The Progression of Economic Value

Does your business sell its products and services as commodities based on price?

Consider a true commodity: the coffee bean. Convert its commodity price from a per-ton to a per-cup basis, and you will find that a cup of coffee costs just two or three cents as a commodity. When a manufacturer roasts, grinds, packages, and sells the same beans in a grocery store, the price jumps to between five and 25 cents a cup (depending on brand, quality, and package size).

Brew the ground beans in a vending machine, kiosk, or corner coffee shop, and that service now sells for fifty cents to a dollar, maybe $1.50 per cup. But serve that coffee at a Starbucks or other experiential coffee shop – where the ordering, creation, and consumption of the cup happens with a sense of theatre and within an inviting environment where people want to hang out – and consumers gladly pay anywhere from $2 to $8 for each cup.

Businesses that ascend to this fourth level of value beyond commodities, goods, and services establish a distinctive experience that envelops the purchase of the coffee, increasing its value (and therefore its price) by several orders of magnitude over the original commodity.

Experiences are in fact a distinct economic offering, as distinct from services as services are from goods.

Experiences result when a company uses tangible goods as props and intangible services as the stage for engaging each customer in an inherently personal way, and thereby create a memory, the hallmark of every experience.

How can you apply this in your business?

See the progression of economic value in these experiences below. And for more insight, read “Beyond Products & Services in Banking” by B. Joseph Pine II, author of “The Experience Economy.”

The Car Experience

Commodity

When iron ore is mined from the earth, that ore is considered a “commodity”. The value of a commodity correlates directly to its demand in the manufacturing of goods.

Good

Iron, for example, is a commodity that is forged into steel for the purpose of manufacturing automobiles. The assembled cars are then sold to consumers as “goods”.

Service

If you take that same car and use it as a vehicle for hire, which transports passengers to the location of their choice, you have now provided a "service".

Experience

Limousines, in contrast, allow passengers to “experience” the ride by escaping normal life and relaxing in luxurious comfort. The limousine experience shares the same concept as the taxi service (transportation for hire), but consumers are willing to pay a premium for the experience because of the sensation of luxury and the association with wealth.

When metal is converted into a luxurious transportation experience, the consumer will pay additional money for the associated experiences of status, wealth and opulence.

The Coffee Experience

Commodity

Raw coffee beans are a "commodity". When sold, the profit margin is very low because they are only worth a few cents a kilo.

Good

Once roasted and packaged, the coffee beans become "goods". When sold, the margin grows and the average price increases to about 20 cents a scoop.

Service

Serve the same coffee beans in a local diner or corner coffee shop and they become part of a "service", which results in an even greater margin as the average price is around $1.50 per cup.

Experience

Using those very same beans and providing a heightened ambiance or "experience" (like serving the coffee in a cafe on a quaint Venetian square), profits surge as you are able to charge more than $5.00 per cup, demonstrating the power of offering a truly unique Customer Experience.

When the focus shifts from the coffee to the experience and delight created by it, consumers are willing to pay more for the resulting mood, memories and sense of well-being.

The Wine Experience

Commodity

Harvested grapes are an agricultural “commodity” that is low-cost and may be used to make jam, jelly, vinegar, wine, and grape seed oil.

Good

Approximately 71% of the world’s grapes are used for wine production. Wine is considered “goods” , made by fermenting grape juice. Bottles of wine are purchased in retail markets or specialty stores that sell alcoholic beverages.

Service

When a sommelier recommends wine at a restaurant and the wine is served by a waiter, it becomes a service and its price increases significantly.
 

Experience

 

When the same wine is served at a wine tasting in a specially decorated the room at a winery or restaurant, customers appreciate the unique learning experience and the price increases exponentially.

When the emphasis shifts from the grapes to the wine tasting experience, the profit margin increases because consumers are willing to pay more for a sensory experience in a friendly atmosphere.
 

The Cake Experience

Commodity

Do you remember in childhood when people still baked birthday cakes from scratch?

Back then, we actually used commodities like butter, sugar, eggs, flour, and milk, all of which usually cost less than a dollar.

Good 

These commodities became less relevant to consumers when companies began packaging cake and frosting mixes.

Of course, the cost increased $1 or $2, but the packaged goods were welcomed because of increased value to the consumer in terms of flavor and texture, consistency, ease of mixing and overall time savings.

Service

Some years later, many people stopped baking birthday cakes altogether.

It was simply easier to pick up a decorated ready-to-eat cake at the local supermarket or bakery.

At $10 to $20,this service costs ten times more than the boxed cake mix but still involves less than a dollar’s worth of ingredients.

Experience

Today, many people outsource the birthday party to specialty companies.

These companies stage a birthday experience at costs of $100 to $200.

Even so, consumers are willing to pay a premium price as the focus shifts from cake baking and party planning to truly enjoying the party itself.

As you can see from the birthday party illustration, each successive offering—pure ingredients (commodities), packaged mixes (goods), finished cakes (services) and staged parties (experiences), greatly increases in value because buyers find each more relevant to what they truly want; a fun and effortless birthday party.

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