, for example, opened its Visionar- ium Reality Center at corporate headquarters in Mountain View, California, to bring customers and engineers together in an environment where they can interact with real-time, three-dimensional product visualizations. Customers can view, hear, and touch – as well as drive, walk, or fly – through myriad product possibilities. “This is experiential computing at its ultimate, where our customers can know what their products will look like, sound like, feel like before manufacturing,” said then chairman and CEO Edward McCracken.

You Are What You Charge For Notice, however, that while all of these companies stage experiences, most are still charging for their goods and services. Companies generally move from one economic stage to the next in incremental steps. In its heyday in the 1960s and 1970s, IBM’s slogan was “IBM Means Service,” and the computer manufacturer indeed lavished services – for free –

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on any company that would buy its hardware goods. It planned facilities, programmed code, inte- grated other companies’ equipment, and repaired its own machines; its service offerings over- whelmed the competition. But eventually IBM had to charge customers for what it had been giving away for free, when a Justice Department suit re- quired the company to unbundle its hardware and

Companies should think about what they would do differently if they charged admission. software. The government order notwithstanding, IBM couldn’t afford to continue to meet increasing customer-service demands without explicitly charging for them. Services, it turned out, were the company’s most valued offerings. Today, with its mainframe computers long since commoditized, IBM’s Global Services unit grows at double-digit annual rates. The company no longer gives away its services to sell its goods. In fact, the deal is re- versed: the company will buy its clients’ hardware if they’ll contract with Global Services to manage their information systems. IBM still manufactures computers, but now it’s in the business of providing services.

It’s an indication of the maturity of the service economy that IBM and other manufacturers now make greater profits from the services than from the goods they provide. General Electric’s GE Cap- ital unit and the financial arms of the Big Three automakers are cases in point. Likewise, it’s an in- dication of the immaturity of the experience econ- omy that most companies providing experiences – like the Hard Rock Cafe, the Geek Squad, or Silicon Graphics – don’t yet explicitly charge for the events that they stage.

No company sells experiences as its economic offering unless it actually charges guests an admis- sion fee. An event created just to increase customer preference for the commoditized goods or services that a company actually sells is not an economic offering. But even if a company rejects (for now) charging admission to events that it stages, its man- agers should already be asking themselves what they would do differently if they were to charge ad- mission. The answers will help them see how their company might begin to move forward into the ex- perience economy, for such an approach demands the design of richer experiences.

Movie theaters already charge admission to see featured films, but Jim Loeks, part-owner of the Star theater complex in Southfield, Michigan, told Forbes magazine that “it should be worth the price of the movie just to go into the theater.” Star charges 3 million customers a year 25% higher ad- mission for a movie than a local competitor does because of the fun-house experience it provides.

Soon, perhaps, with 65,000 square feet of restaurants and stores being added to the complex, Star will charge its customers admission just to get into the complex.

Some retailers already border on the experiential. At the Sharper Image or Brookstone, notice how many people play with the gadgets, listen to minia-

turized stereo equipment, sit in massage chairs, and then leave without paying for what they valued, namely, the experience. Could these stores charge admission? Not as they are currently managed. But if they did charge an admission fee, they would be forced to stage a much better experience to attract paying guests. The merchandise mix would need to change more often – daily or even hourly. The stores would have to add demonstrations, showcases, contests, and other attractions to enhance the cus- tomer experience.

With its Niketown stores, Nike is almost in the experience business. To avoid alienating its exist- ing retail channels, Nike created Niketown as a merchandising exposition. It’s ostensibly for show – to build the brand image and stimulate buy- ing at other retail outlets – not for selling. If that is so, then why not explicitly charge customers for experiencing Niketown? Would people pay? People have already queued to enter the Niketown on Chicago’s Michigan Avenue. An admission fee would force Nike to stage more engaging events inside. The stores might actually use the basketball court, say, to stage one-on-one games or rounds of horse with National Basketball Association play- ers. Afterward customers could buy customized Nike T-shirts, commemorating the date and score of events – complete with an action photo of the winning hoop. There might be more interactive kiosks for educational exploration of past athletic events. Virtual reality machines could let you, as Nike’s advertising attests, be Tiger Woods. Nike could probably generate as much admission-based revenue per square foot from Niketown as the Walt Disney Company does from its entertainment venues – and as Disney should (but does not) yield from its own retail stores. For the premier company of the experience economy, Disney’s specialty re-

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tailing outside of its own theme parks disappoints. Its mall stores aren’t much different from anyone else’s, precisely because Disney doesn’t charge ad- mission to them – and so doesn’t bother creating the extraordinary experiences it so expertly creates elsewhere.

An entrepreneur in Israel has entered the experi- ence economy with the opening of Cafe Ke’ilu, which roughly translates as “Cafe Make Believe.” Manager Nir Caspi told a reporter that people come to cafés to be seen and to meet people, not for the food; Cafe Ke’ilu pursues that observation to its log- ical conclusion. The establishment serves its cus- tomers plates and mugs that are empty and charges guests $3 during the week and $6 on weekends for the social experience.

Charging admission – requiring customers to pay for the experience – does not mean that companies have to stop selling goods and services. Disney gen- erates significant profits from parking, food, and other service fees at its theme parks as well as from the sale of memorabilia. But without the staged ex- periences of the company’s theme parks, cartoons, movies, and TV shows, customers would have nothing to remember – and Disney would have no characters to exploit.

In the full-fledged experience economy, retail stores and even entire shopping malls will charge admission before they let a consumer even set foot in them. Some shopping malls, in fact, already do charge admission. We’re not thinking of the Mall of America outside of Minneapolis, which contains an amusement park; it charges for the rides, but the shopping is still free. We’re referring to the Gilroy Garlic Festival in California, the Minnesota Renaissance Festival, the Kitchener-Waterloo Oktoberfest in Ontario, Canada, and other sea- sonal festivals that are really outdoor shopping malls and do indeed charge admission. Consumers judge them worth the fees because the festival op- erators script distinctive experiences around enticing themes, as well as stage activities that captivate customers before, after, and while they shop. With nearly every customer leaving with at least one bag of merchandise, these festival experiences clearly capture shopping dollars that otherwise would be spent at traditional malls and retail outlets.

The business equivalent of a shopping mall is a trade show – a place for finding, learning about, and, if a need is met, purchasing exhibitors’ offerings. Trade-show operators already charge admission to the experiences they create; individual business-to-

business companies will need to do the same, es- sentially charging customers to sell to them. Dia- mond Technology Partners for instance, stages the Diamond Exchange, a series of forums that help members explore the digital future. Current and potential clients pay tens of thousands of dollars annually to attend because what they gain – fresh insights, self-discovery, and engaging interactions – is worth it. No one minds that in staging the event, Diamond greatly improves its chances of selling follow-up consulting work.

The Characteristics of Experiences Before a company can charge admission, it must de- sign an experience that customers judge to be worth the price. Excellent design, marketing, and delivery will be every bit as crucial for experiences as they are for goods and services. Ingenuity and innovation will always precede growth in revenue. Yet experi- ences, like goods and services, have their own dis- tinct qualities and characteristics and present their own design challenges.

One way to think about experiences is across two dimensions. The first corresponds to customer par- ticipation. At one end of the spectrum lies passive participation, in which customers don’t affect the performance at all. Such participants include sym- phony-goers, for example, who experience the event as observers or listeners. At the other end of the spectrum lies active participation, in which customers play key roles in creating the perfor- mance or event that yields the experience. These participants include skiers. But even people who

Some companies will eventually be like trade shows, charging

customers to sell to them. turn out to watch a ski race are not completely pas- sive participants; simply by being there, they con- tribute to the visual and aural event that others experience.

The second dimension of experience describes the connection, or environmental relationship, that unites customers with the event or perfor- mance. At one end of the connection spectrum lies absorption, at the other end, immersion. People viewing the Kentucky Derby from the grandstand can absorb the event taking place beneath and in front of them; meanwhile, people standing in the

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infield are immersed in the sights, sounds, and smells that surround them. Furiously scribbling notes while listening to a physics lecture is more absorbing than reading a textbook; seeing a film at the theater with an audience, large screen, and stereophonic sound is more immersing than watch- ing the same film on video at home.

We can sort experiences into four broad cate- gories according to where they fall along the spectra of the two dimensions. (See the exhibit “The Four Realms of an Experience.”) The kinds of experi- ences most people think of as entertainment – watching television, attending a concert – tend to be those in which customers participate more pas- sively than actively; their connection with the event is more likely one of absorption than of im- mersion. Educational events – attending a class, taking a ski lesson – tend to involve more active participation, but students (customers, if you will) are still more outside the event than immersed in the action. Escapist experiences can teach just as well as educational events can, or amuse just as well as entertainment, but they involve greater customer immersion. Acting in a play, playing in an orches- tra, or descending the Grand Canyon involve both active participation and immersion in the experi- ence. If you minimize the customers’ active partici- pation, however, an escapist event becomes an ex- perience of the fourth kind – the esthetic. Here customers or participants are immersed in an activ-

ity or environment, but they them- selves have little or no effect on it – like a tourist who merely views the Grand Canyon from its rim or like a visitor to an art gallery.

Generally, we find that the richest experiences – such as going to Disney World or gambling in a Las Vegas casino – encompass aspects of all four realms, forming a “sweet spot” around the area where the spectra meet. But still, the universe of possi- ble experiences is vast. Eventually, the most significant question man- agers can ask themselves is “What specific experience will my company offer?” That experience will come to define their business.

Experiences, like goods and ser- vices, have to meet a customer need; they have to work; and they have to be deliverable. Just as goods and ser- vices result from an iterative process of research, design, and development, experiences derive from an iterative

process of exploration, scripting, and staging – capa- bilities that aspiring experience merchants will need to master.

Designing Memorable Experiences We expect that experience design will become as much a business art as product design and process design are today. Indeed, design principles are al- ready apparent from the practices of and results obtained by companies that have (or nearly have) advanced into the experience economy. We have identified five key experience-design principles.

Theme the experience. Just hear the name of any “eatertainment” restaurant – Hard Rock Cafe, Planet Hollywood, or the Rainforest Cafe, to name a few – and you instantly know what to expect when you enter the establishment. The proprietors have taken the first, crucial step in staging an expe- rience by envisioning a well-defined theme. One poorly conceived, on the other hand, gives cus- tomers nothing around which to organize the im- pressions they encounter, and the experience yields no lasting memory. An incoherent theme is like Gertrude Stein’s Oakland: “There is no there there.” Retailers often offend the principle. They talk of “the shopping experience” but fail to create a theme that ties the disparate merchandising pre- sentations together into a staged experience. Home-appliance and electronics retailers in partic-

The Four Realms of an Experience

Absorption

Passive Active participation participation

Educational Entertainment

Esthetic Escapist

Immersion

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ular show little thematic imagination. Row upon row of washers and dryers and wall after wall of re- frigerators accentuate the sameness of different companies’ stores. Shouldn’t there be something distinctive about an establishment called Circuit City, for example?

Consider the Forum Shops in Las Vegas, a mall that displays its distinctive theme – an ancient Roman marketplace – in every detail. The Simon DeBartolo Group, which developed the mall, fulfills this motif through a panoply of architectural effects. To create the desired impression, These include marble floors, stark white pillars, “outdoor” cafés, living companies must provide cues that trees, flowing fountains – and even a painted blue sky with fluffy white afÞrm the nature of the experience. clouds that yield regularly to simulat- ed storms, complete with lightning and thunder. Every mall entrance and every store- front is an elaborate Roman re-creation. Every hour inside the main entrance, statues of Caesar and other Roman luminaries come to life and speak. “Hail, Caesar!” is a frequent cry, and Roman centu- rions periodically march through on their way to the adjacent Caesar’s Palace casino. The Roman theme even extends into some of the shops. A jew- elry store’s interior, for instance, features scrolls, tablets, Roman numerals, and gold draperies. The theme implies opulence, and the mall’s 1997 sales – more than $1,000 per square foot, compared with a typical mall’s sales of less than $300 – suggest that the experience works.

An effective theme is concise and compelling. It is not a corporate mission statement or a marketing tag line. It needn’t be publicly articulated in writ- ing. But the theme must drive all the design ele- ments and staged events of the experience toward a unified story line that wholly captivates the cus- tomer. Educational Discoveries and Professional Training International of Orem, Utah, stage a day- long course on basic accounting skills to nonfinan- cial managers. Their exquisitely simple theme – running a lemonade stand – turns learning into an experience. Students use real lemons and lemon- ade, music, balloons, and a good deal of ballyhoo while they create a corporate financial statement. The theme unifies the experience in the students’ minds and helps make the learning memorable.

Harmonize impressions with positive cues. While the theme forms the foundation, the experi- ence must be rendered with indelible impressions. Impressions are the “takeaways” of the experience; they fulfill the theme. To create the desired impres- sions, companies must introduce cues that affirm the nature of the experience to the guest. Each cue

must support the theme, and none should be incon- sistent with it.

George Harrop, founder of Barista Brava, a fran- chised chain of coffee bars based in Washington, D.C., developed the company’s theme of “the mar- riage of Old-World Italian espresso bars with fast- paced American living.” The interior decor sup- ports the Old World theme, and the carefully designed pattern of the floor tiles and counters en-

courages customers to line up without the usual signage or ropes that would detract from that theme. The impressions convey quick service in a soothing setting. Furthermore, Harrop encourages baristas to remember faces so that regular cus- tomers are handed their usual order without even having to ask.

Even the smallest cue can aid the creation of a unique experience. When a restaurant host says, “Your table is ready,” no particular cue is given. But when a Rainforest Cafe host declares, “Your adven- ture is about to begin,” it sets the stage for some- thing special.

It’s the cues that make the impressions that cre- ate the experience in the customer’s mind. An ex- perience can be unpleasant merely because some architectural feature has been overlooked, under- appreciated, or uncoordinated. Unplanned or incon- sistent visual and aural cues can leave a customer confused or lost. Have you ever been unsure how to find your hotel room, even after the front-desk staff provided detailed directions? Better, clearer cues along the way would have enhanced your experi- ence. Standard Parking of Chicago decorates each floor of its O’Hare Airport garage with icons of dif- ferent Chicago sports franchises – the Bulls on one floor, the White Sox on another, and so forth. And each level has its own signature song wafting through it. “You never forget where you parked,” one Chicago resident remarked, which is precisely the experience a traveler wants after returning from a week of travel.

Eliminate negative cues. Ensuring the integrity of the customer experience requires more than the layering on of positive cues. Experience stagers also must eliminate anything that diminishes, contra- dicts, or distracts from the theme. Most constructed

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spaces – malls, offices, buildings, or airplanes – are littered with meaningless or trivial messages. While customers sometimes do need instructions, too often service providers choose an inappropriate medium or message form. For example, trash bins at fast-food facilities typically display a “Thank You” sign. True, it’s a cue to customers to bus their own trays, but it also says, “No service here,” a negative reminder. Experience stagers might, instead, turn the trash bin into a talking, garbage- eating character that announces its gratitude when

If airlines truly sold experiences, more passengers would actually shop in the seat-pocket catalogs for mementos of their ßight.

the lid swings open. Customers get the same mes- sage but without the negative cue, and self-busing becomes a positive part of the eating experience.

The easiest way to turn a service into an experi- ence is to provide poor service – thus creating a memorable encounter of the unpleasant kind. “Overservicing” in the name of customer intimacy can also ruin an experience. Airline pilots interrupt customers who are reading, talking, or napping to announce, “Toledo is off to the right side of the air- craft.” At hotels, front-desk personnel interrupt face-to-face conversations with guests to field tele- phone calls. In the guestrooms, service reminders clutter end tables, dressers, and desktops. (Hide them away and housekeeping will replace these an- noyances the next morning.) Eliminating negative cues – by transmitting pilots’ offhand announce- ments through headsets instead of speakers, by as- signing off-stage personnel to answer phones, and by placing guest information on an interactive tele- vision channel – creates a more pleasurable customer experience.

Mix in memorabilia. Certain goods have always been purchased primarily for the memories they convey. Vacationers buy postcards to evoke a trea- sured sight, golfers purchase a shirt or cap with an embroidered logo to recall a course or round, and teenagers obtain T-shirts to remember a rock con- cert. They purchase such memorabilia as a physical reminder of an experience.

People already spend tens of billions of dollars every year on memorabilia. These goods generally sell at price points far above those commanded by

similar items that don’t represent an experience. A Rolling Stones concert-goer, for example, will pay a premium for an official T-shirt emblazoned with the date and city of the concert. That’s because the price points are a function less of the cost of goods than of the value the buyer attaches to remember- ing the experience.

If service businesses like airlines, banks, grocery stores, and insurance companies find no demand for memorabilia, it’s because they do not stage en- gaging experiences. But if these businesses offered

themed experiences layered with pos- itive cues and devoid of negative cues, their guests would want and would pay for memorabilia to commemorate their experiences. (If guests didn’t want to, it probably would mean the experience wasn’t great.) The special agents of the Geek Squad, for exam- ple, stage such a distinctive computer- repair experience that customers buy T-shirts and lapel pins from the com-

pany’s Web site. If airlines truly were in the experi- ence-staging business, more passengers would actually shop in those seat-pocket catalogs for ap- propriate mementos. Likewise, mortgage loans would inspire household keepsakes; grocery check- out lanes would stock souvenirs in lieu of nickel- and-dime impulse items; and perhaps even insur- ance policy certificates would be considered suitable for framing.

Engage all five senses. The sensory stimulants that accompany an experience should support and enhance its theme. The more senses an experience engages, the more effective and memorable it can be. Smart shoeshine operators augment the smell of polish with crisp snaps of the cloth, scents and sounds that don’t make the shoes any shinier but do make the experience more engaging. Savvy hair stylists shampoo and apply lotions not simply be- cause the styling requires it but because they add more tactile sensations to the customer experience. Similarly, grocery stores pipe bakery smells into the aisles, and some use light and sound to simulate thunderstorms when misting their produce.

The mist at the Rainforest Cafe appeals serially to all five senses. It is first apparent as a sound: Sss-sss-zzz. Then you see the mist rising from the rocks and feel it soft and cool against your skin. Finally, you smell its tropical essence, and you taste (or imagine that you do) its freshness. What you can’t be is unaffected by the mist.

Some cues heighten an experience through a sin- gle sense affected through striking simplicity. The Cleveland Bicentennial Commission spent $4 mil-

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lion to illuminate eight automobile and railroad bridges over the Cuyahoga River near a nightspot area called the Flats. No one pays a toll to view or even to cross these illuminated bridges, but the dra- matically lighted structures are a prop that city managers hope will help attract tourist dollars by making a trip to downtown Cleveland a more mem- orable nighttime experience.

Not all sensations are good ones, and some com- binations don’t work. Bookstore designers have dis- covered that the aroma and taste of coffee go well with a freshly cracked book. But Duds n’ Suds went bust attempting to combine a bar and a coin-oper- ated laundromat. The smells of phosphates and hops, apparently, aren’t mutually complementary.

Entering the Experience Economy Using these five design principles, of course, is no guarantee of success; no one has repealed the laws of supply and demand. Companies that fail to pro- vide consistently engaging experiences, overprice their experiences relative to the value perceived, or overbuild their capacity to stage them will of course see pressure on demand, pricing, or both. One stalwart of the children’s birthday-party cir- cuit, Discovery Zone, has had a rough few years because of inconsistent experience staging, poorly maintained games, and little consideration of the experience received by adults, who are, after all,

paying for the event. More recently, the Rainforest Cafe and Planet Hollywood have encountered trou- ble because they have failed to refresh their experi- ences. Guests find nothing different from one visit to the next. Disney, on the other hand, avoids stale- ness by frequently adding new attractions and even whole parks such as the Animal Kingdom, which opened in the spring of 1998.

As the experience economy unfolds, more than a few experience stagers will exit the business. It’s hard to imagine, for example, that every one of the scores of theme-based restaurants operating today will last into the millennium. Recall that once there were more than 100 automakers in eastern Michigan and more than 40 cereal makers in west- ern Michigan. Now only the Big Three automakers in Detroit and the Kellogg Company in Battle Creek remain. The growth of the industrial econ- omy and the service economy came with the prolif- eration of offerings – goods and services that didn’t exist before imaginative designers and marketers invented and developed them. That’s also how the experience economy will grow: through the “gales of creative destruction,” as the economist Joseph Schumpeter termed it – that is, business innova- tion, which threatens to render irrelevant those who relegate themselves to the diminishing world of goods and services.

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