Economists have typically lumped experiences in with services, but experiences are a distinct economic offering, as different from services as services are from goods. Today we can identify and describe this fourth economic offering because consumers unquestionably desire experiences, and more and more businesses are responding by explicitly designing and promoting them. As services, like goods before them, increasingly become commoditized—think of long-distance telephone services sold solely on price—experiences have emerged as the next step in what we call the progression of economic value. (See the exhibit “The Progression of Economic Value.”) From now on, leading-edge companies—whether they sell to consumers or businesses—will find that the next competitive battleground lies in staging experiences.

An experience occurs when a company intentionally uses services as the stage, and goods as props, to engage individual customers in a way that creates a memorable event. Commodities are fungible, goods tangible, services intangible, and experiences memorable. Buyers of experiences—we’ll follow the lead of experience-economy pioneer Walt Disney and call them “guests”—value what the company reveals over a duration of time. While prior economic offerings—commodities, goods, and services—are external to the buyer, experiences are inherently personal, existing only in the mind of an individual who has been engaged on an emotional, physical, intellectual, or even spiritual level. Thus, no two people can have the same experience, because each experience derives from the interaction between the staged event (like a theatrical play) and the individual’s state of mind.

No company sells experiences as its economic offering unless it actually charges guests an admission fee. An event created just to increase customer preference for the commoditized goods or services that a company actually sells is not an economic offering. But even if a company rejects (for now) charging admission to events that it stages, its managers should already be asking themselves what they would do differently if they were to charge admission. The answers will help them see how their company might begin to move forward into the experience economy, for such an approach demands the design of richer experiences.

Companies should think about what they would do differently if they charged admission.

Some retailers already border on the experiential. At the Sharper Image or Brookstone, notice how many people play with the gadgets, listen to miniaturized stereo equipment, sit in massage chairs, and then leave without paying for what they valued, namely, the experience. Could these stores charge admission? Not as they are currently managed. But if they did charge an admission fee, they would be forced to stage a much better experience to attract paying guests. The merchandise mix would need to change more often—daily or even hourly. The stores would have to add demonstrations, showcases, contests, and other attractions to enhance the customer experience.

One way to think about experiences is across two dimensions. The first corresponds to customer participation. At one end of the spectrum lies passive participation, in which customers don’t affect the performance at all. Such participants include symphony-goers, for example, who experience the event as observers or listeners. At the other end of the spectrum lies active participation, in which customers play key roles in creating the performance or event that yields the experience. These participants include skiers. But even people who turn out to watch a ski race are not completely passive participants; simply by being there, they contribute to the visual and aural event that others experience.

The second dimension of experience describes the connection, or environmental relationship, that unites customers with the event or performance. At one end of the connection spectrum lies absorption, at the other end, immersion. People viewing the Kentucky Derby from the grandstand can absorb the event taking place beneath and in front of them; meanwhile, people standing in the infield are immersed in the sights, sounds, and smells that surround them. Furiously scribbling notes while listening to a physics lecture is more absorbing than reading a textbook; seeing a film at the theater with an audience, large screen, and stereophonic sound is more immersing than watching the same film on video at home.

Generally, we find that the richest experiences—such as going to Disney World or gambling in a Las Vegas casino—encompass aspects of all four realms, forming a “sweet spot” around the area where the spectra meet. But still, the universe of possible experiences is vast. Eventually, the most significant question managers can ask themselves is “What specific experience will my company offer?” That experience will come to define their business.

Experiences, like goods and services, have to meet a customer need; they have to work; and they have to be deliverable. Just as goods and services result from an iterative process of research, design, and development, experiences derive from an iterative process of exploration, scripting, and staging—capabilities that aspiring experience merchants will need to master.

If service businesses like airlines, banks, grocery stores, and insurance companies find no demand for memorabilia, it’s because they do not stage engaging experiences. But if these businesses offered themed experiences layered with positive cues and devoid of negative cues, their guests would want and would pay for memorabilia to commemorate their experiences. (If guests didn’t want to, it probably would mean the experience wasn’t great.) The special agents of the Geek Squad, for example, stage such a distinctive computer-repair experience that customers buy T-shirts and lapel pins from the company’s Web site. If airlines truly were in the experience-staging business, more passengers would actually shop in those seat-pocket catalogs for appropriate mementos. Likewise, mortgage loans would inspire household keepsakes; grocery checkout lanes would stock souvenirs in lieu of nickel-and-dime impulse items; and perhaps even insurance policy certificates would be considered suitable for framing.

Welcome to the experience economy