Service Marketing Summary

BM302 SERVICES MARKETING
Table of Contents
CHAPTER 1 – INTRODUCTION TO SERVICES MARKETING....................................................................................................................3
Factors Transforming the Service Markets/ Economy....................................................................................................................................3
What are Services?...........................................................................................................................................................................................4
Four (4) Broad Categories Of Services – A Process Perspective....................................................................................................................4
Services Pose Distinctive Marketing Challenges............................................................................................................................................5
The 7Ps of Service Marketing.........................................................................................................................................................................6
TUTORIAL 1........................................................................................................................................................................................................7
CHAPTER 2 – CONSUMER BEHAVIOUR IN A SERVICE CONTEXT.........................................................................................................8
Pre-purchase Stage...........................................................................................................................................................................................8
Service Encounter Stage................................................................................................................................................................................10
Post-purchase Stage.......................................................................................................................................................................................12
TUTORIAL 2......................................................................................................................................................................................................12
CHAPTER 3 – POSITIONING SERVICES IN COMPETITIVE MARKET....................................................................................................13
Customer-Driven Services Marketing Strategy.............................................................................................................................................13
Segmenting Service Markets.........................................................................................................................................................................13
Targeting Service Markets.............................................................................................................................................................................14
Achieve Competitive Advantage Through Focus..........................................................................................................................................14
Positioning Services.......................................................................................................................................................................................15
Using Positioning Maps to Analyse Competitive Positioning......................................................................................................................16
TUTORIAL 3......................................................................................................................................................................................................16
CHAPTER 4 – DEVELOPING SERVICE PRODUCTS: CORE & SUPPLEMENTARY ELEMENTS.........................................................17
The flower of service.....................................................................................................................................................................................17
Facilitating Supplementary Services.............................................................................................................................................................17
Enhancing Supplementary Services...............................................................................................................................................................18
Branding Service Products & Experiences....................................................................................................................................................19
New Service Development............................................................................................................................................................................20
TUTORIAL 4......................................................................................................................................................................................................20
CHAPTER 5 – DISTRIBUTING SERVICE THROUGH PHYSICAL & ELECTRONIC CHANNELS.........................................................21
Distribution in a Services Context.................................................................................................................................................................21
Place & Time Decision..................................................................................................................................................................................22
Delivering services in cyberspace..................................................................................................................................................................23
The Role of Intermediaries............................................................................................................................................................................23
Distributing Services Internationally.............................................................................................................................................................25
TUTORIAL 5......................................................................................................................................................................................................25
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CHAPTER 1 – INTRODUCTION TO SERVICES MARKETING
Factors Transforming the Service Markets/ Economy

1. Government Policies
- Changes in regulations - New rules to protect customers,

- Privatization employees, and the environment
- New agreement on trade in services
2. Social Changes
- Rising consumer expectations - Rising consumer ownership of high-

- More affluence tech equipment
- Personal outsourcing - Easier access to more information
- Increased desire for buying experience - Immigration
vs. things - Growing but aging population
3. Business Trends
- Push to increase shareholder value - More strategic alliances

- Emphasis on productivity and cost - Focus on quality and customer
savings satisfaction
- Manufacturers add value through - Growth of franchising
service and sell services - Marketing emphasis by nonprofits
4. Advances in IT
- Growth of internet - Wireless networking

- Greater bandwidth - Faster, more powerful software
- Compact mobile equipment - Digitization of text, graphics, audio,
video
5. Globalization
- More companies operating on - “offshoring” of customer service

transnational basis - Foreign competitors invade domestic
- Increased international travel markets
- International mergers and alliances
 New markets and product categories

 Increase in demand services
 More intense competition
 Innovation in service products and delivery systems, stimulated by better

technology
 Customers have more choices and exercise more power
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 Success hinges on:

o Understanding customers and competitors
o Viable business models
o Creation of value for customers and firm
What are Services?

Benefits Without Ownership
Services involve a form of rental through which customers can obtain benefits (Lovelock and
Gummesson) The term rent as a general term to describe payment made for use of something or
access to skills and expertise, facilities, or networks instead of buying it outright.
Five (5) non-ownership framework categories:
- Renting goods services: these services allow customers to obtain the temporary right to use a
physical object that they prefer not to own.
- Defined space and place rentals: this is when customers obtain the use of a certain portion of a
larger space in a building, vehicle, or area.
- Labor, skills, and expertise rentals: other people are hired to perform work that customers
either cannot or choose not to do themselves.
- Access to shared facilities: customers rent the right to share the use of facility.
- Access and use of systems and networks: customer rent the right to participate in a specific
network.
Defining Services
Services are economic activities offered by one party to another. Often time based, these activities
bring about desired results to recipients, objects, or other assets. In exchange for money, time, and
effort, service customers expect value from access to labour, skills, expertise, goods, facilities,
networks, and systems. However, they do not normally take ownership of the physical elements
involved.
Four (4) Broad Categories Of Services – A Process Perspective

The nature of the processing can be tangible or intangible.
- Tangible actions are performed on people’s bodies or to their physical possessions.

- Intangible actions are performed on people’s minds or to their intangible assets.
The classification of services – four (4) broad categories:

People Processing: these are services that are directed at the people themselves. Implications of such
services are:
- Customers have to be present in the physical location (service factory). This requires planning
about the location of the service operation.
- Active cooperation of the customer is needed in the service delivery process.
- Need for managers to think about the process and output from the customer’s point of view.
Possession Planning: customers may ask service organizations to provide treatment for some of their
physical possessions. Implications of such services are:
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- There is no simultaneous production and consumption.

- Customer involvement trends to be limited to just dropping off or picking up the item.
Mental Stimulus Processing: these services touch people’s minds and have the power to shape
attitudes and influence behaviour. Implications of such services are:
- The customers do not have to be physically present in the service factory. They only need to
be able to take in the information when it is being presented.
- Services in this category can be “inventoried” for consumption at a later date, or even
consumed repeatedly.
Information Processing: information is the most tangible form of service output. However, it can be
transformed into more permanent and tangible forms like letters, reports, books, CDs, or DVDs. It is
sometimes difficult to tell the difference between information processing and mental stimulus
processing services. Therefore, for simplicity, mental stimulus processing services and information
processing services are sometimes termed information-based services.
Nature of the Who or What is the Direct Recipient of the Service?

Service Act PEOPLE POSSESSIONS
TANGIBLE People-processing: services directed Possession-processing: services
ACTIONS at people’s bodies (barbers, health directed at physical possessions
care) (refueling, disposable/ recycling)
INTANGIBLE Mental stimulus processing: services Information processing: services
ACTIONS directed at people’s mind (education, directed at intangible assets
advertising/PR) (accounting, banking)
Services Pose Distinctive Marketing Challenges

Services tend to have different features from goods, including the frequently cited four characteristics
of intangibility, heterogeneity, inseparability of production and consumption, and perishability of
output. It is important to recognise that these differences, while useful generalisations, do not apply
equally to all services.
DIFFERENCE IMPLICATIONS MARKETING-RELATED TASKS

Most service products cannot be Customers may be turned away Use pricing, promotion, reservations
inventoried to smooth demand; work with ops to
manage capacity
Intangible elements usually dominate Harder to evaluate service & Emphasize physical clues, employ
value creation distinguish from competitors metaphors and vivid images in
advertising
Services are often difficult to Greater risk & uncertainty perceived Educate customers on making good
visualize and understand choices; offer guarantees
Customers may be involved in co- Interaction between customer & Develop user-friendly equipment,
production provider; but poor task execution facilities & systems; train customers,
could affect satisfaction provide good support
People may be part of service Behaviour of service personnel & Recruit, train employees to reinforce
experience customers can affect satisfaction service concept
Shape customer behavior
Operational inputs and outputs tend Hard to maintain quality, Redesign for simplicity and failure
to vary more widely consistency, reliability proofing
Difficult to shield customers from Institute good service recovery
failures procedures
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Time factor often assumes great Time is money; customers want Find ways to compete on speed
importance service at convenient times delivery; offer extended hours
Distribution may take place through Electronic channels or voice Create user-friendly, secure websites
nonphysical channels telecommunications and free access by telephone
The 7Ps of Service Marketing

The traditional marketing mix applied to services:
1. Product elements: Planning the marketing mix begins with creating a service concept that offers
value. Service products consist of a core product and supplementary service elements. The core
product responds to the customer’s primary need, while the supplementary elements are mutually
reinforcing value-added enhancements.
2. Place & time: Service distribution may take place through physical or electronic channels (or
both), depending on the nature of the service. In order to deliver service elements to customers,
companies need to decide where and when these services are delivered, and the methods and
channels used.
- Distribution of core vs. supplementary services. We need to differentiate between delivering
information-based core products (respond to customers’ primary requirements) and providing
supplementary services that facilitate the purchase and use of physical goods.
- Importance if the time factor. Speed and convenience of place and time have become
important determinants of effective distribution and delivery of services. Many busy
customers expects service when it suits them, rather than when it suits the supplier.
3. Price & other user outlays: For firms, the pricing strategy determines income generation. From
the customer’s perspective, price is a key part of the costs they must incur to obtain the wanted
benefits.
- Most service products cannot be inventoried. Services usually cannot be stocked as inventory
for future use. A key task for service marketers, therefore, is to find ways of smoothing
demand levels to match the firm’s available capacity using dynamic pricing strategies.
4. Promotion & education: This component plays three vital roles: (1) providing needed
information and advice, (2) persuading target customers to buy the brand or service product, and
(3) encouraging them to act at specific times.
- Services are often difficult to visualise and understand as intangible elements usually
dominate value creation. Mental intangibility means it is not easily visualised and understood,
while physical intangibility is that which cannot be touched or experiences by the five senses.
- Firms can use physical images and metaphors to promote service benefits and demonstrate the
firm’s competencies. Well-trained service employees can help potential customers to make
good choices by educating them on what to expect during and after service delivery and by
helping them move smoothly through the service process.
- Customer-customer interactions affect the service experience. We need to use marketing
communications to attract the right segment of customers to the service facility, and to
educate them on the proper behaviour.
The extended services marketing mix for managing the customer interface:
5. Process: Smart managers know that for services, how a firm does things is as important as what it
does. Thus, creating and delivering product elements require the design and implementation of
effective processes.
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- Operational inputs and outputs can vary widely. Operational inputs and outputs tend to vary
more widely and make customer service process management a challenge.
- Nevertheless, the best service firms have made significant progress in reducing variability by
adopting standardised procedures, implementing rigorous management of service quality,
training employees more carefully, and automating tasks previously performed by human
beings.
- Customers are often involved in co-production. Service scholars argue that customers often
function as partial employees. Increasingly, your involvement takes the form of self-service,
often using self-service technologies (SSTs) facilitated by smart machines,
telecommunications, and the internet.
- Demand and capacity need to be balanced. Effective service process management is closely
related to the balancing of demand and capacity, the design of waiting systems and queues
configurations, and the management of the customer’s psychology of waiting.
6. Physical environment: The appearance of visible cues such as buildings, landscapes, vehicles,
interior furnishing, equipment, staff members’ uniforms, signs and printed materials, together
with the use of colours, smells and sounds, all provide tangible evidence of a firm’s image and
service quality.
7. People: Well-managed firms devote special care to selecting, training and motivating those
people who will be responsible for serving customers directly. When you encounter other
customers at a service facility, you know that they, too, can affect your satisfaction.
TUTORIAL 1
Refer to a service firm of your choice, explain how foreign competitors invade domestic markets
is influencing the service industry that your firm is in. Recommend the strategic marketing
planning that your firm can apply to deal with such change in the market.
The entry of multinational banks into the domestic market can attract small and medium size
manufacturing firms to use these banks services because the small and medium size firms intends to
utilize the reputation of these multinational banks to increase their corporate image in the foreign
markets when they are penetrating these markets. This creates threat for domestic banks to compete
with these multinational banks for small and mediums size manufacturing firms. To deal with this
threat, Q bank must enter the ASEAN markets in the coming five years. New branches must set up to
cater the foreign customers and helping the small and medium size manufacturing to enter ASEAN
markets.
The easier accessibility of sources for information by the prospects has transformed the marketing
communication activities of the banking industry especially in the personal financial services. The
banking industry has to utilize offline and online media to persuade and provide the accurate personal
financial service information to the prospects. Despite the traditional media, such as newspapers and
magazines advertisements, Q bank must develop an online media team to monitor the bank users'
comments. The team also must update and contrasting the uniqueness of Q bank personal financial
services to the prospects and existing customers of Q bank.
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CHAPTER 2 – CONSUMER BEHAVIOUR IN A SERVICE

CONTEXT
Pre-purchase Stage
1. Need awareness
When a person/ organization decides to buy or use a service, it is triggered by an underlying need or
need arousal. When people recognise a need, they are more likely to be motivated to take action to
resolve it. Needs may be triggered by:
- People’s unconscious minds (e.g. personal identity and aspirations)

- Physical conditions (e.g. chronic back pain)
- External sources (e.g. marketing activities)
2. Information search
Once a need has been recognised, customers are motivated to search for solutions. Several alternatives
may come to mind, and these form the evoked set, which is the set of possible products or brands that
a customer may consider in the decision process. Instead, the consumer is likely to narrow it down to
a few alternatives to seriously consider, and these alternatives then form the consideration set.
3. Evaluation of alternative services
In marketing, we often use multi-attribute models to stimulate consumer decision making.
Multi-attribute model
This model holds that consumers use product attributes that are important to them, to evaluate and
compare alternative offerings of firms in their consideration set. Consumer can use two common
decision rules to come to a decision. They are the very simpler linear compensatory rule, and the more
complex but also more realistic conjunctive rule.
- Under the linear compensatory rule, consumer mentally computes a global score for each
product, e.g. dry cleaner. This is done by multiplying the score of the dry cleaner for each
attribute by the importance weight. The scores than added up.
- In the conjunctive rule, the consumer will make the decision based on the total overall score
in conjunction with minimum performance levels on one or several attributes. If none of the
brands meets all the cut-offs in a conjunctive model, then the consumer may delay making a
choice, change the decision rule, or modify the cut-offs.
Service providers who understand how their target consumers make decisions can try and influence
that decision-making process in several ways to enhance their chance of being the chosen provider:
- First, firms need to ensure that their service is in the consideration set, since a firm cannot be
chosen without first being considered
- Next, firms can change and correct consumer perception
- They can also shift importance weight
- Firms can even introduce new attributes such as a car rental company Herts did when
advertising the environmentally friendly car.
The objective is to shape the firm’s target customers’ decision making so that they make the “right”
choice to choose the firm’s service offering.
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Service attributes
Ease or difficulty of evaluation in advance of purchase is a function of a product attributes. There may
be big differences between an experienced customer’s ability to evaluate a service and that of a first-
time user.
- Search attributes are tangible characteristics that customers evaluate before purchase. E.g.
Style, colour, texture, taste, and sound.
- Experience attributes are those that cannot be evaluated before purchase. Customers must
“experience” the service to know what they are getting. E.g. Vacations, live entertainment
performances and sporting events.
- Credence attributes are characteristics that customers find hard to evaluate even after
consumption. E.g. Counselling, surgery, legal advice, financial investment, planning services
and consulting services.
Perceived risk
Perceived risk is usually greater for services that are high in experience and credence attributes, and
first-time users are likely to face greater uncertainty. The worse the possible outcome and the more
likely it is to occur, the higher is the perception of risk.
- Functional: unsatisfactory performance outcomes

- Financial: monetary loss, unexpected costs
- Temporal: wasting time, consequences of delays
- Physical: personal injury or damage to possessions
- Psychological: personal fears and emotions
- Social: how others think and react
- Sensory: unwanted effects on any of the five senses
People typically feel uncomfortable with perceived risks during the pre-purchase stage and use a
variety of methods to reduce them, including:
- Seeking information from respected personal sources such as family, friends, or peers.
- Using the internet to compare service offerings and search for independent reviews and
ratings.
- Relying on a firm that has a good reputation.
- Looking for guarantees and warranties.
- Visiting service facilities or trying aspects of the service before purchasing.
- Asking knowledgeable employees about competing services.
Among the factors that cause services to be high in experience and credence attributes are that
performances are transitory, many intangible elements are involved, and the variability of inputs and
outputs often leads to quality control problems. Suitable strategies vary according to the nature of the
service, and may include all or some of the following:
- Encourage prospective customers to preview the service through brochures, websites, videos.
- Free trial. This is suitable for services with high experience attributes.
- Advertising. This provides consumers with an interpretation and value of any product or
service.
- Displaying credentials. Many professionals such as doctors, architects and lawyers use this.
- Using evidence management. An organised approach where customers are presented with
coherent evidence of the company.
- Offering guarantees. These include money-back guarantees and performance warranties.
- Encouraging prospective customers to visit the service facilities in advance of purchase.
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- Giving customers access to online information about the status of an order or procedure.
- Have visible safety procedures that build confidence and trust.
Service expectations
Customers assess attributes and risks related to a service offering. In the process, they develop
expectations of how the service they have will perform. Expectations are formed during the search
and decision-making processes, and they are heavily shaped by information searches and evaluations
of alternatives.
Firms try to shape consumers’ expectations through advertising, pricing, new technologies or service
innovation. Expectations have several elements. The model in the figure shows the factors that
influence the different levels of customer expectations.
- Desired service: “Wish for” level of service. They also have a minimum level of expectation,
called adequate service and predicted service level.
- Adequate service: The minimum level of service that customers will accept, without being
dissatisfied.
- Predicted service: This is the level of service that the customers anticipate receiving.
- Zone of tolerance: The extent to which customers are willing to accept variation in service
delivery.
4. Purchase decision
When consumers have evaluated possible alternatives, they will now select the option they like best.
In many instances, however, purchase decisions involve trade-offs. Price is often the key factor.
For more complex decisions, trade-offs can involve multiple attributes. Once a decision is made, the
consumer is ready to move to the service encounter stage.
Service Encounter Stage

First, the “moment of truth” metaphor shows the importance of effectively managing touch points.
The second framework, the high / low contact service model, helps us to better understand the extent
and nature of points of contact.
The third concept, the servuction model, focuses on the various types of interactions that together
create the customer’s service experience. Finally, the theatre metaphor, together with the script and
role theories, communicates effectively how one can look at “staging” service performance to create
the experience customers desire.
1. Service encounters are “moments of truth”
Richard Normann borrowed the metaphor “moment of truth” from bullfighting to show the
importance of contact points with customers. Each service firms challenges in defining and managing
the moments of truth that its customers will encounter.
2. Service encounters range from high contact to low contact
In figure, we group services into three levels of customer contact. These represent the extent of
interaction with service personnel, physical service elements or both. However, it is useful to examine
the differences between organisations at the high and low ends.
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- High-contact services: When the customers visit the service facility, they enter the “factory”.
During the service delivery process, customers are exposed to many physical clues about the
organisation. These are the exterior and interior of its buildings, the equipment and
furnishings, the appearance and behaviour of service personnel, and even other customers.
Service Encounters Range from
High-contact to Low-contact (Fig 2.20)
Slide © by Lovelock, Wirtz and Chew 2009 Essentials of Services Marketing Chapter 1 - Page 18
- Low-contact services: There is very little, if any face-to-face contact between customers and
the service organisation. Contact is at arm’s length through electronic or physical distribution
channels. For example, customer can conduct more of their banking transactions by mail,
telephone, and the internet.
3. Servuction system
The servuction system (short for service production system) in figure shows all the interactions that
together make up a typical customer experience in a high contact service.
The Servuction System (Fig 2.22)
The servuction system consists of a technical core which is invisible to the customer, and the service
delivery system visible to and experienced by the customer.
- Technical core - where inputs are processed, and the elements of the service product are
created. This technical core is typically in the backstage and invisible to the customer. Like in
a theatrical play, the visible components can be termed “front stage”, while the invisible
components can be termed “backstage”.
The front stage relates to the actors (service personnel) and the backstage relates to the stage set
(physical facilities, equipment and other tangibles).
- Service delivery system: Where the final “assembly” takes place and the product is delivered
to the customer. This subsystem includes the visible part of the service operator’s system –
buildings, equipment and personnel – and possibly other customers.
In high-contact services, the service operations tend to be substantial with many interactions – or
moments of truth – that must be managed. In contrast, low-contact services usually have most of the
service operations system backstage with front-stage elements limited to mail and telecommunications
contacts.
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4. Theatre as metaphor: An integrative perspective

The theatre is a good metaphor for services and their creation through the servuction system. This is
because service delivery consists of a series of events that customers experience as a performance.
- Service facilities: This is the stage on which the drama unfolds. Sometimes, there may be a
need to change the sets from one act to another.
- Personnel: The front stage personnel are like the members of a cast, playing roles as actors in
a drama. The backstage personnel are the support production team in the play.
- Role theory: A role can be defined as “a set of behaviour patterns learned through experience
and communication, to be performed by an individual in a certain social interaction in order
to attain maximum effectiveness in goal accomplishment.”
- Script theory: a service script specifies the sequences of behaviour that employees and
customers are expected to follow during service delivery. The more experience a customer
has with a service company, the more familiar that script becomes.
Post-purchase Stage
During the post-encounter stage, customers evaluate the service performance they have received and
compare it with their prior expectations.
- Satisfaction: It is an attitude, like judgement following a purchase act, or a series of consumer

product interactions. Most satisfaction studies are based on the theory that the
confirmation/disconfirmation of customers’ prior expectations is key to the determinant of
satisfaction.
If the judgement is worse than expected, it is called negative disconfirmation. If it is better than
expected, it is positive disconfirmation. If it is as expected, then it is simply confirmation.
- Delight: It is a function of three components:

o unexpectedly high levels of performance
o arousal (e.g. surprise, excitement)
o positive affect (e.g. pleasure, joy, or happiness)
One thing to note though, once customers have been delighted, their expectations are raised.
They may be dissatisfied if service levels return to the previous levels, and it probably will take more
effort to “delight” them in future.
TUTORIAL 2
Referring to a service firm of your choice, describe the attributes of firm’s service in one of the
three types of service attributes. Demonstrate how your firm uses these services attributes to
differentiate your services with the competing services.
Q bank is using 14 points yellow star and with one longer tip at the right bottom corner like the Q
shape as the logo of the bank. The main colour of the staff uniforms and the interior of the outlets is
yellow. Yellow is reflecting the money and gold and the star indicates the leader in the Malaysia
market. These search attributes can help the customers to differentiate Q bank with other competing
banks in the market. This is because no bank has used the yellow colour for logo and uniform now.
Q bank advertised in the newspapers and radio stations to inform the golden age prospects about Q
bank’s fixed deposit interest rate is 4.25% per annum with the minimum deposit of RM10000. This
rate is the highest interest rate in the market for the golden age prospects. The highest interest rate can
increase the golden age prospects interest and attention to switch to Q bank because they can earn
higher return on investment compare with the existing bank's service that they are using.
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CHAPTER 3 – POSITIONING SERVICES IN COMPETITIVE

MARKET
Customer-Driven Services Marketing Strategy

As competition intensifies in the service sector, it is becoming ever more important for service
organisations to differentiate their products in ways that are meaningful to customers. Without
knowing which product features are of specific interest to customers, it’s hard for managers to
develop an appropriate strategy.
A systematic way to do this typically starts with an analysis of customers, competitors, and the
company. This analysis then helps a firm to determine the key elements of its services positioning
strategy, which are segmentation, targeting and positioning.
Customer, competitor, and company analysis (3Cs)
1. Customer analysis
- The customer analysis is typically done first and includes an examination of the overall
market characteristics, followed by an in-depth exploration of customer needs and related
customer characteristics and behaviours.
- The market analysis tries to establish the attractiveness of the overall market and potential
segments within. Specifically, it looks at the overall size and growth of the market, the
margins, and profit potential, and demand levels and trends affecting the market.
- The customer needs analysis involves answering a few questions. Who are the customers in
that market in terms of demographics and psychographics? Which needs or problems do they
have? What are the benefits of the service each of these groups values the most?
2. Competitor analysis
Identification and analysis of competitors can provide a marketing strategist with a sense of
competitors’ strengths and weaknesses. These analyses should suggest what might be opportunities
for differentiation and competitive advantage.
3. Company analysis
The objective is to identify the organisation’s strengths in terms of its current brand positioning and
image, and the resources the organisation has. It also examines the organisation’s limitations or
constraints and how its values shape the way it does business.
Segmentation, targeting, and positioning
- Segmentation: This involves dividing the population of possible customers into groups. Those
customers within the same segment share common service-related needs, for example,
convenience.
- Targeting: Once a firm’s customers have been segmented, the firm has to assess the
attractiveness of each segment, decide which segment(s) would most likely be interested in its
services and focus on how to serve them well.
- Positioning: The unique place that the firm and / or its service offerings occupy in the minds
of its consumers. Before a firm can create a unique position for its service, it must first
differentiate its services from these of its competitors.
Segmenting Service Markets

Through the process of market segmentation, firms will identify those parts or segments of the market
that they can serve best. You need to recognise that, often, people have different needs and decision
making criteria according to:
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- The purpose of using the service

- Who makes the decision
- The timing of use (time of day / week / season)
- Whether the individual is using the service alone or with a group, and if the latter, the
composition of that group
For companies to effectively segment a market, it is often best to start with a deep understanding of
customers’ needs. Marketers can then combine this understanding with demographic, psychographic,
behavioural, and consumption context variables to further define and describe key segments in a
market.
Important vs. determinant service attributes
- The attributes that determines a consumer’s final choice may not necessarily be the most
important attribute. Determinant attributes are often way down on the list of service
characteristics that are important to purchasers.
- Identifying determinant attributes is therefore crucial to effective positioning, which makes a
firm’s service stand out in the minds of its target customers.
Segmenting based on service levels
- Customer often can be segmented according to their willingness to give up some level of
service for a lower price. Price-insensitive customer are willing to pay a relatively high price
to obtain higher levels of service on each of the attributes important to them.
- In contrast, price-sensitive customers will for an inexpensive service that offers a relatively
low level of performance on many key attributes. Segmentation helps to identify potential
attributes and service levels that have different degrees of relevance for key market segments.
Targeting Service Markets

Rather than trying to compete in an entire market, each company ideally focuses its efforts on those
customers it can serve best – its target segment.
Achieve Competitive Advantage Through Focus

In marketing term, focus means providing a relatively narrow product mix for a particular target
segment. Market focus is the extent to which a firm serves a few or many markets, while service focus
describes the extent to which a firm offers few or many services. These two dimensions define the
four basic focus strategies shown in the figure.
Four focus strategies
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The extent of a company’s focus can be described along two dimensions – market focus and service
focus. Market focus is the extent to which a firm serves few or many markets, while service focus
describes the extent to which a firm offers few or many services.
1. Fully focused: A fully focused organisation provides a limited range of services to a narrow
and specific market segment. If a firm has recognised expertise in a well-defined area, it may
provide protection against would-be competitors, and then the firm can charge high prices.
The biggest risk is that the market may be too small to get the volume of business needed for
financial success. Other risks include the danger that demand for the service may decrease
because of alternative products, or that purchasers in the chosen segment may be affected by
an economic downturn.
2. Market focused: A market focused company concentrates on a narrow market segment but
has a wide range of services. Managers need to be sure that their firms have the operational
capability to do an excellent job of delivering each of the different services selected. They
also need to understand customer purchasing practices and preferences.
3. Service focused: Service focused firms offer a narrow range of services to a fairly broad
market. However, as new segments are added, the firm needs to develop knowledge and skills
in serving each segment.
4. Unfocused: Many service providers fall into the unfocused category, because they try to serve
broad markets and provide a wide range of services. The danger with this strategy is that
unfocused firms often are “jack of all trades and master of none”.
A market-focused strategy may be appropriate if (a) customers value the convenience of one-stop
shopping, (b) the firm is able to deliver these multiple services better than its competitors are, and / or
(c) there are significant synergies in selling multiple services to the same customer, which then
enables the firm to either lower the price or provide better services.
A service-focused strategy can work best if the firm has a unique set of capabilities and resources to
deliver a particular service exceptionally well or cost-effectively.
Finally, a fully focused strategy may work well if a particular segment has very specific needs and
requires a unique service environment, service processes, and interaction with the firm’s frontline
employees.
Positioning Services
Effective positioning is based on four principals:
- A company must establish a position in the minds of its target customers.

- The position should have one simple and consistent message.
- The position must set a company apart from its competitors
- A company cannot be all things to all people – it must focus its efforts.
The concept of positioning forces service managers to analyse their firm’s existing offerings and
provide specific answers to the following six questions for developing an effective positioning
strategy:
- What does our firm currently stand for in the minds of current and potential customers?
- What customers do we serve now, and which ones would we like to target in the future?
- What is the value proposition for each of our current service products, and what market
segments is each one targeted at?
- How does each of our service products differ from those of our competitors?
- How well do customers in the chosen target segments perceive our service products as
meeting their needs?
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- What changes do we need to make to our service products in order to strengthen our
competitive position within our target segment?
One of the challenges in developing a positioning strategy is to avoid the trap of investing too heavily
in points of difference that can easily copy.
Developing an effective positioning strategy
There are four basic elements to writing a good positioning statement. They are:
- Target audience: the specific group(s) of people that the brand wants to sell to and serve
- Frame of reference: the category that the brand is competing in
- Point of difference: the most compelling benefit offered by the brand that stands out from its
competition
- Reason to believe: proof that the brand can deliver the benefits that are promised
The outcome of integrating the 3 Cs and the STP analyses is the positioning statement that defines the
desired position of the organisation in the marketplace.
With this understanding, marketers can now develop a specific plan of action that includes its
positioning strategy along the 7Ps of services marketing, its customer relationship management and
loyalty strategies, and its service quality and productivity strategies.
Using Positioning Maps to Analyse Competitive Positioning

Positioning maps are great tools to visualise competitive positioning, to map developments over time,
and to develop scenarios of potential competitor responses. Developing a positioning “map” – a task
sometimes referred to as perceptual mapping – is a useful way of showing consumers’ perceptions of
alternative products graphically.
A map usually has two attributes, although three-dimensional models can be used to portray three of
these attributes. When more than three dimensions are needed to describe product performance in a
given market, then a series of separate charts need to be drawn.
Positioning charts help executives visualise strategy
Graphic representations of a firm’s profile and product positions are much easier to understand than
tables of quantitative data or paragraphs of writing. Charts and maps can help to achieve a “visual
awakening”. This can thus help confirm or get rid of the belief that a service or a firm occupies a
unique position in the marketplace.
TUTORIAL 3
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CHAPTER 4 – DEVELOPING SERVICE PRODUCTS: CORE &

SUPPLEMENTARY ELEMENTS
The flower of service

A service product consists of two components, the core product and supplementary services.
- The core product is based on the core set of benefits and solutions delivered to customers.
The core product is the main component that supplies the desired experience or the problem-
solving benefit that the customers are looking for.
- Supplementary services play two roles. Facilitating supplementary services are either
needed for service delivery (e.g. payment) or help in the use of the main product (e.g.
information). Enhancing supplementary services add extra value and appeal for customers.
The core product often becomes commoditised, and supplementary services then play an important
role in differentiating and positioning the core product against competing services. In figure, the
petals are arranged in a clockwise sequence, following how they are likely to be encountered by
customers. This sequence may vary.
Facilitating Supplementary Services

1. Information
- To obtain full value from any good or service, customers need relevant information.
Information may sometimes be required by law. Customers also appreciate advice on how to
get the most value from a service and how to avoid problems.
- E.g. direction to service site, schedules/ service hours, prices, reminders, warnings, conditions
of sale/ service, notifications of changes, documentation, confirmation of reservations,
summaries of account activities, receipts and tickets.
2. Order-taking
- Once customers are ready to buy, the company accepts applications, orders, and reservations.
The process of order-taking should be polite, fast, and accurate so that customers do not waste
time and endure unnecessary mental or physical effort. Technology can be used to make
order-taking easier and faster for both customers and suppliers.
- E.g. Applications: Memberships in clubs/ programs, Subscription services (e.g. utilities),
Prerequisite based services (e.g. financial credit, college enrolment). Order entry: On-site
order fulfilment, Mail/telephone/e-mail/web order. Reservations and Check-in: Seats/ tables/
rooms, Vehicles or equipment rental, Professional appointments
3. Billing
- Customers usually expect bills to be clear. Inaccurate, illegible, or incomplete bills risk
disappointing customers who may, up to that point, have been quite satisfied with their
experience. Billing should be timely, because it encourages people to make payment faster.
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- E.g. periodic statements of account activity, invoices for individual transactions, Verbal
statements of amount due, Self-billing (computed by customer), Machine display of amount
due.
4. Payment
- Increasingly, customers expect it to be easy and convenient to make payment, including using
credit, when they make purchases in their own countries, and while travelling abroad.
- E.g. Self-service: Insert card, cash, or token into machine, Electronic funds transfer, Mail a
check, Enter credit card number online. Direct to Payee or intermediary: Cash handling or
change giving, Check handling, Credit/charge/debit card handling, Coupon redemption.
Automatic deduction from financial deposits: Automated systems (e.g. machine-readable
tickets that operate entry gate), Human systems (e.g. toll collectors)
Enhancing Supplementary Services

5. Consultation
- Consultation involves a dialog to probe customer requirements and then develop a solution
that is suited to the needs of the customers. Counselling is another type of consultation that is
less direct than consultation. It involves helping customers understand their situations better,
so that they can come up with their “own” solutions and action programs.
- E.g. Customized advice, personal counselling, tutoring/training in product use, management
or technical consulting.
6. Hospitality
- Well-managed businesses try, at least in small ways, to ensure that their employees treat
customers as guests. Courtesy and consideration for customers’ needs apply to both face-to-
face encounters and telephone interactions. The quality of the hospitality services offered by a
firm can increase or decrease satisfaction with the core product.
- E.g. greeting, food and beverages, toilets and washrooms, waiting facilities and amenities
(lounges, waiting areas, seating, weather protection, magazines, entertainment, newspapers),
transport, security.
7. Safekeeping
- While visiting a service site, customers often want their personal possessions to be “look
after”. In fact, some customers may choose not to go to certain places that do not have
safekeeping services like a safe and convenient car park.
- E.g. caring for possessions customer bring with them (child care, pet care, parking for
vehicles, valet parking, coat rooms, baggage handling, storage space, safe deposit boxes,
security personnel), caring for good purchased or rented by customers (packaging, pickup,
transportation and delivery, installation, inspection and diagnosis, cleaning, refuelling)
8. Expectations
- Exceptions involve supplementary services that fall outside the normal service delivery.
Managers need to keep an eye on the level of exception requests. Too many requests may
indicate that standard procedures need to be changed.
- E.g. Special requests in advance of service delivery (children’s needs, dietary requirements,
medical or disability needs, religious observances), Handling special communications
(complaints, compliments, suggestions), Problem solving (warranties and guarantees,
resolving difficulties), Restitution (refunds and compensation, free repair of defective goods)
Managerial implications
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- Four categories of processes were introduced, people, possession, mental-stimulus, and

information processing. They each have different implications for operational procedures, the
degree of customer contact with service personnel and facilities.
- People-processing services tend to have more supplementary elements, especially hospitality,
since they involve close interactions with customers.
- Possession processing services sometimes place heavy demands on safekeeping elements, but
there may be no need for this particular “petal” when providing information-processing
services in which customers and suppliers deal entirely at arm’s length.
- A strategy of adding benefits to increase customers’ perceptions of quality will probably
require more supplementary services than a strategy of competing on low prices will.
Branding Service Products & Experiences

Branding strategies for services
Service firms can choose from among four broad branding alternatives: branded house (i.e. using a
single brand to cover all products and services), house of brands (i.e. using a separate standalone
brand for each offering), or sub-brands and endorsed brands which are both some combination of
these two extremes.
- Branded house: Branded house is used by the Virgin Group that applies its brand name to
multiple offerings in often unrelated fields. The danger of such a branding strategy is that the
brand gets overstretched and weakened.
- Sub-brands: Sub-brand for which the corporate or the master brand is the main reference
point, but the product itself also has distinctive name too. When FedEx decided to rebrand a
ground delivery service it had purchased, it chose the name FedEx Ground and developed
alternative colour for the standard logo (purple and green).
- Endorsed brands: For endorsed brands, the product brand dominates, but the corporate
name is still featured. For instance, Intercontinental Hotel Group is well known. However, its
product brands are dominant. They are Intercontinental Hotels & Resorts, Holiday Inn Hotel
& Resorts, etc.
For a multi-brand strategy to succeed, each brand must have a unique value proposition,
targeted at a different customer segment. Some instances, segmentation is situation based. A
multi-brand strategy is aimed at encouraging customers to continue buying from within the
brand family.
- House of brands: At the far end of the spectrum is the house of brand strategy. A good
service example is Yum! Brands Inc. which owns more than 35000 restaurants across 110
countries.
Tiering service products with branding

Branding is used not only to differentiate core services but also to clearly differentiate service levels.
This is known as service tiering. It is common in industries such as hotels, airlines, car rentals, and
computer hardware and software support.
Building brand equity and developing a branded experience
Branding helps marketers to establish a mental picture of the service in customers’ minds and clarify
the nature of the value proposition. There are four key ways in which service companies can build
strong brands. They are:
- Dare to be different. Companies that are different can build their own distinct brand
personality.
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- Determine your own fame. Companies that become famous over time are the ones that serve
a need and provide a service that customers really value, perform service more effectively
than competitors do; and have their stories told through customer experience and word-of-
mouth.
- Make an emotional connection. This involves sparking feelings of closeness, affection, and
trust.
- Internalise the brand. Service employees are the firm and the brand. The key to helping
employees to internalise the brand is through education and communication.
New Service Development

A hierarchy of new service development categories
Following are seven categories of new services that we can identify, ranging from simple style
changes to major innovations. They are in increasing complexity:
- Style changes are the simplest type of innovation, usually involving no changes in either
processes or performance. However, they are often highly visible, create excitement, and may
serve to motivate employees.
- Service improvements are the most common type of innovation. They involve small changes
in the performance of current products, including improvements to either the core product or
to existing supplementary services.
- Supplementary service innovations take the form of adding new facilitating or enhancing
service elements to an existing core service, or of significantly improving an existing
supplementary service.
- Process line extensions are less innovative than process innovations. However, they often
represent new ways of delivering existing products. The intention is either to offer more
convenience and a different experience for existing customers, or to attract new customers
who find the traditional approach unappealing.
- Product line extensions are additions to current product lines by existing firms. These new
services may be targeted at existing customers to serve a broader variety of needs or designed
to attract new customers with different needs (or both).
- Major process innovations consist of using new processes to deliver existing core products
in new ways with additional benefits. In recent years, the growth of the internet has led to the
creation of many service process innovations that exclude the use of traditional stores and
save customers time and travel.
- Major service innovations are new core products for markets that have not been previously
defined. They usually include both new service characteristics and radical new processes.
Achieving success in developing new services

For a new product to be successful, the sound core product is necessary but not enough. It is the
quality of the total service offering, and the marketing support that goes with it that is important for
success. Success is based on market knowledge. Scott Edgett and Steven Parkinson found that the
three factors contributing most to success were, in order of importance:
- Market synergy: the new product fit well with the existing image of the firm, was better than
competitors at meeting customers’ known needs, and received strong support during and after
the launch from the firm and its branches. In addition, the firm had a good understanding of
its customers’ purchase decision behaviour.
- Organisational factors: there was strong inter-functional cooperation and coordination.
Development personnel were fully aware of why they were involved and of the importance of
new products of the company.
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- Market research factors: detailed and properly designed market research studies were
conducted early in the development process. A good definition of the product concept was
developed before undertaking field surveys.
TUTORIAL 4
CHAPTER 5 – DISTRIBUTING SERVICE THROUGH PHYSICAL

& ELECTRONIC CHANNELS
Distribution in a Services Context

What is distribution?
In a service context, however, we often have nothing to move. Experiences, performance, and
solutions are not being physically shipped and stored. Distribution has three interrelated flows, which
helps to address the question of what is distributed:
- Information and promotion flows: distribution of information and promotion materials

relating to the service offer. The objective is to get the customer interested in buying the
service.
- Negotiation flow: reaching an agreement on the service features and configuration, and the
terms of the offer, so that a purchaser contract can be closed. The objective is to sell the right
to use a service (e.g., sell a reservation or a ticket).
- Product flow: Many services, especially those involving people processing or possession
processing, require physical facilities for delivery. Here, distribution strategy requires
development of a network of local sites.
Distribution options for serving customers: Determining the type of contact

As shown in table, there are six possible choices for a firm in terms of distribution sites.
Types of Interaction between customer and Availability of service outlets

service organizations Single site Multiple sites
Customer goes to service organization Theatre, hair salon Bus service, fast-food
chain
Service organization comes to customer House painting, Mail delivery, banking
mobile car wash branch network
Customer and service organization transact Credit card company, Broadcast network,
remotely (mail or electronic communications) local TV station telephone company
1. Customers visit the service site

When customers must visit the service site, the following factors need to be considered.
- The convenience of service factory locations

- Operational hours
2. Service providers go to their customers

When should service providers go to their customers?
- Going to the customer’s site is unavoidable whenever the object of the service is some
immovable physical item.
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- In remote areas, service providers often fly to visit their customers, because the latter find it
so difficult to travel.
- In general, service providers are more likely to visit corporate customers at their premises
than to visit individuals in their homes, reflecting the larger volume associated with business-
to-business transactions.
3. Service transaction is conducted remotely

Dealing with a service firm through remote transactions may mean that a customer never sees the
service facilities and never meets the service personnel face-to-face. Those encounters that do take
place with service personnel are more likely to be made through a call centre or, even more remotely,
by mail or email.
- Repair services for small pieces of equipment sometimes require customers to ship the
product to a maintenance facility, where it is serviced and then returned by mail. Many
service providers offer solutions with the help of logistic firms.
- Any information-based product can be delivered almost instantly through the internet to
almost any point on the globe.
4. Channel preferences vary among consumers

Recent research has explored how customers choose between personal, impersonal, and self-service
channels, and has identified the following key drivers:
- For complex and high perceived risk services, people tend to rely on personal channels.
- Individuals with higher confidence and knowledge about a service and / or the channel are
more likely to use impersonal and self-service channels.
- Customers who look for the functional aspects of a transaction prefer more convenience. This
often means the use of impersonal and self-service channels. Customers with social motives
tend to use personal channels.
- Convenience is a key driver of channel choice for most consumers. Service convenience
means saving time and effort, rather than saving money.
Place & Time Decision

Where should service be delivered in a bricks-and-mortar context?
For backstage elements, cost, productivity, and access to labour are often the main determinants.
Firms should make it easy for people to access frequently purchased services facing active
competition.
- Locational constraints: Although customer convenience is important, operational

requirements may restrict the location of the services.
o Airports, for instance, are often inconveniently located relative to travellers’ homes,
offices, or destinations.
o Terrain and climate can also impose location constraints.
o Customers who need complex, in-patient treatment must go to the service factory
(hospital) rather than be treated at home.
- Mini-stores: An interesting innovation among multi-site service businesses involves creating
numerous small service factories to maximise geographic coverage.
o Automated kiosks represent one approach.
o Another approach is the separation of the front and back stages of the operation.
- Locating in multi-purpose facilities: The most obvious locations for consumer services are
close to where customers live or work. Interest is growing in locating retail and other services
on transportation routes and in bus, rail, and air terminals.
When should service be delivered?
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In the past, most retail and professional services in industrialised countries followed a traditional
schedule of about 40 – 50 hours a week. Today, the situation has changed. For some highly
responsive service operations, the standard has become “24/7” service – 24 hours a day, seven days a
week, around the world.
Delivering services in cyberspace

Information and Physical process of augmented service product
As we look at the eight petals of the Flower of Service, we can see that no fewer than five
supplementary services are information based. Information, consultation, order-taking, billing, and
payment can all be transmitted electronically. The distribution of information, consultation, and order
taking has reached extremely sophisticated levels in some global service industries such as hotels,
airlines, and car rental companies.
Service delivery innovations facilitated by technology
Three innovations of interest are:
- Development of “smart” cell phones and PDAs, and Wi-Fi high-speed internet technology
that can link users to the internet wherever they may be.
- Usage of voice recognition technology that allows customers to give information and request
service simply by speaking into a phone or microphone.
- Sale of smart cards containing a microchip that can store detailed information about the
customer and act as an electronic purse containing digital money.
Electronic channels can be offered together with physical channels or take the place of physical
channels for delivering information-based services.
E-commerce: the move to cyberspace
Among the factors luring customers into virtual stores are:
- Convenience
- Ease of search
- Broader selection
- Potential for better prices
- 24 / 7 service with prompt delivery.
There are exciting recent developments that link web sites, Customer Relationship Management
(CRM) systems, and mobile telephony. The integration of mobile devices is a means to following
services:
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- Access services.
- Alert customers to opportunities or problems by delivering the right information or
interaction at the right time.
- Update information in real time to ensure that it is continuously accurate and relevant.
The Role of Intermediaries

In figure, we use the Flower of Service framework to show an example in which the core product is
delivered by the original supplier, together with certain supplementary elements in the informational,
consultation, and exceptions categories. Delivery of the remaining supplementary services packaged
with this offering is through an intermediary.
The challenge for the original supplier is to oversee the overall process. They must make sure that
each element offered by intermediaries fits the overall service concept and creates a consistent and
service experience for the customer.
Franchising
Franchising has become a popular way to expand delivery of an effective service concept that
includes all the 7Ps. Franchising reaches multiple sites without the level of monetary investment that
would be needed for rapid expansion of company-owned and -managed sites.
The franchisor provides training on how to operate and market the business, sells necessary supplies,
and provides promotional support at a national or regional level to add to the local marketing
activities. These activities are paid for by the franchisee but must follow the copy and media
guidelines of the franchisor.
Growth-oriented service firms like franchising because franchisees are highly motivated to ensure
good customer service and high-quality service operations. However, there is a high drop-out rate
among franchisors in the early years of a new franchise system.
One-third fail within the first four years and no less than three quarters of all franchisors stop existing
after 12 years. Success factors for franchisors include:
- The ability to achieve a larger size with a more recognisable brand name.
- Offering franchisees fewer support services but longer-term contracts.
- Having lower overhead per outlet
- Providing accurate and realistic information about expected characteristics of franchise
operations, and support given.
- Building a cooperative rather than controlling relationship.
While franchising has many success stories, it also has some disadvantages which are as follows:
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- Letting franchisees take over service delivery and other activities will result in some loss of
control over the delivery system and, thereby, over how customers experience the actual
service.
- Making sure that an intermediary adopts the same priorities and procedures as laid down by
the franchisor is difficult. However, it is necessary for effective quality control.
- An ongoing problem is that as franchisees gain experience, they may start to feel that they
should not be paying the various fees to the franchisor.
An alternative to franchising is licensing another supplier to act on the original supplier’s behalf to
deliver the core product. Trucking companies regularly make use of independent agents instead of
locating company-owned branches in each of the different cities they serve.
Distributing Services Internationally

How to enter international market?
The strategy that is most suitable for entering a new international market depends on (1) how a firm
can protect its intellectual property (IP) and control its key sources of value creation, and (2) whether
the level of desired interaction with the customer is high or low.
In the case where a firm’s IP and value creation sources can be protected through copyright or other
legal means, and if only low customer contact is required, then a company can simply export the
service.
In these cases, there is little risk of losing the business to local competitors, distributors, or other local
partners. Examples include database services, online news, online advertising, and the downloading of
music, films, e-book, and software.
Some services like fast food, global hotel chains, and courier services allow a firm to control its IP
and source of value creation. This is done through branding, having a global customer base, and
global resources, capabilities, and networks.
Firms in this category can expand globally through licensing, franchising, or joint ventures without
losing control.
Finally, there are services where the added value comes mainly from the skills and knowledge of the
service provider, and where a high degree of customer contact is needed to deliver value. These are
often knowledge-based, professional services.
For such services, value is typically created by the firm’s employees through their knowledge and the
relationship they have built with their clients. It is difficult to control the sources of value creation for
such services.
Hence it is necessary for firms in this category to have tight control over its local resources. The most
effective ways to enter a new market are typically through foreign direct investment by setting up a
branch office, a subsidiary, or through mergers and acquisitions.
TUTORIAL 5
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TUTORIAL 6 – SETTING PRICES & IMPLEMENTING

REVENUE MANAGEMENT
Effective Pricing is Central to Financial Success

It is usually harder for managers to calculate the financial costs of services, as costs vary widely
depending on capacity utilisation. In addition, the importance of the time factor in service delivery
means that speed of delivery and avoidance of waiting time often increase value. Consumers often
find service pricing difficult to understand, risky, and sometimes even unethical.
Objectives for establishing prices
The most common pricing objectives are related to revenue and profits, building demand, and
developing a user base.
Revenue and profit objectives:
- Gain profit
o Make the largest possible contribution or profit
o Achieve a specific target level, but do not seek to maximise profits
o Maximise revenue from a fixed capacity by varying prices and target segments over
time
- Cover costs
o Cover fully allocated costs, including corporate overhead
o Cover costs of providing one service, excluding overhead
o Cover incremental costs of selling one extra unit or to one extra customer
Patronage and user base-related objectives

- Build demand
o Maximise demand, provided a certain minimum level of revenue is achieved
o Achieve full capacity utilisation, especially when high capacity utilisation adds to the
value created for all customers
- Build a user base
o Encourage trial and adoption of a service
o Build market share and/or a large user base, especially if there are a lot of economies
of scale that can lead to a competitive cost advantage
Pricing Strategy Stands on 3 Foundations

There are three legs, namely costs to the provider, competition, and value to the customer. The pricing
objectives of the organisation then decide where actual prices should be set, given the possible range
provided by the pricing tripod analysis.
1. Cost-based pricing
It is usually harder to find out the costs involved in producing an intangible performance, than it is to
trace the costs of producing a physical good.
Establishing the costs of providing service
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You may find it helpful to review how service costs can be estimated, using fixed, semi-variable, and
variable costs. These traditional cost-accounting approaches work well for service firms with a large
proportion of variable costs and / or semi-variable costs.
For service firms with high fixed-costs and complex product lines with shared infrastructure, it may
be worthwhile considering the more complex activity-based costing (ABC) approach. ABC is a more
accurate way to allocate indirect costs (overheads) for service firms.
Pricing implications of cost analysis
To make a profit, a firm must set its price high enough to cover the full costs of producing and
marketing the service. Hence, firms that compete based on low prices need to have a very good
understanding of their cost structure and of the sales volume needed to break even at prices.
2. Value-based pricing
Marketers need to understand how customers perceive service value in order to set an appropriate
price.
Understanding net value
Net value is the sum of all the perceived benefits (gross value) minus the sum of all the perceived
costs of service. The greater the positive difference between the two, the greater the net value. If the
perceived costs of a service are greater than the perceived benefits, then the service will have negative
net value, and the consumer will not buy. When customers look at competing services, they are
basically comparing the relative net values.
Managing the perception of value
Since value is subjective, not all customers have the skills or knowledge to judge the quality and value
they receive. To manage the perception of value, effective communications and even personal
explanations are needed to help customers understand the value they receive.
3. Reducing related monetary and non-monetary costs

There are other costs of service, which are made up of both the related-monetary costs and non-
monetary costs incurred by customers.
Related-monetary costs
Customers often spend more in searching for, purchasing, and using the service, than the price paid to
the supplier.
Non-monetary costs
These costs reflect the time, effort, and discomfort connected to search, purchase, and use of a service.
Non-monetary costs tend to be higher when customers are involved in production and must travel to
the service site. There are four distinct categories of non-monetary costs.
- Time costs are part of service delivery. Time spent on one activity means that they must give
up spending time on some other activity.
- Physical costs may be part of the costs of obtaining services, especially if customers must go
to the service factory, if queuing is involved, and if delivery entails self-service.
- Psychological costs such as mental effort, perceived risk, cognitive dissonance, feelings of
inadequacy, or fear are sometimes attached to buying and using a service.
- Sensory costs relate to unpleasant feelings affecting any of the five senses.
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As shown in figure, there may be costs to service users during any of the three stages of the service
consumption model. Thus, firms must consider 1) search cost, 2) purchase and service encounter
costs, and 3) post-purchase costs. A firm can create competitive advantage by minimising non-
monetary and related-monetary costs to increase consumer value. Possible approaches include:
- Working with operations experts to reduce the time required to complete service purchase,
delivery, and consumption.
- Minimising unwanted psychological costs of service at each stage. This can be done by
getting rid of, or redesigning unpleasant or inconvenient processes, educating customers on
what to expect, and retraining staff to be friendlier and more helpful.
- Getting rid of, or minimising unwanted physical effort, especially during search and delivery
process.
- Decreasing unpleasant sensory costs of service by creating more attractive visual
environments, reducing noise, installing more comfortable furniture and equipment, getting
rid of offensive smells, and so on.
- Suggesting ways in which customers can reduce other monetary costs, including discounts
with partner suppliers or offering mail or online delivery of activities that previously required
a personal visit.
4. Competition-based pricing
The firm with the lowest cost per unit of service enjoys a market advantage, and often assume price
leadership. Price competition is greater with 1) increasing number of competitors, 2) increasing
number of substituting offers, 3) wider distribution of competitor and/or substitution offers, and 4)
increasing excess capacity in the industry. There are some situations that reduce price competition:
- Non-price-related costs of using competing alternatives are high. When saving time and
effort are of equal or greater importance to customers than price, the intensity of price
competition is reduced.
- Personal relationships matter. In services that are highly personalised and customised, such
as hair styling or family medical care, relationships with individual providers can be very
important to customers.
- Switching costs are high. When it takes time, money, and effort to switch providers,
customers are less able to take advantage of competing offers.
- Time and location specificity reduce choice. When people want to use a service at a specific
location or at a time, they usually find they have fewer choices.
Managers should beware of falling into the trap of comparing competitors’ prices dollar for dollar,
and then seeking to match them. A better strategy is to consider the whole cost to customers of each
competitive offering.
Revenue Management: What it is and How it works

Revenue management is important in value creation. It ensures that capacity is better used and
reserves available capacity for higher-paying segments. Airlines, hotels, and car rental firms have
become very skilful in varying their prices in response to the price sensitivity and needs of different
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market segments. Revenue management has been most effective when applied to operations
characterised by:
- High fixed cost structure and relatively fixed capacity, which result in perishable inventory.
- Variable and uncertain demand
- Varying customer price sensitivity
1. Reserving capacity for high-yield customers

Revenue management involves setting prices according to predicted demand levels among different
market segments. A well-designed revenue management system can predict with reasonable accuracy
the number of customers who will use a given service, at a specific time, at each of several different
price levels.
Sophisticated firms use complex mathematical models for this purpose and employ revenue managers
to make decisions about inventory allocation.
2. Price elasticity
To allocate and price capacity effectively, the revenue manager needs to find out how sensitive
demand is to price, and what net revenues will be generated at different prices for each target
segment. If a small change in price has a big impact on sales, demand for that product is said to be
price elastic. If a change in price has little effect on sales, demand is described as price inelastic.
3. Designing rate fences
Revenue management is built on the concept of price customisation – charging different customers
different prices for what is the same product. Properly designed rate fences allow customers to choose
which segment they want to belong to, based on the characteristics of the service and willingness to
pay.
Fences can be either physical or non-physical. Physical fences refer to product differences that may be
due to different prices, such as the seat location in a theatre, or the size and furnishing of a hotel room.
Non-physical fences refer to consumption, transaction, or buyer characteristics. Examples of common
rate fences are shown in table.
A good understanding of the demand curve is needed so that “buckets” of inventory can be distributed
to the various products and price categories.
28
Key Categories of Rate Fences: Physical (1)

(Table 6.2)
Key Categories of Rate Fences: Non-physical (1)

(Table 6.2)

(Table 6.2)

(Table 6.2)
Ethical concerns in service pricing

Although price can serve as an indication of quality, it is sometimes hard to be sure if the extra value
is there.
Service pricing is complex
Complexity makes it easy for firms to engage in unethical behaviour. The quoted prices typically used
by consumers for price comparisons may be only the first of several charges they can be billed.
Many people find it difficult to forecast their own usage, which makes it hard to compute comparative
prices when evaluating competing suppliers whose fees are based on a variety of usage-related
factors.
29
Piling on the fees

There is a growing trend today to impose fees that sometimes have little to do with usage. There has
also been a trend of adding (or increasing) fines and penalties. It’s possible to design fees and
penalties that do not seem unfair to customers.
Designing fairness into revenue management

The following approaches can help firms to reconcile revenue management practices with customer
satisfaction, trust, and goodwill.
1. Design price schedules and fences that are clear, logical and fair
Firms should state all fees and expenses clearly in advance so that there are no surprises. A related
approach is to develop a simple fee structure so customers can more easily understand how much they
must pay for a usage situation.
2. Use high published prices and frame fences as discount
Rate fences framed as customer gains (i.e. discounts) generally are seen to be fairer than those framed
as customer losses (i.e. surcharges), even if the situations are economically equivalent.
3. Communicate consumer benefits of revenue management
Providing different prices and values allows customers to self-segment and enjoy the services. It
allows each customer to find the price and benefits (value) that best satisfies his or her needs.
4. Use bundling to “hide” discounts
Bundling a service into a package hides the discounted price. Bundling usually makes price
comparisons between the bundles and its individual parts impossible. This reduces unfairness
perceptions.
5. Take care of loyal customers
Firms should try to retain valued customers, even to the extent of not charging the maximum possible
amount on a given transaction. Yield management systems can be programmed to include “loyalty
multipliers” for regular customers so that reservations systems can give them special treatment at peak
times even when they are not paying premium rates.
6. Use service recovery to compensate for overbooking
Many service firms overbook to make allowances for anticipated cancellations and no-shows. So, it’s
important to back up overbooking programs with well-designed service recovery procedures, such as:
- Give customers a choice between keeping their reservation or receiving compensation.

- Provide enough advance notice so that customers can make other arrangements.
- If possible, offer a substitute service that delights customers.
30
TUTORIAL 7
FOUR NON MONETARY COSTS CAN INFLUENCE THE PERCEPTION OF CONSUMERS
TOWARDS THE PRICE OF A SERVICE. Refer to one of these costs, recommend the method to reduce
cost and justify the method can help customers to perceive the price of your firm’s services are value-for-
money.
The 1 mark is not counted for assessment.
Alliance Bank helps small and medium enterprises to recognize its offers of SMEs Loans as value-for-
money due to their supportive and the SMEs will receive a 6-month automatic moratorium with
loans/financing. Their use of this non-monetary cost of Phycological costs lessens their target
customers' perceived risk and feelings of inadequacy when starting a new business and taking loans
because of the uncertainty of business failure and bankruptcy. After lending the money, we are helping
by loaning the money and provide advices of how to use the money to become successful.
31

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BM302 SERVICES MARKETING

CHAPTER 1 – INTRODUCTION TO SERVICES MARKETING

Factors Transforming the Service Markets/ Economy

- Changes in regulations - New rules to protect customers,

- Rising consumer expectations - Rising consumer ownership of high-

- Push to increase shareholder value - More strategic alliances

- Growth of internet - Wireless networking

- More companies operating on - “offshoring” of customer service

 New markets and product categories

 Innovation in service products and delivery systems, stimulated by better

 Customers have more choices and exercise more power

 Success hinges on:

What are Services?

Four (4) Broad Categories Of Services – A Process Perspective

- Tangible actions are performed on people’s bodies or to their physical possessions.

The classification of services – four (4) broad categories:

- There is no simultaneous production and consumption.

Nature of the Who or What is the Direct Recipient of the Service?

Services Pose Distinctive Marketing Challenges

DIFFERENCE IMPLICATIONS MARKETING-RELATED TASKS

The 7Ps of Service Marketing

CHAPTER 2 – CONSUMER BEHAVIOUR IN A SERVICE

- People’s unconscious minds (e.g. personal identity and aspirations)

- Functional: unsatisfactory performance outcomes

Service Encounter Stage

4. Theatre as metaphor: An integrative perspective

- Satisfaction: It is an attitude, like judgement following a purchase act, or a series of consumer

- Delight: It is a function of three components:

CHAPTER 3 – POSITIONING SERVICES IN COMPETITIVE

Customer-Driven Services Marketing Strategy

Segmenting Service Markets

- The purpose of using the service

Targeting Service Markets

Achieve Competitive Advantage Through Focus

- A company must establish a position in the minds of its target customers.

Using Positioning Maps to Analyse Competitive Positioning

CHAPTER 4 – DEVELOPING SERVICE PRODUCTS: CORE &

The flower of service

Facilitating Supplementary Services

Enhancing Supplementary Services

- Four categories of processes were introduced, people, possession, mental-stimulus, and

Branding Service Products & Experiences

Tiering service products with branding

Building brand equity and developing a branded experience

New Service Development

Achieving success in developing new services

CHAPTER 5 – DISTRIBUTING SERVICE THROUGH PHYSICAL

Distribution in a Services Context

- Information and promotion flows: distribution of information and promotion materials

Distribution options for serving customers: Determining the type of contact

Types of Interaction between customer and Availability of service outlets

1. Customers visit the service site

- The convenience of service factory locations

2. Service providers go to their customers

3. Service transaction is conducted remotely

4. Channel preferences vary among consumers

Place & Time Decision

- Locational constraints: Although customer convenience is important, operational

When should service be delivered?

Delivering services in cyberspace

The Role of Intermediaries

Distributing Services Internationally

TUTORIAL 6 – SETTING PRICES & IMPLEMENTING