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On the importance of experiences in the experience economy Why the Experience is so important for companies and institutions

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Tags: user experienceexperience designcustomer experiencefour orders of designexperience economy

In both business and design, we are focusing increasingly on our users' experience, especially in the digital medium. What are the reasons for this development? This article traces this development and answers questions like: What is the economic value of experience? What is characteristic of experiences? Why are experiences so important, especially in the digital medium? And how can experience help us shape a future worth living?

Design and economy focusing on experiences

The idea that experiences are becoming increasingly important has gradually moved into our consciousness for a little over 20 years. Design professor Richard Buchanan (2001) has described experiences as one of four order of design. Each order focuses on a different aspect of design:

  • In the first order, design deals with communication in different media, such as posters, websites, or magazines (communication design, graphic design, visual design, web design).
  • The second order is about physical or digital products (industrial design, product design).
  • In the third order, designers focus on interactions, for example interpersonal services or interactions of humans and technology (interaction design, UX design, service design). These interactions create experiences. Experiences are by no means limited to entertainment and leisure activities. We can also design products and services with a focus on experience.
  • Finally, the fourth order is about complex systems, such as organizations, education, businesses, or institutions.
Four orders of design, created by Richard Buchanan. A table-like visual presents the four orders and describes how they relate to fields of design problems. The first order is about symbols as words and images. It is concerned with problems of communication. The second order is about objects as products. It is concerned with constructing things. The third order is about interactions, like activities, services, or processes. It is about shaping actions. The fourth order is about systems as organizations of environments. It seeks to integrate and evaluate thoughts.
Richard Buchanan's Four Orders of Design

In these orders of design, we move from the objects of design (and their properties such as shape or color) to their effects. This is accompanied by reflecting on making our designs useful, usable, and desirable (Buchanan 2001, 2015).

Experiences also have increased economic value. Some authors even posit that we live in an "Experience Economy". This term was described in 1998 by the scientists B. Joseph Pine II and James H. Gilmore in Harvard Business Review. In the Experience Economy, companies and institutions consider experience as an integral part of their business activities, with the aim of ensuring that people have a positive experience with their products or services that they remember fondly.

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.
B. Joseph Pine II & James H. Gilmore (1998, 98)

They describe four different economic offers that companies can make to their customers:

  • Commodities (undifferentiated, natural offerings, for example malt for brewing beer or the ingredients of a menu)
  • Products (standardized, manufactured offerings, for example beer or various finished products for cooking)
  • Services (customized, on-demand offerings based on activities, for example in a pub or restaurant, where beer and food are served and attractively presented)
  • and finally, experiences (memorable, personal offerings, for example a tasting that combines beer and food)
Four types of offerings in a matrix of pricing and competitive position. Raw materials or commodities are natural offerings. Products are standardized, manufactured offerings. Services are customized, on-demand offerings. And experiences are memorable, personal offerings. The types of offerings move increasingly from market pricing to premium pricing and from an undifferentiated to a differentiated competitive position.
Relations between type of offerings, pricing, and competitive position in the experience economy

Designing for experience

What exactly are we designing when we focus on an "experience"? Compared to other offerings, experiences have several distinctive features (Hassenzahl, 2010). They are memorable and highly personal. This focus on memorability explains why research and design have concentrated primarily on extraordinary experiences (Becker & Jaakola, 2020). Normal, everyday experiences began to receive more attention in recent years (Clemmensen, Hertzum, & Abdelnour-Nocera, 2020; Meneweger et al., 2018). Experiences also encompass various dimensions (such as emotions, aesthetic impressions, or psychological needs) and can only be understood holistically. Furthermore, experiences are dynamic and strongly depend on context. They develop in interaction with our environment, including digital products and services (Buchanan, 2015). As designers, we influence experiences through our design, but do not determine them (Becker & Jaakola, 2020): We can make certain experiences more likely, but the individual situation greatly influences my experience and can even "overrule" the external stimuli. However, human-centered design can continually examine these individual situations and help our designs respond to different contexts.

Beyond these general considerations about experience, what specific kind of experience is the center of design? Today, a variety of terms describe different kinds of experiences. These terms typically come from different research and design traditions. My background is in user experience, or UX for short. UX has a very broad definition to capture the holistic user experience:

user's perceptions and responses that result from the use and/or anticipated use of a system, product or service
Definition of User Experience (ISO 9241-210: 2019)

In economics, there are several other terms, for example Customer Experience (CX) and Brand Experience (BX). Researchers Larissa Becker and Elina Jaakola (2020, 637; italics in original) define customer experience as "non-deliberate, spontaneous responses and reactions to particular stimuli". Various authors highlight that Customer Experience (similarly to UX) includes different dimensions, such as emotional, cognitive, sensory, and behavioral aspects (Verhoef et al., 2009). Brand Experience focuses on the holistic impact of brands (Brakus, Schmitt, & Zarantonello, 2009). It is defined as "a combination of memorable, subjective esoteric impressions varying in polarity and amplitude, in humans, triggered from brand interactions, which occur at various stages of contact with a brand"; Chevtchouk et al., 2021, 1304). Other experience terms refer specifically to the experience of digital content (Digital Experience) or services (Service Experience; Chevtchouk et al., 2021), for example.

These terms can help us define what we are talking about in a particular context. However, they all have their limits. User Experience and Customer Experience focus on the people who experience something. Still, there are always other groups to consider, such as employees or people who are affected by the behaviors of others. For example, my smartphone affects people sitting next to me on the bus while I'm talking on it. Perhaps we would need to talk about human experience, as some scholars do (Fisk et al., 2020). But even then, non-human beings need to be considered, like the impact of technology on the environment.

Digital experiences

Experiences are particularly important in the digital medium, and as a consequence, I see them at the heart of digital strategies. I see four central reasons for this.

  1. Experiences are becoming key differentiation criteria. Technological advances increasingly remove market barriers for companies. Digital products and services can be programmed in a relatively short time. Physical products are also increasingly copyable through 3D printing or microcontrollers. Globalization and digitization make it easier and quicker to scale businesses or enter into new markets. The constant global availability of information quickly depletes even a knowledge advantage. For these reasons, the quality of experience is becoming a differentiator that allows companies to stand out from others. A positive experience also helps retain customers, which is considerably cheaper than acquiring new customers (article in German).
  2. Digital reminders preserve our interactions with products, services, and companies. Memories are an integral part of experiences. The more important an experience is for us, the better we remember it. Places, people, and objects are also linked to our memories. They often have an emotional value for us, for example when we hang a ticket to a concert on a pinboard in our apartment. The constant availability of digital technologies takes the culture of remembering experiences to a new level. Smartphones allow us to take photos in any situation, and mobile operating systems automatically generate flashbacks from those photos. Social networks log our social interactions. Digital services generate usage logs. At the same time, the wealth of collected data enables us to better understand users and create positive experiences (Newman & Blanchard, 2016).
iPad with the 2021 review of personal listening history
Digital services like Spotify create logs of our interactions and can create new experiences based on this information, for example with an annual review of our listening habits
  1. The social dimension of experiences becomes stronger. Humans are social beings and share their experiences with friends. Digital technologies facilitate sharing of experiences, often publicly via social media. As a consequence, the individual experiences of customers can reach a wide audience and become increasingly important for companies and institutions. Trends like referral marketing explicitly encourage customers to share their experiences publicly.
  2. Experiences are becoming more and more personalized. Experiences have always been personal: How I experience something is different from how someone else experiences the same situation. Digital technologies make experiences even more personalized. They allow for customization of numerous facets such as window sizes, design settings (e.g., dark mode), or output format (e.g., voice output of text). Usage situations are also becoming increasingly diverse, for example when we consume content on a smartphone, pause, and continue later on another device. Broader societal trends contribute further to the individualization of experience. For example, the diversity in society increases. It requires a personalized design approach, especially when general human classifications like demographic characteristics are no longer sufficient. As a consequence, companies and institutions need design approaches that allow them to capture and actively shape the individual dimension of experiences.

With the growing importance of experience, companies and institutions need to become proactive and start actively designing and continuously improving experiences.

Three advantages of experiences for companies and institutions

Advantage 1: Experiences focus on people

Experience helps us focus our attention on the essential: humans. After all, it is ultimately the human experience with technology that determines the success or failure of digital products and services.

It is certainly important that designers know how to create visual symbols for communication and how to construct physical artifacts, but unless these become part of the living experience of human beings, sustaining them in the performance of their own actions and experiences, visual symbols and things have no value or significant meaning.
Richard Buchanan (2001, 11)

Focusing on experience can also create empathy, i.e., the ability to put oneself in the shoes of other people. In the experience economy, this becomes a real competitive advantage that creates corporate value. Such an empathy approach combines well with participative methods, for example co-design. Co-design allows people to help shape products and services actively, and increases the chances of positive experiences.

Advantage 2: Experience is holistic

When we think of digital products and services, we often think of functions and features. Experiences, however, go beyond the purely functional. A product or service doesn't just have to get the job done somehow, but influences our experience in manifold ways. A design leaves a certain aesthetic impression: for example, when we are delighted by the elegant design. A function generates an emotional response: for example, when a cumbersome interaction design frustrates us. And a service gets personally meaningful because it helps us achieve something meaningful for us: for example, when YouTube allows me to share my knowledge. There are countless similar examples of non-functional dimensions of experience. Experience is holistic and must be investigated from various sides beyond functions and features. As a consequence, human-centered design not only identifies what functions people want, but also investigates emotional and aesthetic aspects or deeper needs of people.

Advantage 3: Experience pays off

Greater loyalty, acceptance of new technologies, more frequent recommendations: There are many good reasons why designing for positive experience is worth the effort. Several studies confirm its value for companies and institutions:

  • The stock index of companies with a strong focus on human-centered design is 228% higher than the S&P 500 stock index, according to a Design Management Institute study (2014). A McKinsey study from 2018 reports strong correlations between design and business metrics. Furthermore, the study identified four core considerations for a design focus in business processes: (1) analyze design performance using appropriate metrics, (2) embed human-centered design in all processes of the organization, (3) establish continuous iterations with users, and (4) focus on experience rather than just looking at products and services.
  • Good experience and human-centered design reduce support costs. Mozilla reduced 70% of requests and significantly reduced the support department's workload through a redesign of its support website. At the same time, this optimization allowed its support staff to answer a higher percentage of requests within 24 hours, further improving experience.
  • A focus on experience can reduce development risks. It is estimated that up to 15% of IT projects fail, and about half of development time is spent on revising previous work (Charette 2005). Human-centered design helps to identify promising solutions early in the development process.
  • Good experience increases willingness to pay by 14.4%, decreases willingness to switch to another brand by 15.8% and increases likelihood to recommend by 16.6%, according to Forrester Research (article in Fast Company).

There are several levels of embedding experience in business processes, generally called UX maturity models. An experience focus can offer advantages in individual projects, but can also influence strategic business processes. Therefore, one of the central tasks for many (especially medium-sized) companies and other organizations in the next few years will be to establish human-centered design in their processes to avoid falling fall behind.

Not just designing for experiences, but shaping the future

This article argued how experiences are becoming increasingly important and can provide considerable business benefits for organizations (Solis, 2015). But design and experience can also become strategic and shape entire systems (Buchanan, 2015; Rye, 2018). Such systems include organizations, businesses, institutions, or the environment and society in general. It is worthwhile to consider experience on this level of design for several reasons.

First, not only digital products and services create experiences, but every contact with an institution, for example a telephone call with a service employee. Consequently, it makes sense to think about experience beyond products or services: How can we align our entire organization to create positive experiences? Such a comprehensive view of experience is characteristic of companies and organizations that have reached the highest UX maturity level. This is one of the reasons why numerous management theories emphasize the importance of design (Buchanan, 2015).

Second, humans are part of complex social systems. A consequence of this social environment is that we cannot concentrate on an isolated group alone – not even our users or customers. We have to consider every human in the social environment impacted by our creations. Ethics play a central role here: As designers, we need to be aware of what our products and services do. What if a function creates a positive experience for some users, but a negative experience for others? For example, if a service optimizes the customer experience by making delivery times shorter, but also creates worse working conditions for delivery employees? Therefore, a holistic approach to experience has to include all humans and the ecosystem. This holistic view and its ethical consequences are increasingly discussed under the term "Society Centered Design".

Third, experience covers different temporal dimensions, which might conflict with each other. Thus, there is anticipated experience (before the interaction), momentary experience (during the interaction), episodic experience (after the interaction), and cumulative experience (over a longer period of time), and these levels can have complex relationships with each other. Consider the example of a smart machine for caffeinated drinks. Should it give me a coffee or an energy drink even though the data indicates that my excessive consumption could cause health problems in a few years? On the other hand, should such a machine restrict my freedom of choice? And how does it decide that I am at risk of health problems? And how do we know whether the database has undesirable effects, for example because its training data support prejudices? Taking different temporal dimensions of experience into account is vital for human-centered design. Per definition, human-centered design is about shaping the future. On a small scale, that may be a digital product long before a line of code is written. But it can also be about larger issues. In workshops, people can work together to find ideas for pressing future challenges like new approaches for collaboration, people-friendly cities, local policy decisions, or the educational system of the future. This necessarily has to cover future generations, non-human living beings, or the environment as a whole.

User experience covers different time spans; anticipated experience, which is imagining an interaction before it occurs; momentary experience, which is experiences during interaction; episodic experience, which is reflecting on an experience after interaction; and cumulative experience, which is recollecting multiple episodes of experience
Different time spans of user experience

Fourth, I think we should discuss the limits of human-centered design. In order to report my experience, I have to be aware of what is happening. But what about aspects that we humans are not aware of (and therefore not reflected in their experience, or at least not in our descriptions of it)? Perhaps established methods from user experience design can help us avoid overlooking these aspects - provided we apply them broadly enough. One example might be to apply personas not only to explicit audiences, but also to create non-human personas or environmental personas. Measures like this can help us explore the boundaries of experience.

Conclusion: Experience is important

For about two decades, the human experience has become increasingly important for companies and institutions, especially in the digital context. Experience focuses on people, allows a holistic view, and experience is worthwhile and pays off. For companies and institutions, it is therefore worthwhile to place experience with their offerings at the center. But we can go one step further and not only design for experience, but also design our organizations and thus our future.