A conversation with B. Joseph Pine II and James H. Gilmore, authors of 'The Experice Economy'

Partners B. Joseph Pine II and James H. Gilmore are authors of the new book "The Experience Economy: Work is Theatre & Every Business a Stage," to be published later this month by the Harvard Business School Press. Pine and Gilmore are also co-founders of Cleveland-based Strategic Horizons LLP, a thinking studio dedicated to helping businesses conceive and design new ways of adding value to their economic offerings.

Prior to founding Strategic Horizons, Pine held numerous positions with IBM and is also author of the 1993 text "Mass Customization: The New Frontier in Business Competition." Gilmore's career began with Procter & Gamble, after which he spent more than 10 years consulting with Cleveland Consulting Associates and Computer Sciences Corp.

Together they have written numerous articles on business strategy and innovation for publications such as "Harvard Business Review," "The Wall Street Journal," "Strategy & Leadership," "Context," "The Journal of Cost Management," "CIO" and "Chief Executive." Pine and Gilmore's comments are frequently found in "Forbes," "Fortune," "Business Week" and "The New York Times," among others.

Pine and Gilmore recently spoke with SCW about the emerging experience economy, a term they coined four years ago.

SCW: In your book, "The Experience Economy," you detail the history of economic progress in terms of the four-stage evolution of the birthday cake. What's that all about?

PINE: My mom always baked a birthday cake when I was growing up in the 1950s and '60s. And that cake was baked from scratch, mixing the raw materials -- flour, sugar, butter and eggs -- and costing 10 cents to maybe 30 cents.

Then in the 1960s and '70s, we started to buy cake mixes from Betty Crocker and Duncan Hines. So when we made a cake, it wasn't from scratch anymore, but we'd still make that cake. How much did the manufactured goods in the grocery store cost? Perhaps $2 or $3. Ten times as much as the stuff inside of it. Then in the 1980s, we stopped baking the cake altogether. We'd go to the supermarket or call the bakery and say, "I need such and such a cake at such and such a time and I'd like it to say this." And they'd deliver the cake. They were performing a service now -- and how much did that cost? $10 or $20 perhaps. And how much stuff was in there? Still about 10 or 20 cents.

Now in the '90s, not only don't we bake the cake, we don't even throw the party. We outsource it to some other company, whether its Creativity, Discovery Zone, Chuck E. Cheese, Club Disney or even McDonald's.

GILMORE: My favorite is Club Disney, where kids and adults play for an hour, then have a one-hour birthday party -- in one of six or so themed rooms -- based on a character like Pooh or a movie such as Toy Story. They get one piece of pizza, shaped like Mickey's ears, one piece of cake and one party favor -- and prices for that start at $250.

The point is how any industry naturally progresses from commodities to goods to services, and then to experiences.

SCW: So, then, what market forces are now moving us from a service economy into the experience economy?

PINE: The Internet is going to commoditize all goods and services. The friction-free economy means consumers will be able to instantly compare the prices of goods out there and quickly find the lowest possible price. The only reason they're going to come out and spend more money on these things is if the experience is worth it.

The fact that goods and services are commoditizing means companies must find a way of differentiating themselves. They have to find a higher echelon of value, and that's what experiences afford them.

Someone recently asked: How can we possibly afford to have all these experiences when we're so time-starved and have no time for anything? We said: It's precisely because we are time-starved that we're willing to pay someone else to relieve us of all that planning. And the fact that we are time-starved means that when we do have an experience, we want it to be a great experience. And we don't want to depend on ourselves to stage it. We're willing to pay somebody else to increase the probability that we're going to have a great time in that limited amount of time that we do indeed have.

GILMORE: Check out priceline.com. A hotel is a hotel is a hotel, undifferentiated in the minds of customers who buy accommodations based on price, price and price.

We've also seen productivity gains in services. As it takes fewer and fewer people to deliver more and more services, people will become increasingly employed in staging experiences -- where technology has not yet hit with full force in automating and eliminating labor.

Rising affluence also plays a factor. By the way, we don't categorize consumers into "haves" and "have-nots." Rather, we prefer to speak in terms of "haves" and "have-mores." As people save money shopping for goods at Wal-Mart and Sam's Club or call around for the lowest long-distance service, they're using the savings to spend more liberally on various other experiences.

And, just wait until those baby boomers free up all their 401-K funds. They've spent life incessantly working and regretting that they never learned to play the piano or cook or whatever. All these regrets will translate into wants and needs for experiential offerings.

Finally, there are technological enablers. Motion-based simulators, virtual reality, microchips in baseballs such as Rawlings' Radarball or the Intensor chairs and the like will continue to create new genres of experiences.

SCW: OK, so if experience is everything, then why are concepts such as Planet Hollywood and Rainforest Cafe peaking?

GILMORE: Many theme restaurants -- Planet Hollywood most notably -- are having trouble primarily for three reasons: One, they don't focus on the food on which the experience is built, so the food quality isn't that great. Two, they don't charge admission, so customers impute the entire price of the experience onto the goods. For instance, at $8.95, it better be a really great hamburger -- but with an admission fee, a $4.95 or $5.95 hamburger doesn't have to be nearly as good.

And three, they don't refresh the experience. It's the same every time you go no matter which restaurant you go to. Experience stagers must constantly refresh the experience in order to make it continually engaging for guests.

PINE: Retailers need to realize just what it is that customers value -- and then charge for it. Some retailers already border on the experiential. Look at how many people are playing with the gadgets at Sharper Image and Brookstone. They're listening to miniaturized stereo equipment, sitting in the massage chairs and then leaving without paying for what they valued, namely, the experience. Could these stores charge admission? Not the way they're currently managed. But, if they did charge admission, they'd be forced to stage a much better experience. The merchandise would need to change more often, perhaps daily or even hourly. They'd need to add demonstrations, contests and other attractions to enhance the experience.

SCW: You can't really be serious in thinking that some day shopping centers and retailers will be able to charge entrance fees. Look at how much retailers and centers already give away just to remain competitive. Aren't experiences the next step in value-added retailing?

GILMORE: How do you begin charging admission for something that has traditionally been free? Go to almost any mall in America before the stores open and you'll find people there for a specific experience. I'm talking about mall walkers who use the facility as a crime-safe, weather-free environment to log a few miles. We admit it would be difficult for a mall to start asking for admission fees when for years there's been no charge.

But if you were planning a new mall, you could design elements to enhance the walking experience, like adding a tartan-track surface to minimize shin splints, digital read-out clocks to take time-splits, and possibly, celebrity guest-walkers. The point is that if these features were introduced from the outset, then charging an admission fee might be accepted.

We think there's a natural progression that's going to go like this: First, experiences will be layered onto retail venues and given away for free to sell more goods and services. Then portions of the retail space -- places within places -- will command a fee, like the American Girl Revue and Cafe in American Girl Place in Chicago, but the rest of the store is still free. Other places will command a fee for certain times and dates, like Monday Night Football at ESPNZone, when Chris Berman does his "Monday Night Blast" broadcasts during halftime. They're able to charge between $25 and $75. The price is determined based on proximity to Berman. The rest of the week there's no admission charge.

PINE: I'm perfectly willing for people to say we're crazy, but let's see what happens in a couple of decades. Fifty years ago, people would have laughed if you told them one day you'd pay someone to clean your house. Or, that three or four times a week someone would cook your dinner. Similarly, 50 years from now, we'll be paying a fee to go shopping. In fact, we already have the beginnings of charging admission. REI in Seattle charges customers $5 to scale its climbing wall. Jordans (a furniture chain in the Northeast) is charging customers $3 to go on a motion-based attraction. Jordans doesn't keep the money; it donates the proceeds to charity. But this is one way to get consumers used to the fact that they are being charged.

You must, however, be careful of nickel and diming and wanting to charge people for every little piece of the experience. That tends to have a negative psychological effect. Places being clean, safe and comfortable are part of the services retailers need to offer as part of the total experience. They are the table stakes needed to get into the game