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Joe Pine, co-author of The Experience Economy and one of the leading experts on serving customers, created this simple but powerful model that explains how pricing impacts the definition of your business.

Pine argues that you are what you charge for:

  • If you charge for undifferentiated products, you are in the commodity business
  • If you charge for distinctive items, you are in the goods business
  • If you charge for the activities that your team performs, then you are in the services business
  • If you charge for the time your customers spend with you, you are in the experience business (i.e. staging a memorable and engaging experience)
  • If you charge for the demonstrated outcome your customers achieve, you are in the transformation business

Generally speaking, the lower down this list you get, the higher your profit margins. That is, if you are in the commodities business, your margins will be very small. But competitors who succeed in the transformation business will attract clients who are happy to pay a premium price.

But Pine cautions that many companies set out to follow his advice with only a superficial understanding of his intent… and thus they fail. For example, a CEO proclaims that “we are going to deliver the best service in our industry”, but most of the subsequent service improvements are largely superficial in nature and thus they don’t have a meaningful impact on revenue or profit results.

Pine says that meaningful changes in service, experience, or transformation offerings must have real economic value to your customers. In other words, customers must be willing to pay more to obtain your offerings. That leads to a simple test when you are deciding whether to improve a particular service or offering. Ask, “How much would a customer pay for this improvement?”

Unfortunately, most companies don’t compete near the bottom of this list. Instead, they compete from a commodity or goods positioning, which basically means they compete on price. When you do that, says bestselling customer strategy author Don Peppers, “You are always at the mercy of your dumbest competitor, the one who is willing to lower prices below the point that is profitable.”

One way to get out of the commodity trap and to move towards the transformation business is to embrace a practice called operational entanglement. This means to take on processes that your client used to do themselves, so much so that your clients becomes dependent on your business. In the consumer space, an example of this is a bank that automatically pays your bills every month, or a supermarket that automatically delivers eggs, milk, cereal, paper towels, and other items that you use every week.

In the business to business space, an example of this is Fedex or UPS expanding from handling your shipments to also providing the software that allows customers to track their packages; this takes pressure off each shipper’s customer service group.

With operational entanglement, the more vital functions you can assume for your customers, the greater the profit margins and loyalty you can achieve. Importantly, the goal is not to take advantage of your customer, but rather to help them more than the prices they must pay for your help. The better your systems, and the better your people, the greater the positive impact you can have on your customers.