contributed articles

doi: 10.1145/ 1785414.1785449

by Wei-Lun Chang, Soe-Tsyr Yuan, and Carol W. Hsu

Creating the
Experience
Economy in
E-Commerce
together with
the forces of globalization have accelerated the growth
of service industries. In 2003, the OECD reported
that service industries now account for over 60% of
both employment and the gross domestic product
(GDP) of OECD member countries. The U.S Bureau of
Labor Statistics (BLS) has forecast strong employment
growth in the American service sector between
2004 and 2014. Although service industries are
expanding, Gilmore and Pine argue that, the growing
commoditisation of services offered has gradually
transformed the competition for market share from
focusing on the quality of services to the creation
of memorable experiences.4 As a consequence, the
competitive position of a firm now depends to a large
extent on its ability to generate impressive experiences
through innovative delivery channels.
In this article, we adopt Gilmore and Pines view that
the economic value of the experience economy lies in
co-producing the staging experiences via customer
participation and connection.4 Furthermore, we
suggest that current technologies and the growth of
the Internet have both enabled and strengthened
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the opportunities for experience-oriented offerings beyond limitations of

time and place. In following sections,
we first describe the current practice
of experience economy in electronic
commerce. Taking the iCare health
care service as an example, we demonstrate how collaborative pricing over
the Internet can further provide addedvalue to the production of experiences
offered in the electronic marketplace.
Experience Economy
in E-Commerce
In discussing the evolution of economies, Pine and Gilmore9 observed that
the economic value of a given offering
increases as its form changes from a
commodity, product or service to an experience. In Pine and Gilmores view,
a product has the highest economic
value when it becomes an experience
product,9 for example, when consumption of the product focuses on the process of staging a memorable experience. Compared with other economic
offerings, the creation of experience
consumption depends on the extent of
a customers participation and absorption during the consumption process.
Therefore, while the key attribute of
service product involves focusing on
the extent of customization, the dominant element of experience offerings
lies on the level of personalization.
The more personalization a business
manages to create, the more the customer will be prepared to spend. Pine
and Gilmore offered a number of examples from the entertainment and
retail industries. The leading example
is Disneyland, where customers pay to
immerse themselves in distinctive and
memorable experiences.
In recent years, the Internet and
intensified market competition have
motivated organizations to pay more
attention to the significance of experience offerings. The Internet infrastructure has reduced the cost of coordination, and thereby accelerated the
commoditization of services.7 At the
same time, competitive pressures continue to press the need for product dif-

contributed articles
ferentiation and innovation in order to
gain a competitive edge in todays fastmoving business environment. Therefore, the business value and potential
profits generated by experience offerings are becoming increasingly attractive and vital to firms that endeavor to
remain competitive in the global marketplace. As Pine and Gilmore9 note:
Increased price volatility as market forces take over awaits the
sellers of all commoditized goods
and services. Companies that
stage experiences, on the other
hand, increase the price of their
offering much faster than the
rate of inflation simply because
consumer value experiences
more highly.9
In this article, we argue that the
power and capability of the Internet allows the creation of experience-oriented consumption beyond these limitations, as shown by the implementation
of collaborative design and pricing applications on the Internet.
Collaborative Design in the
E-Commerce Environment
Toffler and Toffler11 coined the term
prosumer, a combination of producer and consumer, to describe people
who consume the products they create. In electronic commerce, online
collaborative design is an example of
how the prosumer concept can be used
to provide experience offerings. For instance, Koren6 revamped collaborative
filtering recommendation approaches
by modeling time changing behavior,
which can track dynamic customer
preferences for products. By creating a
process that involves consumers in the
design and development of a product,
a company can ensure that the product
meets the consumers needs. It would
also engender a sense of ownership
among customers that leads to intense
customer loyalty.10 Many such business
strategies have been implemented. For
example, an e-interior design service
enables designers and customers to
co-operate in the interior design of a
house.1 Customers can alter their requirements, and the e-interior design
service encompasses certain cognitive
components (for example, design concepts) to adapt a users design demands
automatically. As a result, through the

Table 1. Conventional and Collaborative Pricing Process

Conventional Pricing Process
Steps

Understanding
the budget

Setting price
differentials

Steps

Setting price
differentials

Collaborating to
determine actual
needs

Considering
psychological
dimensions

Establishing
prices

Making price
revision decisions

Collaborative Pricing Process

Co-shaping the
product/service

process of engagement, the customer

is given a memorable experience. Nike,
the world largest athletic shoemaker,
embraced the potential of e-collaborative design in 1999 by offering customdesigned mens and womens shoes
over the Internet.
In addition to physical goods, the
development of digitized products appears to a great opportunity for implementing experience-centered business
models.13 For example, digital content
design services empower producers
and consumers so that they can effectively co-create digital content in
a novel collaborative way without the
constraints of time and place. In the
entertainment sector, the growing
popularity of online interactive gaming also offers experiences unknown to
previous economic models. The players come together to enjoy the thrill of
interaction in cyberspace. We suggest
that the success of YouTube lies in its
ability to create a platform that not
only allows people to contribute content, but also to immerse themselves
in experiences through video created
by others in the global community.
These examples demonstrate how
customers can actively participate in
the consumption process in the virtual
world. In this article, we propose the
concept of collaborative pricing as an
extension of collaborative design to
create an experience economy on the
Internet. We believe that offering collaborative pricing could create better
entertainment and education experiences, and thereby increase the economic value of such offerings in the
electronic marketplace.
Experiencing Collaborative
Pricing in E-Commerce
Similar to the concept of collaborative
design, collaborative pricing allows customers to become active participants in
deciding the prices (for example, the
amount they are willing to pay) for ser-

Establishing
prices

Making price
revision decisions

vices tailored to meet their changing

needs. We define collaborative pricing
as a model that allows customers and
providers to participate and to jointly
decide prices with the underlying objectives of maximizing the willingnessto-pay and optimizing profits.
In the conventional pricing model of
electronic commerce, pricing strategies
are based primarily on mass customization; allow limited customer participation in price determination (See Table
1). We suggest the current form of information technology also has the potential for creating a collaborative pricing process, which would add to the
economic value of digital goods.
The proposed collaborative pricing
process involves four steps, namely, setting price differentials, anchoring and
collaboration, e-service molding, and
price optimization (See Figure 1(a)).
In the first step, producers set different prices for various versions of an eservice according mass customization.
The consumer then chooses a specific
version, which provides the anchor for
future collaboration about pricing. The
process then elicits consumers feedback and modifies the services accordingly. This molding phase continues until a consensus is reached, after which
an optimal price will be generated.
iCare: An Example of
Collaborative Pricing
We believe that implementing a collaborative pricing model can contribute
substantially to experience-generation
in the digital entertainment and health
care industries. For example, eCare
has utilized Web technology to improve the quality of health care via experiences. However, existing aging services (health care or eCare) are mostly
oriented towards clinical gerontology
(such as, exercise technology, sensor
technology) or the neuropsychology of
aging (such as, pre-symptomatic diagnosis of age-related cognitive decline,

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of attentive personalized service. Such
warm-hearted features would not only
provide elderly people and their families with essential services, but also
allow them to engage in a virtual collective decision-making process about
the services they would like to have (via
a case-based model, brainstorming
model, or garbage can model).
During the process of interaction,
the model collaboratively generates
bundled services for the elderly to experience and prices the bundled services
based on the maximum willingness-topay (WTP) and optimal profits. The final price results from the collaborative
process, the charges for prototypes and
the testing effort involved.

Figure 1. Understanding collaborative pricing

(a) The collaborative pricing process

(b) The flow of the collaborative pricing process

devices for the amelioration of agerelated changes in human sensory and

motor systems). The present design of
eCare lacks quality dimensions, such
as community involvement, consumer
participation and continuous quality
improvement, which are crucially important to increasing the value of care
for an aging population.3
We have implemented a platform
called iCare (intelligent Care) (see Figure 2),1 which extends eCare technolo124

c o mm unicatio ns o f t h e acm

gies to a domain of ambient e-services

that addresses the concept of experience offering. The objective is to provide quality e-services to elderly people
anywhere-anytime via an iCare home
portal. The features of iCare e-services
include ambient service accessibility,
attentive personalized service provision, innovative life-style creation, precious digital memory, and seamless
social connections. The concept of
iCare is unique through the provision

| J u ly 201 0 | vo l . 5 3 | no. 7

Collaborative Pricing Process

Here we define a collaborative pricing
model (CPM) as a model that has the
objectives of optimizing WTP (CUtility)
and profits (PProfit), that allows consumers and producers to actively participate
and collaborate when pricing products
or bundles, and that generates an optimal bundle price at equilibrium.
CPM = Optimal(PProfit, CUtility)
In iCare, the formulation of prices
that the elderly and their family members would be willing to pay is based
on the collaborative design and pricing
method (see Figure 1(b)). The consumer first chooses the version of bundled
services that would satisfy his/her current needs. The interaction with the
consumer and the generation of prototypes continues until those needs are
met. After this phase has been completed, the collaborative price (CP) will be
estimated based on the prototype testing efforts, the design fee for customization, and the cost of the services.
The three principal components of
collaborative price (CP) estimation are
the design fee, the number of bundles,
and test effort involved. The design fee
(D) is estimated based on the optimal
utility (U); the number of bundles (B) is
associated with the test effort (T); and the
bundle cost (C) is the cost of the set of services in the bundle. The following formula incorporates the three components:
CP D(U) + T(B) + C.
Using some experimental evaluation, our proposal model (CPM) can
be compared against another pricing

contributed articles
Figure 2. The platform architecture of iCare

approach, the expected utility theory

(EUT). The optimal willingness-to-pay
and profits attempted by CPM can then
be evidenced by some experimental
evaluation results as benchmarked
against EUT (see Table 2). In the experiments, we assume that the number of
services in a bundle ranges from 2 to 8
and the outcome probability of choosing a specific service bundle is set to

estimates prices compared with CPM

for bundles of services when the probability is 0.5 (Table 2(b)). The reason is
that EUT only considers the final utility
and bundle probability, and ignores
the efforts of the collaborative process.
If a customer is satisfied with the interaction process, the utility will be high,
and the price can increase. That is,
prices may be under-estimated when

0.9 to 0.5, which may exceed the average weighting. It is sufficiently high to
verify the difference between EUT and
CPM, except when the outcome probability is 100%.
When the probability is 0.9, EUT
will probably over-estimate the price
for 2 services in a bundle and underestimate the price for 58 services in a
bundle (Table 2(a)). EUT always under-

Table 2. Evaluation results of CPM benchmarked against EUT

Probability=0.9
No. of Service
Utility (CPM)

16.7184

22.032

4
27.6048

5
28.7712

Utility (EUT)

23.22

30.6

38.34

39.96

Average Price (CPM)

39.13515

59.13508

80.60968

90.73046

6
32.4
45

46.008

54.432

63.9

114.5507

75.6

180.8644

221.7905

Average Price (EUT)

49.02

64.6

80.94

84.36

95

134.9

159.6

Average Profit (CPM)

13.33515

25.13508

38.00968

46.33046

64.55069

109.8644

137.7905

Average Profit (EUT)

23.22

30.6

38.34

39.96

45

63.9

75.6

(a) The case when the outcome probability is 0.9

Probability=0.5
No. of Service

Utility (CPM)

5.688

11.664

16.2

18.72

21.024

21.384

27.36

Utility (EUT)

7.9

16.2

22.5

26

29.2

29.7

38

Average Price (CPM)

24.32725

53.43773

85.83707

Average Price (EUT)

23.7

48.6

67.5

102.5955
78

137.6745
87.6

148.1236
89.1

114
130.3607

Average Profit (CPM)

8.527252

21.03773

40.83707

50.59552

79.27447

88.72362

Average Profit (EUT)

7.9

16.2

22.5

26

29.2

29.7

206.3607

38

(b) The case when the outcome probability is 0.5

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Figure 3. Evaluation results of CPM benchmarked against EUT

(a) Simulated prices for CPM and EUT (Probability=0.9)

(b) Simulated profits for CPM and EUT (Probability=0.9)

(c) Simulated prices for CPM and EUT (Probability=0.5)

(d) Simulated profits for CPM and EUT (Probability=0.5)

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| J u ly 201 0 | vo l . 5 3 | no. 7

the number of services in a bundle is

large (such as, 48 services when the
probability is 0.9) (Figure 3(a)). Prices
are always under-estimated when the
probability is very low (such as, 0.5), as
consumers are not satisfied with, and
will not accept, the offered services
(Figure 3(c)). The experiment results
indicate that EUT generates the highest
profits when there are 2 or 3 services in
a bundle and the probability is 0.9, and
generates the lowest profits when there
are 58 services in a bundle (see Figure
3(b)). However, EUT only considers the
final utility and the probability that a
bundle will be chosen, and ignores the
effects of the collaborative process.
Bundle prices are always under-estimated when the probability is very low
(e.g., 0.5) as the provider under-estimates profits (see Figure 3(d)).
In short, the experimental results of
utilities for EUT and CPM demonstrate
that EUT may over-estimate the utility from the consumers perspective,
whereas CPM can potentially achieve
equilibrium (for example, neither overestimate nor under-estimate the utility). The experiment results demonstrate that EUT either over-estimates
or under-estimates prices, resulting
in higher or lower prices than those
obtained with CPM. The results also
indicate that collaborative pricing is
profitable from the producers perspective. In summary, the experiment
demonstrates a positive outcome for
implementing collaborative pricing in
the electronic commerce context.
Summary
The potential economic value of experience-oriented offerings has been
demonstrated in the physical marketplace. In this article, we suggest the
widespread use of the Internet and existing technologies allow us to extend
the experience economy to the virtual
marketplace. The growing practice of
online collaborative design demonstrates the potential for providing the
experience economy via the Internet.
Our major contribution is that we propose expanding existing practices by
incorporating the concept of collaborative pricing into the design of experience offerings. Moreover, we propose
a collaborative pricing model based
on a platform called iCare, which can
be implemented in the Internet envi-

contributed articles
ronment. We hope that this article will
motivate further research into the development of the experience economy
in electronic commerce.

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Wei-Lun Chang (wlchang@ms10.hinet.net) is an
assistant professor at BA Department, Tamkang
University.
Soe-Tsyr Yuan (yuans@seed.net.tw) is a professor and
Director of Service Science Research Center, National
Cheng-Chi University.
Carol W. Hsu (carolhsu@ntu.edu.tw) is an associate
professor in the Department of Information Management
at National Taiwan University.
2010 acm 0001-0782/10/0700 $10.00

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