CO-CREATION EXPERIENCES:THE NEXT PRACTICE IN VALUECREATIONC. K. PRAHALAD AND VENKAT RAMASWAMY

consumers today have more choices of products and services than ever

before, but they seem dissatisfied. Firms invest in greater product variety but

are less abie to differentiate themseives. Growth and vaiue creation have

become the dominant themes for managers, in this paper, we expiain this

paradox. The meaning of value and the process of vaiue creation are rapidiy

shifting from a product- and firm-centric view to personalized consumer

experiences. Informed, networked, empowered, and active consumers are

increasingly co-creating value with the firm.The interaction between the firm

and the consumer is becoming the locus of value creation and value extrac-

tion. As value shifts to experiences, the market is becoming a forum for

conversation and interactions between consumers, consumer communities,

and firms. It is this dialogue, access, transparency, and understanding of risk-

benefits that is central to the next practice in value creation.

© 2004 Wiley Periodicals, Inc. and Direct Marketing Educational Foundation, Inc.

JOURNAL OP INTERACTIVE MARKETING VOLUME 18 / NUMBER 3 / SUMMER 2004

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/dir.20015

C.K. PRAHALAD

is the Harvey C. Fruehauf Professor

of Business Administration at the

University of Michigan Business

School In Ann Arbor;

e mail: cprahalad@aol.com

VENKAT RAMASWAMY

is the Michael R.and Mary Kay

Hallman Feilov;/ of Electronic Business

and Professor of Marketing at the

University of Michigan Business

School; e-mail: venkatr@umich.edu

This article is based on Prahalad and

Ramaswamy (2004), The Future of

Competition: Co-creating Unique Value

with Customers, Harvard Business

School Press.

INTRODUCTION

The word "market" conjures up two distinct images.On one hand, it represents an aggregation of con-sumers. On the other hand, it is the locus of exchangewhere a firm trades goods and services with the con-sumer. Imphcit in this view is a critical assumptionthat ;^rms can act autonomously in designing products,developing production processes, crafting marketingmessages, and controlling sales channels with little orno interference from or interaction with consumers.^Consumers get involved only at the point of exchange.Firms aggregate consumers into "meaningful seg-ments" for ease of exchange. Both of these images ofthe market are heing challenged hy the emergence ofconnected, informed, empowered, and active con-sumers. Consumers now seek to exercise their influ-ence in every part of the business system. Armed withnew tools and dissatisfied with available choices, con-sumers want to interact with firms and thereby"co-create" value (Prahalad & Ramaswamy, 2004). Thechanging nature of the consumer-company interactionas the locus of co-creation (and co-extraction) of valueredefines the meaning of value and the process of valuecreation. In this article, we discuss how the concept ofa market is undergoing change and transforming thenature of the relationship between the consumer andthe firm.

CONSUMERS, MARKETS, FIRMS, ANDVALUE CREATION: THE TRADITIONALSYSTEM

In the traditional conception of process of value cre-ation, consumers were "outside the firm." Value cre-ation occurred inside the firm (through its activities)and outside markets. The concept of the "value chain"epitomized the unilateral role of the firm in creatingvalue I Porter. 1980). The firm and the consumer haddistinct roles of production and consumption, respec-tively. In this perspective, the market, viewed eitheras a locus of exchange or as an aggregation of con-sumers, was separate from the value creation process(Kotler, 2002). It had no role in value creation. Its rolewas value exchange and extraction. The market,

^We use the terms "consumer" and "customer" interchangeablythroughout the paper.

defined as an aggregation of consumers, was a "tar-get" for the firm's offerings.^

Needless to say, the traditional concept of a marketis company-centric. So is the process of value cre-ation. Consequently, firms conceptualize customer-relationship management as targeting and managingthe "right" customers. Firms focus on the locus ofinteraction—the exchange—as the locus of economicvalue extraction. The interactions between companiesand customers are not seen as a source of value cre-ation (Normann & Ramirez, 1994; Wikstrom, 1996).Value exchange and extraction are the primary func-tions performed by the market, which is separatedfrom the value creation process, as shown in Figure 1.It is no surprise that the flow of communications isalso from the firm to the consumer, as the market is aplace where value is exchanged and the consumer hasto be persuaded such that the firm can extract themost value from transactions.

Informed, connected, empowered, and active con-sumers are increasingly learning that they too canextract value at the traditional point of exchange.Consumers are now subjecting the industry's valuecreation process to scrutiny, analysis, and evaluation.Consumer-to-consumer communication and dialogueprovides consumers an alternative source of informa-tion and perspective. They are not totally dependenton communication from the firm. Consumers canchoose the firms they want to have a relationshipwith based on their own views of how value should becreated for them.

Online auctions for hotel rooms and airline reserva-tions are just one example of this growing phenomenon.The popularity of businesses such as eBay suggeststhat the auction is increasingly serving as the basis forpricing goods and services online. From the customer'sperspective, the advantage of the auction process isthat prices truly reflect the utility to that customer, ata given point in time, of the goods and services beingpurchased. That doesn't necessarily mean that pricesare lower, only that the customer pays according to her

^ We use the term "ofFering" to denote products and services. Ourpoint of view applies equally to conventional distinctions of"products" versus "services."

JOURNAL OF INTERAaiVE MARKETING

Firm^onsumer Interaction(1) Interaction is the locus of economic value extraction

by the firm (and tfie consumer)(2) Interaction is the basis of consumer experience

The Firm:Creates value

TheMarfcatExchange of value

(products and sendees)

TmConsumanDemand targetfor the finm's

offerings

Tbe market Is separate from the value creation process

FIGURE 1The Traditional Concept of a MarketSource: Prahalad and Ramaswamy (2004)

utility rather than according to the company's cost ofproduction.

As customers become more knowledgeable andincreasingly aware of their negotiating clout, morebusinesses—from automakers to cosmetic surgeryclinics—will feel pressure to adopt an implicit (if notan explicit) negotiation. An auction is one approach tothis negotiation process. Armed with knowledgedrawn from today's increasingly transparent businessenvironment, customers are much more willing thanin the past to negotiate prices and other transactionterms with companies. We are moving toward a worldin which value is the result of an implicit negotiationbetween the individual consumer and the firm.Therefore, value creation, for an automaker, forexample, is the result of individualized negotiationswith millions of consumers.

The consequences of not recognizing this shift can behigh. As long as firms believe that the market can beseparated from the value creation process, firms insearch of sources of value will have no choice but tosqueeze as much costs from their "value chain" activ-ities as possible. Meanwhile, globalization, deregula-tion, outsourcing, and the convergence of industriesand technologies are making it much harder for man-agers to differentiate their offerings. Products andservices are facing commoditization as never before.Companies can certainly not escape being super effi-cient. However, if consumers do not see any differen-tiation they will buy smart and cheap. The result is

the "Walmartization" of everything, from clothes toDVD players.

Is there an antidote to this dilemma? We think so.Firms continually reduce costs and the consumersnegotiate away the cost reductions in price erosion.But to find the antidote, companies must escape thefirm-centric view of the past and seek to co-createvalue with customers through an obsessive focus onpersonalized interactions between the consumer andthe company. Further, doing so viill require managersto escape their product-centered thinking and insteadfocus on the experiences that customers will seek toco-create. We need to challenge the traditional, dis-tinct roles of both the consumer and the company andexamine the impact of a convergence of the roles ofproduction and consumption; or the convergence ofthe roles of the company and the consumer.

CO-CREATION EXPERIENCES AS THEBASIS FOR VALUE CREATION

High-quality interactions that enable an individualcustomer to co-create unique experiences with thecompany are the key to unlocking new sources ofcompetitive advantage. Value will have to be jointly cre-ated by both the firm and the consumer (see Table 1).

In the traditional system, as firms decide the prod-ucts and services they will produce, by implicationthey decide what is of value to the customer. In this

CO-CREATION EXPERIENCES

system, consumers have little or no role in value cre-ation. During the last two decades, managers havefound ways to partition some of the work done bythe firm and pass it on to their consumers—be itself-checkout (e.g., gas pumps, ATMs, supermarketcheckout), involvement of a subset of customers inproduct development (e.g., industrial customers helpdesign the products they need as airlines do withBoeing), or a range of variants in between.Consumers find some of these beneficial. Firms such

TABLE 1 The Concept of Co-Creation

WHAT CO-CREATION IS NOT

• Customer focus

•Customer is king or

customer is always right

' Delivering good customer

service or pampering the

customer with lavish

customer service

' Mass customization of

offerings that suit the

industry's suppiy chain

• Transfer of activities from

the firm to the customer as

in self-service

• Customer as product

manager or co-designing

products and services

Product variety

• Segment of one

' Meticulous Market research

' Staging experiences

' Demand-side innovation for

new products and services

WHAT CO-CREATION IS

• Co-creation is ahout joint

creation of value by the

company and the customer. It

is not the firm trying to

please the customer

• Allowing the customer to

co-construct the service

experience to suit her context

• Joint problem definition and

problem solving

• Creating an experience

environment in which

consumers can have active

dialogue and co-construct

personalized experiences;

product may be the same

(e.g., Lego Mindstorms) but

customers can construct

different experiences

• Experience variety

• Experience of one

• Experiencing the business as

consumers do in real time

• Continuous dialogue

'Co-constructing personalized

experiences

• Innovating experience

environments for new

co-creation experiences

as Disney and Ritz Carlton have found interestingways to stage an experience for consumers (Pine &Gilmore, 1999). In all variations of consumer involve-ment, from self-checkout to participation in a stagedexperience, the firm is still in charge of the overallorchestration ofthe experience. Yes, they focus on con-sumer experience, but their consumers are basicallytreated as passive. Such companies disproportionate-ly influence the nature of the experience. They areprimarily product-centric, service-centric, and, there-fore, company-centric. The focus is clearly on connect-ing the customer to the company's offerings.

This firm-centric view of the world, refined over thelast 75 years, is being challenged not by new competi-tors, but by communities of connected, informed,empowered, and active consumers. We believe thatthere is an emerging disconnect between the opportu-nities for value creation and differentiation enabledby a networked, active, informed consumer (and con-sumer communities), their expectations and capabili-ties and the constraining force of the traditional con-cept of a market. The more than 1.3 billion cell phonesand the proliferation of PCs around the world are cre-ating ubiquitous connectivity. For example, more than70 million Americans have visited www.WebMD.com.More than 500 chat rooms exist on just cancer alone. Avisit to the doctor today is qualitatively different thanit was 10 years ago. Patients want to engage in dia-logue. They want to understand the risk-benefits ofalternate modalities of treatment. They have access tomore information than ever before, regardless of qual-ity. Consumers expect transparency. "Don't hold back,tell me the truth," is often the approach. Doctors maynot like this. It takes time. It exposes them and thequality of their expertise. It is hard to hide behindauthority. However, the doctor now has a betterpatient. Because he or she understands and isinvolved, the patient is more willing to comply with thetreatment modalities that they have jointly developed.

Put yourself in the position of a patient. What is ofvalue here? Is it the medications, the hospital, theequipment that is used, and the expertise of the doc-tor? Surely, all these are critical. But what differenti-ates one hospital from another? One doctor fromanother? For the patient, it is the experience of co-creating with the doctor a modality of treatment thattakes into account his or her peculiar circumstances.

8 JOURNAL OF INTERAaiVE MARKETING

Patient A may live alone and find it difficult to followthe diet regimen. She may need help. A differentpatient with the same medical condition may havetotally different circumstances or context. His experi-ence may depend on taking care of his children. Hewants to indulge his children in the American ritualand must make it to the little league games withoutappearing to be very sick. The traditional view of thehospital and its product—medical treatment—has notdisappeared. Rather, what has emerged as the basisfor unique value to consumers is their experience(which is contextual). The quality of that experienceis dependent on the nature of the involvement thecustomer (patient) has had in co-creating it with doc-tors, counselors, and others. Individual involvementcan go beyond the treatment modality to the processof diagnosis, therapy, counseling, and wellness indica-tors. It can vary from patient to patient, and dependson how each patient chooses to co create his or herown unique experiences. What we need to create is anexperience environment within which individualpatients (consumers) can create their own uniquepersonalized experience. Thus, products can be com-moditized hut co-creation experiences cannot he.

BUILDING BLOCKS OF INTERACTIONS:DIALOGUE, ACCESS, RISK BENEFITS,AND TRANSPARENCY (DART)

Let us look at what has changed. How do we build asystem for co-creation of value? First, we have to startwith the building blocks of interactions between thefirm and consumers that facilitate co-creation experi-ences. Dialog, access, risk-benefits, and transparency(DART) are emerging as the basis for interactionbetween the consumer and the firm (see Figure 2).These huilding hlocks of consumer-company interac-tion challenge the strong positions managers havetraditionally taken on labeling laws, disclosure ofrisks (as in smoking or genetically modified plants),transparency of financial statements, and open accessand dialog with consumers and communities.

Dialog is an important element in the co-creationview. Markets can be viewed as a set of conversationsbetween the customer and the firm (Levine, Locke,Searls, & Weinberger, 2001). Dialog implies interac-tivity, deep engagement, and the ability and willing-

Dialogue

Tfaneparency Access

Risk-benalHs

FIGURE 2Building Blocks of Interactions forCo-creation of Value

ness to act on both sides. It is difficult to envisage adialog between two unequal partners. So, for anactive dialog and the development of a shared solu-tion, the firm and the consumer must become equaland joint problem solvers. Dialog must center aroundissues of interest to both—the consumer and the firmand must have clearly defined rules of engagement.For example, buyers and sellers engage in a dialoguein eBay. The rules of engagement are evolving butclear at any point in time.

But dialog is difficult if consumers do not have thesame access and transparency to information. Firmshave traditionally benefited fi"om exploiting the infor-mation asymmetry between them and the individualconsumer. Because of ubiquitous connectivity, it ispossible for an individual consumer to get access to asmuch information as she needs from the communityof other consumers as well as from the firm. Bothaccess and transparency are critical to have a mean-ingful dialog.

More importantly, dialog, access, and transparencycan lead to a clear assessment by the consumer oftherisk-benefits of a course of action and decision. ShouldI change my medication? What are the risks? Insteadof just depending on the doctor—the expert—thepatient has the tools and the support structure to helpmake that decision—not in some generic risk categoryhut "for me"—with a medical condition, a lifestyle, orsocial obligations. This is a personalized understand-ing of risk-benefits.

The progress towards DART cannot be stopped. Thecase of the patient-doctor interaction is not isolated.

CO-CREATION EXPERIENCES

We believe that the opportunities for value creationare enhanced significantly for firms that embrace theconcepts of personalized co-creation experience as thesource of unique value. Personalizing the co-creationexperience differs from the concept of "customers asinnovators." Customers of a firm like General ElectricPlastics assume much of the task of developing a cus-tom resin for a specific application. By providingaccess to tools and a library of compounds, GE shiftseffort and risk to its customers (Thomke & vonHippel, 2002). When the process works well, both par-ties benefit. GE saves development time and reducesits risk, while customers can get what they want withgreater speed and accuracy. But as long as the processremains firm centric and product centered, it is atbest a variant of the cuirent dominant logic.

The same applies to the conventional approach toproduct or service customization. Starting from a tra-ditional firm-centric view of value creation, managersfocus on providing products and services to a singlecustomer at low cost. This process leads to mass cus-tomization, which combines the benefits of "mass"(large-scale production and marketing and thereforelow cost) with those of "customization" (targeting asingle customer). The focus on product-feature devel-opment leads to increased product choice for con-sumers. On the Web, for example, consumers can cus-tomize products and services ranging from businesscards and computers to home mortgages and fiowerarrangements, simply by choosing from a menu of fea-tures. But such customization tends to suit the com-pany's supply chain, rather than a consumer's uniquedesires and preferences.

Personalizing the co-creation experience means fos-tering individualized interactions and experience out-comes. It involves more than a company's a la cartemenu. A personalized co-creation experience reflectshow the individual chooses to interact with the expe-rience environment that the firm facilitates. We aresuggesting a totally different process—one thatinvolves individual consumers on their terms—abroad challenge that business leaders must face(Prahalad & Ramaswamy, 2003).

Once we discard the "firm-centric" view of value cre-ation and accept the "co-creation" view, the evidence ofthis shift is visible in a wide variety of industries. For

example, video games could not exist without activeco-creation with consumers. At the other extreme, tra-ditional firms like John Deere are building extensivenetworks that allow farmers to share their experi-ences, dialogue with the company and among them-selves, and increase their productivity. The OnStarnetwork of GM is another case in point. The systemhas the potential to allow individuals to construct theirown experience. GM provides the platform. As an indi-vidual, I can decide to seek advice on restaurants orask them to alert me to breaking news or the progressof my favorite football team. These are all possibilities.Individuals construct their own experiences. Ebay andAmazon are further examples of this trend—both facil-itate the process of personalized experiences, bothinvolve communities, both facilitate dialogue.

The transition fi"om a firm-centric view to a co-creation view is not about minor changes to the tradi-tional system. Note what co-creation is not. It isneither the transfer or outsourcing of activities to cus-tomers nor a customization of products and services.Nor is it a scripting or staging of customer eventsaround the firm's various offerings (e.g., La Salle &Britton, 2002; Peppers & Rodgers, 1993; Schmitt,1999; Seybold, 1998). That kind of company-customerinteraction no longer satisfies most consumers today.The change that we are describing is far more funda-mental. It involves the co-creation of value throughpersonalized interactions based on how each individ-ual wants to interact with the company. Co-creationputs the spotlight squarely on consumer-companyinteraction as the locus of value creation. Becausethere can be multiple points of interaction anywberein the system (including the traditional point ofexchange), this new framework implies that all thepoints of consumer-company interaction are criticalfor creating value. Since no one can predict the expe-rience a consumer will have at any point in time, thetask of the firm is one of innovating a robust experi-ence environments (Prahalad & Ramaswamy, 2003).Hence, our view of value co-creation challenges bothimages of a market: as an exchange of product andservice offerings and as an aggregation of consumers.Traditional economics focuses squarely on theexchange of products and services between the com-pany and the consumer, placing value extraction bythe firm and the consumer at the heart of the interac-tion. In the co-creation view, all points of interaction

10 JOURNAL OF INTERAaiVE MARKETING

between the company and the consumer are opportu-nities/or both value creation and extraction.

The co-creation view also challenges the market as anaggregation of consumers for what the firm can offer.In the new value co-creation space, business man-agers have at least partial control over the experienceenvironment and the networks they build to facilitateco-creation experiences. But they cannot control howindividuals go about co-constructing their experi-ences. Co-creation, therefore, forces us to move awayfrom viewing the market as an aggregation of con-sumers and as a target for the firm's offerings. Marketresearch, including focus groups, surveys, statisticalmodeling, video ethnography, and other techniqueswere developed in an effort to get a better under-standing of consumers, identify trends, assess con-sumer desires and preferences, and evaluate the rela-tive strength of competitors' positions. Within thisframework, the ultimate concept in customer segmen-tation is one-to-one marketing.

While debates rage about the adequacy of our mar-keting methodology, the underlying vision of con-sumers as targets (prey) is rarely questioned. Butwhat if the consumers were to turn the tables? Whatif consumers were to start investigating companies,products, and potential experiences in a systematicway? Is it sufficient for companies to "sense andrespond" to customer demands? Do managers needmarket foresight—besides market insight? Must they

learn to anticipate and lead, and further, to co-shapeexpectations and experiences?

In co-creation, direct interactions with consumers andconsumer communities are critical. Consumer shiftsare best understood by being there, co-creating withthem. Firms must learn as much as possible about thecustomer through rich dialogue that evolves with thesophistication of consumers. The information infra-structure must be centered on the consumer andencourage active participation in all aspects ofthe co-creation experience, including information search,configuration of products and services, fulfillment,and consumption. Co-creation is more than co-marketing or engaging consumers as co-sales agents.It's about developing methods to attain a visceralunderstanding of co-creation experiences so that com-panies can co-shape consumer expectations and expe-riences along with their customers.

Thus, in the emerging concept of a market, the focusis squarely on consumer-company interaction—theroles of the company and the consumer converge. Thefiirm and the consumer are both collaborators andcompetitors—collaborators in co-creating value andcompetitors for the extraction of economic value. Themarket as a whole becomes inseparable from thevalue creation process, as shown in Figure 3.

Co-creation converts the market into a forum wheredialogue among the consumer, the firm, consumer

Rrm-Consumer Interaction(1) Interactionisthelocusof co-creat/on of va/ue and

economic value extraction by the consumer and the firm(2) Co-creatlon experiences are the basis of value

TlM Market;Co^rwetlan experiences

of Unique Valuein the contOKt of an

tndtvtdual at a specificmomeni

TheConsunMRCollaboratw tn co-cmatlng

value and competitor inextracting economic vaiue

TheRrm:CallaboTHtor in co-ctBating

value and competHor inextracting economic value

Ttw market )s integral to the value creation procesa

FIGURE 3The Emerging Concept of the Market

CO-CREATION EXPERIENCES 11

TABLE 2

FROM

• One-way

• Firm to consumer

• Controlled by firm

• Consumers are 'prey'

• Choice = buy/not buy

• Firm segments and

targets consumers;

consumers must "fit

into" firm's offerings

Transformation of the RelationshipBetween Firms and Consumers

TO

•Two-way

•Consumer to firm

• Consumer to consumer

• Consumer can "hunt"

• Consumer wants to/can

impose her view of choice

• Consumer wants to/is being

empowered to co-construct

a personalized experience

around herself, with firm's

experience environment

SouKE Adapted from Prahalad & Ramaswamy (2005).

communities, and networks of firms can take place.The transformation of the relationship between firmsand consumers is shown in Table 2.

THE MARKET AS A FORUM FORCO-CREATION EXPERIENCES

Co-creation of value fundamentally challenges thetraditional distinction between supply and demand.When the experience, along with the value inherentin it, is co-created, the firm may still produce a phys-ical product. But the focus shifts to the characteristicsof the total experience environment. Now demand iscontextual. Given that customers cannot predict theirexperiences, co-creation of value may well imply thedeath of traditional forecasting. Instead, the focusshifts to capacity planning, the ability of the experi-ence network to scale up and down rapidly, and forthe system to reconfigure resources in real time toaccommodate shifting consumer desires and person-alization of co-creation experiences. Such a systemmay be highly demanding, yet it promises incredihleefficiency gains as well. We must view the market asa space of potential co-creation experiences in whichindividual constraints and choices define their will-ingness to pay for experiences. In short, the marketresembles a forum for co-creation experiences.

The market as a forum challenges the basic tenet oftraditional economic theory: that the firm and the

consumers are separate, with distinct, predeterminedroles, and, consequently, that supply and demand aredistinct, but mirrored, processes oriented around theexchange of products and services between firms andconsumers. We believe that, in time, new approachesand tools consistent with a new experience-based viewof economic theory will emerge. We have identifiedand summarized some of the key points of departurein Table 3.

The new frame of value creation creates new compet-itive space for firms. To compete effectively however,managers need to invest in building new infrastruc-ture capabilities, as luell as new functional and gover-nance capabilities—capabilities that are centered onco-creation through high-quality customer-companyinteractions and personalized co-creation experiences(see Prahalad & Ramaswamy, 2004). While the build-ing of new capabilities is critical, it is less difficultthan changing one's dominant logic. Unless we makea shift from a firm-centric to a co-creation perspectiveon value creation, co-extraction of economic value byinformed, connected, empowered, and active commu-nities of consumers on the one hand and cost pres-sures wrought by increased competition, competitivediscontinuities, and commoditization on the other willonly make it harder for companies to develop a sus-tainable competitive advantage. The future belongs tothose that can successfully co-create unique experi-ences with customers.

IMPLICATIONS FOR INTERACTIVEMARKETING

As we move rapidly to a co-creation experience as thebasis of value, the fundamental interaction betweenthe firm and the consumer changes in character andimportance. As we have discussed, the interactionbecomes the locus of value creation; the interactioncan be anywhere in the system, not just at the con-ventional point of sale or customer service. In the tra-ditional view of marketing, interaction is where thefirm markets its offerings to extract economic valuefrom the consumer (based on the value the firm hasalready created through its value chain). This firm-centric and product-centric view is deep-rooted andmanifests itself at all the interfaces and touchpointsbetween firms and customers. Firms manage cus-tomer relationships leaving little room for customers

12 JOURNAL OF INTERAaiVE MARKETING

TABLE 3 The Market as a Target for the Firm's Offerings Versus a Forum for Co-Creation Experiences

THE MARKET AS ATARGET

The firm and the consumer are separate, with distinct

predetermined roles.

Supply and demand are matched; price is the clearing mechanism.

Demand is forecast for products and services that the firm can suppiy.

Value is created by the firm in Its value chain. Products and services are

exchanged with consumers.

Firm disseminates information to consumers.

Fimi chooses which consumer segments to serve, and the distribution

channels to use for its offerings.

Firms extract consumer surplus. Consumers are "prey," whether as

'groups" or "one-to-one." Firms want a 360-degree view of the customer,

but remain opaque to customers. Firms want to "own" the customer

relationship and lifetime value.

Companies determine, define, and sustain the brand.

THE MARKET AS A FORUM

The firm and the consumer converge; the relative "roles of the moment"

cannot be predicted.

Demand and suppiy are emergent and contextual. Supply is associated

with facilitating a unique consumer experience on demand.

Value is co<reated at multiple points of Interaction. Basis of value Is

co-creation experience.

Consumers and consumer communities can also initiate a dialogueamong themselves.

Consumer chooses the nodal firm and the experience environment to

interact with and co-create value.The nodal firm, its products and

services, employees, multiple channels, and consumer communities come

together seamiessly to constitute the experience environment for

individuals to co-construct their own experiences.

Consumers can extract the firm's surplus. Value is co-extracted. Consumers

expect a 360-degree view of the experience that is transparent in the

consumer's language.Trust and stickiness emerge from compelling

experience outcomes. Consumers are competitors In extracting value.

The experience is the brand.The brand is co-created and evolves

with experiences.

Source.- Prahalad & Ramaswamy (2004).

to have a voice, inject their view of how they want to(individually and collectively) interact with firms andconsumer communities, and co-create value that cus-tomers are, by design, "willing to pay for."

But co-creation demands that both managers andconsumers make the necessary adjustments. Forexample, both must recognize that the interactionbetween the two—the locus of value creation—mustbe built on critical building blocks. It must start fromaccess and transparency. Firms have traditionallyopposed transparency. The fight against productlabeling is well known. Releasing information regard-ing the likely risks is often mandated. It must becomevoluntary. Further, transparency and access are of lit-tle value if the firms do not create the infrastructurefor dialog. This requires investment in technology butmore important, investments in socializing managers

and changing managerial practices. How does a firmengage in a dialog? How do you understand theunderlying expectations of millions of consumers andtheir utility functions? The infrastructures and thegovernance processes that are emerging in a widerange of industries is an indication of implicit negoti-ations (e.g., Expedia, eBay, Amazon, and others). Thesystem allows for the consumers to inject or statetheir expectations and their willingness to monetizetheir own experiences and makes it explicit. The firmalso has a way of accepting or rejecting that specifictransaction at that time. What is emerging is thatdialog requires us to invest time and effort to under-stand the economics of experience and develop sys-tems to come to agreements rapidly. Finally, firmsmust recognize that the more educated the consumer,the more likely it is that she will make an intelligentchoice and make tradeoffs that are appropriate to her

CO-CREATION EXPERIENCES 13

context. This does not take away the responsibility ofthe company to deny some choices. As everyoneknows, the barman has the obligation to know whento stop serving drinks.

Consumers have to also learn that co-creation is atwo-way street. The risks cannot be one sided. Theymust take some responsibility for the risks they con-sciously accept. The tobacco company has the obliga-tion to educate consumers on the risks of smoking anddevelop cessation programs. But if a consumer per-sists in smoking, he must take responsibility for hisown actions. In cases where the consumer is unlikelyto have the expertise to make that choice, they mustaccept the choice made for them by a neutral partysuch as the Federal Drug Administration. The gover-nance issues that will mediate the interactions andcreate mutually beneficial results for the consumerand the firm is the goal. This we believe is the nextpractice of value creation.

REFERENCESKotler, P. (2002). Marketing Management. Engiewood

Cliffs, NJ: Prentice Hall.

LaSalle, D., & Britton, TA. (2002). Priceless: TurningOrdinary Products into Extraordinary Experiences.Boston: Harvard Business School Press.

Levine, R., Locke, C, Searls, D., & Weinberger, D. (2001).The Cluetrain Manifesto: The End of Business as Usual.Cambridge, MA; Perseus Publishing.

Normann, R., & Ramirez, R. (1994). Designing InteractiveStrategy: From Value Chain to Value Constellation.Chichester, UK: Wiley.

Peppers, D., & Rogers, M. (1993). The One to One Future:Building Relationships One Customer at a Time. NewYork: Doubleday.

Pine, B.J., II, & Gilmore, J.H. (1999). The ExperienceEconomy: Work Is Theater and Every Business a Stage.Boston: Harvard Business School Press.

Porter, M.E. (1980). Competitive Strategy: Techniques forAnalyzing Industries and Competitors. The Free Press.

Prahalad, C.K., & Ramaswamy, V. (2003). The New Frontierof Experience Innovation. Sloan Management Review,Summer, 12-18.

Prahalad, C.K., & Ramaswamy, V. (2004). The Future ofCompetition: Co-Creating Unique Value withCustomers. Boston: Harvard Business School Press.

Prahalad, C.K., & Ramaswamy, V. (2005). Building NewStrategic Capital for Co-Creation. Strategy + Business,forthcoming.

Schmitt, B.H. (1999). Experiential Marketing: How to GetCustomers to Sense, Feel, Think, Act, and Relate to YourCompany and Brands. New York: Free Press.

Seybold, P.B. (1998). Customers.com: How to Create aProfitable Business Strategy for the Internet andBeyond. New York: Times Books.

Thomke, S., & Von Hippel, E. (2002). Customers asInnovators: A New Way to Create Value. HarvardBusiness Review, April, 74-81.

Wikstrom, S. (1996). Value Creation by Company-Consumer Interaction. Journal of MarketingManagement, 12, 359-374.

14 JOURNAL OF INTERAQtVE MARKETING