Services Marketing Christopher Lovelock

Chapter 1
Introduction to Services Marketing
Slide 2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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How Important is the Service Sector in Our Economy?

In most countries, services add more economic value than agriculture, raw materials and manufacturing combined In developed economies, employment is dominated by service jobs and most new job growth comes from services Jobs range from high-paid professionals and technicians to minimum-wage positions Service organizations can be any sizefrom huge global corporations to local small businesses Most activities by government agencies and nonprofit organizations involve services
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E
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Services dominate the United States Economy: GDP by Industry, 2001 (Fig. 1.1)
Agriculture, Forestry, Mining, Construction 8% Manufacturing 14%
Finance, Insurance, Real Estate 20%
Government (mostly services) 13% Other Services 11%

SERVICES
Wholesale and Retail Trade 16% Transport, Utilities, Communications 8%
Business Health Services 6% 5%

Source: Bureau of Economic Analysis, November 2002
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Changing Structure of Employment as Economic Development Evolves (Fig. 1.2)
Agriculture Services
Industry
Time, per Capita Income

Source: IMF, 1997
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Some Service Industries Profiled by NAICS but Not Identified by SIC Codes
Casino Hotels Continuing Care Retirement Communities Diagnostic Imaging Centers Diet and Weight Reducing Centers Environmental Consulting Gold Courses and Country Clubs Hazardous Waste Collection
HMO Medical Centers Industrial Design Services Investment Banking and Securities Dealing Management Consulting Services Satellite Telecommunications Telemarketing Bureaus Temporary Help Services
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Internal Services
Service elements within an organization that facilitate creation of--or add value to--its final output Includes: accounting and payroll administration recruitment and training legal services transportation catering and food services cleaning and landscaping Increasingly, these services are being outsourced
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Major Trends in Service Sector (Fig. 1.3)

Government Policies (e.g., regulations, trade agreements) Social Changes (e.g., affluence, lack of time, desire for experiences) Business Trends
Manufacturers offer service Growth of chains and franchising Pressures to improve productivity and quality More strategic alliances Marketing emphasis by nonprofits Innovative hiring practices
Advances in IT (e.g., speed, digitization, wireless, Internet) Internationalization (travel, transnational companies)
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Some Impacts of Technological Change
Radically alter ways in which service firms do business:

with customers (new services, more convenience) behind the scenes (reengineering, new value chains)
Create relational databases about customer needs and behavior, mine databanks for insights Leverage employee capabilities and enhance mobility Centralize customer servicefaster and more responsive Develop national/global delivery systems Create new, Internet-based business models
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Marketing Relevant Differences Between Goods and Services
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Defining the Essence of a Service
An act or performance offered by one party to another An economic activity that does not result in ownership A process that creates benefits by facilitating a desired change in:
customers themselves physical possessions intangible assets
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Distinguishing Characteristics of Services

(Table 1.1)
Customers do not obtain ownership of services Service products are ephemeral and cannot be inventoried Intangible elements dominate value creation Greater involvement of customers in production process Other people may form part of product experience Greater variability in operational inputs and outputs Many services are difficult for customers to evaluate Time factor is more important--speed may be key Delivery systems include electronic and physical channels
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Marketing Implications - 1
No ownership
Customers obtain temporary rentals, hiring of personnel, or access to facilities and systems Pricing often based on time Customer choice criteria may differ for renting vs. purchase--may include convenience, quality of personnel Cant own people (no slavery!) but can hire expertise and labor
Services cannot be inventoried after production

Service performances are ephemeraltransitory, perishable Exception: some information-based output can be recorded in electronic/printed form and re-used many times Balancing demand and supply may be vital marketing strategy Key to profits: target right segments at right times at right price Need to determine whether benefits are perishable or durable
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Customers may be involved in production process
Customer involvement includes self-service and cooperation with service personnel Think of customers in these settings as partial employees Customer behavior and competence can help or hinder productivity, so marketers need to educate/train customers Changing the delivery process may affect role played by customers Design service facilities, equipment, and systems with customers in mind: user-friendly, convenient locations/schedules
Intangible elements dominate value creation

Understand value added by labor and expertise of personnel Effective HR management is critical to achieve service quality Make highly intangible services more concrete by creating and communicating physical images or metaphors and tangible clues
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Value Added by Tangible vs Intangible Elements in Goods and Services (Fig. 1.4)
Hi
Salt Soft drinks CD Player Golf clubs New car Tailored clothing Furniture rental Fast food restaurant Plumbing repair Office cleaning Health club Airline flight Retail banking Insurance Weather forecast Intangible Elements
Lo
Hi
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Other people are often part of the service product
Achieve competitive edge through perceived quality of employees Ensure job specs and standards for frontline service personnel reflect both marketing and operational criteria Recognize that appearance and behavior of other customers can influence service experience positively or negatively Avoid inappropriate mix of customer segments at same time Manage customer behavior (the customer is not always right!)
Greater variability in operational inputs and outputs

Must work hard to control quality and achieve consistency Seek to improve productivity through standardization, and by training both employees and customers Need to have effective service recovery policies in place because it is more difficult to shield customers from service failures
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Often difficult for customers to evaluate services
Educate customers to help them make good choices, avoid risk Tell customers what to expect, what to look for Create trusted brand with reputation for considerate, ethical behavior Encourage positive word-of-mouth from satisfied customers
Time factor assumes great importance

Offer convenience of extended service hours up to 24/7 Understand customers time constraints and priorities Minimize waiting time Look for ways to compete on speed
Distribution channels take different forms

Tangible activities must be delivered through physical channels Use electronic channels to deliver intangible, information-based elements instantly and expand geographic reach
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Important Differences Exist among Services
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Four Categories of Services Employing Different Underlying Processes (Fig. 1.5)
What is the Nature of the Service Act?

TANGIBLE ACTS
Who or What is the Direct Recipient of the Service?

DIRECTED AT PEOPLE DIRECTED AT POSSESSIONS
People Processing
e.g., airlines, hospitals, haircutting, restaurants hotels, fitness centers
Possession Processing
e.g., freight, repair, cleaning, landscaping, retailing, recycling
INTANGIBLE ACTS
Mental Stimulus Processing

e.g., broadcasting, consulting, education, psychotherapy
Information Processing
(directed at intangible assets)
e.g., accounting, banking, insurance, legal, research
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Implications of Service Processes (1) Seeking Efficiency May Lower Satisfaction

Processes determine how services are created/delivered process change may affect customer satisfaction Imposing new processes on customers, especially replacing people by machines, may cause dissatisfaction New processes that improve efficiency by cutting costs may hurt service quality Best new processes deliver benefits desired by customers
Faster Simpler More conveniently
Customers may need to be educated about new procedures and how to use them
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Implications of Service Processes: (2) Designing the Service Factory

People-processing services require customers to visit the service factory, so: Think of facility as a stage for service performance Design process around customer Choose convenient location Create pleasing appearance, avoid unwanted noises, smells Consider customer needs--info, parking, food, toilets, etc.
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Implications of Service Processes: (3) Evaluating Alternative Delivery Channels

For possession-processing, mental-stimulus processing, or information processing services, alternatives include: 1. Customers come to the service factory 2. Customers come to a retail office 3. Service employees visit customers home or workplace 4. Business is conducted at arms length through - physical channels (e.g., mail, courier service) - electronic channels (e.g., phone, fax, email, Web site)
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Implications of Service Processes: (4) Balancing Demand and Capacity

When capacity to serve is limited and demand varies widely, problems arise because service output cant be stored: 1. If demand is high and exceeds supply, business may be lost 2. If demand is low, productive capacity is wasted Potential solutions: - Manage demand - Manage capacity
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Implications of Service Processes: (5) Applying Information Technology

All services can benefit from IT, but mental-stimulus processing and information-processing services have the most to gain: Remote delivery of informationbased services anywhere, anytime New service features through websites, email, and internet (e.g., information, reservations) More opportunities for self-service New types of services
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Implications of Service Processes: (6) Including People as Part of the Product

Involvement in service delivery often entails contact with other people Managers should be concerned about employees appearance, social skills, technical skills Other customers may enhance or detract from service experience--need to manage customer behavior
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The Services Marketing Mix
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Elements of The Services Marketing Mix: 7Ps vs. the Traditional 4Ps
Rethinking the original 4Ps Product elements Place and time Promotion and education Price and other user outlays Adding Three New Elements Physical environment Process People
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The 7Ps: (1) Product Elements

All Aspects of Service Performance that Create Value Core product featuresboth tangible and intangible elements Bundle of supplementary service elements Performance levels relative to competition Benefits delivered to customers (customers dont buy a hotel room, they buy a good nights sleep) Guarantees
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The 7Ps: (2) Place and Time

Delivery Decisions: Where, When, and How Geographic locations served Service schedules Physical channels Electronic channels Customer control and convenience Channel partners/intermediaries
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The 7Ps: (3) Promotion and Education

Informing, Educating, Persuading, and Reminding Customers Marketing communication tools
media elements (print, broadcast, outdoor, retail, Internet, etc.) personal selling, customer service sales promotion publicity/PR
Imagery and recognition

branding corporate design
Content
information, advice persuasive messages customer education/training
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The 7Ps: (4) Price and Other User Outlays

Marketers Must Recognize that Customer Outlays Involve More than the Price Paid to Seller
Traditional Pricing Tasks Selling price, discounts, premiums Margins for intermediaries (if any) Credit terms Identify and Minimize Other Costs Incurred by Users Additional monetary costs associated with service usage (e.g., travel to service location, parking, phone, babysitting,etc.) Time expenditures, especially waiting Unwanted mental and physical effort Negative sensory experiences
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The 7Ps: (5) Physical Environment

Designing the Servicescape and providing tangible evidence of service performances Create and maintaining physical appearances
buildings/landscaping interior design/furnishings vehicles/equipment staff grooming/clothing sounds and smells other tangibles
Select tangible metaphors for use in marketing communications
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7Ps: (6) Process

Method and Sequence in Service Creation and Delivery Design of activity flows Number and sequence of actions for customers Providers of value chain components Nature of customer involvement Role of contact personnel Role of technology, degree of automation
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The 7Ps: (7) People

Managing the Human Side of the Enterprise The right customer-contact employees performing tasks well
job design recruiting/selection training motivation evaluation/rewards empowerment/teamwork
The right customers for the firms mission

fit well with product/processes/corporate goals appreciate benefits and value offered possess (or can be educated to have) needed skills (co-production) firm is able to manage customer behavior
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Managing the 7Ps Requires Collaboration between Marketing, Operations, and HR Functions (Fig. 1.7)
Operations Management Customers
Marketing Management
Human Resources Management

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Chapter 2
Consumer Behavior in Service Encounters
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Where Does the Customer Fit in a Service Organization? (Fig. 2.1)

Consumers rarely involved in manufacture of goods but often participate in service creation and delivery Challenge for service marketers is to understand how customers interact with service operations Flowcharting clarifies how customer involvement in service encounters varies with type of process - see Fig. 2-1:
People processing (e.g., motel stay): customer is physically involved throughout entire process Possession processing (e.g., DVD repair): involvement may be limited to drop off of physical item/description of problem and subsequent pick up Mental stimulus processing (e.g., weather forecast): involvement is mental, not physical; here customer simply receives output and acts on it Information processing (e.g., health insurance): involvement is mental specify information upfront and later receive documentation of coverage
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High-Contact and Low-Contact Services

High Contact Services Customers visit service facility and remain throughout service delivery Active contact between customers and service personnel Includes most people-processing services Low Contact Services Little or no physical contact with service personnel Contact usually at arms length through electronic or physical distribution channels New technologies (e.g. Web) help reduce contact levels
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Levels of Customer Contact with Service Organizations (Fig. 2.2)

Emphasizes encounters with service personnel
Management Consulting
Good Restaurant Airline Tra vel (Econ.)
High
Nursing Home
HairCut
4- Star Hotel
Telephone Banking
Retail Banking Motel Dry Cleaning Fast Food Movie Theater
Car Repair Insurance
Cable TV
Subway Internet Banking Mail Based Repairs
Emphasizes encounters with equipment

Internet-based Services
Low
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Managing Service Encounters--1
Service encounter: A period of time during which customers interact directly with a service Moments of truth: Defining points in service delivery where customers interact with employees or equipment Critical incidents: specific encounters that result in especially satisfying/dissatisfying outcomes for either customers or service employees
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Managing Service Encounters--2
Service success often rests on performance of junior contact personnel Must train, coach, role model desired behavior Thoughtless or badly behaved customers can cause problems for service personnel (and other customers) Must educate customers, clarify what is expected, manage behavior
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The Purchase Process for Services

(Adapted from Fig. 2-3)
Prepurchase Stage Awareness of need Information search Evaluation of alternative service suppliers Service Encounter Stage Request service from chosen supplier Service delivery Postpurchase Stage Evaluation of service performance Future intentions
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Perceived Risks in Purchasing and Using Services (Table 2.1)

Functional unsatisfactory performance outcomes Financial monetary loss, unexpected extra costs Temporal wasted time, delays lead to problems Physical personal injury, damage to possessions Psychological fears and negative emotions Social how others may think and react Sensory unwanted impacts to any of five senses
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Factors that Influence Customer Expectations of Services
(Fig. 2.4)
Personal Needs Desired Service Beliefs about What Is Possible
Explicit & Implicit Service Promises Word-of-Mouth Past Experience
ZONE OF TOLERANCE
Perceived Service Alterations Adequate Service Situational Factors Predicted Service
Source: Adapted from Zeithaml, Parasuraman & Berry Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E
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Components of Customer Expectations
Desired Service Level: wished-for level of service quality that customer believes can and should be delivered Adequate Service Level: minimum acceptable level of service Predicted Service Level: service level that customer believes firm will actually deliver Zone of Tolerance: range within which customers are willing to accept variations in service delivery
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Intangible Attributes, Variability, and Quality Control Problems Make Services Hard to Evaluate
Search attributes Tangible characteristics that allow customers to evaluate a product before purchase Experience attributes Characteristics that can be experienced when actually using the service Credence attributes Characteristics that are difficult to evaluate confidently even after consumption Goods tend to be higher in search attributes, services tend to be higher in experience and credence attributes Credence attributes force customers to trust that desired benefits have been delivered
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How Product Attributes Affect Ease of Evaluation) (Fig. 2.5)

Most Goods Most Services
Clothing
Restaurant meals
Computer repair
Haircut
High in search attributes
High in experience High in credence attributes attributes

Source: Adapted from Zeithaml
Complex surgery
Chair
Foods
Legal services
Motor vehicle
Lawn fertilizer
Entertainment
Easy to evaluate
Difficult to evaluate
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Customer Satisfaction is Central to the Marketing Concept

Satisfaction defined as attitude-like judgment following a service purchase or series of service interactions Customers have expectations prior to consumption, observe service performance, compare it to expectations Satisfaction judgments are based on this comparison
Positive disconfirmation if better than expected Confirmation if same as expected Negative disconfirmation if worse than expected
Satisfaction reflects perceived service quality, price/quality tradeoffs, personal and situational factors Research shows links between customer satisfaction and a firms financial performance
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Customer Delight: Going Beyond Satisfaction
Research shows that delight is a function of 3 components Unexpectedly high levels of performance Arousal (e.g., surprise, excitement) Positive affect (e.g., pleasure, joy, or happiness) Is it possible for customers to be delighted by very mundane services? Progressive Insurance has found ways to positively surprise customers with customer-friendly innovations and extraordinary customer service
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A Service Business is a System Comprising Three Overlapping Subsystems

Service Operations (front stage and backstage) Where inputs are processed and service elements created. Includes facilities, equipment, and personnel Service Delivery (front stage) Where final assembly of service elements takes place and service is delivered to customers Includes customer interactions with operations and other customers Service Marketing (front stage) Includes service delivery (as above) and all other contacts between service firm and customers
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Service Marketing System: (1) High Contact Service--e.g., Hotel (Fig. 2.7)
Service Marketing System
Service Delivery System Service Operations System
Interior & Exterior Facilities Other Customers
Other Contact Points

Advertising Sales Calls Market Research Surveys Billing / Statements Miscellaneous Mail, Phone Calls, Faxes, etc. Random Exposure to Facilities / Vehicles Chance Encounters with Service Personnel Word of Mouth
Technical Core
Equipment
The Customer
Service People
Backstage (invisible)
Front Stage (visible)
Other Customers
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Service Marketing System: (2) Low Contact Service--e.g., Credit Card (Fig. 2.8) Service Marketing System
Service Delivery System Service Operations System Other Contact Points
Advertising Mail Technical Core Self Service Equipment Phone, Fax, Web site etc.
Backstage (invisible) Front Stage (visible)
The Customer
Market Research Surveys

Random Exposures Facilities, Personnel
Word of Mouth
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Service as Theater
All the worlds a stage and all the men and women merely players. They have their exits and their entrances and each man in his time plays many parts
William Shakespeare As You Like It
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The Dramaturgy of Service Delivery

Service dramas unfold on a stage--settings may change as performance unfolds Many service dramas are tightly scripted, others improvised Front-stage personnel are like members of a cast Like actors, employees have roles, may wear special costumes, speak required lines, behave in specific ways Support comes from a backstage production team Customers are the audiencedepending on type of performance, may be passive or active
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Role and Script Theories
Role: A set of behavior patterns learned through experience and communication Role congruence: In service encounters, employees and customers must act out defined roles for good outcomes Script: A sequence of behavior to be followed by employees and customers during service delivery
Some scripts (e.g. teeth cleaning) are routinized, others flexible Technology change may require a revised script Managers should reexamine existing scripts to find ways to improve delivery, increase productivity, enhance experiences
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Chapter 3
Positioning Services in Competitive Markets
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Search for Competitive Advantage in Services Requires Differentiation and Focus

Intensifying competition in service sector threatens firms with no distinctive competence and undifferentiated offerings Slowing market growth in mature service industries means that only way for a firm to grow is to take share from competitors Rather than attempting to compete in an entire market, firm must focus efforts on those customers it can serve best Must decide how many service offerings with what distinctive (and desired) characteristics
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Standing Apart from the Competition
A business must set itself apart from its competition. To be successful it must identify and promote itself as the best provider of attributes that are important to target customers
GEORGE S. DAY
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Basic Focus Strategies for Services (Fig. 3.1)
BREADTH OF SERVICE OFFERINGS
Narrow
Service Focused
Wide
Unfocused (Everything for everyone)
Many
NUMBER OF MARKETS SERVED
Few
Fully Focused (Service and market focused)
Market Focused
Source: Robert Johnston

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Four Principles of Positioning Strategy
1. Must establish position for firm or product in minds of customers 2. Position should be distinctive, providing one simple, consistent message 3. Position must set firm/product apart from competitors 4. Firm cannot be all things to all people--must focus Jack Trout
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Uses of Positioning in Marketing Management (Table 3.1)

Understand relationships between products and markets
compare to competition on specific attributes evaluate products ability to meet consumer needs/expectations predict demand at specific prices/performance levels
Identify market opportunities

introduce new products redesign existing products eliminate non-performing products
Make marketing mix decisions, respond to competition

distribution/service delivery pricing communication
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Possible Dimensions for Developing Positioning Strategies

Product attributes Price/quality relationships Reference to competitors (usually shortcomings) Usage occasions User characteristics Product class
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Developing a Market Positioning Strategy (Fig. 3.3)

MARKET ANALYSIS
- Size - Composition - Location - Trends Define, Analyze Market Segments
Select Target Segments To Serve
INTERNAL ANALYSIS
- Resources - Reputation - Constraints - Values
Articulate Desired Position in Market Select Benefits to Emphasize to Customers
Marketing Action Plan
COMPETITIVE ANALYSIS
- Strengths - Weaknesses - Current Positioning
Analyze Possibilities for Differentiation

Source: Adapted from Michael R. Pearce
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Positioning of Hotels in Belleville: Price vs. Service Level (Fig. 3.4)

Expensive
Grand Regency PALACE Shangri-La High Service Sheraton Atlantic Moderate Service
Italia Castle Less Expensive

Alexander IV Airport Plaza
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Positioning of Hotels in Belleville: Location vs. Physical Luxury (Fig. 3.5)

High Luxury
Grand Sheraton PALACE

Financial District Shopping District and Convention Centre
Regency Shangri-La
Inner Suburbs
Castle Atlantic
Italia Alexander IV
Airport Plaza Moderate Luxury
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Positioning after New Hotel Construction: Price vs. Service Level (Fig. 3.6)
Mandarin New Grand Heritage Marriott Continental Expensive
Action? Regency High Service PALACE Shangri-La No action? Atlantic Sheraton Italia Castle Alexander IV Airport Plaza Moderate Service
Less Expensive
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Positioning after New Hotel Construction: Location vs. Physical Luxury (Fig. 3.7)
High Luxury Mandarin New Grand Continental Action? PALACE Financial District No action? Heritage Marriott Sheraton Shangri-La Regency
Shopping District and Convention Centre Italia Alexander IV Atlantic
Inner Suburbs
Castle
Airport Plaza
Moderate Luxury
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Positioning Maps Help Managers to Visualize Strategy

Positioning maps display relative performance of competing firms on key attributes Research provides inputs to development of positioning maps Challenge is to ensure that attributes employed in maps are important to target segments performance of individual firms on each attribute accurately reflects perceptions of customers in target segments Predictions can be made of how positions may change in the light of new developments in the future Simple graphic representations are often easier for managers to grasp than tables of data or paragraphs of prose Charts and maps can facilitate a visual awakening to threats and opportunities and suggest alternative strategic directions
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Chapter 4
Creating the Service Product
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Key Steps in Service Planning: Matching Opportunities to Resources

Must relate marketing opportunities to firms resources (physical, financial, technological, human) Identify, evaluate firms marketing assets
Customer portfolio/lifetime value (customer equity) Market knowledge Marketing implementation skill Product line Competitive positioning strategies Brand reputation (brand equity)
Identify, evaluate firms operating assets

Physical facilities, equipment Technology and systems (especially IT) Human resources (numbers, skills, productivity) Leverage through alliances and partnerships Potential for customer self service Cost structure
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Service Design Involves Matching Marketing Concept with Operations Concept (Fig. 4.1)
Corporate Objectives and Resources
Marketing Assets
(Customer Base, Mkt. Knowledge, Implementation Skills, Brand Reput.)
Operating Assets
(Facilities/Equipment, IT Systems, People, Op. Skills, Cost Structure)
Service Marketing Concept

Benefits to customer from core/ supplementary elements, style, service level, accessibility User costs/outlays incurred Price/other monetary costs Time Mental and physical effort Neg. sensory experiences
Service Operations Concept

Nature of processes Geographic scope of ops Scheduling Facilities design/layout HR (numbers, skills) Leverage (partners, self-service) Task allocation: front/backstage staff; customers as co-producers
Service Delivery Process
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Understanding the Components of the Augmented Service Product
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Shostacks Molecular Model of a Total Market Entity - Passenger Airline Service (Fig. 4-2)
Distribution Price
Service
frequency
Vehicle
Transport Pre- and post-flight service KEY
In-flight service
Food and drink
Tangible elements Intangible elements

Marketing Positioning (Weighted toward evidence)
Source: Shostack
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Core Products and Supplementary Services
Most firms offer customers a package of benefits: core product (a good or a service) supplementary services that add value to the core In mature industries, core products often become commodities Supplementary services help to differentiate core products and create competitive advantage by: facilitating use of the core service enhancing the value and appeal of the core
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Core and Supplementary Product Design: What Do We Offer and How Do We Create and Deliver It?
Supplementary services offered and how created and delivered
Delivery Concept For Core Product

Scheduling
Process
Core Service Level Customer Role
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What Should Be the Core and Supplementary Elements of Our Service Product?
How is our core product defined and what supplementary elements currently augment this core? What product benefits create the most value for customers? Is our service package differentiated from the competition in ways that are meaningful to target customers? What are current levels of service on the core product and each of the supplementary elements? Can we charge more for higher service levels on key attributes (e.g., faster response, better physical amenities, easier access, more staff, superior caliber personnel)? Alternatively, should we cut service levels and charge less?
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Core and Supplementary Services in a Luxury Hotel (Offering Guests Much More than a Cheap Motel!)
R eservation Cashier Business Center A Bed for the Night in an Elegant Private R oom with a Bathroom Valet Parking Reception Baggage Service
R oom Service Wake-up Call T elephone
Cocktail Bar
Entertainment/ Sports / Exercise
R estaurant
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What Happens, When, and in What Sequence? The Time Dimension in the Augmented Service Product
Reservation Parking Check in USE ROOM Get car Check out Phone USE GUESTROOM OVERNIGHT Porter Meal Pay TV Room service
Pre Visit
Time Frame of an Overnight Hotel Stay (real-time service use)
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The Flower of Service: Categorizing Supplementary Services (Fig. 4-5)
Information Payment Consultation
Billing
Core
Order-Taking
Exceptions
KEY:
Hospitality Safekeeping
Facilitating elements Enhancing elements

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Facilitating Services - Information

(Table 4.1)
Core
Customers often require information about how to obtain and use a product or service. They may also need reminders and documentation
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Facilitating Services - Order-Taking

(Table 4.2)
Core
Many goods and services must be ordered or reserved in advance. Customers need to know what is available and may want to secure commitment to delivery
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Facilitating Services - Billing

(Table 4.3)
Core
How much do I owe you? Customers deserve clear, accurate and intelligible bills and statements
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Facilitating Services - Payment

(Table 4.4)
Core
Customers may pay faster and more cheerfully if you make transactions simple and convenient for them
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Enhancing Services - Consultation

(Table 4.5)
Core
Value can be added to goods and services by offering advice and consultation tailored to each customers needs and situation
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Enhancing Services - Hospitality

(Table 4.6)
Core
Customers who invest time and effort in visiting a business and using its services deserve to be treated as welcome guests (after all, marketing invited them there!)
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Enhancing Services - Safekeeping

(Table 4.7)
Core
Customers prefer not to worry about looking after the personal possessions that they bring with them to a service site. They may also want delivery and after-sales services for goods that they purchase or rent
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Enhancing Services - Exceptions

(Table 4.8)
Core
Customers appreciate some flexibility in a business when they make special requests. They expect it when not everything goes according to plan
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Branding Service Products
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Service Branding: Clarifying Distinctive Service Offerings
Marriott Hotel Brands

Marriott Hotels Marriott Resorts Courtyard by Marriott Fairfield Inns Residence Inns SpringHill Suites TownePlace Suites Marriott Vacation Clubs International
British Airways Brands

Intercontinental
First Club World World Traveller Plus World Traveller

European
Club Europe Euro-Traveller

UK Domestic
Shuttle
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Branding a High-Tech, B2B Product Line: A Family of Brands at Sun Microsystems

Corporate umbrella brand
Sun Microsystems
Product line brand (system support services)

Sun Spectrum Support
Sub-brands (4 levels of support service programs)

Platinum Gold Silver Bronze
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Sun Spectrum Support: Sub-branding Highlights Four Service Levels

Sub-branding clarifies service levels offered at different fees
Platinum: Mission Critical On-site service 24/7, two-hour response; telephone support 24/7, onsite parts replacement; additional services available Gold: Business Critical Onsite service Mon-Fri 8am-8pm, four-hour response; telephone support 24/7; onsite parts replacement Silver: Basic Support Onsite service Mon-Fri 8am-5pm, four-hour response; telephone support Mon-Fri 8am-8pm; onsite parts replacement Bronze: Self Support Phone support Mon-Fri 8am-5pm; parts replacement by courier
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New Service Development
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New Service Development: A Hierarchy of New Service Categories

Major service innovations--new core products for previously undefined markets Major process innovations--using new processes to deliver existing products and offer extra benefits Product line extensions--additions to current product lines Process line extensions--alternative delivery procedures Supplementary service innovations--adding new or improved facilitating or enhancing elements Style changes--visible changes in service design or scripts
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New Service Development: Physical Goods as Source of Service Ideas

Customers can rent goodsuse and return for a fee instead of purchasing them Customers can hire personnel to operate their own or rented equipment Any new durable product may create need for after-sales services (possession processing)
Shipping Installation Problem-solving and consulting advice Cleaning Maintenance Repair Upgrading Disposal
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Creating Services as Substitutes for Owning and/or Using Goods (Fig. 4-7)
Own a Physical Good
Rent the Use of a Physical Good

Rent car and drive it
Rent word processor and type
Perform the Work Oneself Hire Someone to Do the Work
Drive own car Type on own word processor
Hire chauffeur to drive car Hire typist to use word processor
Hire a taxi or limousine Send work to secretarial service
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Service Development through Delivery Options: Alternative Meal Service Formats (Fig. 4-8)
Fast-Food Restaurant (Eat In) Drive-In Restaurant (Take Out) Home Delivery
See sign
Park and enter
Order meal, and pay
Pick up meal
Find table and eat
Clear table and leave
See sign
Stop car at order point
Order via microphone
Get meal at pickup, pay
Drive away, eat later
Telephone Restaurant
Order food, give address
Driver rings doorbell
Pay driver, take food
Eat
Home Catering
Arrange to meet caterer
Plan meal, pay deposit
Food and staff arrive
Meal is prepared and served
Eat
Staff cleans up; pay
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Elements of a Hotel Offering: Trading off Room Price vs. Features/Services

External building design and features Room features Food-related services Lounge facilities Services (e.g., reception) Leisure facilities Securitypeople/systems
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Success Factors in New Service Development

Market synergy
Good fit between new product and firms image/resources Advantage vs. competition in meeting customers needs Strong support from firm during/after launch Firm understands customer purchase decision behavior
Organizational factors
Strong interfunctional cooperation and coordination Internal marketing to educate staff on new product and its competition Employees understand importance of new services to firm
Market research factors

Scientific studies conducted early in development process Product concept well defined before undertaking field studies
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Chapter 5
Designing the Communications Mix for Services
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Advertising Implications for Overcoming Intangibility (Fig. 5-1)

Problem
Generality - objective claims - subjective claims Nonsearchability Document physical system capacity Cite past performance statistics Present actual service delivery incident Present customer testimonials Cite independently audited performance Display typical customers benefiting Documentary of step-by-step process, Case history of what firm did for customer Narration of customers subjective experience
Source: Mittal and Baker
Advertising Strategy
Abstractness Impalpability
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Other Communications Challenges in Services Marketing

Facilitate customer involvement in production
prepare customers for service experience and demonstrate roles teach customers about new technologies, new features
Help customers to evaluate service offerings

provide tangible or statistical clues to service performance highlight quality of equipment and facilities emphasize employee qualifications, experience, professionalism
Simulate or dampen demand to match capacity

provide information about timing of peak, off-peak periods offer promotions to stimulate off-peak demand
Promote contribution of service personnel

help customers understand service encounter highlight expertise and commitment of backstage personnel
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Setting Clear Objectives: Checklist for Marketing Communications Planning (5 Ws)
Who is our target audience? What do we need to communicate and achieve? How should we communicate this? Where should we communicate this? When do communications need to take place?
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Common Educational and Promotional Objectives in Service Settings (Table 5-2)

Create memorable images of specific companies and their brands Build awareness/interest for unfamiliar service/brand Build preference by communicating brand strengths and benefits Compare service with competitors offerings and counter their claims Reposition service relative to competition Stimulate demand in off-peak and discourage during peak
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Educational and Promotional Objectives (cont.)
Encourage trial by offering promotional incentives Reduce uncertainty/perceived risk by providing useful info and advice Provide reassurance (e.g., promote service guarantees) Familiarize customers with service processes before use Teach customers how to use a service to best advantage Recognize and reward valued customers and employees
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Marketing Communications Mix for Services

(Fig. 10.4)
Personal Communications
Selling
Advertising
Broadcast
Sales Promotion
Sampling
Publicity & Public Relations

Press releases/kits Press conferences Special events Sponsorship
Instructional Materials
Web sites
Corporate Design
Signage
Customer service
Print
Coupons Sign-up rebates Gifts
Manuals
Interior decor
Training
Internet
Brochures Videoaudiocassettes Software CD-ROM
Vehicles
Telemarketing Word-of-mouth Word mouth (other of customers)
Outdoor
Equipment
Direct mail
Prize promotions
Trade Shows, Exhibitions
Stationery
Media-initiated coverage
Voice mail
Uniforms
Key: * Denotes communications originating from outside the organization
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Originating Sources of Messages Received by a Target Audience (Fig. 5-5)

Messages originating within the organization
Front-line staff Service outlets Advertising Sales promotions Direct marketing Personal selling Public relations
A U D I E N C E
Word of mouth
Messages originating outside the organization

Media editorial
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What is Brand Equity and Why Does It Matter? (From Berry, Cultivating Brand Equity) Definition: A set of assets and liabilities linked to a brands name and symbol that adds to (or subtracts from) the perceived value of the product Insights Brand equity can be positive or negative Positive brand equity creates marketing advantage for firm plus value for customer Perceived value generates preference and loyalty Management of brand equity involves investment to create and enhance assets, remove liabilities
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A Service Branding Model: How Communications + Experience Create Brand Equity
Marketer-controlled communications
Firms Presented Brand (Sales, Advertising, PR)

Uncontrolled brand communications
Awareness of Firms Brand
What Media, Intermediaries, Word-of-Mouth Say re: Firm
Firms Brand Equity
Customers Experience with Firm
Meaning Attached To Firms Brand

Source: Adapted from L. L. Berry ( Fig. 1)
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Marketing Communication and the Internet (1)
International in Scope
Accessible from almost anywhere in the world Simplest form of international market entry
Internet Applications
Promote consumer awareness and interest Provide information and consultation Facilitate 2-way communications through e-mail and chat rooms Stimulate product trial Enable customers to place orders Measure effectiveness of specific advertising/promotional campaigns
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Marketing Communications and the Internet (2)

Web Site design considerations
Memorable address that is actively promoted Relevant, up-to-date content (text, graphics, photos) Contain information that target users will perceive as useful/interesting Easy navigation Fast download
Internet advertising
Banners and buttons on portals and other websites seek to draw online traffic to own site Limits to effectivenessexposure (eyeballs) may not lead to increases in awareness/preference/sales Hence, advertising contracts may tie fees to marketing relevant behavior (e.g., giving personal info or making purchase)
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Chapter 6
Pricing and Revenue Management
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What Makes Service Pricing Strategy Different (and Difficult)?

No ownership of services--hard for firms to calculate financial costs of creating an intangible performance Variability of inputs and outputs--how can firms define a unit of service and establish basis for pricing? Many services hard for customers to evaluate--what are they getting in return for their money? Importance of time factor--same service may have more value to customers when delivered faster Delivery through physical or electronic channels--may create differences in perceived value
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Objectives of Pricing Strategies

Revenue and profit objectives
Seek profit Cover costs
Patronage and user base-related objectives

Build demand Build a user base
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The Pricing Tripod (Fig. 6.1)
Pricing Strategy
Competition Costs
Value to customer
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Three Main Approaches to Pricing

Cost-Based Pricing Set prices relative to financial costs (problem: defining costs) Competition-Based Pricing Monitor competitors pricing strategy (especially if service lacks differentiation) Who is the price leader? (one firm sets the pace) Value-Based Relate price to value perceived by customer
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Activity-Based Costing: Relating Activities to the Resources They Consume

Managers need to see costs as an integral part of a firms effort to create value for customers When looking at prices, customers care about value to themselves, not what production costs the firm Traditional cost accounting emphasizes expense categories, with arbitrary allocation of overheads ABC management systems examine activities needed to create and deliver service (do they add value?) Must link resource expenses to: variety of products produced complexity of products demands made by individual customers
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Net Value = (Benefits Outlays)

(Fig. 6.3)
Effort Time
Perceived Benefits
Perceived Outlays
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Enhancing Gross Value

Pricing Strategies to Reduce Uncertainty
service guarantees benefit-driven (pricing that aspect of service that creates value) flat rate (quoting a fixed price in advance)
Relationship Pricing
non-price incentives discounts for volume purchases discounts for purchasing multiple services
Low-cost Leadership
Convince customers not to equate price with quality Must keep economic costs low to ensure profitability at low price
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Paying for Service: The Customers Perspective

Customer expenditures on service comprise both financial and non-financial outlays
Financial costs:
price of purchasing service expenses associated with search, purchase activity, usage
Time expenditures Physical effort (e.g., fatigue, discomfort) Psychological burdens (mental effort, negative feelings) Negative sensory burdens (unpleasant sensations affecting any of the five senses)
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Determining the Total Costs of a Service to the Consumer (Fig. 6.4)

Search Costs Price Related Monetary Costs Time Costs Purchase and Use Costs Physical Costs Psychological Costs Sensory Costs Necessary follow-up Problem solving
Operating Costs
Incidental Expenses
After Costs
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Trading off Monetary and Non- Monetary Costs

(Fig. 6.5)
Which clinic would you patronize if you needed a chest x-ray (assuming all three clinics offer good quality) ? Clinic A
Price $45 Located 1 hour away by car or transit Next available appointment is in 3 weeks Hours: Monday Friday, 9am 5pm Estimated wait at clinic is about 2 hours
Clinic B
Price $85 Located 15 min away by car or transit Next available appointment is in 1 week Hours: Monday Friday, 8am 10pm Estimated wait at clinic is about 30 45 minutes
Clinic C
Price $125 Located next to your office or college Next appointment is in 1 day Hours: Mo Sat, 8am 10pm By appointment estimated wait at clinic is about 0 to 15 minutes
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Increasing Net Value by Reducing Non-financial Costs of Service

Reduce time costs of service at each stage Minimize unwanted psychological costs of service Eliminate unwanted physical costs of service Decrease unpleasant sensory costs of service
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Revenue Management: Maximizing Revenue from Available Capacity at a Given Time

Based on price customization - charging different customers (value segments) different prices for same product Useful in dynamic markets where demand can be divided into different price buckets according to price sensitivity Requires rate fences to prevent customers in one value segment from purchasing more cheaply than willing to pay RM uses mathematical models to examine historical data and real time information to determine what prices to charge within each price bucket how many service units) to allocate to each bucket
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The Strategic Levers of Revenue (Yield) Management

Price Fixed Duration
Quadrant 1: Predictable
Movies Stadiums/Arenas Function Space
Variable
Quadrant 2:
Hotel Rooms Airline Seats Rental Cars Cruise Lines
Quadrant 3: Unpredictable
Restaurants Golf Courses
Quadrant 4:
Continuing Care Hospitals
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Dealing with Common Customer Conflicts Arising from Revenue Management

Customer conflict can arise from: Perceived Unfairness & Perceived Financial Risk Associated with Multi-Tier Pricing and Selective Inventory Availability Unfulfilled Inventory Commitment Unfulfilled Demand of Regular Customers Unfulfilled Price Expectation of Group Customers Change in the Nature of the Service Marketing tools to reduce customer conflicts: Fenced Pricing Bundling Categorising High Published Price Well designed Customer Recovery Programme for Oversale Preferred Availability Policies Offer Lower Displacement Cost Alternatives Physical Segregation & Perceptible Extra Service Set Optimal Capacity Utilisation Level
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Price Elasticity (Fig. 6.6)
Price per unit of service
Di De
De Di
Quantity of Units Demanded

De : Demand is price elastic. Small changes in price lead to big changes in demand. Di : Demand for service is price inelastic. Big changes have little impact on demand.
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Key Categories of Rate Fences (Table 6.2)
Rate Fences
Examples
Physical (Product-related) Fences Basic Product Class of travel (Business/Economy class) Size and furnishing of a hotel room Seat location in a theatre Free breakfast at a hotel, airport pick up etc. Free golf cart at a golf course Priority wait listing Increase in baggage allowances Dedicated service hotlines Dedicated account management team
Amenities Service Level
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Key Categories of Rate Fences (Table 6.2 contd)
Non Physical Fences Transaction Characteristics Time of booking or reservation Location of booking or reservation Flexibility of ticket usage Requirements for advance purchase Must pay full fare two weeks before departure Passengers booking air tickets for an identical route in different countries are charged different prices Fees/penalties for canceling or changing a reservation (up to loss of entire ticket price) Non refundable reservation fees
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Non Physical Fences (contd) Consumption Characteristics Time or duration of use Early bird special in restaurant before 6pm Must stay over on Sat for airline, hotel Must stay at least five days
Location of consumption
Price depends on departure location, esp in international travel Prices vary by location (between cities, city centre versus edges of city)
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Non Physical Fences (contd) Buyer Characteristics Frequency or volume of consumption Group membership Member of certain loyalty-tier with the firm get priority pricing, discounts or loyalty benefits Child, student, senior citizen discounts Affiliation with certain groups (e.g. Alumni) Group discounts based on size of group
Size of customer group
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Relating Price Buckets and Fences to the Demand Curve (Fig. 6.7)
Price per Seat
First Class Full Fare Economy (No Restrictions) One-Week Advance Purchase One-Week Advance Purchase, Saturday Night Stayover 3-Week Advance Purchase, Saturday Night Stayover 3-Week Adv. Prchs, Sat. Night Stay., $100 for Changes 3-Wk Adv. Prchs, Sat. Night Stay, No changes/refunds Late Sales through Consolidators/ Internet, no refunds
Capacity of 1st-class Cabin
Capacity of Aircraft
No. of Seats Demanded

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Ethical Concerns in Pricing

Customers are vulnerable when service is hard to evaluate or they dont observe work Many services have complex pricing schedules
hard to understand difficult to calculate full costs in advance of service
Unfairness and misrepresentation in price promotions

misleading advertising hidden charges
Too many rules and regulations

customers feel constrained, exploited customers unfairly penalized when plans change
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Pricing Issues: Putting Strategy into Practice (Table 6.3)

How much to charge? What basis for pricing? Who should collect payment? Where should payment be made? When should payment be made? How should payment be made? How to communicate prices?
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Consumption follows the Timing of Payments

(Research Insight 6.1)
Frequency of Health Club Visits
Annual Payment Plan
Quarterly Payment Plan
Frequency of Health Club Visits
Semiannual Payment Plan
Monthly Payment Plan
Time Line
Source: John Gourville and Dilip Soman, Pricing and the Psychology of Consumption, Harvard Business Review, September 2002, 90-96.
Time Line
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Chapter 7
Distributing Services
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Applying the Flow Model of Distribution to Services

Distribution embraced three interrelated elements Information and promotion flow Negotiation flow Product flow
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Information and Physical Processes of the Augmented Service Product (Fig. 7.1)
Information Processes
Payment Information Consultation
OrderTaking
Billing
Core
Exceptions Safekeeping
Hospitality
Physical Processes
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Using Websites for Service Delivery

Information
Read brochure/FAQ; get schedules/ directions; check prices
Payment
Pay by bank card Direct debit
Consultation
Conduct e-mail dialog Use expert systems
Billing
Receive bill Make auction bid Check account status Core
Order-Taking
Make/confirm reservations Submit applications Order goods, check status
Exceptions
Make special requests Resolve problems
Hospitality
Record preferences
Safekeeping
Track package movements Check repair status
CORE: Use Web to deliver information-based core services

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Options for Service Delivery

There are 3 types of interactions between customers and service firms Customer goes to the service provider (or intermediary) Service provider goes to the customer Interaction at arms length (via the Internet, telephone, fax, mail, etc.)
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Method of Service Delivery (Table 7.1)

Availability of Service Outlets Nature of Interaction Single Site Multiple Sites between Customer and Service Organization
Customer goes to service organization Service organization goes to customer Customer and service organization transact at arms length Theater Barbershop House painting Mobile car wash Credit card company Local TV station Bus service Fast-food chain Mail delivery Auto club road service Broadcast network Telephone company
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Place vs. Cyberspace

Place - customers and suppliers meet in a physical environment
Required for people processing services Offers live experiences, social interaction, e.g., food services More emphasis on eye-catching servicescape, entertainment
Cyberspace - customers and suppliers do business electronically in virtual environment created by phone/internet linkages
Ideal for info-based services Saves time Facilitates information gathering May use express logistics service to deliver physical core products
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24/7 - Factors Encouraging Extended Operating Hours (Mgt Memo 7.1)
Economic pressure from consumers Changes in legislation Economic incentives to improve asset utilization Availability of employees to work nights, weekends Automated self-service
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Technology Revolutionizes Service Delivery: Some Examples

Smart mobile telephones to link users to Internet Voice recognition software Automated kiosks for self-service (e.g. bank ATMs) Web sites provide information take orders and accept payment deliver information-based services Smart cards that can act as electronic wallets
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E-Commerce: Factors that Attract Customers to Virtual Stores
Convenience (24-hour availability, save time, effort) Ease of obtaining information on-line and searching for desired items Better prices than in bricks-and-mortar stores Broad selection
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Splitting Responsibilities for Delivering Supplementary Services (Fig. 7.2)
As created by originating firm
As enhanced by distributor
As experienced by customer
Core
Core
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Franchising
Franchising is a fast growth strategy, when Resources are limited Long-term commitment of store managers is crucial Local knowledge is important Fast growth is necessary to pre-empt competition
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Service Process and Market Entry People Processing Services

Export the service concept Import customers Transport customers to new locations
Possession Processing Services

Most require an ongoing local presence, whether it is the customers dropping off items or personnel visiting customer sites
Information Based Services

Export the service to a local service factory Import customers Export the information via telecommunications and transform it locally
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Barriers to International Trade in Services

Operating successfully in international markets remains difficult for certain services despite efforts of the WTO and control relaxations Barriers include Refusal by immigration offices to issue work permits Heavy taxes on foreign firms Domestic preference policies Legal restrictions Lack of broadly-agreed accounting standards Cultural differences (esp. for entertainment industry)
1 - 147
Forces for Internationalization
Market drivers Competition drivers Technology drivers Cost drivers Government drivers Impact will vary by service type (people, possessions, information)
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Modes of Internationalization
Export information-based services
transmit via electronic channels store in physical media, ship as merchandise
Use third parties to market/deliver service concept

licensing agents brokers franchising alliance partners minority joint ventures
Control service enterprise abroad

direct investment in new business buyout of existing business
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Impact of Globalization Drivers on Different Service Categories (Table 7.2)
Globalization Drivers Competition
People Processing
Simultaneity of production and consumption limits leverage of foreign competitive advantage, but management systems can be globalized People differ economically and culturally, so needs for service and ability to pay may vary.
Possession Processing
Technology drives globalization of competitors with technical edge.
Information Based
Highly vulnerable to global dominance by competitors with monopoly or competitive advantage in information. Demand for many services is derived to a significant degree from economic and educational levels.
Market
Level of economic developments impacts demand for services to individually owned goods
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Impact of Globalization Drivers on Different Service Categories (Table 7.2, contd)

Globalization People Drivers Processing Use of IT for delivery of Technology Possession Processing Information Based
Ability to deliver core services through remote terminals may be a function of investment in computerization etc. Major cost elements can be centralized & minor cost elements localized. Policies may impact demand and supply and distort pricing
Need for technologysupplementary services based service delivery may be a function of systems depends on ownership and familiarity possessions requiring with technology. service and the cost trade-offs in labor substitution Variable labor rates may impact on pricing in labor-sensitive services. Social policies (e.g., health) vary widely and may affect labor cost etc. Variable labor rates may favor low-cost locations. Policies may decrease/increase cost & encourage/discourage certain activities
Cost
Government
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Chapter 8
Designing and Managing Service Processes
1 - 152
Developing a Blueprint Some Basic Advice
Identify key activities in creating and delivering the service Distinguish between front stage (what customers experience) and back stage Chart activities in sequence Show how interactions between customers and employees are supported by backstage activities and systems Establish service standards for each step Identify potential fail points Focus initially on big picture (later, can drill down for more detail in specific areas)
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Service Blueprinting: Key Components

1. Define standards for frontstage activities 2. Specify physical evidence 3. Identify principal customer actions 4. ------------line of interaction (customers and front stage personnel)-------5. Front stage actions by customer-contact personnel 6. ------------line of visibility (between front stage and backstage)-------------7. Backstage actions by customer contact personnel 8. Support processes involving other service personnel 9. Support processes involving IT
Where appropriate, show fail points and risk of excessive waits
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Simplified Example: Blueprinting a Hotel Visit

(extract only)
Physical Evidence Stage
Hotel exterior, lobby, employees, key Make Customer reservation Actions Employee Actions Face-to-face Phone Contact Rep. records, confirms Valet Parks Car Enter data Register guest data
Elevator, corridor, room, bellhop Go to room
Arrive, valet park Doorman greets, valet takes car
Check-in at reception Receptionist verifies, gives key to room
Line of Interaction Front Line of Visibility Backstage
Make up Room
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Improving Reliability of Processes by Failure Proofing

Analysis of reasons for failure often reveals opportunities for failure proofing to reduce/eliminate risk of errors Errors include:
treatment errorshuman failures during contact with customers tangible errorsfailures in physical elements of service
Fail-safe procedures include measures to prevent omission of tasks or performance of tasks

incorrectly in wrong order too slowly not needed or specified
Need fail-safe methods for both employees and customers

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Process Redesign: Principal Approaches

(Table 8-1)
Eliminating non-value-adding steps Shifting to self-service Delivering direct service Bundling services Redesigning physical aspects of service processes
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Customers as Co-Producers: Levels of Participation in Service Production

Low Employees and systems do all the work Medium Customer inputs required to assist provider
Provide needed information, instructions Make personal effort May share physical possessions
High Customer works actively with provider to co-produce the service
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Self Service Technologies (SSTs)

Self-service is ultimate form of customer involvement in service production
Customers undertake specific activities using facilities or systems provided by service supplier Customers time and effort replace those of employees
Concept is not newself-serve supermarkets date from 1930s, ATMs and self-serve gas pumps from 1970s Today, customers face wide array of SSTs to deliver information-based services, both core and supplementary Many companies seek to divert customers from employee contact to Internet-based self-service
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Service Firms as Teachers: Well-trained Customers Perform Better

Firms must teach customers roles as co-producers of service Customers need to know how to achieve best results Education can be provided through:
Brochures Advertising Posted instructions Machine-based instructions Websites, including FAQs Service providers Fellow customers
Employees must be well-trained to help advise, assist customers

1 - 160
Managing Customers as Partial Employees to Increase Productivity and Quality

1. Analyze customers present roles in the business and compare to managements ideal 2. Determine if customers know how to perform and have necessary skills 3. Motivate customers by ensuring that will be rewarded for performing well 4. Regularly appraise customers performance; if unsatisfactory, consider changing roles or termination
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The Problem of Customer Misbehavior Identifying and Managing Jaycustomers

What is a jaycustomer?
A customer who behaves in a thoughtless or abusive fashion, causing problems for the firm itself, employees, other customers
Why do jaycustomers matter?

Can disrupt processes Affect service quality May spoil experience of other customers
What should a firm do about them?

Try to avoid attracting potential jaycustomers Institute preventive measures Control abusive behavior quickly Take legal action against abusers BUT firm must act in ways that dont alienate other customers
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Six Types of Jaycustomer

Thief seeks to avoid paying for service Rule breaker ignores rules of social behavior and/or procedures for safe, efficient use of service Belligerent angrily abuses service personnel (and sometimes other customers) physically and/or emotionally Family Feuders fight with other customers in their party Vandal deliberately damages physical facilities, furnishings, and equipment Deadbeat fails to pay bills on time Can you think of others? How should firms deal with each of these problems?
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Chapter 9
Balancing Demand and Capacity
1 - 164
Relating Demand to Capacity: Four Key Concepts

Excess demand: too much demand relative to capacity at a given time Excess capacity: too much capacity relative to demand at a given time Maximum capacity: upper limit to a firms ability to meet demand at a given time Optimum capacity: point beyond which service quality declines as more customers are serviced
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Variations in Demand Relative to Capacity

(Fig. 9-1)
VOLUME DEMANDED Demand exceeds capacity (business is lost)
CAPACITY UTILIZED Maximum Available Capacity Optimum Capacity (Demand and Supply Well Balanced Demand exceeds optimum capacity (quality declines)
Low Utilization (May Send Bad Signals)
Excess capacity (wasted resources)

TIME CYCLE 1 TIME CYCLE 2
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Defining Productive Capacity in Services
Physical facilities to contain customers Physical facilities to store or process goods Physical equipment to process people, possessions, or information Labor used for physical or mental work Public/private infrastructuree.g., highways, airports, electricity
1 - 167
Alternative Capacity Management Strategies

Level capacity (fixed level at all times) Stretch and shrink
offer inferior extra capacity at peaks (e.g. bus/metro standees) vary seated space per customer (e.g. elbow room, leg room) extend/cut hours of service
Chase demand (adjust capacity to match demand)

schedule downtime in low demand periods use part-time employees rent or share extra facilities and equipment cross-train employees
Flexible Capacity (vary mix by segment)
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Predictable Demand Patterns and Their Underlying Causes (Table 9-1)
Predictable Cycles of Demand Levels

day week month year other
Underlying Causes of Cyclical Variations

employment billing or tax payments/refunds pay days school hours/holidays seasonal climate changes public/religious holidays natural cycles (e.g. coastal tides)
1 - 169
Causes of Seemingly Random Changes in Demand Levels

Weather Health problems Accidents, Fires, Crime Natural disasters Question: which of these events can be predicted?
1 - 170
Alternative Demand Management Strategies

(Table 9-2) Take no action
let customers sort it out
Reduce demand
higher prices communication promoting alternative times
Increase demand
lower prices communication, including promotional incentives vary product features to increase desirability more convenient delivery times and places
Inventory demand by reservation system Inventory demand by formalized queueing

1 - 171
Hotel Room Demand Curves by Segment and by Season (Fig. 9-2)
Price per Room Night Th

Tl
Bl
Bh
Bh = business travelers in high season Bl = business travelers in low season Th = tourist in high season Tl = tourist in low season
Bl
Bh
Th Tl
Note: hypothetical example 1 - 172
Quantity of Rooms Demanded at Each Price by Travelers in Each Segment in Each Season
Avoiding Burdensome Waits for Customers

Add extra capacity so that demand can be met at most times (problem: may add too many costs) Rethink design of queuing system to give priority to certain customers or transactions Redesign processes to shorten transaction time Manage customer behavior and perceptions of wait Install a reservations system
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Alternative Queuing Configurations (Fig. 9-4)

Single line, single server, single stage Single line, single servers at sequential stages Parallel lines to multiple servers Designated lines to designated servers
Single line to multiple servers (snake) Take a number (single or multiple servers)
28 30 31 26 27 32 29 25 21 20 24 23
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Tailoring Queuing Systems to Market Segments: Criteria for Allocation to Designated Lines
Urgency of job
emergencies vs. non-emergencies
Duration of service transaction

number of items to transact complexity of task
Payment of premium price

First class vs. economy
Importance of customer
frequent users/loyal customers vs. others
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Ten Propositions on the Psychology of Waiting Lines (Table 9-3)

1. Unoccupied time feels longer 2. Preprocess/postprocess waiting feel longer than inprocess 3. Anxiety makes waiting seem longer 4. Uncertain waiting is longer than known, finite waiting 5. Unexplained waiting seems longer 6. Unfair waiting is longer than equitable waiting 7. People will wait longer for more valuable services 8. Waiting alone feels longer than in groups 9. Physically uncomfortable waiting feels longer 10. Waiting seems longer to new or occasional users
Sources: Maister; Davis & Heineke; Jones & Peppiatt
1 - 176
Benefits of Effective Reservations Systems
Controls and smoothes demand Pre-sells service Informs and educates customers in advance of arrival Customers avoid waiting in line for service (if service times are honored) Data capture helps organizations prepare financial projections
1 - 177
Characteristics of Well-designed Reservations Systems

Fast and user friendly for customers and staff Can answer customer questions Offers options for self service (e.g. Web) Accommodates preferences (e.g., room with view) Deflects demand from unavailable first choices to alternative times and locations Includes strategies for no-shows and overbooking
requiring deposits to discourage no-shows canceling unpaid bookings after designated time compensating victims of over-booking
1 - 178
Setting Capacity Allocation Sales Targets for a Hotel by Segment and Time Period (Fig. 9-5)
Capacity (% rooms)
100%
Week 7
(Low Season)
Week 36
(High Season) Executive service guests
Out of commission for renovation Executive service guests Transient guests Weekend package
50%
Transient guests Groups and conventions
W/E package
Groups (no conventions) Airline contracts Nights: M Tu W Th F S Sn Airline contracts
Time
Tu
Th
Sn
1 - 179
Information Needed for Demand and Capacity Management Strategies

Historical data on demand level and composition, noting responses to marketing variables Demand forecasts by segment under specified conditions Fixed and variable cost data, profitability of incremental sales Site-by-site demand variations Customer attitudes towards queuing Customer evaluations of quality at different levels of capacity utilization
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Chapter 10
Planning the Service Environment
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The Purpose of Service Environments

The service environment influences buyer behaviour in 3 ways
Message-creating Medium: symbolic cues to communicate the distinctive nature and quality of the service experience. Attention-creating Medium: to make the servicescape stand out from other competing establishments, and to attract customers from target segments. Effect-creating Medium: colors, textures, sounds, scents and spatial design to enhance the desired service experience, and/or to heighten an appetite for certain goods, services or experiences
Helps the firm to create a distinctive image & positioning that is unique.
1 - 182
Comparison of Hotel Lobbies

(Figure 10.1)
The servicescape is part of the value proposition!
Orbit Hotel and Hostel, Los Angeles Four Seasons Hotel, New York
1 - 183
The Mehrabian-Russell Stimulus-Response Model (Figure 10.2)
Environmental Stimuli & Cognitive Processes
Dimensions of Affect: Pleasure and Arousal
Response Behaviors: Approach/ Avoidance & Cognitive Processes
1 - 184
The Mehrabian-Russell Stimulus-Response Model

Simple and fundamental model of how people respond to environments Peoples conscious and unconscious perceptions and interpretation of the environment influence how they feel in that environment Feelings, rather than perceptions or thoughts drive behavior Typical outcome variable is approach or avoidance of an environment, but other possible outcomes can be added to the model as well
1 - 185
The Russell Model of Affect
Arousing Distressing Exciting
Unpleasant
Pleasant
Boring
Relaxing
Sleepy
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The Russell Model of Affect

Emotional responses to environments can be described along two main dimensions, pleasure and arousal. Pleasure is subjective depending on how much the individual likes or dislikes the environment Arousal quality of an environment is dependent on its information load, i.e., its degree of
Novelty (unexpected, surprising, new, familiar) and Complexity (number of elements, extent of motion or change)
1 - 187
Drivers of Affect
Affect can be caused by perceptions and cognitive processes of any degree of complexity. Simple Cognitive Processes, Perception of Stimuli tangible cues (of service quality) consumer satisfaction Complex Cognitive Processes affective charged schemata processing attribution processes
The more complex a cognitive process becomes, the more powerful its potential impact on affect.However, most service encounters are routine. Simple processes can determine affect.
1 - 188
Behavioral Consequence of Affect

Basically, pleasant environments result in approach, and unpleasant environments result in avoidance Arousal acts as an amplifier of the basic effect of pleasure on behavior If the environment is pleasant, increasing arousal can lead to excitement and stronger positive consumer response. If the environment is unpleasant, increasing arousal level will move consumers into the Distressing region Feelings during the service encounter is also an important driver of customer loyalty
1 - 189
An Integrated Framework Bitners ServiceScape Model (Figure 10.4)

Environmental Dimensions Moderators Holistic Environment
Employee Response Moderator Perceived ServiceScape
Internal Responses Cognitive Emotional Psychological Employee Responses
Behaviour
Ambient Conditions
Approach or Avoid
Social Interaction Between Customers & Employees
Space/ Function
Signs, Symbols & Artefacts
Customer Response Moderator
Customer Responses Cognitive Emotional Psychological
Approach or Avoid
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An Integrated Framework Bitners ServiceScape Model(cont)

Identifies the main dimensions in a service environment and views them holistically Customer and employee responses classified under, cognitive, emotional and psychological which would in turn lead to overt behavior towards the environment Key to effective design is how well each individual dimension fits together with everything else
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Dimensions of the Service Environment

Service environments are complex and have many design elements. The main dimensions in the servicescape model includes: Ambient Conditions
Music (e.g, fast tempo and high volume increase arousal levels) Scent (strong impact on mood, affect and evaluative responses, purchase intention and in-store behavior) Color (e.g, warm colors associated with elated mood states and arousal but also increase anxiety, cool colors reduce arousal but can elicit peacefulness and calm)
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Dimensions of the Service Environment (cont)
Spatial Layout and Functionality

Layout refers to size and shape of furnishings and the ways it is arranged Functionality is the ability of those items to facilitate performance
Signs, Symbols and Artifact

Explicit or implicit signals to communicate the firms image, help consumers find their way and to convey the rules of behavior
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Impact of Music on Restaurant Diners

(Table 10-2) Restaurant Patron Behavior Fast-beat Slow-beat Difference between Music Music Slow and Fast-beat Environment Environment Environments
Absolute Difference Consumer time spent at table Spending on food Spending on beverages Total spending Estimated gross margin 45min $55.12 $21.62 $76.74 $48.62 56min $55.81 $30.47 $86.28 $55.82 +11min +$0.69 +$8.85 +$9.54 +$7.20 % Difference +24% +1% +41% +12% +15%
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The Effects of Scents on the Perceptions of Store Environments (Table 10-3)

Evaluation Unscented Environment Mean Ratings Scented Environment Mean Ratings Difference
Store Evaluation Negative/positive Outdated/modern Store Environment Unattractive/attracti ve Drab/colorful Boring/Stimulating 4.12 3.63 3.75 4.98 4.72 4.40 +0.86 +1.09 +0.65 4.65 3.76 5.24 4.72 +0.59 +0.96
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The Effects of Scents on the Perceptions of Store Environments (Table 10-3)

Evaluation Unscented Environment Mean Ratings Scented Environment Mean Ratings Difference
Merchandise Outdated/up- to-date style Inadequate/adequate Low/high quality Low/high price 4.71 3.80 4.81 5.20 5.43 4.65 5.48 4.93 +0.72 +0.85 +0.67 -0.27
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Aromatherapy: The Effects of Fragrance on People (Table 10-4)

Fragrance Aromath erapy Citrus Aromather apy Class Calming Tradition Potential Psychological al Use Impact on People Soothing agent, astringen t Muscle relaxant, soothing agent Emollient soothing agent Skin cleanser Calming and relaxing effect esp. for nervous people Relaxing and calming, helps create a homey and comfortable feel Helps makes people feel refreshed, joyful, comfortable Increase attention level and boosts energy
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Orange
Lavender
Herbaceo Calming, us balancing, soothing Floral Uplifting, balancing Energizing, stimulating
Jasmine
Peppermint Minty
Common Associations and Human Responses to Colors (Table 10-5)

Color Degree of Nature Common Association and Warmth Symbol Human Responses to Color Warm Earth High energy and passion; can excite, stimulate, and increase arousal and blood pressures Emotions, expressions, and warmth Nurturing, healing and unconditional love
Red
Orange
Warmest
Sunset
Green
Cool
Grass and Trees
Blue
Coolest
Sky and Relaxation, serenity and loyalty Ocean
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Selection of Environmental Design Elements

There is a multitude of research on the perception and impact of environmental stimuli on behaviour, including: People density, crowding Lighting Sound/noise Scents and odours Queues No standard formula to designing the perfect combination of these elements. Design from the customers perspective Design with a holistic view!
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Tools to Guide in Servicescape Design

Keen Observation of Customers Behavior and Responses to the service environment by management, supervisors, branch managers, and frontline staff Feedback and Ideas from Frontline Staff and Customers using a broad array of research tools ranging from suggestion boxes to focus groups and surveys. Field Experiments can be used to manipulate specific dimensions in an environment and the effects observed. Blueprinting or Service Mapping - extended to include the physical evidence in the environment.
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Chapter 11
Managing People for Service Advantage
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Frontline Service Personnel: Source of Customer Loyalty and Competitive Advantage

Frontline is an important source of differentiation and competitive advantage. It is:
a core part of the product the service firm the brand
Frontline also drives customer loyalty, with employees playing key role in anticipating customer needs, customizing service delivery and building personalized relationships
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Boundary Spanning Roles

Boundary spanners link the inside of the organization to the outside world Multiplicity of roles often results in service staff having to pursue both operational and marketing goals Consider management expectations of restaurant servers:
deliver a highly satisfying dining experience to their customers be fast and efficient at executing operational task of serving customers do selling and cross selling, e.g. We have some nice desserts to follow your main course
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Role Stress in the Frontline

3 main causes of role stress: Person vs. Role: Conflicts between what jobs require and
employees own personality and beliefs
Organization vs. Customer: Dilemma whether to follow

company rules or to satisfy customer demands
Customer vs. Customer: Conflicts between customers that

demand service staff intervention
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Emotional Labor
The act of expressing socially desired emotions during service transactions (Hochschild, The Managed Heart) Three approaches used by employees
surface acting deep acting spontaneous response
Performing emotional labor in response to societys or managements display rules can be stressful Good HR practice emphasizes selective recruitment, training, counseling, strategies to alleviate stress
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The Cycles of Failure, Mediocrity and Success

Too many managers make short-sighted assumptions about financial implications of:
Low pay Low investment (recruitment, training) High turnover human resource strategies
Often costs of short-sighted policies are ignored:

Costs of constant recruiting, hiring & training Lower productivity & lower sales of new workers Costs of disruptions to a service while a job remains unfilled Loss of departing persons knowledge of business and customers Cost of dissatisfied customers
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Cycle of Failure (Fig. 11.1)

Customer turnover
Repeat emphasis on attracting new customers
Failure to develop customer loyalty
Low profit margins
High employee turnover; poor service quality No continuity in relationship for Employee dissatisfaction; customer poor service attitude
Narrow design of jobs to accommodate low skill level
Use of technology Emphasis on to control quality rules rather than service Payment of low wages Minimization of selection effort Minimization of training
Customer dissatisfaction
Employees become bored
Employees cant respond to customer problems
Source: Schlesinger and Heskett
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Service Sabotage (Fig. 11-A)

Routinized
Normality of Service Sabotage Behaviors
Openness of Service Sabotage Behaviors

Covert Overt
Customary-Private Service Sabotage e.g. Waiters serving smaller servings, bad beer or sour wine
Customer-Public Service Sabotage e.g. Talking to guests like young kids and putting them down
Sporadic-Private Service Sabotage e.g. Chef occasionally purposefully slowing down orders
Sporadic-Public Service Sabotage e.g. Waiters spilling soup onto laps, gravy onto sleeves, or hot plates into someones hands
Intermittent
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Cycle of Mediocrity (Fig. 11.2)

Customers trade horror stories
Other suppliers (if any) seen as equally poor
Employee dissatisfaction (but cant easily quit)
Employees spend working life in environment of mediocrity Narrow design of jobs Emphasis on rules vs. pleasing customers
Training emphasizes Success = learning rules not making mistakes Service not focused on customers needs Jobs are boring and repetitive; employees Good wages/benefits unresponsive high job E security Resentment at inflexibility and Promotion lack of employee initiative; and pay complaints to employees increases based Initiative is on longevity, discouraged lack of mistakes Customer dissatisfaction
No incentive for cooperative relationship to obtain better service
Complaints met by indifference or hostility
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Cycle of Success (Fig. 11.3)

Low customer turnover
Repeat emphasis on customer loyalty and retention
Customer loyalty
Higher profit margins
Lowered turnover, high service quality Continuity in relationship with customer Employee satisfaction, positive service attitude
Broadened job designs
Train, empower frontline personnel to control quality
High customer satisfaction
Extensive training
Above average wages Intensified selection effort
Source: Heskett and Schlesinger
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How to Manage People for Service Advantage?

Staff performance is a function of both ability and motivation. How can we get able service employees who are motivated to productively deliver service excellence?
1. Hire the right people 2. Enable your people 3. Motivate and energize your people
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Hire the Right People
The old saying People are your most important asset is wrong. The RIGHT people are your most most important asset. Jim Collins
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Recruitment
The right people are a firms most important asset: take a focused, marketing-like approach to recruitment Clarify what must be hired versus what can be taught Clarify nature of the working environment, corporate values and style, in addition to job specs Ensure candidates have/can obtain needed qualifications Evaluate candidates fit with firms culture and values Fit personalities, styles, energies to the appropriate jobs
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Select And Hire the Right People: (1) Be the Preferred Employer
Create a large pool: Compete for Talent Market Share What determines a firms applicant pool?
Positive image in the community as place to work Quality of its services The firms perceived status
There is no perfect employee

Different jobs are best filled by people with different skills, styles or personalities Hire candidates that fit firms core values and culture Focus on recruiting naturally warm personalities
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Select and Hire the Right People: (2) How to Identify the Best Candidates
Observe Behavior
Hire based on observed behavior, not words you hear Best predictor of future behavior is past behavior Consider group hiring sessions where candidates given group tasks
Personality Testing
Willingness to treat co-workers and customers with courtesy, consideration and tact Perceptiveness regarding customer needs Ability to communicate accurately and pleasantly
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Select and Hire the Right People: (3) How to Identify the Best Candidates
Employ Multiple, Structured Interviews
Use structured interviews built around job requirements Use more than one interviewer to reduce similar to me effects
Give Applicants a Realistic Preview of the Job

Chance to have hands-on with the job Assess how the candidates respond to job realities Allow candidates to self select themselves out of the job
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Train Service Employees

The Organizational Culture, Purpose and Strategy
Promote core values, get emotional commitment to strategy Get managers to teach why, what and how of job.
Interpersonal and Technical Skills

Both are necessary but neither is sufficient for optimal job performance
Product/Service Knowledge
Staffs product knowledge is a key aspect of service quality Staff need to be able to explain product features and to position products correctly
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Factors Favoring Employee Empowerment

Firms strategy is based on competitive differentiation and on personalized, customized service Emphasis on long-term relationships vs. one-time transactions Use of complex and non-routine technologies Environment is unpredictable, contains surprises Managers are comfortable letting employees work independently for benefit of firm and customers Employees seek to deepen skills, like working with others, and are good at group processes
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Control vs. Involvement Model of Management

Control concentrates 4 key features at top of organization; Involvement pushes them down:
Information about operating results and measures of competitive performance Rewards based on organizational performance (e.g. profit sharing, stock ownership) Knowledge/skills enabling employees to understand and contribute to organizational performance Power to influence work procedures and organizational direction (e.g. quality circles, self-managing teams)
Source: Bowen and Lawler Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E
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Levels of Employee Involvement
Suggestion involvement
Employee recommendation
Job involvement
Jobs redesigned Employees retrained Supervisors facilitate
High involvement
Information is shared Employees skilled in teamwork, problem solving etc. Participate in decisions Profit sharing and stock ownership
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Motivate and Energize the Frontline

Use the full range of available rewards effectively, including:
Job content Feedback and recognition Goal accomplishment
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The Inverted Organizational Pyramid (Fig. 11.5)

Customer Base Top Mgmt Frontline Staff
Middle Mgmt Frontline Staff Traditional Organizational Pyramid

Legend:
Middle Mgmt & Top Mgmt Support Frontline Inverted Pyramid with a Customer & Frontline Focus
= Service encounters, or Moments of Truth.

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The Wheel of Successful HR in Service Firms

(Fig. 11.6) Leadership that:
Focuses the entire organization on supporting the frontline Fosters a strong service culture with passion for service and productivity Drives values that inspire, energize and guide service providers
1. Hire the Right People

Be the preferred employer & compete for talent market share Intensify the selection process
3. Motivate & Energize Your People
Utilize the full range of rewards
Service Excellence & Productivity 2. Enable Your People
Empower Frontline Build high performance service delivery teams Extensive Training
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Chapter 12
Managing Relationships and Building Loyalty
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Four Stages of Brand Loyalty in a Consumer
Cognitive loyalty perception from brand attribute information that one brand is preferable to its alternatives Affective loyalty developing a liking for the brand based on cumulatively satisfying usage occasions Conative loyalty commitment to rebuying the same brand Action loyalty exhibiting consistent repurchase behavior
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Loyalty is Important to Profitability : Index of Customer Profits over Time (Fig. 12.1)
(Year 1=100)
350 300 250 200 150 100 50 0
Year 1
Credit card
Year 2
Industrial laundry
Year 3
Year 4
Year 5
Auto servicing
Industrial distribution
Based on data from Reichheld and Sasser
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What Makes Loyal Customers More Profitable?

Tend to spend more as relationship develops customers balances may grow may consolidate purchases to one supplier Cost less to serve less need for information and assistance make fewer mistakes Recommend new customers to firm (act as unpaid sales people) Trust leads to willingness to pay regular prices vs. shopping for discounts
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Analyzing Why Customers Are More Profitable over Time (Fig. 12.2)
Profit from price premium Profit from references Profit from reduced op. costs Profit from increased usage Base Profit
7
Source: Reichheld and Sasser
Year
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Measuring Customer Equity: Calculating Life Time Value of Each Customer

Value at Acquisition
revenues (application fee + initial purchase) Less costs (marketing +credit check + account set up)
Annual Value (project for each year of relationship)

revenues (annual fee + sales + service fees + value of referrals) Less costs (account management + cost of sales + write-offs)
Net Present Value

Determine anticipated customer relationship lifetime Select appropriate discount figure Sum anticipated annual values (future profits) at chosen discount rate
Customer Equity is total sum of NPVs of all current customers

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Customer-Firm Relationship
Todays marketers seek to develop long-term relationships with customers. Relationship marketing includes:
Database Marketing: Involves the use of technology by delivering differentiated service levels to consumers and subsequently tracking the relationship. Interaction Marketing: Usually in B2B context where people and the social process also add mutually beneficial value. Network Marketing: Common in B2B context where companies commit resources to develop positions in a network of relationships with the stakeholders and relevant agencies.
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Types of Relationships with Customers (Table 12.1)
Type of Relationship--Firm and Customer Nature of Service Delivery

Continuous Membership Cable TV Insurance College enrollment Subscriber phone Theater subscription Warranty repair No formal relationship Radio station Police Lighthouse Pay phone Movie theater Public transport
Discrete transactions
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Basic Segmentation Issues: Building an Appropriate Customer Portfolio

Target customers whose needs match firms capabilities Focus on value of prospective customers within each segment, not just numbers Avoid targeting customers who might abuse: our employees, facilities other customers Create a mix of segments to reduce risks of volatility during swings of economic cycles
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Service-Relevant Segmentation Variables
Timing of service use (e.g., by hour, day, season) Level of skill and experience as co-producer/selfserver Preferred language in face-to-face contact Access to electronic delivery systems (e.g., Internet) Attitudes toward use of new service technologies
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Identifying and Selecting Target Segments

(Mgt Memo 12.2)
User characteristics
demographics psychographics geographic location benefits sought
User behavior
when, where, how services used quantity/value of purchases frequency of use profitability of relationship sensitivity to marketing variables
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Portfolio of Professional Assignments
(Fig. 12.4)
Major, State-of-the-art challenges for the firms principals that give the firm high visibility Demanding client assignments offering a learning experience for the firms most experienced associates Routine client projects shared among principals and associates Entry-level tasks for new associates or for research assistants & paraprofessionals
Pacesetters
Significant Projects
Bread and Butter Projects
Analytical Work on Project Data
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The Customer Pyramid (Fig. 12.5)

Good Relationship Customers Which segment sees high value in our offer, spends more with us over time, costs less to maintain, and spreads positive word-of-mouth?
Platinum Gold Iron Lead

Poor Relationship Customers
Which segment costs us in time, effort and money, yet does not provide the return we want? Which segment is difficult to do business with?
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How Customers See Relational Benefits in Service Industries (Research Insights 12.1)
Confidence benefits
less risk of something going wrong, less anxiety ability to trust provider know what to expect get firms best service level
Social benefits
mutual recognition, known by name friendship, enjoyment of social aspects
Special treatment benefits

better prices, discounts, special deals unavailable to others extra services higher priority with waits, faster service
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The Customer Satisfaction-Loyalty Relationship

(Fig. 12.6)
Apostle
100
Loyalty (Retention)
Zone of Affection
80
Near Apostle
60
Zone of Indifference Zone of Defection
40
20
Terrorist 0
1
Very dissatisfied
5
Very Satisfied
Neither satisfied Dissatisfied Satisfied nor dissatisfied
Satisfaction
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The Wheel of Loyalty (Fig. 12.7)

3. Reduce Churn Drivers
Conduct churn diagnostic Address key churn drivers
Enabled through: Frontline staff Account managers Membership programs CRM Systems
1. Build a Foundation for Loyalty

Segment the market Be selective in acquisition Use effective tiering of service. Deliver quality service.
Implement complaint handling & service recovery Increase switching costs
Customer Loyalty
Build higher level bonds
2. Create Loyalty Bonds

Deepen the relationship Give loyalty rewards
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Rewarding Value of Use, Not Just Frequency at British Airways (Best Practice in Action 12.2)
Dedicated reservations Reservations assurance Priority waitlist and standby Advance notification of delays exceeding 4 hours Upgraded check-in Preferred boarding Special services assistance Bonus air miles Upgrade for two
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Drivers of Service Switching (Fig. 12.9)

Service Failure / Recovery
Core Service Failure
Service Mistakes Billing Errors Service Catastrophe
Value Proposition
Pricing
High Price Price Increases Unfair Pricing Deceptive Pricing
Service Encounter Failures

Uncaring Impolite Unresponsive Unknowledgeable
Service Switching
Inconvenience
Location/Hours Wait for Appointment Wait for Service
Response to Service Failure

Negative Response No Response Reluctant Response
Competition
Found Better Service
Others
Involuntary Switching
Customer Moved Provider Closed
Ethical Problems
Unsafe Cheat Hard Sell Conflict of Interest
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Common CRM Applications (Mgt Memo 12.2)

Signifies the whole process by which relationships with customers are built and maintained. CRM as an enabler, offering a unified customer interface and allow firms to better understand and segment the customers etc. Applications include:
Data collection Data analysis Sales force automation Marketing automation Call center automation
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Customer Relationship Strategies with CRM Systems: Key Questions

How should our value proposition change to increase customer loyalty? How much customization or one-to-one marketing and service delivery is appropriate and profitable? What is the incremental profit potential of increasing share of wallet with current customers? How much does this vary by customer tier and/or segment? How much time and resource can we allocate to CRM right now? If we believe in CRM, why have we not taken steps in that direction before? What can we do today to develop customer relationship without spending on technology?
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Chapter 13
Customer Feedback and Service Recovery
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American Customer Satisfaction Index: Selected Industry Scores, 2002

Score
(Max = 100)
100 90 80 70 60 50 40 30 20 10 85 79 80 79 76 65 62
74
71
71
66
70
% Change 0 3.7% 2002 vs 2001
1.3% 0.0% 1.3% 2.8% 0.0% 0.0% 8.2% 2.9% -2.6%
4.8% 3.3%
Industry:
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Key Questions for Managers to Ask about Customer Complaining Behavior

Why do customers complain? What proportion of unhappy customers complain? Why dont unhappy customers complain? Who is most likely to complain? Where do customers complain?
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Courses of Action Open to a Dissatisfied Customer (Figure 13.1)

Complain to the service firm Take some form of public action Service Encounter is Dissatisfactory Take some form of private action Complain to a third party Take legal action to seek redress Defect (switch provider) Negative word-ofmouth
Take no action
Any one or a combination of these responses is possible

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Dimensions of Perceived Fairness in Service Recovery Process (Figure 13.2)

Complaint Handling & Service Recovery Process Justice Dimensions of the Service Recovery Process Procedural Justice Interactive Justice Outcome Justice
Customer Satisfaction with the Service Recovery

Source: Tax and Brown Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E
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Proportion of Unhappy Customers Who Buy Again Depending on the Complaint Process
100 90 80 70 60 50 40 30 20 10 0 95% 82% 70% 54% 46% 37% 19% 9%
Customer did not complain Complaint was not resolved Complaint was resolved
Problem cost $1 - 5
Source: TARP study Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E
Complaint was resolved quickly
Problem cost > $100
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Impact of Effective Service Recovery on Retention
No Problem Problem, but effectively resolved
84%
92%
Problem Unresolved
0% 10% 20% 30% 40%
46%
50% 60% 70% 80% 90% 100%
Customer Retention
Source: IBM-Rochester study Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E
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Components of an Effective Service Recovery System (Figure 13.3)
Do Dothe theJob JobRight Rightthe the First Time First Time
Effective EffectiveComplaint Complaint Handling Handling
Increased IncreasedSatisfaction Satisfaction and Loyalty and Loyalty Conduct ConductResearch Research Monitor MonitorComplaints Complaints Develop DevelopComplaints Complaints as Opportunity as Opportunity Culture Culture Develop DevelopEffective Effective System and System andTraining Trainingin in Complaints Handling Complaints Handling Conduct ConductRoot RootCause Cause Analysis Analysis
Identify IdentifyService Service Complaints Complaints
Resolve ResolveComplaints Complaints Effectively Effectively
Learn Learnfrom fromthe the Recovery Experience Recovery Experience
Close the Loop via Feedback
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Strategies to Reduce Customer Complaint Barriers (Table 13.1)

Complaint Barriers for Dissatisfied Customers
Inconvenience Difficult to find the right complaint procedure. Effort, e.g., writing a letter. Doubtful Pay Off Uncertain whether any action, and what action will be taken by the firm to address the issue the customer is unhappy with.
Strategies to Reduce These Barriers

Make feedback easy and convenient by: Printing Customer Service Hotline numbers, e-mail and postal addresses on all customer communications materials. Reassure customers that their feedback will be taken seriously and will pay off by: Having service recovery procedures in place, and communicating this to customers. Featuring service improvements that resulted from customer feedback. Make providing feedback a positive experience: Thank customers for their feedback. Train the frontline not to hassle and make customers feel comfortable. Allow for anonymous feedback.
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Unpleasantness Complaining customers fear that they may be treated rudely, may have to hassle, or may feel embarrassed to complain.
How to Enable Effective Service Recovery
Be proactiveon the spot, before customers complain Plan recovery procedures Teach recovery skills to relevant personnel Empower personnel to use judgment and skills to develop recovery solutions
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Guidelines for Effective Problem Resolution (Management Memo 13.1)

Act fast Admit mistakes but dont be defensive Understand problem from customers viewpoint Dont argue Acknowledge customers feelings Give benefit of doubt Clarify steps to solve problem Keep customers informed of progress Consider compensation Persevere to regain goodwill
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Service Guarantees Help Promote and Achieve Service Loyalty

Force firms to focus on what customers want Set clear standards Highlights cost of service failures Require systems to get & act on, customer feedback Reduce risks of purchase and build loyalty
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Types of Service Guarantees

Single attribute-specific guarantee one key service attribute is covered Multiattribute-specific guarantee a few important service attributes are covered Full-satisfaction guarantee all service aspects covered with no exceptions Combined guarantee like the full-satisfaction, adding explicit minimum performance standards on important attributes
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The Hampton Inn 100% Satisfaction Guarantee

(Figure 13.4)
What are the benefits of such a guarantee? Are there any downsides?
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Key Objectives of Effective Customer Feedback Systems Assessment and benchmarking of service quality and performance Customer-driven learning and improvements Creating a customer-oriented service culture
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Building a Customer Feedback System
Total market surveys Post-transaction surveys Ongoing customer surveys Customer advisory panels Employee surveys/panels Focus groups Mystery shopping Complaint analysis Capture of service operating data
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Strengths and Weakness of Key Customer Feedback Collection Tools (Table 13.3) Selection of a cocktail of effective customer feedback collection tools.
Multi-level Measurement
Collection Tools
Total Market Survey (inclu. competitors) Annual Survey on overall satisfaction Transactional Survey (process specific) Service Feedback Cards (process specific) Mystery Shopping (service testers) Unsolicited Feedback Recd (Online feedback system) Focus Group Discussions Service Reviews
Service Satisfaction
Process Satisfaction
Specific Feedback
Actionable
Represen Potential -tative, for Service Reliable Recovery
First Hand Learning
Cost Effective
Meets Requirements:
Fully
Moderate
Little/Not at all
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Entry Points for Unsolicited Feedback

Employees serving customers face-to-face or by phone Intermediaries acting for original supplier Managers contacted by customers at head/regional office Complaint cards mailed or placed in special box Complaints passed to company by third-party recipients consumer advocates trade organizations legislative agencies other customers
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Chapter 14
Improving Service Quality and Productivity
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Importance of Productivity and Quality for Service Marketers Productivity

Helps to keep costs down
lower prices to develop market, compete better increase margins to permit larger marketing budgets raise profits to invest in service innovation
May impact service experience (must avoid negatives) May require customer involvement, cooperation
Quality
Gain competitive advantage, maintain loyalty Increase value (may permit higher margins) Improve profits
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Perspectives on Service Quality

Transcendental: Quality = excellence. Recognized only through
experience
Product-Based: Quality is precise and measurable User-Based: ManufacturingBased: Value-Based:

Quality lies in the eyes of the beholder
Quality is conformance to the firms developed specifications Quality is a trade-off between price and value
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Dimensions of Service Quality

Tangibles Reliability Responsiveness Assurance
competence, courtesy credibility security
Empathy
access communication understanding of customer
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Seven Service Quality Gaps (Fig. 14.1)

Customer needs and expectations
CUSTOMER
1. Knowledge Gap
Management definition of these needs
MANAGEMENT
2. Standards Gap
Translation into design/delivery specs
3. Delivery Gap
Execution of design/delivery specs
4. I.C.Gap
Advertising and sales promises
5. Perceptions Gap
Customer perceptions of product execution
6. Interpretation Gap
Customer interpretation of communications
7.
Service Gap
Customer experience relative to expectations
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Prescriptions for Closing Service Quality Gaps

(Table 14.3)
Knowledge: Learn what customers expect--conduct research, dialogue, feedback Standards: Specify SQ standards that reflect expectations Delivery: Ensure service performance matches specs-consider roles of employees, equipment, customers Internal communications: Ensure performance levels match marketing promises Perceptions: Educate customers to see reality of service delivery Interpretation: Pretest communications to make sure message is clear and unambiguous.
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Hard and Soft Measures of Service Quality

Hard measures refer to standards and measures that can be counted, timed or measured through audits
typically operational processes or outcomes e.g. how many trains arrived late?
Soft measures refer to standards and measures that cannot easily be observed and must be collected by talking to customers, employees or others
e.g. SERVQUAL, surveys, and customer advisory panels.
Control charts are useful for displaying performance over time against specific quality standards.
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Hard Measures of Service Quality
Control charts to monitor a single variable Service quality indexes Root cause analysis (fishbone charts) Pareto analysis
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Composition e of FedExs Service Quality Index (SQI) (Table 14.4)

Failure Type
Weighting X Factor
1 5 1 5 1 1 10 10 10 5 5 1
No of Daily = Incidents Points
Late Delivery Right Day Late Delivery Wrong Day Tracing request unanswered Complaints reopened Missing proofs of delivery Invoice adjustments Missed pickups Lost packages Damaged packages Aircraft Delays (minutes) Overcharged (packages missing label) Abandoned calls
Total Failure Points (SQI) =

XXX,XXX
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Control Chart: Percent of Flights Leaving within 15 Minutes of Schedule (Fig. 14.2)
100% 90% 80% 70% 60%

J F M A M J J A S O N D
Month
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Tools to Address Service Quality Problems
Fishbone diagrams: A cause-and-effect diagram to identify potential causes of problems. Pareto charts: Separating the trivial from the important. Often, a majority of problems is caused by a minority of causes i.e. the 80/20 rule. Blueprinting: A visualization of service delivery. It allows one to identify fail points in both the frontstage and backstage.
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Cause and Effect Chart for Airline Departure Delays (Fig. 14.3)
Facilities, Equipment Frontstage Front-Stage Personnel Personnel Procedure
Procedures
Arrive late Oversized bags
Customers
Customers
Delayed check-in Gate agents Aircraft late to procedure gate cannot process Mechanical fast enough Acceptance of late Failures passengers Late/unavailable Late pushback airline crew
Delayed Departures Other Causes

Weather Air traffic Late food service Late baggage Late fuel
Materials, Materials, Supplies Supplies
Late cabin cleaners
Poor announcement of departures Weight and balance sheet late
Backstage Personnel
Information
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Analysis of Causes of Flight Departure Delays
(Fig. 14.4)
15.3% 15.4% 23.1%
23.1%
All stations, excluding Chicago-Midway Hub 11.7%
4.9 % 19% 9.5% 33.3% 33.3%
23.1%
8.7% 11.3% 15% 53.3%
Newark
Washington Natl.
Late passengers Waiting for pushback Waiting for fueling
Late weight and balance sheet Late cabin cleaning / supplies Other
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Return on Quality (ROQ)

ROQ approach is based on four assumptions: Quality is an investment Quality efforts must be financially accountable Its possible to spend too much on quality Not all quality expenditures are equally valid Implication: Quality improvement efforts may benefit from being related to productivity improvement programs
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When Does Improving Service Reliability Become Uneconomical? (Fig. 14.5)

Satisfy Target Customers Through Service Recovery Optimal Point of Reliability: Cost of Failure = Service Recovery Satisfy Target Customers Through Service Delivery as Planned
100%
Service Reliability
D Investment
Small Cost, Large Improvement
Large Cost, Small Improvement

Assumption: Customers are equally (or even more) satisfied with the service recovery provided than with a service that is delivered as planned.
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Productivity in a Service Context

Productivity measures amount of output produced relative to the amount of inputs. Improvement in productivity means an improvement in the ratio of outputs to inputs. Intangible nature of many service elements makes it hard to measure the productivity of service firms, especially for information based services.
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Efficiency, Effectiveness, and Productivity

Efficiency: comparison to a standard--usually time-based (e.g., how long employee takes to perform specific task)
Problem: focus on inputs rather than outcomes May ignore variations in quality or value of service
Effectiveness: degree to which firm is meeting its goals

Cannot divorce productivity from quality/customer satisfaction
Productivity: financial valuation of outputs to inputs

Consistent delivery of outcomes desired by customers should command higher prices
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Measuring Service Productivity

Traditional measures of service output tend to ignore variations in quality or value of service
That is, they focus on outputs rather than outcomes, and stress efficiency but not effectiveness.
Firms that are more effective in consistently delivering outcomes desired by customers can command higher prices. Furthermore, loyal customers are more profitable. Measures with customers as denominator include:
profitability by customer capital employed per customer shareholder equity per customer
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Questions to Ask When Developing Strategies to Improve Service Productivity

How to transform inputs into outputs efficiently? Will improving productivity hurt quality? Will improving quality hurt productivity? Are employees or technology the key to productivity? Can customers contribute to higher productivity?
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Operations-driven vs. Customer-driven Actions to Improve Service Productivity

Operations-driven strategies Customer-driven strategies Control costs, reduce waste Set productive capacity to match average demand Automate labor tasks Upgrade equipment and systems Train employees Leverage less-skilled employees through expert systems
Change timing of customer demand Involve customers more in production Ask customers to use third parties
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Backstage and Frontstage Productivity Changes: Implications for Customers
Backstage improvements can ripple to the front stage and affect customers
e.g., new printing peripherals may affect appearance of bank statements.
Front-stage productivity enhancements are especially visible in high contact services.

Some may just require passive acceptance by customers Others require customers to change their scripts and behavior.
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Overcoming Customers Reluctance to Accept Changes in Environment and Behavior

Develop customer trust Understand customers habits and expectations Pretest new procedures and equipment Publicize the benefits Teach customers to use innovations and promote trial Monitor performance, continue to seek improvements
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Six Sigma Methodology to Improve and Redesign Customer Service Processes

Process Improvement Process Design/Redesign
Define Measure Analyze
Identify the problem Define requirements Set goals Validate problem/process Refine problem/goal Measure key steps/inputs Develop causal hypothesis Identify root causes Validate hypothesis Develop ideas to measure root causes Test solutions Measure results Establish measures to maintain performance Correct problems if needed Identify specific or broad problems Define goal/change vision Clarify scope & customer requirements Measure performance to requirements Gather process efficiency data Identify best practices Assess process design Refine requirements Design new process Implement new process, structures and systems Establish measures & reviews to maintain performance Correct problems if needed
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Improve
Control
Chapter 15
Organizing for Service Leadership
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Customer-Led versus Market-Oriented Philosophies of Management

Firms may lose market leader position if listen too closely to current customers Service leadership requires curiosity, risk taking Customer-led businesses focus on understanding expressed desires of customers in currently served markets Market-oriented businesses commit to understand current/ latent customer desires plus competitors plans, capabilities
Scan market more broadly, have longer-term focus Work closely with lead users (windows to future vs. anchors to past) Combine traditional research with experimentation, observation
Conclusion: Pursue customer satisfaction, but set limits on being led by customers, especially during rapid change
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The Service Profit Chain (Fig. 15.1)

Internal
Operating strategy and service delivery system
Loyalty EMPLOYEES Satisfaction Productivity & Output Quality Capability Service Quality
External
Service concept Target Market
CUSTOMERS Service Value
Revenue Growth
Satisfaction Loyalty
Profitability
Workplace design Job design Selection and development Rewards and recognition Information and communication Tools for serving customers
Quality and productivity improvements yield higher service quality and lower costs
Lifetime value Retention Repeat business Referral
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Causal Links in the Service Profit Chain (Table 15.1)

Customer loyalty drives profitability and growth Customer satisfaction drives customer loyalty Value drives customer satisfaction Employee productivity and retention drive value Employee loyalty drives productivity Employee satisfaction drives loyalty and productivity Internal quality drives employee satisfaction Top management leadership underlies chains success
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Integrating Three Functional Imperatives

(recap from Chapter 1)
Marketing Imperative
Human Resources Imperative
Customers
Operations Imperative
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Defining Three Functional Imperatives

Marketing Imperative
Target right customers and build relationships Offer solutions that meet their needs Define quality package with competitive advantage
Operations Imperative
Create, deliver specified service to target customers Adhere to consistent quality standards Achieve high productivity to ensure acceptable costs
Human Resource Imperative

Recruit and retain the best employees for each job Train and motivate them to work well together Achieve both productivity and customer satisfaction
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Reducing Intra-Organizational Tension

Transfers and cross training Cross functional taskforces New tasks and new people Process management teams Gain-sharing programs
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The Search for Synergy: A Top Management Perspective

What do we want?
What do our employees, intermediaries, and other partners want?
What do our customers want?
What can we do?

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From Losers to Leaders: Moving Up the Service Performance Ladder
Service Leaders
Crme de la crme of their respective industries Names synonymous with outstanding service, customer delight
Service Professionals
Clear positioning strategy Sustained reputation for meeting customer expectations
Service Non-entities
Traditional operations mindset Rudimentary marketing, often emphasizing price discounts
Service Losers
Only survive because of lack of viable alternatives in marketplace
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Achieving Service Leadership by Focusing on Role of Each Functional Area Marketing: move from tactical to innovative and strategic Operations: move from reactive/cost oriented to focused, innovative, well coordinated with marketing and HR Human Resources: move from tight control of lowcost workers to quality of employees as strategic advantage
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Leadership for Change Management Involves Eight Stages

Create sense of urgency to develop impetus for change Put together strong team to direct process Create appropriate vision of where organization must go Communicate new vision broadly Empower employees to act on vision Produce sufficient short term results to create credibility Build momentum to tackle tougher problems Anchor new behaviors in the organizational culture
Source: John Kotter
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Leadership Qualities Needed in Service Organizations

Vision, charisma, persistence, high expectations, expertise, empathy, persuasiveness, integrity Ability to visualize quality of service as foundation for competing Believe in people who work for the firm, make good communications a priority Possess a natural enthusiasm for the business, teach it to others, pass on nuances, secrets, crafts of operating Cultivate leadership qualities of others in organization Use values to navigate firms through difficult times
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Transformational Leadership May Require Changing Corporate Culture

Corporate Culture:
Shared perceptions regarding what is important Shared values about what is right and wrong Shared understanding about what works and what doesnt Shared beliefs about why these things are important Shared styles of working and relating to others
Climate for Service--Tangible working environment atop underlying culture. Influential factors include:
Shared perceptions concerning practices, procedures and types of behaviors that get rewarded Clarity about mission and values, level of commitment to common purpose Flexibility: freedom to innovate, sense of responsibility, standards
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Services Marketing Christopher Lovelock

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Services Marketing Christopher Lovelock

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Chapter 1

Introduction to Services Marketing

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

How Important is the Service Sector in Our Economy?

Agriculture, Forestry, Mining, Construction 8% Manufacturing 14%

Finance, Insurance, Real Estate 20%

Government (mostly services) 13% Other Services 11%

Wholesale and Retail Trade 16% Transport, Utilities, Communications 8%

Business Health Services 6% 5%

Source: Bureau of Economic Analysis, November 2002

Changing Structure of Employment as Economic Development Evolves (Fig. 1.2)

Time, per Capita Income

Source: IMF, 1997

Services Marketing 5/E

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Major Trends in Service Sector (Fig. 1.3)

Some Impacts of Technological Change

Radically alter ways in which service firms do business:

Marketing Relevant Differences Between Goods and Services

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Defining the Essence of a Service

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Distinguishing Characteristics of Services

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Services cannot be inventoried after production

Intangible elements dominate value creation

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Greater variability in operational inputs and outputs

Time factor assumes great importance

Distribution channels take different forms

Important Differences Exist among Services

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Four Categories of Services Employing Different Underlying Processes (Fig. 1.5)

What is the Nature of the Service Act?

Who or What is the Direct Recipient of the Service?

Mental Stimulus Processing

e.g., accounting, banking, insurance, legal, research

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Implications of Service Processes (1) Seeking Efficiency May Lower Satisfaction

Implications of Service Processes: (2) Designing the Service Factory

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Implications of Service Processes: (3) Evaluating Alternative Delivery Channels

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Implications of Service Processes: (4) Balancing Demand and Capacity

Implications of Service Processes: (5) Applying Information Technology

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Implications of Service Processes: (6) Including People as Part of the Product

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

The Services Marketing Mix

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

The 7Ps: (1) Product Elements

The 7Ps: (2) Place and Time