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Climbing the Value Hierarchy

Jeremy Chan

By Jeremy Chan

Founder

View bio
August 19, 2020

1. Climbing the Value Hierarchy

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."

Figure 1 –
Figure 1 – "The Progression of Economic Value", Pine and Gilmour

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.

1.1 Coffee

Figure 2 – The Progression of Economic Value for Coffee, White
Figure 2 – The Progression of Economic Value for Coffee, White2

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!

Figure 3 – A Specialty Meat Experience\!
Figure 3 – A Specialty Meat Experience!

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.

1.2 Software

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.

Figure 4 - Value Hierarchy for a Software Services firm
Figure 4 - Value Hierarchy for a Software Services firm

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.

Figure 5 - The Jonah Group Brand
Figure 5 - The Jonah Group Brand

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.

2.1 Apple

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 albums)

2.2 Amazon

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)

2.3 SpaceX

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)

2.4 Tesla

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 Tesla mission.

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

2.5 SMBs

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 sizes:

  • 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, and internetworking
  • 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 ugly details
  • 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!

Jeremy Chan (jeremy.chan@jonahgroup.com) is a co-founder and owner of Jonah Group, a software solutions consultancy based in Toronto, Canada.


  1. B. Joseph Pine II and James H. Gilmore, Harvard Business Review, July-August 1998

  2. Randy White, White Hutchison Learning Group, Defining Agritainment as the 4th level of economic value https://www.whitehutchinson.com/leisure/articles/agritainment.shtml

About Jonah Group

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.

  • 24,465
    sq. ft office in downtown Toronto
  • 153
    team members in our close-knit group
  • 21
    years in business, and counting