Services Marketing:

People, Technology, Strategy

CHAPTER 9
Balancing Demand And Capacity

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 Learning Objectives
• Know different demand-supply situations that fixed-
capacity firms may face.
• Describe building blocks of dealing with problem of
fluctuating demand.
• Understand what is meant by productive capacity in a
service context.
• Be familiar with basic ways of managing capacity.
• Recognize that demand patterns vary by segment, so that
segment-specific variations in demand can be predicted.
• Be familiar with five basic ways of managing demand.

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 Learning Objectives
• Understand how to use marketing mix elements of price,
product, place, and promotion to smoothen out
fluctuations in demand.
• Know how to use waiting lines and queuing systems to
inventory demand.
• Understand how customers perceive waits and how to
make waiting less burdensome for them.
• Know how to use reservations systems to inventory
demand.
• Be familiar with strategic approaches to utilize residual
surplus capacity even after all other options of matching
demand and capacity have been exhausted.
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 Fluctuations In Demand Threaten
Profitability
• Services with limited capacity face wide swings in
demand
• Service capacity cannot be kept aside for sale at a
later date
• Effective use of expensive productive capacity is a
secret of success in service businesses
• Service marketers should develop strategies to bring
demand and capacity balance to create benefits for
customers & improve business profitability

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 From Excess Demand To Excess
Capacity
A fixed-capacity service faces one of the four following
conditions:
• Excess demand — Level of demand exceeds maximum available
capacity.
• Demand exceeds optimum capacity — Conditions are crowded
and customers are likely to perceive a deterioration in service
quality.
• Demand and supply are well-balanced at the level of optimum
capacity — Staff and facilities are busy without being
overworked.
• Excess capacity — Demand is below optimum capacity and
productive resources are underutilized.
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Implications Of Variations In
Demand Relative To Supply

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Building Blocks In Managing Capacity And
Demand

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Defining Productive Service Capacity
Productive capacity takes several forms:
1. Facilities
• critical to capacity management
• relates to those that are designed to “hold” customers
and those that “hold” goods
2. Equipment
• used to process people, possessions, or information,
may encompass a large range of items
• can be very situation-specific.

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Defining Productive Service Capacity

1. Labor
• a key element of productive capacity in all high-contact
services and many low-contact ones
2. Infrastructure
• organizations are dependent on access to sufficient
capacity in the public, or private infrastructure, to be
able to deliver quality service to their own customers.

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 Managing Capacity
Capacity can be stretched or shrunk
•Stretched Capacity Levels —
– The same capacity is stretched to absorb extra
demand. Ex: public transportation
– Utilizing the facilities for longer periods. Ex:
stretched working hours in banks

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 Managing Capacity
• Adjusting Capacity to Match Demand —
– Schedule downtime during periods of low demand
– Cross-train employees
– Use part-time employees
– Invite customers to perform self-service
– Ask customers to share
– Create flexible capacity
– Rent or share extra facilities and equipment

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 Understanding Patterns Of Demand
Demand differs by market segment
Questions about demand patterns and their underlying causes (Table 9.1)
1 Do demand levels follow a predictable cycle?
If so, is the duration of the demand cycle:
• One day (varies by hour)
• One week (varies by day)
• One month (varies by day or by week)
• One year (varies by month or by season or reflects annual public holidays)
• Another period
2 What are the underlying causes of these cyclical variations?
• Employment schedules
• Billing and tax payment/refund cycles
• Wage and salary payment dates
• School hours and vacation
• Seasonal changes in climate
• Occurrence of public or religious holidays
• Natural cycles, such as coastal tides
3 Do demand levels seem to change randomly?
If so, could the underlying causes be:
• Day-to-day changes in the weather
• Health events whose occurrence cannot be pinpointed exactly
• Accidents, fires, and certain criminal activities
• Natural disasters (e.g., earthquakes, storms, mudslides, and volcanic eruptions)
4 Can demand for a particular service over time be disaggregated by market segment to reflect such
components as follows?
• Use patterns by a particular type of customer or for a particular purpose
• Variations in the net profitability of each completed transaction

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 Managing Demand
Five approaches to managing demand:
• Take no action and leave demand to find its own levels
• Reduce demand during peak periods
• Increase demand during low periods
• Inventory demand using a queuing system
• Inventory demand using a reservations system

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Alternate Demand Management Strategies for
Different Capacity Situations

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 Marketing Mix Elements Used
To Shape Demand Patterns
• Use price and non-monetary costs to manage demand
– Lower prices may encourage some people to change timing of purchase.
• Change product elements
– A new service product targeted at different segments is created to
encourage demand.
• Modify place and time of delivery
– Varying timings when service is available, offering service to customers at
new locations.
• Promotion and education
– If other variables of the marketing mix remain unchanged,
communication efforts alone may be able to help facilitate smooth
demand.

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 Inventory Demand Through
Waiting Lines And Queuing Systems
Demand can be inventoried in two ways:
1. By asking customers to wait in line, usually
on a first-come first serve basis
2. By offering customers the opportunity of
reserving or booking a service capacity in
advance

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 1. Managing Waiting Lines
Managers may consider a variety of ways for managing waiting
lines
• Rethinking design of queuing system
 queue configuration and virtual waits.
• Tailoring queuing system to different market segments
 by urgency, price or importance of customer

• Managing customers’ behavior and their perceptions of

wait
 use the psychology of waiting to make waits less unpleasant

• Installing a reservations system

 use reservations, booking, or appointments to distribute demand

• Redesigning processes to shorten the time taken in each

transaction
 by installing self-service machines
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 Different Queue Configurations
• Single line sequential
stages
– Bottlenecks may occur
where process takes
longer to execute
• Parallel lines to multiple
servers
– Offer more than 1
serving station,
customers can choose
– However, not all lines
move at equal speed
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 Different Queue Configurations
• Single line to multiple servers
– Commonly known as a “snake”, used at post offices and
airport check-ins
• Designated lines
– E.g. Express lines at supermarkets or different check-ins for
first class, business class etc
• Taking a number
– Saves customers from standing in line
• Wait lists
– Commonly used in restaurants
– E.g. Party-size seating, VIP seating, call-ahead seating or
large party reservations
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 Different Queue Configurations
• Virtual Waits
– Customers register their
place in line on a terminal
– Terminal estimates the time
customer will reach front of
virtual line for them to return
and claim their place
– E.g. Sushi Tei Restaurant has
a self-service touch screen
for diners to register; they
will receive a call 5 minutes
before their table is available

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 Queuing Systems Tailored To
Market Segments
Allocation to separate queuing areas may be based on
any of the following:
• Urgency of the job
• Duration of service transaction
• Payment of a premium price
• Importance of the customer

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 Customer Perceptions Of Waiting Time
Suggestions for using the psychology of waiting to make
waits less stressful and unpleasant
• Unoccupied time feels longer than occupied time
– Engage customer during longer waiting times
• Solo waits feel longer than group waits
– Make group waits more enjoyable
• Physically uncomfortable waits feel longer than comfortable
waits
– Provide customers with comfortable waiting facilities
• Pre- and post-process waits feel longer than in-process waits
– engaging customers during pre- and post-process waits

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 Customer Perceptions Of Waiting Time
• Unfair waits are longer than equitable waits
– Do not honor people who jump lines
• Unfamiliar waits seem longer than familiar ones
– Create customer awareness about usual waiting time
• Uncertain waits are longer than known, finite waits
– Be certain about wait times for different situations
• Unexplained waits are longer than explained waits
– Apologize for unexplained waits
• Anxiety makes waits seem longer
– Introduce special efforts to reduce anxiety
• The more valuable or important the service, the longer people
will wait
– Project the value of the service
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 Inventory Demand Through Reservations
Systems
Benefits of a reservations system:
• Customer dissatisfaction due to excessive waits can be
avoided.
• Allows demand to be controlled and smoothed out in a
more manageable way.
• Enables implementation of revenue management and
serves to pre-sell service to different customer segments.
• Helps organizations prepare operational and financial
projections for future.

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 Creating Alternative Use For
Otherwise Wasted Capacity
Possible uses for otherwise wasted capacity
include:
• Use capacity for service differentiation
• Reward your best customers, and build loyalty
• Customer and channel development
• Reward employees
• Barter free capacity

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