This famous diagram below, initially from Pine and Gilmour's article "Welcome to the Experience Economy"1 shows how pricing (value) increases with differentiation and relevance through a process of "customization."
Each step up the hierarchy provides more value than the last. Further up the hierarchy, we have the "experience economy" and the "transformation economy." Wholesale transformations can be said to have occurred when business processes, customer experiences, and culture itself are upended in response to new requirements and offerings.
The diagram also shows how "commoditization" forces act in the opposite direction to the forces of “customization”, reducing the marginal value of those customizations as they are eventually subsumed into everyone else's offering as well. The transformations of today become the commodities of tomorrow. Like electricity, today the internet is a utility, but it has been the most transformative force of the digital age.
Services sit higher on the value hierarchy than products, and experiences sit higher than services. Prices increase on the way up the hierarchy as well, in a way that is completely accepted by and acceptable to consumers. We will pay between $0.05 and $5.00 for a cup of coffee, depending on how it's presented to us.
While it's not always apparent, it is usually possible to turn a product or asset into a service or an experience. Indeed, the social media giants of the world provide services that conveniently offer *you* (unwittingly) up as the underlying product, for the corporate advertisers of the world to consume using a population search and ad placement service. How did they do that? They thought about how the product would be used throughout the value chain, and then to attempt to make that use easier, and more valuable, and more delightful by climbing the value hierarchy.
You can all clearly see behind this meat delivery service’s motivations in the image below, even if it is a somewhat ham-fisted (sorry) attempt!
Customers care about the product, but they care even more about how it is delivered to them. They want to pay for other ancillary benefits that the product engenders. We are now living in a service and experience economy.
Jonah Group is a custom enterprise software solutions provider, which means that
we supply software development services to companies to help them achieve their
goals. Over the years we’ve learned a lot about what customers really want from
a partner. Also, software services firms already have the advantage of being
able to produce exactly the software you need relative to off-the-shelf product
software vendors. In tandem, our own customer maturity models reflect the
progression of economic value along the dimensions of brand differentiation and
relevance, relative to our customers’ needs.
With a new customer, we may start out as a commodity staff augmentation agency,
but we aim to quickly grow into a managed service provider operating under LightWave®,
our software methodology, and further into a strategic partner that continuously
helps the customer clarify their own software road map and target their
investments wisely. In some cases, the lines are completely blurred between our
customers’ staff and our own, and we become an "embedded partner."
Our desire to climb the value hierarchy is reflected in our relationship-focused brand:
great experiences and relationships are more important to our customers than simply software.
2. Case Studies
The studies presented here consider how some of the most successful
companies moved from product to service to experience to transformation.
They will help you begin to dissect how you might be able to apply these
techniques to your own business.
Apple created the iPod, an incredibly innovative product, allowing you
to carry around your music collection on a hard drive in your pocket.
But the iTunes service opened this up even further, allowing you to
individually purchase and listen to an unlimited number of songs from a
vast global catalogue over the internet, at any time. In the experience
economy, it’s standing room only for the very privilege of being able to
participate in the fanfare of their annual hardware and software product
releases (!) at the WWDC. One transformation effected by all of this is
that physical music collections, tape players, turntables and CD
players, are the relics of a bygone era. The culture around media
consumption, for better or worse, has dramatically shifted in favour of
fine-grained, on-demand, ultra-convenience, as opposed to the more
curated, collector-focused, High Fidelity music maven and appreciator
use case we used to see. Picture the artwork from an album cover and
then ask yourself what decade it’s from. Streaming music on demand has
effected a major cultural transformation.
Service and Experience Enablers: electronics hardware
miniaturization, user experience focus, vertical integration, internet
distribution channel, automated billing, integrated software, finer
granularity of offering (purchasing individual songs as opposed to whole
As of this writing, Amazon is the 3rd largest company in the world by
market cap. They have a few products (Echo, Kindle, Amazon Basics), but
their main visible offering is a digital product – the online portal.
Amazon started by selling books online and providing user reviews of
those books to their users. Over the years they have morphed into the
world's leading online marketplace for just about anything you might
like to buy. Retailers have been forced to follow suit with their own
e-commerce and logistics portals to keep pace.
But given that retailers have followed suit, why does Amazon still
dominate? Not only are they a huge product discovery and ratings
service, but they are also a provider of payment and delivery logistics
services, driving costs and delivery times downward, providing
incredible convenience and a memorable customer experience, while
unlocking the giant wave of e-commerce we see today. Neither brick and
mortar nor digital retailers will ever be able to compete with them in
the delivery experience space and are therefore left to compete in other
areas. This is why high-end department stores now offer
client-appreciation cocktail parties.
Along the way, Amazon had to make massive capital investments in
internal server infrastructure products such that they could handle
holiday e-commerce loads. Over time they noticed that these servers were
largely unused during off-peak periods. They recognized that this spare
capacity could be turned into Amazon Web Services—the world's first
major infrastructure-as-a-service (IaaS) offering—and have enjoyed
market leader status ever since.
Service and Experience Enablers:
Retail and Logistics: vertical integration, internet distribution
channel, automated billing, process automation, Prime subscription
model, user experience focus (1-click buy), massive distribution
centers and infrastructure, novel experience
AWS: hardware cost curve decline, internet distribution channel,
automated billing, exposing untapped value (off-peak hardware
rental), finer granularity of offering (logical shards of CPU cores,
disks, and network infrastructure, as opposed to whole servers)
SpaceX's primary mission is to make life multi-planetary, focussing
initially on establishing a base on Mars, a goal so fantastic that to
this day it is still openly ridiculed as economically unfeasible and
largely irrelevant. Elon Musk recognized that affordability of multiple
Mars missions necessary to achieve this incredible goal hinged upon the
development of re-usable rocket boosters, the development of the
technology for which he planned to fund by offering relatively
inexpensive spaceflight-as-a-service to governments, research
organizations, and corporations.
While doing this, Musk realized that he himself could indeed launch a
suite of his own satellites, with the goal of providing low-latency
wireless satellite internet service to the entire planet, with the hopes
of turning profits from this endeavour into the main funding mechanism
for the company's original Mars mission. All this value is being created
because of SpaceX's ability to turn their special sauce assets
(re-usable rocket boosters) into services (inexpensive space payload
delivery, worldwide rural internet).
Service and Experience Enablers: vertical integration, untapped
market (fast rural internet, space-flight-as-a-service), asset
repurposing (inexpensive launch capability enables new business model),
cost curve decline (re-usable rockets), innovation mindset, finer
granularity of offering (numerous launch vehicles and frequent payloads)
The mission of Tesla, another of Musk's companies, is to accelerate the
world's transition to renewable energy. Unfortunately, analysts often
mistake Tesla to be simply a car company, and as a result have long
valued them incorrectly in the marketplace. It is becoming much more
apparent these days that Tesla will almost certainly turn their apparent
products (vehicles, batteries, ASIC chip boards, software, and solar
panels) into a host of novel value-generating services, experiences, and
transformations (over-the-air entertainment and productivity tools,
autonomous taxi network, vehicle-to-grid marketplace, virtual private
utilities, and what could even be viewed as an environmental emissions
credit offset service). These will all massively extend the company's
value proposition and accelerate the progress toward achievement of the
Service and Experience Enablers: vertical integration, untapped market
(electric vehicles), cost curve declines (batteries), innovation mindset,
software capability (cars operate and drive by wire), internet (over-the-air
software updates), novel driving experience
The studies above chronicle behemoth companies to illustrate the power
of services, experiences, and transformation, but these techniques also
operate at a much smaller scale.
For example, in the COVID era, unable to offer dine-in experiences,
restaurants regularly syndicate meal production by outsourcing delivery
and logistics to the burgeoning industry of digitally-enabled food
ordering and gig-work delivery companies offering those services,
effectively renting the benefit of their market penetration from them.
Digital fin-techs are transforming banks into commodity platforms
without having to do the hard work of becoming a bank by syndicating
bank assets (customers, accounts, loans, investments brokerages,
transaction data) to the market, providing novel friction-less services
atop them, like P2P payments, cryptocurrency exchange, digital wallets,
and identity authentication and authorization.
University lesson plans soon will not be delivered in lecture halls but
will instead be syndicated online at a fraction of the cost, interwoven
with the best lessons from the best professors worldwide. Degrees will
be granted by new degree-granting services.
It's not hard to imagine a world in which our every whim is potentially
satisfied by some service or experience (assuming we can afford it).
There are grocery shopping services, grocery delivery services, and even
services that take your delivered groceries from the front steps and put
them away in your pantry and fridge. Top it off with at-home chef
services that cook up a meal in your home, and you've completely
transformed your relationship with groceries. Groceries are products we
need, but a layer cake of services and experiences over top return to us
the most precious resource of all—time. This is increasingly the realm
in which companies must attempt to address the marketplace.
Service and Experience enablers: market condition shift (COVID),
outsourcing to external service-based businesses, focus on user
experience (outdoor dining, digital restaurant menu curation) simplified
workflow (orders and deliveries), innovation mindset, software
capability (workforce and lesson plan curation), internet
3. Case Study Summary
Very large businesses use economies of scale as a moat, and often
command high margins as a result. But many of the shared service and
experience enablers discussed above are relevant to businesses of all
they have been very successful in climbing the value hierarchy to
the highest levels
they continuously ride one or more rapidly declining cost curves in
order to reduce prices or realize additional gains
they are vertically integrated digital businesses that completely
leverage recent and accelerating advancements in hardware, software,
they care about the user experience, and often provide a completely
novel experience to their users
they regularly turn what was once a coarse-grained asset into a
finer-grained service, making it easer to purchase, and hiding the
they repurpose assets relative to the way in which they were
originally intended to be used
they continuously drive user experience, efficiency, and cost
savings increases through process simplification, automation, and
vertical integration, all of which are enabled by digital tools
4. What About My Business?
Can you do this too? Yes you can (and your competitors are)! In fact, by
ignoring the opportunity to turn your products into services and
experiences, you effectively limit the ability of your business to grow
in tandem with market forces and expectations. Consider your company's
assets; your "special sauce." How can they be presented to the market as
a service to increase their utility? Can you push even further into the
realm of delightful, frictionless "experiences", and even
"transformations?" How can you change your offering to provide your
customers with unexpected new value? How do you add "as-a-Service" to
your value proposition, to stay relevant?
It’s important to note that offerings like AWS are not the result of a simple
decision to advertise spare compute capacity to the market. Among myriad other
considerations, the offering is made technically possible by attaching telemetry
components to servers that measure CPU, disk, and network usage, and connecting
these measurements directly to automated billing systems, allowing them to
invoice for micro-uses of those services. This wouldn’t be practical without
software integration, automated billing, and digital distribution of the
service. AWS is made even more useful with meta-services - software APIs that
expose all of the virtual server provisioning functions, so that their compute
capacity can be scripted.
Similarly, Tesla’s touch-less vehicle deliveries are not simply about
hiring an army of people in white gloves and masks to drop off cars
without getting close to you. They are part of a much larger integrated
digital workflow that manages payment processing, delivery logistics,
customer relationship management, and factory integration that
culminates with that capability. To achieve this, they had to invest in
the technology that ties all of their processes and workflows together
within the overall customer journey.
Not coincidentally, this notion of moving from product to service is
completely reflected in modern-day software architectures, which are
dominated by service-orientation at the micro level, mirroring the way
that modern businesses are dominated by service orientation at the macro
level. Microservices are also independent (stateless), single-purpose,
and composable, as business services should aim to be. Understanding how
to build the right software architecture to manifest this transformation
is of paramount importance.
In almost every realm, digitization and digital transformation is at the
heart of these offerings. Low cost infrastructure, the ubiquity of the
internet, open source frameworks and tools, and digital commerce make
for an endless variety of potential use cases, with software tying
everything together at the core. This is what Jonah Group offers as a
software services company, and we try to make the journey there a great
experience as well!
Jonah Group is a digital consultancy the designs and builds high-performance software applications for the enterprise. Our industry is constantly changing, so we help our clients keep pace by making them aware of the possibilities of digital technology as it relates to their business.