For most of the subscribers to Transformations Book on Substack, this post restates much of what you already know about the Progression of Economic Value and its fifth level of value, transformations. But it is foundational to understanding transformations as a distinct economic offering. I plan on starting the book with this writing, with a number of extensions to fill out more of what a transformation offering is, what the Transformation Economy means, and what companies must do to succeed and even thrive in guiding transformations. That’s why there’s a “v1” in the title, for – after your feedback! – there is more to come!
This post also serves as a good reminder for those who have read The Experience Economy (and made it to Chapters 9 and 10 – many did not, I am sure!), and a great introduction to the concept for those who are coming to The Transformation Economy cold, without having that prior background.
And so, the book begins something like this:
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In the beginning, economically speaking, were commodities: the fungible “stuff” you raise on the ground, pull out of the ground, or grow in the ground – animal, mineral, vegetable – and then extract and sell on the open marketplace. Commodities were the basis of the Agrarian Economy that lasted for millennia. In 1776 – a year I choose for a very particular reason: it’s when Adam Smith published The Wealth of Nations – over 90% of working people in the United States worked on farms. Today, it’s down to 1.5%.
And what happened to agricultural output in the past 250 years? It skyrocketed! But thanks to vast technological and productivity improvements, it simply takes fewer and fewer people to produce more and more output.
So people moved off farms and into factories, where they use commodities as the raw material to make or manufacture physical, tangible things. These goods became the basis of the Industrial Economy, which overtook the Agrarian Economy in the early part of the 20th century. Commodity extraction still employed about 40% of US workers then, but the success of the system of Mass Production soon vaulted goods manufacturing as the economic engine of the country (and, soon after that, the world).
As the Industrial Economy progressed, however, it became less and less of a job creator, as once again massive technological and productivity improvements meant it takes fewer and fewer people to produce more and more output. So people moved out of factories and into office jobs, retail establishments, fast food & restaurants, maintenance & repair, warehousing & logistics, childcare, the law, sales, finance, and numerous other service occupations where companies deliver a set of intangible activities on behalf of individual people.
Over time, the Service Economy displaced the Industrial Economy with services becoming the primary economic offering. In the US, service delivery actually overtook manufacturing as the top employment sector in the 1950s, but that wasn’t widely understood until the 1980s when pundits began decrying the “hollowing out” of American manufacturing as such jobs increasingly moved overseas. Service employment was denigrated as “McJobs”, and there was a lot of truth to that. But every single economic shift creates many losers – and always many more winners. Eventually – thanks to the “gales of creative destruction” identified by economist Joseph Schumpeter[i] – the jobs created swamp those displaced at higher levels of salaries & wages.
Commoditization
As we shifted deeper into the Service Economy manufactured goods become commoditized, meaning buyers want to treat them like commodities, purchasing primarily on the basis of price & convenience. (The internet is the greatest force of commoditization ever invented, as customers – both consumers and businesses – can instantly compare prices from one vendor to the next.) Companies lose much of their ability to control prices, which drop down toward marginal costs and become subject to the vagaries of the marketplace.
There’s nothing fundamentally wrong with a commoditized business; it’s just not fun.
There’s nothing fundamentally wrong with a commoditized business; you can still make a lot of money at it. Generally, however, only one or two companies in any industry prove successful at doing so. And it’s not a very fun situation to be in, as you must focus relentlessly on costs and automate – ie, get rid of people – as much as possible.
That’s why back in the 1980s and continuing through to today so many manufacturers have shifted into the services business – repair, leasing, warranty plans, equipment management, and so forth. Today, many if not most manufacturers make as much if not more money from the service side of their businesses than from actually making goods.
Ah, but services can be commoditized as well! Think fast-food restaurants, telecommunications, or oil changes on your car. I don’t think any industry has more commoditized itself than banking, for managers came to view customers coming into their banks as costing them money. So they pushed them out of branches to use first ATMS, then the internet, and finally phone apps. Eliminating human contact is a sure way to commoditize yourself.
Customization
Customization is the antidote to commoditization. Commoditization is like the law of gravity; if you do nothing to counteract it, it will just drag you down year after year. Customization, on the other hand, lifts you up. You cannot help but be differentiated – ie, not a commodity – if you customize to each individual customer.
Customization is the antidote to commoditization.
My first book, Mass Customization: The New Frontier in Business Competition,[ii] in fact sparked my discovery of the Progression of Economic Value.[iii] I realized that mass customizing – efficiently serving customers uniquely – automatically turned a good into a service. If you look at the classic economic distinctions, goods are standardized while services are customized – done on behalf of an individual customer. Goods are inventoried after production, while services are delivered on demand, when the customer says this is exactly what he wants. And goods are tangible, while services are intangible. Part and parcel of Mass Customization is the intangible service of helping customers figure out exactly what they want.
Consider the Coca-Cola Freestyle machine. The company is a paragon of Mass Production, but with this device found at Five Guys, Wendy’s, Jack-in-the-Box, and many other restaurants, you get to determine exactly what drink you want right now and have it made for you. After you buy the drink, you bring the cup to the machine where you first select the base for your drink: regular Coke, diet Coke, Coke Zero, plus Barq’s root beer, Sprite, Dr. Pepper, and so forth, many with caffeine and caffeine-free options. Then you pick whether or not to add lemon, lime, cherry, and other flavors. Each of these options have their own containers inside the machine, and when you press your cup on the mechanical lever the machine-as-factory brings the liquid modules together to flow into your cup, just for you.[iv] The next person can opt for completely different options, and the machine mass customizes that individual drink for her.
And while Coca-Cola talks about over a hundred different combinations, there is in fact virtually infinite possibility! What I like to do, for example, is choose Coke with lime, pour it into my cup until it’s around 80% full, and then switch over to Coke Zero with lime, just to limit my calories a bit. You can create what I remember as a kid were called “suicide drinks”, mixing anything with anything else to any degree you want. Not that every set of options yields a tasty drink!
So what the Coca-Cola Freestyle machine and other goods mass customizers do is enable individual customers to design or define what they want, and then make and
From Services to Experiences
In the same way, if you customize a service, devising & delivering exactly the service that this individual customer wants or needs in this specific situation at this particular point in time, then you can’t help but make that customer go “Wow!” and turn it into a memorable event – turn it into an experience.
If you customize a service you can’t help but turn it into an experience.
The Ritz-Carlton Hotel Company, for example, aims to customize as many aspects of its services as it can for each individual guest. If, for example, you stay at a Ritz-Carlton hotel and call housekeeping to ask for hypo-allergenic pillows, a staff member dutifully brings up the pillows, and then ensures that this preference is added to your profile. The next time you stay at a Ritz-Carlton somewhere else in the world, even if you have never been there before, hypo-allergenic pillows will be on your bed before you arrive. The company never asks you twenty questions on what you want, because they want to create a “mystique” about how they know exactly what you want. So staff members observe your preferences across many dimensions of the hotel experience – from how you like to be addressed, to your favorite drinks, to whether you like a low floor or a high floor, and on and on the list goes – and then remember what those preferences are and fulfill them again and again, with every stay an opportunity to learn more. Every time you stay at one of its hotels, they access your preferences from its system – naturally called Mystique – and strive to wow you at every opportunity. The Ritz-Carlton Hotel Company doesn’t just provide hotel services, but by customizing them each step of the way, it stages a hospitality experience.
It's crucial to understand that experiences are a distinct economic offering.
Economic Distinctions
It's crucial to understand that experiences are a distinct economic offering, as distinct from services as services are from goods. Where goods are tangible and services intangible, experiences are memorable. If you do not create a memory within your guests – the customers of any experience – then you did not stage an experience.
Where goods are standardized and services customized, experiences are inherently personal. No two people can have the same experience even if they are in the same place at the same time, for the experience actually happens inside of them, in reaction to the events staged outside of them. Even if you have the same experience at a different day and time, it will be different for you because of your mood, what happened earlier in the day, whether or not you were primed for it, who else is with you, and myriad other factors – including the fact that you had the experience before!
And where goods are inventoried after production and services delivered on demand, experiences are revealed over a duration of time. You cannot have an instantaneous experience; it must rise up to a climax and come back down again.
So recognize this definition of experiences as a distinct economic offering: memorable events that engage each individual in an inherently personal way. As the Progression of Economic Value shows, experiences are built atop services, just as services are formed around goods and goods are made out of commodities. You cannot create a higher-level economic offering without subsuming the lower levels into it. With experiences, you in particular use goods as props and services as the stage to engage guests, each one in that inherently personal way.
Today we are in an Experience Economy, which has supplanted the Service Economy just as it displaced the Industrial Economy based on goods, which had overthrown the Agrarian Economy based on commodities. Experiences have become the predominant economic offering, and effectively causing services to be more and more commoditized, just as goods were before.[v]
Experiences can be commoditized as well!
Ah, but experiences can be commoditized as well! As alluded to above, the second time you have an experience it’s not as engaging as the first, the third time not as good as that, and pretty soon customers are saying “Been there, done that” – the hallmark of a commoditized experience, whether or not you also got the T-shirt.
So-called “theme restaurants” perhaps first encountered commoditization at this level of economic offering, as once you’ve experienced one particular theme restaurant, you’ve pretty much experienced everything it has to offer. Such operators also failed to appreciate that in order to create an engaging & memorable experience it doesn’t cut it to have lousy food and poor service. (The exception: Medieval Times, where eating off a messy plate with no utensils, with your “wench” or “serf” overpouring your mug, intentionally spilling your beer. These elements are perfectly in-theme for the place.)
Think also of Starbucks, which famously styles itself as a “third place” with a coffee-drinking experience, charging $3-6 (and more) for a cup of coffee with only a few cents worth of beans in it. It also increasingly commoditizes itself, with less in-place space, on average, than it used to, also replacing comfy chairs with hard wooden ones so people won’t linger as long. With more and more of its business coming from drive-throughs and mobile ordering, it’s impinging on the experience for those who want to spend time in the place, while the other customers get none of the in-place experience but pay all of the price. (My advice: Starbucks should charge less for those who do not stay in the place, creating an implicit admission fee for those who do.)
With transformations, companies use experiences as the raw material to guide customers to change, to help them in achieving their aspirations, to become what they want to become.
So using the heuristic that customization is the antidote to commoditization, what happens when you customize an experience? When you depict & stage an experience that is so appropriate for this individual person, exactly the experience needed at this particular point in time, then you can’t help but turn it into what’s often called a “life-transforming experience” – an experience that changes us in some way. Here, companies use experiences as the raw material to guide customers to change, to help them in achieving their aspirations, to become what they want to become. That is, economically, a transformation.
The Transformation Economy
Many enterprises are naturally in the transformation business: healthcare, counselors, fitness centers, financial institutions, spiritual organizations, and coaches of all stripes, to name a few. Those all work on personal transformations; many other enterprises are naturally in the business of B2B or organizational transformations, including management consulting, training, and outsourcing, as well as much of technology, accounting, and finance, and once again coaches of all (business) stripes.
However, far too many view their offerings as mere services or engaging experiences, and fail to compete on guiding their customers in truly achieving their aspirations. Think of higher education, such as getting an MBA degree. Why do people spend tens, even hundreds of thousands of dollars for an MBA degree? Is it because of the ideas they get? No, these are the commodities of the business, for every university has the same ideas more or less; their professors have to publish them! Is it because of the books, computers, pens, and other gear of getting an MBA? No. How about the homework analysis and other activities their professors deliver as they teach? No, that’s not it. (“C’s get degrees!” as the business school saying goes.) Certainly the classroom experience and greater environment of the MBA experience – particularly networking – has a great deal to do with it, yes. But fundamentally, people go back to school to gain knowledge and skills; to have a better career, perhaps a new job or vocation; to increase their earning potential; to be a different person. They get an MBA degree be transformed.
One university that recognizes this is the London Business School. As former dean John Quelch once told Fast Company magazine:
We're not in the education business. We're in the transformation business. We expect everyone who participates in a program at the London Business School—whether it's for three days or for two years—to be transformed by the experience. We want people to look back on their time here as something that significantly influenced their career and possibly even their entire life. . . One nice thing about declaring that we're in the transformation business is that everyone here—from custodians to deputy deans—has become much more motivated. People are eager to take part in having an impact on the students who come here.[vi]
That’s a different mindset, and a different economic offering. And “impact” is a great word for it, for without an impactful change there is no transformation.
For where experiences are memorable, transformations are effectual. Commodities, goods, and services have no lasting consequence beyond their consumption, and even the memories of an experience fade over time. But buyers of transformations seek to be guided toward some specific aim or purpose, and transformations must elicit that intended effect. Without a change in attitude, performance, characteristics, or some other fundamental dimension of self, no transformation occurs. The transformation affects the very being of the buyer.
Where experiences are inherently personal, transformations are individual. While experiences happen inside of us, transformations change us from the inside out. They change the buyer, whether a consumer or business. People value transformation above all other economic offerings because it addresses the why , their aspirations.
Where experiences are revealed over a duration of time, transformations are sustained through time. Suppose you go through a smoking cessation program, and a month later light up again. Or you go through a weight-loss program, lose forty pounds, and six months hence are back at your original weight. Or your business hires a consulting company to stop wasteful practices, but the changes never really take hold. If the results of these offerings prove impermanent, then it was not really life- or business-transforming but merely a momentary uptick (or downtick as the case may be) along the same old journey. You were not transformed.
With transformations the customer IS the Product.
In sum, with transformations the customer IS the Product. We are all the product of our experiences, as the saying goes, and only ever change through the experiences we have. But whatever experiences a customer undergoes – and all the goods & services brought to the table to stage such putatively transformative experiences – do not matter unless the customer achieves his aspirations.
Of course, you cannot guarantee your customers achieve their aspirations; as another old saying has it, you can lead a horse to water, but you can’t make it drink. All you can do is create the conditions under which customers transform themselves. That’s why the economic function for transformations is guide. You stage experiences, but you guide transformations, leading customers along a journey from where they are today to what they want to become.
There is no more economic value you can create than to help someone achieve his aspirations. That is why the Transformation Economy is hot on the heels of the Experience Economy, already comprising a large share of employment and GDP, not to mention a large share of customer’s needs, wants, and desires.
Joe Pine
© 2024 B. Joseph Pine II
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[i] Joseph A. Schumpeter, Capitalism, Socialism, & Democracy, First Edition, 1942, Third Edition (New York: HarperPerennial, 1950).
[ii] B. Joseph Pine II, Mass Customization: The New Frontier in Business Competition (Boston: Harvard Business School Press, 1993).
[iii] For more details on this discovery, see Joe Pine, “The History of the Experience Economy”, Strategic Horizons Thoughts Post, August 4, 2017, https://strategichorizons.com/the-history-of-the-experience-economy/.
[iv] The key principle of Mass Customization is modularity, and this type is mix modularity. For more on this and the other six types, see Joe Pine, “The Power of Modularity”, Strategic Horizons Thoughts Post, October 5, 2018, https://strategichorizons.com/the-power-of-modularity/.
[v] For much, much more on this, see of course B. Joseph Pine II and James H. Gilmore, The Experience Economy: Competing for Customer Time, Attention, and Money (Boston: Harvard Business Review Press, 2020).
[vi] John Quelch, quoted in Lucy MacCauley, “Measure What Matters,” Fast Company, May 1999, p. 111.