The Experience Economy and Advanced Value Creating Ideas
What is next for organizations that already provide unsurpassed customer service?
What do companies such as Disney, Ritz-Carlton, FedEx, Zappos, Nordstrom, among others, see as they peer into the future and strive to offer a value proposition to their customers that prevents them from falling into the so-called "commodity trap," while still allowing them to maintain their leadership role as price makers, not takers?
One compelling hypothesis comes from Joseph B. Pine II and James H. Gilmore, in their book The Experience Economy, wherein they put forth a futuristic value curve for businesses, with the following echelon of customer value:
- If you charge for stuff, then you are in the commodity business.
- If you charge for tangible things, then you are in the goods business.
- If you charge for the activities you execute, then you are in the service business.
- If you charge for the time customers spend with you, then you are in the experience business.
- If you charge for the demonstrated outcome the customer achieves, then and only then are you in the transformation business (page 194).
Professional Knowledge Firms are at top of the curve
We believe PKFs are already poised at the top of value curve, since they do offer their customers transformations, even though they may not think of themselves as doing so. To prove this, let us see how Pine and Gilmore define a transformation:
While commodities are fungible, goods tangible, services intangible, and experiences memorable, transformations are effectual.
All other economic offerings have no lasting consequence beyond their consumption. 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.
That's why we call such buyers aspirants--they aspire to be some one or some thing different. With transformations, the customer is the product!
The individual buyer of the transformation essentially says, "Change me." (pages: 171-172, 177, 192).
Think of the difference between a fitness center, one that charges for membership, versus personal trainers. The latter earn more because they take personal responsibility for the outcome of their customer's fitness regimen.
Professionals, such as accountants, financial planners, attorneys, and advertising agencies already enable many transformations for their customers.
For example, they can help their customers become millionaires, retire at a specific age, finance a child's education, grow and enhance the value of a business and brand, and carry out a customer's last wishes through estate and gift planning.
These are inherently personal transformations, guiding the individual into their preferred vision of the future--guiding them from where they are to where they want to be.
There is no similarity between this offering and a commodity or even a bundle of intangible services. You are literally touching your customer's soul, forging a unique relationship with them virtually impervious to outside competition and commanding prices commensurate with the value of the results you are creating.
Our VeraSage colleague Brendon Harrex has taken this transformation strategy to heart, even adopting the language with his customers at the Harrex Group in New Zealand.
He recently wrote me an email detailing how the Harrex Group was deploying this strategy, along with other advanced value creating strategies--Daryl Golemb's idea of "emotional capacity," offering pricing options, conducting an "After Action Review" with customers, and utilizing the "Perpetual Fixed Price Agreement."
It's an excellent demonstration of how a firm can take Value Pricing to the next level by having the customer become the product, thereby creating--and capturing--a much larger proportion of value than merely offering services, or even experiences.
These concepts, obviously, are for firms that are well-along the path of Value Pricing. But for those who are, I think you will find Brendon's observations below absolutely profound.
The purpose of this email is to provide you with some feedback on some of the more positive pricing conversations that have occurred since our telephone conversations with you.
- We have continued our use of pricing options. In general, every customer is provided with three service level options. Sometimes the service levels are differentiated by the amount of work required, and sometimes they are differentiated by the level of service, e.g., turnaround times, accessibility, etc.
- The Value Council is attempting to put a much greater emphasis on [Daryl Goldemb's] "emotional investment" required to deliver to the customer's expectations and we are using this language more in our pricing conversations.
- In several pricing conversations, I have talked to customers about the difficulty of pricing a product when the customer themselves is the product. Interestingly, customers identify very well with the sales hierarchy [proposed by Pine and Gilmore, see above]. Most customers definitely understand that they are seeking a transformation in themselves and I think the sales hierarchy helps them to understand where the value of this transformation sits in the scheme of things. This conversation has also led on to interesting discussions on how we assess the success of the transformation. This is valuable as it greatly assists us in determining the customer's "value points" which, of course, provide our priorities.
- We continue to battle with how to make our proposals less "transactional or service orientated" and more "relational or transformation orientated." As you are aware, customers make irrational purchasing decisions but look for rational measures to support these irrational decisions. We are continuing to work on this, however the best we have come up with is to try and shorten our proposals and present them in a sales meeting where much greater detail can be provided.
- We have fully embraced the concept of a value retainer. This has been very well accepted by our high value customers. Two examples are as follows:
- Last financial year we completed a large business restructure for Customer A and undertook their compliance accounting requirements. Their fee for the last 12 months was approximately $90,000. They requested a meeting with us to discuss some concerns they had regarding our performance and pricing. Their key concerns were as follows: They did not clearly understand the value we had delivered. Because of the large nature of the project, they were not sure where it started and finished. This left them uncertain as to what fees they could expect to pay in the next 12 months. They did not clearly understand the difference between our accounting services and that of our competition. I effectively ran an "after action review" with them. This enabled us to answer all their queries and clearly articulate the value we had provided. In particular, I focused on the difference between strategically focused compliance services and retrospective score keeping. In the example of Customer A, we agreed that their compliance services could be processed elsewhere for approximately $12,000. I advised that while we had not broken it down, our compliance services were priced at $18,000 (we were then only talking about $6,000). Once I explained the additional value we delivered for the extra $6,000, the customer got it. We left the meeting having agreed a 3-year contract for $30,000 per year (inflation adjusted) payable in monthly installments (in advance!).
- Customer B started working with us in a strategic capacity approximately 12 months ago and at this stage, I became directly involved with their business. (Prior to this, they had used Harrex Group for compliance services only for an annual fee of $14,000).
Twelve months ago we agreed a fee of $30,000 and this involved us preparing a Business Life Plan for which we assigned an internal value of $8,000.
When we reviewed pricing with the customer this year, they increased the price from $30,000 to $36,000 (even though there is no Business Life Plan this year) and have committed to this for 3 years.
In addition to this, they want our assistance in clearly defining their vision, values, and purpose and creating a mechanism to align staff remuneration with the achievement of the business goals and vision. This additional project work will likely be between $10,000-$20,000 over and above the base line pricing agreed. The concept of the perpetual service agreement has been very valuable to us--thank you!
I think agreeing 3 year contracts has enabled us to achieve greater margins, create more certainty for our customers, and has enabled us to more clearly define the boundaries of our work.
Once again Ron, thanks for your assistance and we look forward to the continuing conversation with you.
Thanks for sharing your experiences here, Brendon. You have taken Value Pricing to an entirely new level. No one can accuse the Harrex Group of offering a "commodity"!