Service Exam

Differences, Implications, and
Defining Services
Marketing-Related Tasks (2) (Table 1.1)
 Service Product
Difference Implications Marketing-Related Tasks
 A service product comprises all the elements of the service
performance, both tangible and intangible, that creates value for  People may be part of  Behaviour of service  Recruit, train employees to
customers service experience personnel and customers reinforce service concept
 Businesses sell and market the core service product

can affect satisfaction  Shape customer behaviour
 Operational inputs and  Hard to maintain quality,
What Are Services?  This is the marketing of services
outputs tend to vary consistency, reliability
 Redesign for simplicity and
failure proofing
 Customer Service more widely  Difficult to shield  Institute good service
customers from failures recovery procedures
 Customer support of the core product after it is sold  Time factor often  Time is money;  Find ways to compete on
assumes great customers want service speed of delivery; offer
 Marketing through service importance at convenient times extended hours
 Distribution may take  Electronic channels or  Create user-friendly,

place through voice telecommunications secure websites and free
nonphysical channels access by telephone
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 1- 1 Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 1- 4 Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 1- 7
Value Added by Physical, Intangible Elements

Defining Services Importance of Services Helps Distinguish Goods and Services (Fig 1.7)
 Services involve a form of rental and non-ownership  Services dominate economy in most nations
 Meaning access and usage fees, for a defined period of time,  Service sector is growing rapidly
instead of buying it outright
 Services non-ownership framework  Most new jobs are generated by services

 Rental-good services — right to a physical good  Powerful forces are transforming service markets
 Defined space and place rentals — private space shared with other
customers  Reshaping of demand, supply, competition, customers
 Labour and expertise rentals — hire people
 Access to shared physical environments — share use of an
environment, not private
 Systems and networks: access & usage — rent right to participate Personal competitive advantage
Differences, Implications, and

Defining Services Differentiate between services and goods
Marketing-Related Tasks (1) (Table 1.1)
 Marketing tasks in services differ from the manufacturing
Difference Implications Marketing-Related Tasks sector
Services are economic activities offered by one party to another, most
commonly employing time-based performances to bring about desired  Most service products  Customers may be  Use pricing, promotion, and
reservations to smooth  Eight common differences :
results in recipients themselves or in objects or other assets for which cannot be inventoried turned away
demand; work with ops to
purchasers have responsibility. manage capacity 1. Service products cannot be inventoried
 Intangible elements  Harder to evaluate 2. Intangible elements dominate value creation
usually dominate service and distinguish
 Emphasize physical clues, 3. Services difficult to visualize and understand
employ metaphors and vivid
value creation from competitors images in advertising
4. Customers may be involved in co-production
In exchange for their money, time and effort, service customers expect  Educate customers on 5. People may be part of the service experience
to obtain values from access to goods, labour, professional skills,
 Services are often  Greater risk and
difficult to visualize uncertainty perceived making good choices; offer
facilities, networks, and systems; but they do not normally take guarantees
6. Operational inputs and outputs tend to vary widely
and understand
ownership of any of the physical elements involved. 7. Time factor assumes great importance
 Customers may be  Interaction between  Develop user-friendly 8. Distribution through nonphysical channels
involved in co- customer and provider; equipment, facilities, and
production but poor task execution systems; train customers,
could affect satisfaction provide good support  What are marketing implications?
The 8Ps of Services Marketing: The 8Ps of Services Marketing:
The 8 Ps of Services Marketing
(1) Product Elements (4) Promotion and Education
 Marketing is the only function to bring operating  Informing, educating, persuading, reminding customers
revenues into a business; all other functions are  Marketing communication tools
 Embrace all aspects of service performance that create
cost centres value  Media elements (print, broadcast, outdoor, retail, the Internet,
etc.)
 Personal selling, customer service
 The “8Ps” of services marketing are needed to  Core product responds to customer’s primary need  Sales promotion
 Publicity/PR
create strategies for meeting customer needs  Help customers use core product through array of
profitably in a competitive marketplace  Imagery and recognition
supplementary service elements
 Branding
 Traditional – product elements, place and time, price and other  Corporate design
user outlays, promotion and educations  Creates a service concept that offers value to customers
and satisfies better than competitors  Content
 Extended by service delivery – physical environment, processes,
people, productivity and quality  Information, advice
 Persuasive messages
 Customer education/training

(2) Place and Time (5) Process
 Delivery decisions: Where, When, How  How firm does things may be as important as what it does
 Geographic locations served  Customers often involved in processes, especially when

acting as co-producers of service
 Service schedules  Process involves choices of method and sequence in service
creation and delivery
Expanded Marketing Mix  Physical channels  Design of activity flows
for Services  Number and sequence of actions for customers
 Electronic channels  Nature of customer involvement
 Role of contact personnel
 Customer control and convenience  Role of technology, degree of automation
 Channel partners/intermediaries  Badly designed processes waste time, create poor

experiences, and disappoint customers

The 8 Ps of Services Marketing
(3) Price and Other User Outlays (6) Physical Environment
 Product Elements  Traditional pricing tasks:  Design servicescape and provide tangible evidence of
 Selling price, discounts, premiums
service performances
 Place and Time  Margins for intermediaries (if any)
 Credit terms  Create and maintain physical appearances
 Price and Other User Outlays
 Buildings/landscaping
 Service marketers must recognize that customer outlays  Interior design/furnishings
 Promotion and Education involve more than price paid to seller  Vehicles/equipment
 Process  Staff grooming/clothing
 Identify and minimize other costs incurred by users:  Sounds and smells
 Physical Environment  Costs associated with service usage (e.g., travel to service location,  Other tangibles
parking, phone, babysitting, etc.)
 People  Time expenditures, especially waiting  Manage physical cues carefully— can have profound impact
 Unwanted mental and physical effort
on customer impressions
 Productivity and Quality  Negative sensory experiences
The 8Ps of Services Marketing: A Framework for Developing Effective
Four Categories of Services
(7) People Service Marketing Strategies
 Interactions between customers Two Key Themes in Part I of the Who or What Is the Direct Recipient of the Service?
and employees influence
perceptions of service quality
Services Marketing Strategy Framework:
Nature of the Service Act People Possessions
Differences among Services Affect
 Need the right customer-contact Customer Behaviour
Tangible Actions People processing Possession processing
employees, performing tasks well
Three-Stage Model of Service Consumption (services directed at (services directed at
 Job design people’s bodies): physical possessions):
 Recruiting
 Training  Barbers  Refueling
 Motivation Prepurchase Stage: Service Encounter Stage:
Search, evaluation of Role in high-contact vs.  Health care  Disposal/recycling
 Need the right customers for firm’s alternatives, decision low-contact delivery Intangible Actions Mental stimulus Information processing
mission
processing
 Contribute positively to experience Post-Encounter Stage: (services directed at
Evaluation against (services directed at intangible assets):
of other customers
expectations, future people’s minds):
 Possess—or can be trained to
have— needed skills (co- intentions  Accounting
 Education
production)
 Banking
 Can shape customer roles and  Advertising/PR
manage customer behaviour
The 8Ps of Services Marketing:

Four Categories Of Services
(8) Productivity and Quality
 Productivity and quality must work hand in hand People Processing
 Improving productivity key to reducing costs  Customers must:

 Physically enter the service
 Improving and maintaining quality essential for building factory
customer satisfaction and loyalty How Differences among Services  Co-operate actively with the
service operation
 Ideally, strategies should be sought to improve both Affect Customer Behaviour  Managers should think about
productivity and quality simultaneously—technology often process and output from
the key customer’s perspective
 To identify benefits created and
 Technology-based innovations have potential to create high payoffs non-financial costs:
 But, must be user friendly and deliver valued customer benefits ― Time, mental, physical effort
A Framework for Developing Effective Differences among Services Affect

Possession Processing
Service Marketing Strategies Customer Behaviour
Understanding Customer Needs, Decision Making,  Consumers often involved in service production and may have Possession Processing
and Behavior in Service Encounters preferences for service delivery
 Service marketers need to understand how customers interact with § Customers are less physically
service operations involved compared to people
processing services
Building the Service Model  Based on differences in nature of service act (tangible/intangible)
and who or what is direct recipient of service (people/possessions), § Involvement is limited
there are four categories of services:
 People processing § Production and consumption
Managing the Customer Interface  Possession processing are separable
 Mental stimulus processing
 Information processing
Implementing Profitable Service Strategies
Mental Stimulus Processing The Purchase Process for Services
Mental Stimulus Processing

Prepurchase Stage
§ Ethical standards required when
customers who depend on such
services can potentially be
manipulated by suppliers
§ Physical presence of recipients Service Encounter

Stage
Service Encounter Stage
not required
§ Core content of services is

information-based
Ø Can be “inventoried”
Post-Encounter Stage
Information Processing Service Encounter Stage: Overview
Information Processing
§ Service encounters range from high- to
Prepurchase Stage low-contact
§ Information is the most
intangible form of service § Understanding the servuction system
output
§ Service marketing systems: high-
contact and low-contact
§ But may be transformed into
enduring forms of service Prepurchase Stage Service Encounter § Role and script theories
output Stage
§ Theatre as a metaphor for service
delivery: An integrative perspective
§ Line between information
processing and mental stimulus § Implications for customer
processing may be blurred. participation in service creation and
delivery
Post-Encounter Stage
Prepurchase Stage: Overview High Versus Low Contact Services
 Service marketers must manage the ways customers

 Customers seek solutions to encounter the service organization
Prepurchase Stage aroused needs
 Evaluating a service may be  Each element they encounter must be consistent or the
difficult organization’s credibility is weakened
Customer Decision Making:  Uncertainty about outcomes
 High contact services present marketing challenges
Three-Stage Model of Service Service Encounter
increases perceived risk
Stage  What risk reduction strategies can  More contact points, more moments of truth
Consumption service suppliers develop?  Requires consistent messaging at each contact point
 Understanding customers’ service
expectations  Low contact services have less contact points with higher
importance
 Components of customer
Post-Encounter Stage expectations  Customer more reliant on the contact point chosen
 Making a service purchase  Importance of self service technology (SST) that works
decision
The Servuction System = Customer Satisfaction Is Central to Core Products and
Service + Production the Marketing Concept Supplementary Services
 Satisfaction defined as attitude-like judgment following a service  In mature industries, core products often become
 Service Operations (front stage and backstage) purchase or series of service interactions
commodities
 Where inputs are processed and service elements created
 Customers have expectations prior to consumption, observe service
 Includes facilities, equipment, and personnel
performance, compare it to expectations  Supplementary services help to differentiate core products
and create competitive advantage by:
 Service Delivery (front stage)
 Satisfaction judgments are based on this comparison
 Where “final assembly” of service elements takes place and service  Facilitating use of core product (a service or a good)
is delivered and visible to customers  Positive disconfirmation if better than expected  Enhancing the value and appeal of the core product
 Includes customer interactions with operations and other customers  Confirmation if same as expected
 Negative disconfirmation if worse than expected
 Service Marketing (front stage)
 Satisfaction reflects perceived service quality, price/quality tradeoffs,
 Visible part of service operations, service delivery and other personal and situational factors
contact points
 Research shows links between customer satisfaction and a firm’s
financial performance
Designing a Service Concept
 Core Product
 Central component that supplies the principal, problem-solving
benefits customers seek
 Supplementary Services
Post-Encounter Stage Planning and Creating Services  Augment the core product, facilitating its use and enhancing its
value and appeal
 Delivery Processes
 Used to deliver both the core product and each of the
supplementary services
Core and Supplementary Services at Luxury Hotel

Post-Encounter Stage: Overview Planning and Creating Services (Offering Much More than Cheap Motel!)
 A service product comprises all elements of service Reservation

Prepurchase Stage performance, both tangible and intangible, that create Cashier Valet
value for customers Parking
Business
Reception
 Evaluation of service  The service concept is represented by: Centre
performance A Bed for the
Service Encounter  A core product Room Night in an
 Future intentions Service Elegant Private
Stage  Accompanied by supplementary services – facilitate and enhance Room with a Baggage
use of the core product and add value and differentiation Bathroom Service
Wake-up Cocktail
Call Bar
Internet Entertainment/
Post-Encounter Stage Sports/ ExerciseRestaurant
Flowcharting Service Delivery How to Determine What Supplementary The Flower of Service:
Helps to Clarify Product Elements Services Should Be Offered Facilitating Services—Billing
 Helps management visualize the customer’s total  Not every core product is surrounded by all eight supplementary
service experience elements
 Useful for distinguishing between core product itself “How much do I owe you?”
and service elements that supplement core  Nature of product helps to determine: Bills should be clear,
 Which supplementary services must be offered Accurate, and intelligible.
 Restaurants: Food and beverage (core)
 Which might usefully be added to enhance value and ease of use
 Reservations (supplementary services) Examples of elements:
Core
 Nature of customer involvement with service  People-processing and high-contact services have more supplementary
services  Periodic statements of
organizations varies by type of service: account activity
 People processing  Market positioning strategy determines which supplementary services  Machine display of amount
should be included due
 Possession processing
 Mental Stimulus processing
 Firms with different levels of service often add extra supplementary
 Information processing services for each upgrade in service level
Simple Flowchart for Delivery of a The Flower of Service: The Flower of Service:
People-Processing Service Facilitating Services—Information Facilitating Services—Payment
Customers often require

Customers may pay faster
People Processing – Stay at Motel information about how to obtain
and use a product or service. and more cheerfully if you
Spend make transactions simple
Park Car Check In Night in Breakfast Check and convenient for them.
Out Examples of elements:
Room
Core Core Examples of elements:
 Directions to service site
Maid  Schedule/service hours
Breakfast  Self service payment
Makes up  Prices
Prepared  Conditions of sale  Direct to payee or intermediary
Room
 Usage instructions  Automatic deduction
The Flower of Service: The Flower of Service:

The Flower of Service
Facilitating Services—Order Taking Enhancing Services—Consultation
Information
Customers need to know what Value can be added to goods
is available and may want to and services by offering advice
Payment Consultation secure commitment to and consultation tailored to
delivery. The process should each customer’s needs and
be fast and smooth. situation.
Core Core
Billing Core Order Taking Examples of elements: Examples of elements:
 Applications  Customized advice

 Order entry  Personal counseling
Exceptions Hospitality  Reservations and check-in  Management consulting
Safekeeping
KEY:
Facilitating elements
Enhancing elements
The Flower of Service:
Managerial Implications
Enhancing Services—Hospitality
 To develop product policy and pricing strategy, managers

Customers who invest time and need to determine:
effort in visiting a business and
using its services deserve to be  Which supplementary services should be offered as a standard
treated as welcome guests—
after all, marketing invited them! package or as fee based options
 Firms that compete on a low-cost, no-frills basis needs

Developing New Services
Examples of elements:
Core
 Greeting
fewer supplementary elements than those marketing
 Waiting facilities and amenities expensive, high-value-added services
 Food and beverages
 Toilets and washrooms
 Security  Each flower petal must receive consistent care and concern
to remain fresh and appealing
The Flower of Service: A Hierarchy of

Enhancing Services—Safekeeping New Service Categories (1)
Range from major innovations to simple style changes:

Customers prefer not to worry
about looking after the personal 1. Major service innovations
possessions that they bring
with them to a service site.  New core products for previously undefined markets
Core Examples of elements: Planning and Branding Service 2. Major process innovations
 Looking after possessions Products  Using new processes to deliver existing products with added
customers bring with them
benefits
 Caring for goods purchased
(or rented) by customers
3. Product-line extensions
 Additions to current product lines
4. Process-line extensions
 Alternative delivery procedures
The Flower of Service: A Hierarchy of

Branding Alternatives
Enhancing Services—Exceptions New Service Categories (2)
 Purpose of branding is to establish a mental picture of the

service and clarify the value proposition 5. Supplementary service innovations
Customers appreciate some
flexibility when they make  Addition of new or improved facilitating or enhancing elements
special requests and expect  Service marketers need to be their brand champions
responsiveness when things 6. Service improvements
don’t go according to plan.
Core
 Branding alternatives are:  Modest changes in the performance of current products
Examples of elements:
 Branded House – brand name to multiple offerings in unrelated 7. Style changes
 Special requests in advance fields e.g. Virgin Group
 Complaints or compliments  Visible changes in service design or scripts
 Problem solving  Sub Brands – master brand is primary frame of reference but
 Restitution product has a distinctive name e.g. Singapore Airlines Raffles Class
 Endorsed Brands – Product brand dominates the corporate name
 e.g. hotels
 House of Brands – corporation with a number of products, each
promoted under its own brand name e.g. Proctor & Gamble
Applying the Flow Model of Distribution Options for
Reengineering Service Processes
Distribution to Services Serving Customers
 Reengineering involves analyzing and redesigning Distribution impacts the typical sales cycle in three ways:
processes to achieve faster and better performance
 Running tasks in parallel instead of sequence can 1. Information and promotion flow  Customers visit service site
reduce/eliminate dead time
2. Negotiation flow
 Examination of processes can lead to creation of  Service providers go to customers
alternative delivery methods that constitute new service 3. Product flow
concepts
 Add/eliminate supplementary services  Service transaction is conducted remotely
 Resequence delivery of service elements
 Offer self-service options
Services as Substitutes for Goods Six Options for Service Delivery

Using Websites for Service Delivery
Ownership and Task Performance
Information
Read brochure/FAQ; get schedules/ Availability of Service Outlets
directions; check prices Type of Interaction between Customer Single Site Multiple Sites
Payment Consultation and Service Organization
Pay by bank card Conduct e-mail dialog
Use expert systems Theatre Bus service
Direct debit Customer goes to service organization
Barbershop Fast-food chain
Billing Order-taking
Receive bill Core Make/confirm reservations
Make auction bid Submit applications House painting Mail delivery
Check account status Service organization comes to
Order goods, check status Mobile car wash
customer
Exceptions Hospitality
Make special requests Credit card Broadcast
Record preferences Customer and service organization company network
Resolve problems
transact remotely (mail or electronic
Safekeeping communications) Local TV station Telephone
Track package movements company
Check repair status
Core: Use Web to deliver information-based core services
Channel Preferences Vary

among Customers
 For complex and high-perceived risk services, people rely

on personal channels
 Individuals with greater confidence and knowledge about a

service/channel use impersonal and self-service channels
Determining Type of Contact:
Distribution in a Services Context
Options for Service Delivery  Customers with social motives use personal channels
 Convenience is a key driver of channel choice
e-Commerce: Move to Cyberspace (2) Franchising (1)
 Recent Developments link Websites, customer management  Popular way to expand delivery of effective service
(CRM) systems, and mobile telephony concept
 Franchising is a fast growth strategy, when
 Integrating mobile devices into the service delivery
infrastructure can be used as means to:  Resources are limited
 Long-term commitment of store managers is crucial
Delivering Services in Cyberspace  Access services  Local knowledge is important
 Alert customers to opportunities/problems  Fast growth is necessary to pre-empt competition
 Update information in real time
 Study shows significant attrition rate among franchisors in
 See “Online versus Bricks-and-Mortar” (SP 4.4) the early years of a new franchise system
 One-third of all systems fail within first 4 years
 Three-fourths of all franchisors cease to exist after 12 years
Service Delivery Innovations

Franchising (2)
Facilitated by Technology
 Technological Innovations  Disadvantages of franchising

 Development of “smart” mobile telephones and PDAs as well as  Some loss of control over delivery system and, thereby, over how
Wi-Fi high-speed Internet technology that links users to Internet customers experience actual service
from almost anywhere
 Effective quality control is important yet difficult
 Voice-recognition technology  Conflict between franchisees may arise especially as they gain
 Websites
Role of Intermediaries experience
 Smart cards
- Store detailed information about customer
 Alternative: license another supplier to act on the original
- Act as electronic purse containing digital money supplier’s behalf to deliver core product, for example:
 Increase accessibility of services  Trucking companies
 Banks selling insurance products
 Deliver right information or interaction at right time
 Create and maintain up-to-date real-time information
Splitting Responsibilities For

e-Commerce: Move to Cyberspace (1)
Supplementary Service Elements
 Internet facilitates 5 categories of “flow” As created by As enhanced As experienced
originating firm by distributor by customer
 Information
 Negotiation
 Service
 Transactions
 Promotion
Core + = Core
The Challenge of Distribution in
 Electronic channels offer complement/alternative to
traditional physical channels Large Domestic Markets
 Convenience (24-hour availability, save time, effort)
 Ease of obtaining information online and searching for Core product Supplementary Total experience
desired items services and benefits
 Better prices than in many bricks-and-mortar stores Challenges for original supplier
 Act as guardian of overall process
 Broad selection
 Ensure that each element offered by intermediaries fits overall service concept
The Challenge of Distribution In Barriers to International Impact of Globalization Drivers on
Large Domestic Markets Trade in Services Various Service Categories (1)
 Marketing services (i.e., physical logistics) face challenges Globalizatio People Possession Information
due to:  Passage of free-trade legislation is important facilitator of n drivers processing processing based
 Distances involved (geographic areas) transnational operations Competition Simultaneity of Technology drives Highly vulnerable
production and globalization of to global
 Existence of multiple time zones consumption limits competitors with dominance by
 Multiculturalism (especially, immigrants and indigenous people) leverage of foreign technical edge competitors with
competitive monopoly or
 Differences in laws and tax rates  Despite efforts of WTO and GATT, operating in international advantage, but competitive
markets still difficult management advantage in
 Large companies counter this by: systems can be information
globalized
 Targeting specific market segments Market People differ Level of economic Demand for many
 Seeking out narrow market niches economically and development services is derived
culturally, so needs impacts demand to a significant
for service and for services to degree from
 Serving multiple segments across a huge geographic area is ability to pay may individually owned economic and
vary goods educational levels
biggest marketing challenge
Factors Favoring Adoption of Impact of Globalization Drivers on

Transnational Strategies Various Service Categories (2)
Globalization People processing Possession Information
 Transnational strategy involves integration of strategy Drivers processing based
formulation and its implementation across all countries
Technology Use of IT for delivery of Need for technology- Ability to deliver
supplementary services based service delivery core services
may be a function of systems depends on through remote
 Market drivers of common customers across countries and ownership and possessions requiring terminals may be a
corporate standardization leading to supplier consolidation familiarity with service and the cost function of
technology trade-offs in labour investment in
Distributing Services Internationally  Competition
substitution computerization,
etc.
Cost Variable labour rates Variable labour rates Major cost elements
 Technology may impact on pricing may favor low-cost can be centralized
in labour-sensitive locations and minor cost
services elements localized
 Cost Government Social policies (e.g., Policies may Policies may impact
health) vary widely and decrease/increase demand and supply
 Government policies may affect labour cost, cost and encourage/ and distort pricing
etc. discourage certain
activities
How Service Processes Affect

Internationalization Approaches
International Market Entry
 Export information-based services

 People processing services require direct contact with
 Use third parties to market/deliver service concept
customers
 Control service enterprise abroad
 Possession processing involves services to customer’s Effective Pricing Is Central to
physical possessions
Financial Success
 Information-based services include mental processing
services and information processing services
What Makes Service Pricing Strategy The Pricing Tripod Value-Based Pricing
Different and Difficult? Understanding Net Value
 Harder to calculate financial costs than a manufactured  Customers evaluate competition

good Pricing strategy by comparing their perceived
benefits to their perceived
 Difficulty in defining a “unit of service” outlays
 Services hard to evaluate
 Service pricing strategies should
 Customers may be prepared to pay more for faster delivery enhance perceived value by:
 Reducing uncertainty
 Delivery through physical or electronic channels—may  Relationship enhancement Effort Time
create differences in perceived value e
 Low cost leadership Perceived
benefits Perceived
 Manage value perception outlays
Competition
Costs Value to customer
Alternative Objectives for Pricing Cost-Based Pricing: Reduce Related Monetary and Non-
Traditional vs. Activity-Based Costing Monetary Costs
 Revenue and profit objectives  Traditional costing approach  Incremental financial outlays
 Labour and infrastructure costs are considered fixed costs  Includes the price of purchasing service and other expenses
 Seek profit
 Service firms have higher ratio of fixed to variable costs found in  Expenses associated with search, purchase activity, usage
 Cover costs manufacturing ― E.g. Two theatre tickets also requires the cost of parking, babysitters etc.
 Patronage and user-based objectives  Cost reduction decisions often cut these costs which leads to
reduced service levels and unhappy customers  Non-monetary costs
 Build demand  Time costs
 Build a user base  Activity-based costing (ABC)
 Physical costs
 Sets of delivery activities and related costs  Psychological (mental) costs
 Firms can pinpoint profitability of different services, channels etc  Sensory costs (unpleasant sights, sounds,
feel, tastes, smells)
 When looking at prices, customers care about value to
themselves, not what service production costs the firm
Competition-Based Pricing Defining Total User Costs
 When customers don’t see a difference between Money Purchase

competitive offerings, they choose the cheapest Search costs*
Time Operating costs
 Price competition is reduced when Physical effort Incidental

expenses
Pricing Strategy Stands on  Non- price related costs of using competing alternatives are high
Purchase and Psychological
 Personal relationships matter service encounter burdens
Three Legs  Switching costs are high
costs
 Time and location specificity reduce choice Sensory

burdens
 When competing on price take into account the entire cost
Necessary
to customers including:
After costs* follow-up
 All related financial and non-monetary costs PLUS switching costs
Problem * Includes all five
 Compare this cost to the competition cost categories
solving
Trading Off Monetary and Key Categories of Rate Fences
Non-monetary Costs Key Categories of Rate Fences
Rate Fences Examples Nonphysical Fences (cont’d)

Buyer Characteristics
Physical (product-related) Fences
Frequency or volume of  Member of certain loyalty tier with the firm
Basic product  Class of travel (business/economy class) get priority pricing, discounts, or loyalty
consumption
 Size and furnishing of a hotel room benefits
 Seat location in a theatre Group membership  Child, student, senior citizen discounts
Amenities  Free breakfast at a hotel, airport pickup, etc.  Affiliation with certain groups (e.g., alumni)
 Free golf cart at a golf course Size of customer group  Group discounts based on size of group
Service level  Priority wait-listing
 Increase in baggage allowances
 Dedicated service hotlines
 Dedicated account management team
Relating Price Buckets and Fences to

Key Categories of Rate Fences Demand Curve
Price
per
seat
Nonphysical Fences
1st class
Transaction Characteristics
Full fare economy (no restrictions)
Time of booking or  Requirements for advance purchase 1 - week advance purchase

Revenue Management: reservation  Must pay full fare two weeks before departure
1 - week advance purchase, Saturday night stay
Location of booking or  Passengers booking air tickets for an identical
What It Is and How It Works reservation route in different countries are charged
3 - week advance purchase, Saturday night stay
different prices 3-week advance purchase, Saturday night stay,

$100 for changes
Specified flights, book on Internet, no
Flexibility of ticket  Fees/penalties for canceling or changing a changes/refunds
usage reservation (up to loss of entire ticket price)
 Nonrefundable reservation fees Late sales through
consolidators/Internet,
no refunds
Capacity of 1st No. of seats Capacity of aircraft

class cabin
demanded
* Dark areas denote amount of consumer surplus (goal of segmented pricing is to reduce this)
Revenue Management (RM) Key Categories of Rate Fences
 RM charges more for customers booking service closer to time of Nonphysical Fences (cont’d)
consumption instead of on a first come first served basis
 Charge different value segments different prices for same product Consumption Characteristics
 Predicts how many customers will use a given service at a specific time at Time or duration of  Early-bird special in restaurant before 6PM
each of several different price levels and then allocates capacity at each
level or price bucket use  Must stay over on Saturday for airline, hotel
 If booking pace for a higher-paying segment is stronger than expected,

additional capacity is allocated to this segment and taken away from the Location of
 Must stay at least 5 days
 Price depends on departure location, especially
Ethical Concerns in Service Pricing
lowest- paying segment
consumption in international travel
 Rate fences allow customers to self segment on the basis of service  Prices vary by location (between cities, city
characteristics and willingness to pay.
centre versus edges of city)
 This helps companies restrict lower prices to customers willing to accept
certain restrictions
Designing Fairness into Advertising Strategies for
Revenue Management Overcoming Intangibility
 Design clear, logical, and fair price schedules and fences Intangibility problem Advertising strategy
 Use high published prices and present fences as  Generality
opportunities for discounts rather than quoting lower prices  objective claims Document physical system capacity
and using fence as basis to impose surcharges Cite past performance statistics
Communicating Services Presents  subjective claims Present actual service delivery incident
 Communicate consumer benefits of revenue management
Both Challenges and Opportunities  Nonsearchability Present customer testimonials
 Use bundling to “hide” discounts Cite independently audited performance
 Abstractness Display typical customers benefiting

 Take care of loyal customers
 Impalpability Documentary of step-by-step process,
 Use service recovery to compensate for overbooking Case history of what firm did for customer
Narration of customer’s subjective experience
Source: Banwari Mittal and Julie Baker, “Advertising Strategies for Hospitality Services,” Cornell Hotel and Restaurant Administration Quarterly 43, April
2002, 53. Copyright Cornell University. All rights reserved. Used by permission.
Difference between communications Accenture Promotes Ability to Turn

strategies of services and goods Innovative Ideas into Results
 Ad dramatizes abstract notion of
helping clients capitalize on
innovative ideas in fast-moving world
 Implications of intangibility in service performances
 Features Tiger Woods in eye-catching
 Customers are involved in production situations
Putting Service Pricing  Highlights firm’s ability to help clients
 Role of customer-contact personnel “develop the reflexes of a high-
into Practice performance business”
 Difficulty of evaluating many services  Use tangible metaphors when
possible!
 Need to bring supply and demand into balance  See Research Insights 6.1:
Visualization and Comparative
Advertising for Services
Source: Courtesy of Accenture
Pricing Issues: Using Metaphors to

Overcoming Problems of Intangibility
Putting Strategy into Practice Communicate Value Propositions
 Difficult to communicate service benefits to customers,

 How much to charge? especially when intangible
 Metaphor - A word or phrase that designates one thing is
 What basis for pricing?  Intangibility creates four problems: applied to another in an implicit comparison
Abstractness
 Who should collect payment? ― No one-to-one correspondence with physical objects  Should highlight how the service benefits are provided
Generality  Prudential Insurance—uses Rock of Gibraltar as symbol of
 Where should payment be made? ― Items that comprise a well know class of objects, persons, or events corporate strength
Nonsearchability
 When should payment be made? ― Cannot be searched or inspected before purchase  Metaphors communicate value propositions more
Mental impalpability dramatically and emphasize key points of difference
― Customers find it hard to grasp benefits of complex, multidimensional
 How should payment be made? new offerings
 Can you suggest some examples from recent advertising?
 How to communicate prices?
DHL: Promoting the Efficiency of Stimulate or Dampen Demand to Checklist for Marketing Communications
Its Import Express Service (Fig 6.4) Match Capacity Planning: The “5 Ws” Model
 Use of an easily grasped  Live service performances are time-specific and can’t be  Who is our target audience?
metaphor stored for resale at a later date
Heavily knotted string represents For example, seats for Friday evening’s performance; haircut at  What do we need to communicate and achieve?
how complex importing can be Supercuts on Tuesdays
Straight string represents how Advertising and sales promotions can change timing of customer use  How should we communicate this?
easy it would be using DHL’s
express service  Examples of demand management strategies
 Where should we communicate this?
Reducing usage during peak demand periods
Stimulating demand during demand during off-peak period, for  When do communications need to take place?
example:
― Run promotions that offer extra value—room upgrades, free breakfast
Source: Courtesy DHL Express Singapore
Facilitate Customer Involvement in Promote the Contributions of Target audience and communications
Production Service Personnel objectives
 When customers are actively involved in service production, they need  Frontline personnel are central to service delivery in high-  Connect to target audience
training to perform well contact services
First time users – advertising, public relations, direct marketing
 Show service delivery in action
Make the service more tangible and personalized Existing users – contact personnel and point of sale promotions
 Television and videos engage viewer Advertise employees at work to help customers understand nature Employees – secondary audience in front stage roles
of service encounter
Dentists showing patients videos of surgical procedures before  Specify clear communications objectives, select most
surgery  Show customers work performed behind the scenes to appropriate messages and communications tools to achieve
 Streaming videos on Web and podcasts are new channels to reach ensure good delivery (Table 6.2)
active customers
To enhance trust, highlight expertise and commitment of employees  Key planning considerations
 Advertising and publicity can make customers aware of changes in whom customers normally do not normally encounter
service features and delivery systems in b2b and b2c contexts Advertisements must be realistic Know your service product, how buyers evaluate and their exposure
Sales promotions to help change customer behaviour Messages help set customers’ expectations to different media
― Offer incentives to make necessary changes Service personnel should be informed about the content of new Determine the content, structure, style of message and best media
― Price discounts to encourage self-service on an ongoing basis advertising campaigns or brochures before launch Budget, timing and measurement system
Help Customers to Evaluate

Service Offerings
 Customers may have difficulty distinguishing one firm from another
Provide tangible clues related to service performance
 Some performance attributes lend themselves better to advertising
than others
Airlines
― Boast about punctuality
― Do not talk overtly in advertising about safety, admission that things might go wrong Setting Communication Objectives The Marketing Communications Mix
make prospective travelers nervous
― Use indirect approach: promote pilot expertise, mechanic’s maintenance skills,
newness of aircraft
 Firm’s expertise is hidden in low-contact services

Need to illustrate equipment, procedures, employee activities
that take place backstage
Marketing Communications Mix
Message Transmission (1) Strategies for Corporate Design
for Services (1)
Personal Advertising Sales promotion  Through Productions Channels - Developed within  Many service firms employ a unified and distinctive visual
communications
organization and transmitted through production channels appearance for all tangible elements to reinforce the brand
Broadcast, that deliver the service itself For example, logos, uniforms, physical facilities
Selling Sampling
podcasts
Knowledgeable, empathetic front-line staff, programs providing
Customer customer training, and imbedding messages in the service  Provide a recognizable theme linking all the firm’s
service
Print Coupons environment operations
Training Internet Sign-up  Through Marketing Channels – Traditional tools of personal  Use of trademarked symbol as primary logo, with name
rebates
selling, account management programs, trade shows, secondary
Telemarketing Gifts
advertising, direct marketing, sales promotion, public
Outdoor
relations Shell’s yellow scallop shell on a red background
MacDonald’s “Golden Arches”
Word of Prize
* Word-of-mouth Direct mail
promotions
mouth
(other customers)
Key: * Denotes communications originating from outside the organization

Marketing Communications Mix

Message Transmission (2)
for Services (2)
Publicity & Instructional  Through Messages Originating Outside the Organization –

Corporate design
public relations manuals Very influential and powerful
Press Websites Signage
releases/kits  Word of Mouth (WOM) - more credible than firm’s messaging.
Customers rely on it when making high risk decisions
Press Manuals Interior decor  Blogs – On line journals where people can post their point of view,
conferences
bloggers can become de factor watch dogs, links enable information Marketing Communications and
sharing
Special Events Brochures Vehicles
 Editorial Coverage – editorial coverage about a company initiated by
the Internet
Interactive broadcasters and publishers
Sponsorship Equipment
software
Trade Shows, Voice mail Stationery

exhibitions
* Media-initiated
coverage Uniforms
Key: * Denotes communications originating from outside the organization

Sources of Messages Received by Internet Marketing Offers Powerful

Target Audience Opportunities for Interactivity
 Internet used for a variety of communications tasks

Front-line staff
Messages originating  Can market through firm’s own websites or advertise on
within organization Service outlets A other sites
U
Advertising D
 Needs to be part of integrated, well-designed
Sales promotions
Direct marketing
I
E
Role of Corporate Design communications strategy
Sources Personal selling
Public relations N
C  Able to establish rapport with individual customers
Messages originating E
outside organization Word of mouth
 Contain useful, interesting information for target
Media editorial customers
Source: Adapted from a diagram by Adrian Palmer, Principles of Services Marketing, London: McGraw-Hill,4th ed., 2005, p. 397  Facilitate self-service in information gathering
Effective Advertising on Internet: Developing an Integrated Marketing
Website Design Considerations
Banner Advertising (2) Communications Strategy
 Firms must set explicit communication goals for websites  Isolating online marketing activities from other marketing
 Easy for advertisers to measure how many visits to its own activities may result in conflicting message
 Design should address attributes that affect website website are generated by click-throughs
Customers will not have a clear picture of a firm’s positioning and
“stickiness” value proposition
 Limitations
Content quality
Obtaining many exposures (“eyeballs”) to a banner does not  IMC ties together and reinforces all communications to
Ease of use necessarily lead to increase in awareness, preference, or sales deliver a strong brand identity
Speed of download Problem of fraudulent click-throughs designed to boost apparent
Frequency of update effectiveness  Communications in different media should form part of a
single, overall message about the service firm (need
 Memorable web address helps attract visitors to a site consistency within campaigns about specific service
Ensure that people are aware of/can guess firm’s web address products targeted at specific segments)
EasyJet Paints Its Website Address on Effective Advertising on Internet:

Each of Its More than 200 Aircraft Search Engine Advertising (1) Standing Apart from the Competition
 Reverse broadcast network—search engines let advertisers
know exactly what consumer wants through their keyword
search
A business must set itself apart from its competition.
 Can target relevant messages directly to desired consumers To be successful it must identify and promote itself
as the best provider of attributes that are
 Several advertising options important to target customers
Pay for targeted placement of ads to relevant keyword searches
Sponsor a short text message with a click-through link
George S. Day
Buy top rankings in the display of search results
Source: www.easyjet.com/EN/About/photogallery.html. © easyJet airline company limited
Effective Advertising on Internet: Effective Advertising on Internet:

Banner Advertising (1) Search Engine Advertising (2)
 Google – The New Online Marketing Powerhouse

 Placing advertising banners and buttons on portals such as
Yahoo!, Netscape and other firms’ websites Google AdWords—allows businesses to connect with potential
customers at the precise moment when they are looking at related
 Draw online traffic to the advertiser’s own site topics; advertisers can display their ads at websites that are part of
the Google content network
 Websites often include advertisements of other related, Google AdSense—In return for displaying relevant Google ads on
but non-competing services their websites, publishers receive a share of advertising revenue
generated
Advertisements for financial service providers on Yahoo!’s stock
quotes page  See Service Perspectives 6.2: Google: The Online Marketing
Small messages from Amazon.com on web pages devoted to a Powerhouse
specific topic
Links relevant to e-mail content on GMail
Focus Underlies the Search for
Competitive Advantage
 Intensifying competition makes it important to differentiate

products
 In mature market, only way to grow may be to take a share

from competitors
 Must be selective in targeting customers Service Attributes and Levels

 Rather than compete in an entire market, firm must focus
efforts on customers it can serve best
 Emphasize competitive advantage on those attributes that

will be valued by customers in target segment(s)
Risks and Opportunities of a Developing Right Service Concept for a

Fully Focused Strategy Specific Segment
 Opportunities  Use research to identify and prioritize which attributes of a

 Developing recognized expertise in a well-defined niche may given service are important to specific market segments
provide protection against would-be competitors
 Allows firms to charge premium prices  Individuals may set different priorities according to:
 Risks  Purpose of using the service
 Who makes decision
 Market may be too small to generate needed volume of business
 Timing of use
 Demand for a service may be displaced by generic competition from
alternative products  Whether service is used alone or with a group
 Purchasers in chosen segment may be susceptible to economic  Composition of that group
downturn
 Rests upon good market segmentation
Basic Focus Strategies for Services Importance of Determinant Attributes
 Consumers choose between alternative service offerings

BREADTH OF SERVICE OFFERINGS
based on perceived differences between them
Narrow Wide
 Attributes that distinguish competing services from one
Unfocused another are not necessarily the most important ones
Service
Many Focused
(Everything
for everyone)  Determinant attributes determine buyers’ choices between
NUMBER OF
MARKETS competing alternatives
SERVED Fully Focused
Market  Service characteristics that are important to purchasers
(Service and
Few market Focused  Customers see significant differences between competing
focused) alternatives on these attributes
Source: Robert Johnston “Achieving Focus in Service Organizations,” The Service Industries Journal, Vol. 16, January 1996, pp. 10–20
Establishing Service Levels and Tiers Product Positioning versus Copy Positioning
 Positioning often associated with communication mix,

notably advertising, promotion, PR
 Need to make decisions on service levels—level of
performance firm plans to offer on each attribute  Copy Positioning—use of advertising to create images
and associations for broadly similar branded products
to sharpen distinctions in customer's mind
 Segment customers according to willingness to trade off
price versus service level
Positioning Distinguishes a Brand
 Service tiering: Positioning strategy based on offering
from Its Competitors  Growing number of firms engage in co-branding
several price-based classes of service concept  Positioning guides firm to marketing strategy
development
Examples of Service Tiering in “A Passion For the Business of Accounting”

Four Principles of Positioning Strategy
Different Industries at Grant Thornton
 Must establish position for firm or product in minds of  “Highest Performance

customers Among Audit Firms Serving
Companies with up to $12
 Position should be distinctive, providing one simple, billion in Annual Revenue”
consistent message award
 Position must set firm/product apart from competitors
 Links passion for
 A company cannot be all things to all people—must focus accounting to high client
its efforts satisfaction with its
auditing services
Jack Trout
 “Find out how it feels to
work with people who love
what they do!”
Source: Grant Thornton, LLP.
Principles of Positioning Slogans Used by Companies
 What does our firm currently stand for in the minds of current and
prospective customers? “Invest with confidence”
 What customers do we serve now, and which ones would we like to T. Rowe Price
target in the future?
 What is value proposition and target segment for each of our current “Shopping online beats standing in line”
service offerings?
Lands’ End
 How do our service offerings differ from competitor’s?
 What changes must we make to our offerings to strengthen our

competitive position? “We never stop working for you”
Verizon
Avoid trap of investing too heavily in points of

differences that are easily copied “Relax, It’s FedEx”
FedEx Ground
Using Positioning Maps to Plot
Positioning as a Diagnostic Tool Developing a Market Positioning Strategy Competitive Strategy
 Positioning links market analysis and competitive analysis  Useful way to represent consumer perceptions of alternative
- Size
to internal corporate analysis MARKET - Composition
Define, Analyze
Market Segments
products in visual format
ANALYSIS - Location
- Trends  Typically confined to two attributes, but 3-D models can be used
 Understand relationships between products and markets Select
Target Segments to portray positions on three attributes simultaneously
 Compare to competition on specific attributes To Serve
 Evaluate product’s ability to meet consumer needs/expectations - Resources

INTERNAL - Reputation Articulate Marketing  Information about a product can be obtained from market data,
 Predict demand at specific prices/performance levels ANALYSIS - Constraints Desired Position Action derived from ratings by representative consumers, or both.
in Market Plan
- Values
Select Benefits  If consumer perceptions of service characteristics differ sharply
to Emphasize
to Customers
from "reality" as defined by management, then marketing efforts
- Strengths may be needed to change these perceptions
COMPETITOR - Weaknesses Analyze
ANALYSIS - Current Possibilities for  Also known as perceptual maps
Positioning Differentiation
Source: Developed from an earlier schematic by Michael R. Pearce

Positioning of Hotels –
Positioning as a Diagnostic Tool Anticipating Competitive Response Price versus Service Level
 Identify market opportunities

Expensive
 Introduce new products  Competitors might pursue same market position
 Redesign existing products
 Eliminate non-performing products  Get inside competitors’ heads—conduct internal corporate Grand
analysis for all current/potential challengers to get sense of Regency
PALACE
 Make marketing mix decisions, respond to competition how they might act
Shangri-La
 Distribution/service delivery  Analyze possible effects of alternative competitive moves High Moderate
Service Atlantic Service
 Pricing  Impact of price cut on demand, market share, and profits Sheraton
 Communication  Responses of different segments to changes in service attributes
Italia
Castle
Alexander IV
Airport Plaza
Less Expensive
Role of Positioning in Positioning of Hotels :

Marketing Strategy Location versus Physical Luxury
 Positioning links market analysis and competitive analysis to
internal corporate analysis High Luxury
 Positioning strategy can take place at different levels Regency

Grand
 Multi-site, multi-product business: Position may be established for
entire organization, given service outlet or specific service outlet Shangri-La
Sheraton
 Help prospective customers get mental “fix” on what to expect PALACE
 Failure to select desired position in marketplace and develop a Positioning Maps Financial Shopping District Inner
District and Convention Centre Suburbs
marketing action plan to hold this position may result in:
Castle Italia
 Head-on competition from a stronger competitor
Alexander IV
 Being pushed into a position that nobody else wants
Atlantic
 Organization’s position being so blurred that nobody knows what its
distinctive competence really is Airport Plaza
Moderate Luxury
Positioning after New Construction:
Price versus Service Level
Expensive
Mandarin
New Grand Heritage
Marriott
Continental
Action?
Regency PALACE
High
Shangri-La
No action? Moderate
Changing Competitive Positioning
Service Service
Atlantic
Sheraton
Italia
Castle
Alexander IV
Less Expensive Airport Plaza
Positioning After New Construction:

Repositioning
Location versus Physical Luxury (Fig 7.8)
 Positions evolve in response to changing market structures,
High Luxury technology, competitive activity, and the nature of firm
Mandarin
New Grand
itself
Continental Heritage
Marriott Regency  Firm may have to make significant change in existing
Action?
Sheraton Shangri-La position
PALACE  Revising service characteristics; redefining target market segments;
abandoning certain products; withdrawing from certain market
Financial No action? Shopping District Inner
District and Convention Centre Suburbs segments
Castle Italia  Improving negative brand perceptions may require

Alexander IV
Atlantic
extensive redesign of core product
 Weaknesses may be perceptual rather than real—for example: Long
Airport Plaza
Island Trust
 Repositioning introduces new dimensions into positioning
Moderate Luxury equation that other firms cannot immediately match
Positioning Maps Help Managers to

Visualize Strategy
 Positioning maps display relative performance of competing firms
on key attributes
 Research provides inputs to development of positioning maps—

challenge is to ensure that
 Attributes employed in maps are important to target segments Blueprinting Services to
 Performance of individual firms on each attribute accurately reflects
perceptions of customers in target segments Create Valued Experiences and
 Predictions can be made of how positions may change in light of Productive Operations
future developments
 Simple graphic representations are often easier for managers to
grasp than tables of data or paragraphs of prose
 Charts and maps can facilitate “visual awakening” to threats and
opportunities, suggest alternative strategic directions
Blueprinting the Restaurant Experience: Act Blueprinting the Restaurant
Setting Service Standards
1 Experience: A Three Act Performance
Timeline Act 1  Act 1: Prologue and Introductory Scenes
Service W W
Standards Make W Valet
Coat Room …  Act 2: Delivery of Core Product
 Design high standards for each step to satisfy and delight
Reservation Parking
Stage
and Scripts
Physical  Time parameters, correct performance, prescriptions for style and
Evidence Line of  Cocktails, seating, order food and wine, wine service demeanor
interaction  Potential fail points: Menu information complete? Menu intelligible?
Greet Everything on the menu actually available?  First impressions affects customer’s evaluations of quality during later
Front -
Accept Greet, take

customer, Contact
coat, coat stages of service delivery
reservation take car keys person  Mistakes in transmitting information a common cause of quality failure—
checks
(visible e.g. bad handwriting; poor verbal communication
Line of
actions)  Customers may not only evaluate quality of food and drink, but how
visibility
Check Hang coat with promptly it is served, serving staff attitudes, or style of service  Customer perceptions of service experiences tend to be cumulative
- Stage
availability, Take car to visible check Contact

insert parking lot numbers person  Act 3: The Drama Concludes
booking (invisible
Line of
actions)  Remaining actions should move quickly and smoothly, with no surprises at  For low-contact service, a single failure committed front stage is
Back
internal the end relatively more serious than in high-contact service

Maintain Maintain Maintain physical
reservation (or rent) facilities/ interaction  Customer expectations: Accurate, intelligible and prompt bill, payment
Support system facilities equipment handled politely, guest are thanked for their patronage
Processe
s
Developing a Blueprint OTSU – Opportunity to Screw Up
 Identify key activities in creating and delivering service

 Consists of fail points and waiting times
 Define “big picture” before “drilling down” to obtain a
higher level of detail
 Fail points result in failure to access the core service
 Distinguish between “front stage” and “backstage” product
 Clarify interactions between customers and staff, and
 Waiting times are the possibilities of delays between
support by backstage activities and systems
specific actions requiring the customer to wait Redesigning Service Processes
 Identify potential fail points; take preventive measures;
prepare contingency
 Develop standards for execution of each activity— times for Identify all OTSU’s to create a delivery system designed to
task completion, maximum wait times, and scripts to guide avoid the problems
interactions between employees and customers
Improving Reliability by Failure

Key Components of a Service Blueprint Why Redesign?
Proofing
 Analysis reveals opportunities for failure proofing
1. Define standards for front-stage activities
2. Specify physical evidence
3. Identify principal customer actions  Need fail-safe methods for both employees and customers “Institutions are like steel beams—they tend to
4. Line of interaction (customers and front-stage personnel) rust. What was once smooth and shiny and nice
5. Front-stage actions by customer-contact personnel  Errors include treatment errors and tangible errors tends to become rusty.”
6. Line of visibility (between front stage and backstage)
7. Backstage actions by customer contact personnel
8. Support processes involving other service personnel
 Goal of fail-safe procedures is to prevent errors such as: Mitchell T. Rabkin MD,
 Performing tasks incorrectly, in the wrong order, too slowly formerly president of
9. Support processes involving IT Boston’s Beth Israel Hospital
 Doing work that wasn’t requested in the first place
- Identify fail points and risks of excessive waits

- Set service standards and do failure-proofing  Service Perspectives – Poka Yokes
Why Redesign? (2) What Aspects of SSTs Please or Annoy
Levels of Customer Participation
Customers?
§ Revitalizes process that has become outdated  People love SSTs when…
§ Changes in external environment make existing practices obsolete and  Customer participation is the actions and resources supplied  SST machines are conveniently located and accessible 24/7
require redesign of underlying processes by customers during service production and/or delivery  Obtaining detailed information and completing transactions can be
done faster than through face-to-face or telephone contact
§ Rusting occurs internally  Three Levels
 Low—Employees and systems do all the work
 People hate SSTs when…
§ Opportunities exist to achieve a quantum leap in productivity and
 Medium—Customer inputs required to assist provider  SSTs fail—system is down, PIN numbers not accepted, etc
service quality
 They forget passwords, fail to provide information as requested,
 High—Customer works actively with provider to co-produce the service simply hit wrong buttons
Key Measurements
1. Reduce service failures  Key weakness of SSTs: Too few incorporate service recovery
2. Reduce cycle time
systems
3. Enhance productivity  Customers still forced to make telephone calls or personal visits
 Blame service provider for not providing more user-friendly system
4. Increase customer satisfaction
Approaches and Potential Benefits (Table 8.1) Self-Service Technologies (SSTs) HSBC: “The world’s local bank”
Service process redesign encompasses reconstitution,  Customers undertake specific activities using facilities or
rearrangement, or substitution of service processes as systems provided by service supplier
categorized below:  Customer’s time and effort replace those of employees
 Eliminating non-value-adding steps  Information-based services lend selves particularly well to
 Delivering direct service SSTs
 Shifting to self-service  Used in both supplementary services and delivery of core product
 Delivering direct service  Organizations seek to divert customers from employee contact to
 Bundling services Internet-based self-service
 Redesigning the physical aspects of service processes  Economic trade-off between declining cost of these self-service
systems and rising cost of labour
Challenge:
Getting customers to use new technology Source: Courtesy HSBC
Global site brought to customer’s local

computer
Putting SSTs to Test by

Customer Co-production Using SSTs
Asking a Few Simple Questions
 Productivity gains and cost savings result when customers take over
work previously performed by employees  Does the SST work reliably?
 Lower prices, reflecting lower costs, induce customer to use SSTs  Firms must ensure that SSTs are dependable and
user-friendly
 Research shows that customers tend to take credit for successful
outcomes, but not blame for unsuccessful ones  Is the SST better than interpersonal alternatives?
The Customer as Co-Producer  Critical to understand how consumers decide between using an SST  Customers will stick to conventional methods if SST
option versus relying on a human provider doesn’t create benefits for them
 SSTs present both advantages and disadvantages  If it fails, what systems are in place to recover?
 Benefits: Time and cost savings, flexibility, convenience of location, greater  Always provide systems, structures, and technologies
control over service delivery, and a higher perceived level of customization that will enable prompt service recovery when things
go wrong
 Disadvantages: Anxiety and stress experienced by customers who are
uncomfortable with using them
Consequences of Dysfunctional From Excess Demand to
Customers as Partial Employees Customer Behaviour Excess Capacity
 Customers influence productivity and quality of service processes and  Consequences for staff working front stage Four conditions potentially faced by fixed-capacity services:
outputs
 Abused employees may find their emotions negatively affected and/or
 Customers who are offered opportunities to participate at active level suffer long-term psychological damage  Excess demand
are more likely to be satisfied  Productivity and quality may suffer
 Too much demand relative to capacity at a given time
 However, customers cause one-third of all service problems  Consequences for customers can be both negative and positive
 Difficult to recover from instances of customer failure  Exposure to unpleasant incidents can spoil consumption experience; Bad  Demand exceeds optimum capacity
 Focus on preventing customer failure by collecting data on problem behaviour can be contagious
 Upper limit to a firm’s ability to meet demand at a given time
occurrence, analyzing root causes, and establishing preventive solutions  But customers may rally to support of abused employee
 Managing customers as employees helps to avoid customer failures  Consequences for organization  Optimum capacity
 Conduct “job analysis” of customer’s present role in business—compare  Unmotivated employees may work less effectively  Point beyond which service quality declines as more customers are
against role that firm would like customers to play serviced
 Abused employees may take medical leave
 Educate customers on how expected to perform and skills needed
 Direct financial costs of restoring damaged property, legal fees, paying
 Motivate customers by ensuring that rewarded if they perform well fraudulent claims
 Excess capacity
 Appraise customers’ performance regularly
 Too much capacity relative to demand at a given time
Addressing Problem of
Fluctuating Demand
Two basic approaches:
 Adjust level of capacity to meet demand

 Need to understand productive capacity and how it varies on an
incremental basis
Dysfunctional Customer Behaviour Fluctuations in Demand Threaten
 Manage level of demand
Disrupts Service Process Service Productivity
Addressing the Challenge of Productive Capacity and Service Success Variations in Demand Relative to
Jaycustomers Capacity
 A customer who behaves in a thoughtless or  Use marketing strategies to smooth out peaks, fill in valleys
abusive fashion, causing problems for the firm, its
employees, and other customers VOLUME DEMANDED
 Many firms use a mix of both approaches
 No organization wants an ongoing relationship
 Services cannot be stockpiled Demand exceeds capacity
(business is lost)
with an abusive customer CAPACITY UTILIZED
 Divergent views on jaycustomers  This is problematic for people or physical possession
services due to wide swings in demand Maximum Available Demand exceeds
Capacity optimum capacity
 Six types: (quality declines)
 The Thief Optimum Capacity
 Goal is to utilize staff, equipment, and facilities as (Demand and Supply
 The Rule-Breaker productively as possible Well Balanced)
 The Belligerent
 The Family Feuders Excess capacity
 The Vandal Low Utilization (wasted resources)
(May Send Bad Signals)
TIME CYCLE 1 TIME CYCLE 2
Causes of Seemingly
Adjusting Capacity to Match Demand
Random Changes in Demand Levels
 Schedule downtime during periods of low demand

 Weather
 Use part-time employees
 Health problems
 Rent or share extra facilities and equipment
Many Service Organizations Are  Accidents, Fires, Crime
Capacity Constrained  Ask customers to share
 Natural disasters
 Invite customers to perform self-service
 Cross-train employees Question: Which of these events can be predicted?
Defining Productive Capacity in

Analyzing Drivers of Demand
Services
 Physical facilities to contain customers
 Understand why customers from specific
 Physical facilities to store or process goods market segments select this service
 Physical equipment to process people, possessions, or  Keep good records of transactions to

analyze demand patterns
information Patterns and Determinants of
 Sophisticated software can help to track
 Labour used for physical or mental work Demand customer consumption patterns
 Record weather conditions and other

 Public/private infrastructure special factors that might influence
demand
Alternative Capacity Management Predictable Demand Patterns and Overall Usage Levels Comprise
Strategies Their Underlying Causes (Table 9.1) Demand from Different Segments
 Level capacity (fixed level at all times)  Not all demand is desirable
Predictable Cycles Underlying Causes of
 Stretch and shrink of Demand Levels Cyclical Variations  Keep peak demand levels within service capacity of
 day  employment
organization
 Offer inferior extra capacity at peaks (e.g., bus/train standees)
 week  billing or tax
 Vary seated space per customer (e.g., elbow room, leg room) payments/refunds  Marketing cannot smooth out random fluctuations
 month
 pay days in demand
 Extend/cut hours of service  year
 school hours/holidays
 other  Fluctuations caused by factors beyond organization’s control
 seasonal climate (for example: weather)
 Chase demand (adjust capacity to match demand) changes
 Detailed market analysis may reveal that one segment’s demand
 public/religious holidays
 Flexible capacity (vary mix by segment) cycle is concealed within a broader, random pattern
 natural cycles
(e.g., coastal tides)
Hotel Room Demand Curves by
Why Do Waiting Lines Occur?
Segment and Season
Price per
room night  Because the number of arrivals at a facility
Bl Bh exceeds capacity of system to process them at
Th Bh = business travelers in high season a specific point in the process
Bl = business travelers in low season
Demand Levels Can Be Managed Tl Th = tourist in high season  Queues are basically a symptom of unresolved
capacity management problems
Tl = tourist in low season
Th
Bh
Bl Tl
Not all queues take form of a physical waiting
Quantity of rooms demanded at each price line in a single location
by travelers in each segment in each season
Note: hypothetical example
Alternative Demand-Management Saving Customers from

Strategies Burdensome Waits
 Take no action
 Let customers sort it out  Add extra capacity so that demand can be met at most
times (problem: may increase costs too much)
 Reduce demand
 Higher prices  Rethink design of queuing system to give priority to certain
 Communication promoting alternative times customers or transactions
Inventory Demand through Waiting
 Increase demand
 Lower prices
Lines and Reservations  Redesign processes to shorten transaction time
 Communication, including promotional incentives
 Manage customer behaviour and perceptions of wait
 Vary product features to increase desirability
 More convenient delivery times and places
 Install a reservations system
 Inventory demand by reservation system
 Inventory demand by formalized queuing
Marketing Strategies Can Alternative Queue Configurations

Waiting Is a Universal Phenomenon!
Reshape Some Demand Patterns
 Use price and other costs to manage demand Single line, single server, single stage
 An average person may spend up to 30 minutes/day waiting
in line—equivalent to over a week per year! Single line, single servers, sequential stages
 Change product elements
 Almost nobody likes to wait
 Modify place and time of delivery Parallel lines to multiple servers
 No change  It's boring, time-wasting, and sometimes physically

Designated lines to designated servers
 Vary times when service is available uncomfortable
 Offer service to customers at a new location
Single line to multiple servers (“snake”)
 Promotion and education
21
29
28
20
“Take a number” (single or multiple servers) 30
26
25
24
31 27
32 23
Criteria for Allocating Different Market Ten Propositions on Psychology of Characteristics of Well-Designed
Segments to Designated Lines Waiting Lines (2) Reservations System
 Urgency of job  Fast and user-friendly for customers and staff

6. Unfair waits are longer than equitable waiting
 Emergencies versus non-emergencies  Answers customer questions
7. People will wait longer for more valuable services
 Duration of service transaction  Offers options for self service (e.g., the Web)
 Number of items to transact 8. Waiting alone feels longer than waiting in groups
 Complexity of task
 Accommodates preferences (e.g., room with view)
9. Physically uncomfortable waits feel longer
 Payment of premium price  Deflects demand from unavailable first choices to
10. Waits seem longer to new or occasional users
alternative times and locations
 First class versus economy
 Includes strategies for no-shows and overbooking
 Importance of customer
 Requiring deposits to discourage no-shows
 Frequent users/high volume purchasers Sources: Maister; Davis & Heineke; Jones & Peppiatt; see your Services
versus others Marketing text, page 275 for full source information.  Canceling unpaid bookings after designated time
 Compensating victims of over-booking
Setting Hotel Room Sales Targets by

Segment and Time Period (Fig.9.7)
Capacity
(% rooms) Week 7 Week 36
(Low Season) (High Season)
100%
Out of commission for renovation Loyalty Program Members
Loyalty Program
Members
Minimize Perceptions of Waiting Time Create an Effective Reservation System Transient guests
Weekend
package
50% W/E
package
Transient guests
Groups and conventions
Groups (no conventions)
Airline contracts Airline contracts
Time Nights: M Tu W Th F S Su M Tu W Th F S Su
Ten Propositions on Psychology of Information Needed for Demand and

Benefits of Reservations
Waiting Lines (1) Capacity Management Strategies
 Controls and smoothes demand
 Unoccupied time feels longer than occupied time  Historical data on demand level and composition, noting responses to
marketing variables
 Pre-sells service
 Pre- and post-process waits feel longer than in-process
waits  Demand forecasts by segment under specified conditions
 Informs and educates customers in advance of arrival
 Segment-by-segment data
 Anxiety makes waits seem longer
 Saves customers from having to wait in line for service (if
reservation times are honored)  Fixed and variable cost data, profitability of incremental sales
 Uncertain waits are longer than known, finite waits
 Meaningful location-by-location demand variations
 Unexplained waits are longer than explained waits  Data captured helps organizations
 Customer attitudes toward queuing
 Prepare financial projections
Sources: Maister; Davis & Heineke; Jones & Peppiatt; see your Services
Marketing text, page 275 for full source information.
 Plan operations and staffing levels  Customer opinions of quality at different levels of capacity utilization
Servicescape as Part of Insights from Mehrabian-Russell
Value Proposition Stimulus-Response Model
 Physical surroundings help shape appropriate feelings and  Simple yet fundamental model of
reactions in customers and employees how people respond to environments
 For example: Disneyland, Denmark’s Legoland  The environment, its conscious and
unconscious perceptions, and
 Servicescapes form a core part of the value proposition interpretation influence how people
What Is the Purpose of Service  For example: Club Med, Las Vegas, Florida-based Muvico feel in that environment
Environments? - Las Vegas: Repositioned itself to a somewhat more wholesome fun resort,
visually striking entertainment centre  Feelings, rather than
perceptions/thoughts drive
- Florida-based Muvico: Builds extravagant movie theatres and offers plush
amenities. “What sets you apart is how you package it..” (Muvico’s CEO, behaviour
Hamid Hashemi)
 Typical outcome variable is
 The power of servicescapes is being discovered “approach” or “avoidance” of an
environment, but other possible
outcomes can be added to model
Purpose of Service Environments The Russell Model of Affect
 Helps firm to create distinctive image and unique

positioning
 Service environment (servicescape) affects buyer

behaviour in three ways: Understanding Consumer
 Message-creating medium: Symbolic cues to communicate the
distinctive nature and quality of the service experience
Responses to Service Environments
 Attention-creating medium: Make servicescape stand out from
competition and attract customers from target segments
 Effect-creating medium: Use colours, textures, sounds, scents
and spatial design to enhance desired service experience
Comparison of Hotel Lobbies The Mehrabian-Russell

Insights from Russell Model of Affect
Stimulus-Response Model
Each servicescape clearly communicates and reinforces its hotel’s Feelings Are a Key Driver of Customer Responses to Service Environments
respective positioning and sets service expectations as guests arrive  Emotional responses to environments can be described
along two main dimensions:
 Pleasure: Direct, subjective, depending on how much individual
likes or dislikes environment
 Arousal: How stimulated individual feels, depends largely on
Dimensions of Response/
information rate or load of an environment
Environmental Affect: Behaviour:
Stimuli and Cognitive
Approach
 Russell separated cognitive part of emotions from these
Processes Pleasure and two emotional dimensions
Avoidance and
Arousal
Cognitive Processes
 Advantage: simplicity, allows a direct assessment of how

customers feel
 Firms can set targets for affective states
Lobby of a Howard Johnson hotel Lobby of Fairmont Banff Springs Hotel
An Integrative Framework: Impact of Ambient Conditions
Drivers of Affect
Bitner’s Servicescape Model (2)
 Affect can be caused by perceptions and cognitive processes of  Ambient environment is composed of hundreds of
 Identifies the main dimensions in a service environment
any degree of complexity and views them holistically design elements and details that must work together to
create desired service environment
 It’s the simple cognitive processes that determine how people
feel in a service setting  Internal customer and employee responses can be
 Ambient conditions are perceived both separately and
categorized into cognitive, emotional, and psychological
 If higher levels of cognitive processes are triggered, the responses, which lead to overt behavioural responses holistically, and include:
interpretation of this process determines people’s feelings towards the environment  Lighting and colour schemes
 The more complex a cognitive process becomes, the more  Size and shape perceptions
powerful its potential impact on affect.  Key to effective design is how well each individual  Sounds such as noise and music
dimension fits together with everything else  Temperature
 However, most service encounters are routine and simple  Scents
processes can determine affect.
 Clever design of these conditions can elicit desired
behavioural responses among consumers
Behavioural Consequence of Affect Impact of Music
 Pleasant environments result in approach, whereas  In service settings, music can have a powerful effect on
unpleasant ones result in avoidance perceptions and behaviours, even if played at barely audible
levels
 Arousal amplifies the basic effect of pleasure on
behaviour  Structural characteristics of music―such as tempo, volume,
 If environment is pleasant, increasing arousal can generate
Dimensions of the Service and harmony―are perceived holistically
excitement, leading to a stronger positive consumer response
Environment  Fast tempo music and high volume music increase arousal levels
 If environment is unpleasant, increasing arousal level will move  People tend to adjust their pace, either voluntarily or involuntarily, to
customers into the “distressed” region match tempo of music
 Feelings during service encounters are an important  Careful selection of music can deter wrong type of customers
driver of customer loyalty
An Integrative Framework: Main Dimensions in Servicescape Model

Bitner’s Servicescape Model (Fig 10.5) Impact of Music on Restaurant Diners
ENVIRONMENTAL MODERATORS INTERNAL RESPONSES BEHAVIOUR Restaurant Fast-beat Slow-beat Difference between
DIMENSIONS
 Ambient Conditions
Approach Patron Music Music Slow- and Fast-beat
HOLISTIC Cognitive  Characteristics of environment pertaining to our five senses
ENVIRONMENT Emotional
• Affiliation Behaviour Environment Environment Environments
• Exploration
Psychological • Stay longer  Spatial Layout and Functionality Absolute %
Employee
• Satisfaction Difference Difference
Ambient Response  Spatial layout:
Avoid Consumer
Conditions Moderator (opposite of approach) 45min 56min +11min +24%
Employee - Floorplan time spent at
Responses - Size and shape of furnishings, counters, machinery,equipment, and how table
Social Interaction they are arranged
Space/ Perceived Spending on $55.12 $55.81 +$0.69 +1%
Function Between  Functionality: Ability of those items to facilitate performance food
Servicescape Customers and
Employees Spending on
Customer  Signs, Symbols, and Artifacts beverages
$21.62 $30.47 +$8.85 +41%
Responses
Signs, Customer Approach  Explicit or implicit signals to:
Symbols, Response • Attraction - Communicate firm’s image Total $76.74 $86.28 +$9.54 +12%
Moderator Cognitive • Stay/Explore spending
and • Spend More $$$ - Help consumers find their way
Artifacts Emotional Estimated
• Satisfaction - Convey rules of behaviour $48.62 $55.82 +$7.20 +15%
Psychological gross margin
Avoid
Source: Mary J. Bitner, “Servicescapes: The Impact of Physical Surroundings on Customers and (opposite of approach)
Employees,” Journal of Marketing 56 (April 1992), pp. 57-71. American Marketing Association. Source: Ronald E. Milliman (1982), “Using Background Music to Affect the Behavior of Supermarket Shoppers,” Journal Of Marketing, 56 (3):
pp. 86–91
Aromatherapy: Effects of Selected Impact of Signs, Symbols, and
Impact of Scent
Fragrances on People Artifacts
Aroma-Therapy Potential Psychological
 An ambient smell is one that pervades an Fragrance Aroma Type
Class
Traditional Use
Effect on People
environment  Guide customers clearly through process of service delivery
 May or may not be consciously perceived by Deodorant,  Customers will automatically try to draw meaning from the signs,
customers Eucalyptus Camphor-aceous
Toning,
antiseptic, Stimulating and energizing symbols, and artifacts
stimulating
 Not related to any particular product soothing agent
 Unclear signals from a servicescape can result in anxiety and
 Scents have distinct characteristics and can uncertainty about how to proceed and obtain the desired service
be used to solicit emotional, physiological, Calming, Muscle relaxant,  For instance, signs can be used to reinforce behavioural rules (see
and behavioural responses Lavender Herbaceous balancing, soothing agent, Relaxing and calming picture on next slide)
soothing astringent
 In service settings, research has shown that

scents can have significant effect on Energizing, Antiseptic,
customer perceptions, attitudes, and Lemon Citrus
uplifting soothing agent
Soothing energy levels
behaviours
Balancing, Muscle relaxant, Balancing people’s
Black pepper Spicy
soothing aphrodisiac emotions
Effects of Scents on Perceptions of Signs Teach and Reinforce Behavioural

Impact of Colour
Store Environments (1) Rules in Service Settings (Fig 10.8)
Evaluation Unscented Scented Difference
Environment Environment Mean  Colours can be stimulating, calming, expressive, disturbing,
Mean Ratings Ratings impressional, cultural, exuberant, symbolic
Store Evaluation
Negative/positive 4.65 5.24 +0.59  Colour pervades every aspect of our lives, embellishes the
ordinary, gives beauty and drama to everyday objects
Outdated/modern 3.76 4.72 +0.96
 Colours have a strong impact on people’s feelings
Store Environment
 Colours can be defined into three dimensions:
Unattractive/ 4.12 4.98 +0.86
attractive  Hue is the pigment of the colour
Drab/colourful 3.63 4.72 +1.09
 Value is the degree of lightness or darkness of the colour
Boring/Stimulating 3.75 4.40 +0.65  Chroma refers to hue-intensity, saturation, or brilliance
Source: Eric R. Spangenberg, Ayn E. Crowley, and Pamela W. Hendersen (1996), “Improving the Store Environment: Do Olfactory Cues
Affect Evaluations and Behaviors?,” Journal Of Marketing, (April): pp. 67–80.
Note: Fines are in Singapore dollars (equivalent to roughly US $300)
Effects of Scents on Perceptions of Common Associations and Human Responses to People Are Part of the
Store Environments (2) Colours Service Environment (Fig 10.9)
Evaluation Unscented Scented Difference Degree of Common Association and Human

Environment Environment Colour Nature Symbol
Warmth Responses to Colour
Mean Ratings Mean Ratings
High energy and passion; can excite
Merchandise Red Warm Earth
and stimulate
Outdated/up-to-date 4.71 5.43 +0.72 Orange Warmest Sunset Emotions, expressions, warmth
style
Optimism, clarity, intellect, mood-
Yellow Warm Sun
Inadequate/adequate 3.80 4.65 +0.85 enhancing
Growth, grass, Nurturing, healing, unconditional
Green Cool
and trees love
Low/high quality 4.81 5.48 +0.67
Blue Coolest Sky and ocean Relaxation, serenity, loyalty
Low/high price 5.20 4.93 -0.27
Indigo Cool Sunset Mediation and spirituality
Spirituality, reduces stress, can
Source: Eric R. Spangenberg, Ayn E. Crowley, and Pamela W. Hendersen (1996), “Improving the Store Environment: Do Olfactory Cues Violet Cool Violet flower Distinctive Servicescapes Create Customer Expectations
Affect Evaluations and Behaviors?,” Journal Of Marketing, (April): pp. 67–80 create an inner feeling of calm
Why Customers Are More Profitable
Over Time
Profit from price

premium
Profit from references
Profit from reduced

op. costs
Putting It All Together The Search for Customer Loyalty Profit from increased
usage
Base Profit/Loss
Loss
1 2 3 4 5 6 7
Year
Source: Why Are Customers More Profitable Over Time from Fredrick R. Reichheld and W. Earl Sassar, Jr., “Zero Defections: Quality Comes
from Services,” Harvard Business Review 73 (Sep.–Oct. 1990): p. 108.
Selection of Environmental How Much Profit a Customer Assessing the Value of a

Design Elements Generates Over Time Loyal Customer
 Consumers perceive service environments holistically (Year 1=100)

350 –
 Design with a holistic view 300  Must not assume that loyal customers are always more
profitable than those making one-time transactions
 Servicescapes have to be seen holistically: No dimension of 250
design can be optimized in isolation, because everything depends
on everything else 200  Profit impact of a customer varies according to stage of
 Holistic characteristic of environments makes designing service 150 service in product life cycle
environment an art 100
 Determine costs and revenues for customers from
 Match and Mismatch of Scent and Music in Singapore 50
different market segments at different points in their
0 customer lifecycles
 Must design from a customer’s perspective Year 1 Year 2 Year 3 Year 4 Year 5
Credit card Industrial laundry Industrial distribution Auto servicing

Source: Based on reanalysis of data from Fredrick R. Reichheld and W. Earl Sassar, Jr., “Zero Defections: Quality Comes from Services,”
Harvard Business Review 68 (Sep.-Oct. 1990), pp. 105–111.
Why Is Customer Loyalty Important to Measuring Customer Equity:

Tools to Guide Servicescape Design
a Firm’s Profitability? Lifetime Value of Each Customer
 Keen observation of customers’ behaviour and responses to the  Acquisition revenues less costs
service environment by management, supervisors, branch  Revenues (application fee + initial purchase)
managers, and frontline staff  Customers become more profitable the longer they remain  Costs (marketing + credit check + account set up)
with a firm:
 Projected annual revenues and costs
 Feedback and ideas from frontline staff and customers, using a Increase purchases and/or account balances
broad array of research tools from suggestion boxes to focus  Revenues (annual fee + sales + service fees + value of referrals)
groups and surveys. Reduced operating costs  Costs (account management + cost of sales + write-offs)
Referrals to other customers
 Value of referrals
 Field experiments can be used to manipulate specific Price premiums
 Percentage of customers influenced by other customers
dimensions in an environment and the effects observed.  Other marketing activities that drew the firm to an individual’s
attention
 Blueprinting or service mapping—extended to include physical
evidence in the environment.  Net Present Value
 Sum anticipated annual values (future profits)
 Suitably discounted each year into the future
Gap Between Actual and
Relationships with Customers
Potential Customer Value
 What is current purchasing behaviour of customers in each Type of Relationship between the Service
target segment? Organization and Its Customers
Nature of Service Membership No Formal Relationship
 What would be impact on sales and profits if they Delivery Relationship
exhibited ideal behaviour profile of: Cable TV Radio station
Continuous
 (1) buying all services offered by the firm,
Insurance policy Police Building a Foundation for Loyalty
 (2) using these to the exclusion of any purchases from competitors,
 (3) paying full price? College enrollment Lighthouse
 How long, on average, do customers remain with firm? Discrete Transactions Subscriber phone Pay phone
 What impact would it have if they remained customers for Theatre subscription Movie theatre
life?
Warranty repair Public transport
Customer Needs and

Company Capabilities
 Identify and target the right customers

 How do customer needs relate to operations elements?
 How well can service personnel meet expectations of different
Understanding the Customer-Firm types of customers?
The Wheel of Loyalty
Relationship  Can company match or exceed competing services that are
directed at same types of customers?
 Should result in a superior service offering in the eyes of

those customers who value what firm has to offer
Searching for Value—Not Just

Relationship Marketing The Wheel of Loyalty Volume
1. Build a
 Focus on number of customers served as well as value of
3. Reduce
Churn Drivers Foundation each customer
 Marketing within the context of an active ongoing for Loyalty  Heavy users are more profitable than occasional users
relationship rather than a one-off relationship Conduct churn diagnostic
Segment the market  Avoid targeting customers who buy based on lowest price
Address key churn drivers
 Transactional Marketing Be selective in acquisition
Enabled through:
 Frontline staff
Implement complaint
Use effective tiering • Firms that are highly focused and selective in their
 Database Marketing handling and service
acquisition of customers grow faster
 Account recovery Customer of service.
 Interaction Marketing managers
Deliver quality
 Membership Increase switching Loyalty
 Network Marketing programs costs service. • “Right customers” are not always high spenders
 CRM
Systems  Can come from a large group of people that no other supplier is
2. Create Loyalty serving well
Bonds
Build higher
level bonds
Deepen the
relationship
• Different segments offer different value
Give loyalty
rewards
Effective Tiering of Service Strategies for Developing Loyalty Analyze Customer Defections and
The Customer Pyramid Bonds with Customers Monitor Declining Accounts
Good Relationship
Customers Which segment sees high value  Deepening the relationship
in our offer, spends more with us
over time, costs less to maintain,
Platinum and spreads positive word-of-  Reward-based Bonds  Understand reasons for customer switching
mouth?
 Churn diagnostics common in mobile phone industry
Gold  Social Bonds
 Analysis of data warehouse information on churned and declining
Which segment costs us customers
Iron  Customization Bonds
time, effort, and money, yet  Exit interviews
does not provide return we
want? Which segment is  Structural Bonds  Churn Alert Systems
Lead difficult to do business with?
 Transform discrete transactions into relationships
Poor Relationship
Customers
Source: Valarie A Zeithaml, Roland T Rust, and Katharine N. Lemon, “The Customer Pyramid:
Creating and Serving Profitable Customers,” California Management Review 43, no. 4, Summer
2001, pp.118–142. By permission of the Regents.
The Customer Satisfaction Create Customer Bonds by Membership

Loyalty Relationship Relationships and Loyalty Programs What Drives Customers to Switch?
Apostle
100  How customers perceive reward programs Service Failure/Recovery Value Proposition
Zone of Affection
Core Service Failure Pricing
 Brand loyalty versus deal loyalty
Loyalty (Retention)
• Service Mistakes • High Price

80 • Billing Errors
 Buyers value rewards according to: • Price Increases
• Service Catastrophe • Unfair Pricing
Zone of Indifference Near Apostle
― Cash value of redemption award • Deceptive Pricing
60 Service
Service Encounter Failures
― Range of choice among rewards • Uncaring Switching
Inconvenience
― Aspirational value of rewards • Impolite • Location/Hours
40 Zone of Defection • Unresponsive • Wait for Appointment
― Amount of usage required to obtain award • Unknowledgeable • Wait for Service
20
― Psychological benefits of belonging to reward program
Response to Service Failure
 Timing • Negative Response Competition
• No Response • Found Better Service
Terrorist 0 ― Send customers periodic updates on account status and progress towards • Reluctant Response
1 2 3 4 5 particular milestones
Very Dissatisfied Neither Satisfied Very Others
Dissatisfied Satisfied Involuntary Switching Ethical Problems
Source: Adapted from Thomas O. Jones and W. Earl Satisfaction • Customer Moved • Cheat • Unsafe
Sasser, Jr., “Why Satisfied Customers Defect,” • Provider Closed • Hard Sell • Conflict of
Harvard Business Review, November-December 1995, Interest
p. 91. Reprinted by permission of Harvard Business Source: Adapted from Susan M. Keaveney, “Customer Switching Behavior in Service Industries: An Exploratory Study,” Journal of Marketing 59 (April 1995), pp. 71–
School. 82.
Addressing Key Churn Drivers
 Delivery quality
 Minimize inconvenience and nonmonetary costs
 Fair and transparent pricing
Strategies for Reducing
Creating Loyalty Bonds  Industry specific drivers
Customer Defections  Reactive measures
 Implement effective complaint handling and service
recovery procedures
 Increase switching costs
Common Failures in Customer Response Categories to
CRM Implementation Service Failures
 Service firms equate installing CRM systems with having a

Complain to the
customer relationship strategy service firm
 Challenge of getting it right with wide-ranging scope of CRM Take some form Complain to a
of Public Action third party
 Common reasons for failures
CRM: Customer Relationship Service Encounter
Take some form
of Private
Take legal action
to seek redress
 Viewing CRM as a technology initiative is Dissatisfactory
Management  Lack of customer focus
Action
Defect (switch
provider)
 Insufficient appreciation of customer lifetime value (CLV) Take No Action
Negative word-of-
 Inadequate support from top management mouth
 Failure to reengineer business processes
 Underestimating the challenges in date integration
Any one or a combination of
these responses is possible
Key Issues in Defining a Understanding Customer Responses to

Common Objectives of CRM Systems Customer Relationship Strategy Service Failure
 How should our value proposition change to increase customer  Why do customers complain?
loyalty?
 Data collection  What proportion of unhappy customers complain?
 How much customization or one-to-one marketing and service
delivery is appropriate and profitable?
 Data analysis  Why don’t unhappy customers complain?
 What is incremental profit potential of increasing share-of-
 Sales force automation wallet with current customers? How much does this vary by  Who is most likely to complain?
customer tier and/or segment?
 Marketing automation  How much time and resources can we allocate to CRM right  Where do customers complain?
now?
 Call centre automation  What do customers expect once they have made a complaint?
 If we believe in customer relationship management, why
haven’t we taken more steps in that direction in past?
 What can we do today to develop customer relationships
without spending on technology?
An Integrated Framework for CRM Strategy Customers Often View Complaining as

Difficult and Unpleasant
Customer Complaining Behaviour
Source: Courtesy of Images.com.
Three Dimensions of Perceived Fairness in Strategies to Reduce Customer
The Service Recovery Paradox
Service Recovery Process Complaint Barriers
 Customers who experience a service failure that is Complaint Barriers for Strategies to Reduce These Barriers
Complaint Handling and Service satisfactorily resolved more likely to make future purchases Dissatisfied Customers
Recovery Process than customers without problems (Note: not all research Inconvenience  Put customer service hotline
supports this paradox)  Hard to find right complaint numbers, e-mail and postal
Justice Dimensions of the Service Recovery Process procedure addresses on all customer
 If second service failure occurs, the paradox disappears—  Effort involved in complaining communications materials
Procedural Interactive Outcome customers’ expectations have been raised and they become  Have service recovery procedures in
Justice Justice Justice disillusioned Doubtful Pay Off place, communicate this to
customers
 Uncertain if action will be taken
 Severity and “recoverability” of failure (e.g., spoiled by firm to address problem  Feature service improvements that
wedding photos) may limit firm’s ability to delight customer resulted from customer feedback
with recovery efforts Unpleasantness  Thank customers for their feedback
Customer Satisfaction with
 Fear of being treated rudely  Train frontline employees
Service Recovery  Best strategy: Do it right the first time
 Hassle, embarrassment  Allow for anonymous feedback
Source: Tax and Brown
How to Enable
Effective Service Recovery
 Be proactive—on the spot, before customers complain
 Plan recovery procedures

Customer Responses to Effective Principles of Effective Service
Service Recovery Recovery Systems  Teach recovery skills to relevant personnel
 Empower personnel to use judgment and skills to develop

recovery solutions
Components of an Effective How Generous

Importance of Service Recovery
Service Recovery System Should Compensation Be?
 Plays a crucial role in achieving customer satisfaction Increased  Rules of thumb for managers to consider:
Do the job right the
first time + Effective Complaint
Handling = Satisfaction and
Loyalty  What is positioning of our firm?
 Tests a firm’s commitment to satisfaction and service  How severe was the service failure?
quality Conduct research
 Who is the affected customer?
Identify Service Monitor complaints
 Employee training and motivation is highly important Complaints Develop “Complaints as
opportunity” culture
 Impacts customer loyalty and future profitability
 Complaint handling should be seen as a profit centre, Resolve Complaints Develop effective system
Effectively and training in
not a cost centre complaints handling
Learn from the Conduct root cause analysis

Recovery Experience
Source: For full source information, see Services

Marketing textbook, page 386.
Close the loop via feedback
Types of Service Guarantees
 Single attribute-specific guarantee

 One key service attribute is covered
 Multiattribute-specific guarantee
 A few important service attributes are covered
Service Guarantees  Full-satisfaction guarantee Learning from Customer Feedback
 All service aspects covered with no exceptions
 Combined guarantee
 All service aspects are covered
 Explicit minimum performance standards
on important attributes
Service Guarantees Help Promote and Key Objectives of

Achieve Service Loyalty Effective Customer Feedback Systems
 Force firms to focus on what

customers want
 Assessment and benchmarking of service quality and
 Set clear standards performance
 Highlight cost of service

Discouraging Abuse and  Customer-driven learning and improvements
failures Opportunistic Behaviour
 Creating a customer-oriented service culture
 Require systems to get and
act on customer feedback
 Reduce risks of purchase

and build loyalty
How to Design Service Guarantees Dealing with Customer Fraud Customer Feedback Collection Tools
 Treating all customers with suspicion is likely to alienate them  Total market surveys
 Unconditional
 TARP found only 1 to 2 percent of customer base engages in premeditated
fraud—so why treat remaining 98 percent of honest customers as potential  Post-transaction surveys
 Easy to understand and communicate crooks?
 Ongoing customer surveys
 Insights from research on guarantee cheating
 Meaningful to the customer  Amount of a guarantee payout had no effect on customer cheating  Customer advisory panels
 Repeat-purchase intention reduced cheating intent
 Employee surveys/panels
 Easy to invoke  Customers are reluctant to cheat if service quality is high (rather than
just satisfactory)
 Focus groups
 Easy to collect  Managerial implication
 Mystery shopping
 Firms can benefit from offering 100 percent money-back guarantees
 Credible  Guarantees should be offered to regular customers as part of  Complaint analysis
membership program
 Excellent service firms have less to worry about than average providers  Capture service operating data
Key Customer Feedback Collection Tools: Components of Quality:
Strengths and Weaknesses Service-based
POTENTIAL
LEVEL OF MEASUREMENT
FOR FIRST
SERVICE HAND COST
TRANSACTION REPRESENTATIVE
COLLECTION TOOLS FIRM PROCESS SPECIFIC ACTIONABLE RELIABLE RECOVERY LEARNING EFFECTIVENESS Tangibles: Appearance of physical elements
TOTAL MARKET SURVEY
(INCLU. COMPETITORS)
ANNUAL SURVEY ON
OVERALL SATISFACTION
Reliability: Dependable and accurate performance
The Gaps Model—A Conceptual Tool to
TRANSACTIONAL SURVEY Responsiveness: Promptness; helpfulness Identify and Correct Service Quality
SERVICE FEEDBACK
CARDS
Assurance: Competence, courtesy, credibility,
security
Problems
MYSTERY SHOPPING
Empathy: Easy access, good communication,
UNSOLICITED FEEDBACK
(e.g., COMPLAINTS)
understanding of customer
FOCUS GROUP
DISCUSSIONS
SERVICE REVIEWS
Source: Adapted from Jochen Wirtz and Monica Tomlin, “Institutionalizing Customer-Driven Learning Through Fully Integrated Customer Feedback
Systems.” Managing Service Quality,10, no.4 (2000): p. 210.
Capturing the Customer’s Perspective of Seven Service Quality Gaps

Entry Points for Unsolicited Feedback
Service Quality: SERVQUAL
 Frontline employees  Survey research instrument based on premise that Customer needs and CUSTOMER
expectations
customers evaluate firm’s service quality by comparing
 Intermediaries acting for original supplier 1. Knowledge Gap
MANAGEMENT
 Their perceptions of service actually received
Management definition
 Managers contacted by customers at head/regional office  Their prior expectations of companies in a particular industry of these needs
 Developed primarily in context of face-to-face encounters 2. Standards Gap

 Complaint cards deposited in special box or mailed Translation into
design/delivery specs
 Scale contains 22 items reflecting five dimensions of 4. Internal
 Telephone or e-mail service quality 3. Delivery Gap Communications Gap
Execution of 4. Advertising and sales

 Complaints passed to company by third-party recipients  Subsequent research has highlighted some limitations of design/delivery specs promises
SERVQUAL 5. Perceptions Gap 6. Interpretation Gap
•Disseminate the information to Customer perceptions Customer interpretation

relevant parties to take action of service execution of communications
Immediately 7. Service Gap
•Track over time Customer experience
relative to expectations
Other Considerations in Prescriptions for Closing the

Service Quality Measurement Seven Service Quality Gaps
 In uncompetitive markets or in situations where customers 1. Knowledge gap: Learn what customers expect
do not have a free choice, researchers should use needs or
2. Standards gap: Specify SQ standards that reflect expectations
wants as comparison standards
 Time constraints 3. Delivery gap: Ensure service performance meets standards
4. Internal communications gap: Ensure that communications promises

 Services high in credence characteristics may cause
What Is Service Quality? consumers to use process factors and tangible cues as
are realistic
proxies to evaluate quality—halo effect 5. Perceptions gap: Educate customers to see reality of service quality
delivered
 Process factors: Customers’ feelings
6. Interpretation gap: Pretest communications to make sure message is
clear and unambiguous
7. Service gap: Close gaps 1 to 6 to meet customer expectations

consistently
Control Chart for Departure Delays Cause-and-Effect Chart for
Flight Departure Delays
% Flights Departing Within
15 Minutes of Schedule Facilities, Frontstage Procedures
Front-Stage Procedures
Equipment Personnel
Personnel
100%
Aircraft late to Gate agents Delayed check-in
Arrive late gate cannot process procedure
90% Oversized bags Mechanical fast enough Acceptance of late
Measuring and Improving Customers
Customers
Failures
Late pushback
Late/unavailablepassengers
airline crew
80%
Service Quality Delayed
Departures
Late food Late cabin
70% service cleaners
Other Causes Poor announcement of
Weather Late baggage departures
Air traffic
60% Late fuel Weight and balance
sheet late
J F M A M J J A S O N D Materials,
Materials, Backstage Information
Supplies
Supplies Personnel
Month
Soft and Hard Measures Tools to Analyze and Address Case: Analysis of Causes of
of Service Quality Service Quality Problems Flight Departure Delays
 Soft measures—not easily observed, must be collected by  Fishbone diagram 4.9

talking to customers, employees, or others 15.3%
All stations, excluding
%
 Cause-and-effect diagram to identify potential causes of problems 23.1% Chicago-Midway Hub
 Provide direction, guidance, and feedback to employees on ways to 19%
33.3%
achieve customer satisfaction  Pareto Chart 15.4% 11.7%
 Can be quantified by measuring customer perceptions and beliefs  Separating the trivial from the important. Often, a majority of 9.5%
― For example: SERVQUAL, surveys, and customer advisory panels problems is caused by a minority of causes (i.e. the 80/20 rule) 23.1% 8.7%
33.3%
23.1%
 Hard measures—can be counted, timed, or measured  Blueprinting 11.3% 53.3%
through audits
 Visualization of service delivery, identifying points where failures Newark 15% Washington Natl.
 Typically operational processes or outcomes are most likely to occur
 Standards often set with reference to percentage of occasions on
which a particular measure is achieved Late passengers Late weight and balance sheet
 Control charts are useful for displaying performance over time Waiting for pushback Late cabin cleaning/supplies
against specific quality standards Waiting for Other Source: For full source information, see Services
Marketing textbook, page 419.
fuelling
Composition of FedEx’s Tools to Analyze and Address

Blueprinting
Service Quality Index—SQI Service Quality Problems
 Total Quality Management (TQM)  Depicts sequence of front-stage interactions experienced
Weighting Number of Daily
Failure Type Factor
X = by customers plus supporting backstage activities
Incidents Points  ISO 9000
Late delivery—right day 1  Comprises requirements, definitions, guidelines, and related  Used to identify potential fall points—where failures are
Late Delivery—wrong day 5 standards to provide an independent assessment and certification of
Tracing request unanswered
most likely to appear
1 a firm’s quality management system
Complaints reopened 5
Missing proofs of delivery 1  Malcolm Baldrige Model Applied to Services  Shows how failures at one point may have a ripple effect
Invoice adjustments 1 later
Missed pickups
 To promote best practices in quality management, and recognizing,
10
and publicizing quality achievements among U.S. firms
Lost packages 10  Managers can identify points which need urgent attention
Damaged packages 10  Six Sigma
Aircraft delays (minutes) 5  Important first step in preventing service quality problems
Overcharged (packages missing label) 5  Statistically, only 3.4 defects per million opportunities (1/294,000)
Abandoned calls 1  Has evolved from defect-reduction approach to an overall business-
improvement approach
Source: See Services Marketing textbook, page
417, for full source information. Total Failure Points (SQI) = XXX,XXX
Six Sigma Methodology to When Does Improving Service Reliability Service Efficiency, Productivity,
Improve and Redesign Service Processes Become Uneconomical? and Effectiveness
Process Improvement Process Design/Redesign  Efficiency: Involves comparison to a standard,

100%
Satisfy Target usually time-based (for example: how long
Define  Identify the problem  Identify specific or broad problems Customers through employee takes to perform specific task)
 Define requirements  Define goal/change vision Service Recovery
 Set goals  Clarify scope and customer requirements  Problem: Focus on inputs rather than
Service Reliability
Measure  Validate problem/process  Measure performance to requirements outcomes
 Refine problem/goal  Gather process efficiency data Optimal Point of
 Measure key steps/inputs Reliability: Cost of  May ignore variations in service quality/value
Failure = Service
Analyze  Develop causal hypothesis  Identify best practices Recovery  Productivity: Involves financial valuation of
 Identify root causes  Assess process design
 Validate hypothesis  Refine requirements outputs to inputs
Improve  Develop ideas to measure root  Design new process Satisfy Target  Consistent delivery of outcomes desired by
causes  Implement new process, structures, and Customers through customers should command higher prices
 Test solutions systems Service Delivery as
 Measure results Planned
A B C D  Effectiveness: Degree to which firm meets goals
Control  Establish measures to maintain  Establish measures and reviews to maintain
 Cannot divorce productivity from quality and
performance performance Investment
 Correct problems as needed  Correct problems as needed Small Cost, Large Cost, Assumption: Customers are equally (or even more)
customer satisfaction
satisfied with the service recovery provided than with a
Large Improvement Small Improvement service that is delivered as planned.
TQM in a Service Context: Measuring Service Productivity:

Twelve Critical Dimensions for Implementation Variability Is a Major Problem
 Top management commitment and visionary leadership
 Traditional measures of service output tend to ignore
 Human resource management variations in quality or value of service
 Technical system, including service process design and process
management  Focus on outputs rather than outcomes
 Information and analysis system  Stress efficiency but not effectiveness
 Benchmarking  Firms that consistently deliver outcomes desired by

 Continuous improvement
Defining and Measuring Productivity customers can command higher prices; loyal customers are
 Customer focus more profitable
 Employee satisfaction
 Measures with customers as denominator include:
 Union intervention and employee relations
 Profitability by customer
 Social responsibility
 Capital employed per customer
 Servicescapes
 Shareholder equity per customer
 Service culture
Return On Quality (ROQ) Productivity in a Service Context
 Assess costs and benefits of quality initiatives  Productivity measures amount of output produced relative to the
 ROQ approach is based on four assumptions: amount of inputs.
– Quality is an investment
 Improvement in productivity means an improvement in the ratio
– Quality efforts must be financially accountable
of outputs to inputs.
– It’s possible to spend too much on quality
– Not all quality expenditures are equally valid
 Intangible nature of many service elements makes it hard to
 Implication: Quality improvement efforts may benefit from being measure productivity of service firms, especially for information- Improving Service Productivity
related to productivity improvement programs based services
 To determine feasibility of new quality improvement efforts,
determine costs and then relate to anticipated customer response  Difficult in most services because both input and output are
hard to define
 Determine optimal level of reliability  Relatively simpler in possession-processing services, as
 Diminishing returns set in as improvements require higher investments compared to information- and people-processing services
 Know when improving service reliability becomes uneconomical
Questions When Developing Strategies Improving Service Productivity:
to Improve Service Productivity (2) Customer-Driven Strategies The Service-Profit Chain
Internal External
 Change timing of customer demand Operating strategy and Service
service delivery system Concept Target Market
 How to transform inputs into outputs efficiently?  By shifting demand away from peaks, managers can make better
 Will improving productivity hurt quality? use of firm’s productive assets and provide better service Loyalty 4-7
Revenue
 Will improving quality hurt productivity? growth
 Involve customers more in production Satisfaction Customers
 Are employees or technology the key to productivity?
Productivity Service 3 2 1
 Can customers contribute to higher productivity?  Get customers to self-serve Satisfaction Loyalty
Employees and Value
 Encourage customers to obtain information and buy from firm’s Output
Quality
corporate websites Capability Profitability
 Ask customers to use third parties Service

Quality
 Delegate delivery of supplementary service elements to
• Workplace design Quality and
intermediary organizations • Job design productivity
• Attractive value • Lifetime value
• Service designed • Retention
• Selection and development Improvements and delivered to • Repeat business
• Rewards and recognition yield higher meet targeted • Referral
• Information and communication service quality customers’ needs
• Tools for serving customers and lower costs
Source: See Services Marketing textbook, page 436, for full source
information.
Generic Productivity Backstage and Front-stage Productivity Links in the Service-Profit Chain
Improvement Strategies Changes: Implications for Customers
 Typical strategies to improve service productivity:  Backstage improvements can ripple to front and affect customers 1. Customer loyalty drives profitability and growth
 Keep abreast of proposed backstage changes, not only to identify 2. Customer satisfaction drives customer loyalty
 Careful control of costs at every step in process
such ripples but also to prepare customers for them 3. Value drives customer satisfaction
 Efforts to reduce wasteful use of materials or labour ― For example: New printing peripherals may affect appearance of bank statements
 Replacing workers by automated machines 4. Employee productivity and retention drive value
 Front-stage productivity enhancements are especially visible in high
 Installing expert systems that allow paraprofessionals to take on contact services 5. Employee loyalty drives productivity
work previously performed by professionals who earn higher salaries 6. Employee satisfaction drives loyalty and
 Some improvements only require passive acceptance, while others
require customers to change behaviour productivity
 Although improving productivity can be approached
 Must consider impacts on customers and address customer
incrementally, major gains often require redesigning entire resistance to changes
7. Internal quality drives employee satisfaction
processes  Better to conduct market research first if changes are substantial 8. Top management leadership underlies chain’s
success
Source: See Services Marketing textbook, page 437, for full source
information.
Improving Service Productivity: Qualities Associated with

(1) Operations-Driven Strategies Service Leaders
 Control costs, reduce waste  Understands mutual dependency among marketing,

operations and human resource functions of the firm
 Set productive capacity to match average demand
 Automate labour tasks  Has a coherent vision of what it takes to succeed

 Upgrade equipment and systems Effective Marketing Lies at the Heart  Strategies are defined and driven by a strong, effective
leadership team
 Train employees of Value Creation
 Broadening array of tasks that a service worker can perform  Responsive to various stakeholders
 Leverage less-skilled employees through expert systems
 Value creates through customer satisfaction
 Service process redesign
Moving to a Higher Level of Performance
 Firms can move either up or down the

performance ladder
 Organizations devoted to satisfying their
current customers may miss important shifts
in the marketplace
Integrating Marketing, Operations, Creating a Leading Service  As a result, they may face difficulties
attracting new consumers with different
expectations
and Human Resources Organization  Companies defending their control of their
competitive edge may have encouraged
competitors to find higher-performing
alternatives
 Organizations with a service-oriented
culture may turn otherwise as a result of a
merger or acquisition that brings in new
leaders who emphasize short-term profits
From Losers to Leaders: Four Levels of

Reducing Interfunctional Conflict
Service Performance (1)
 One challenge is to avoid creating “functional silos”  Service Losers

 High-value creating enterprises should be thinking in terms of  Bottom of the barrel from both customer and managerial
activities, not functions perspectives
 Customers patronize them because there is no viable alternative
 Top management needs to establish clear imperatives for
 New technology introduced only under duress; uncaring workforce
each function that defines how a specific function
contributes to the overall mission  Service Nonentities In Search of Human Leadership
 The marketing imperative  Dominated by a traditional operations mindset
 The operations imperative  Unsophisticated marketing strategies
 The human resources imperative  Consumers neither seek out nor avoid them
From Losers to Leaders: Four Levels of Leading a Service Organization

Defining the Three Functional Imperatives
Service Performance (2) Involves Eight Stages (1)
 Marketing Imperative  Service Professionals  Creating a sense of urgency to develop the
 Target “right” customers and build relationships  Clear market positioning strategy impetus for change
 Offer solutions that meet their needs
 Customers within target segment(s) seek them out
 Define quality package with competitive advantage
 Research used to measure customer satisfaction  Putting together a strong enough team to
 Operations Imperative direct the process
 Operations and marketing work together
 Create and deliver specified service to target customers  Proactive, investment-oriented approach to HRM
 Adhere to consistent quality standards  Creating an appropriate vision of where the
 Achieve high productivity to ensure acceptable costs  Service Leaders organization needs to go
 Human Resource Imperative  The crème da la crème of their respective industries
 Communicating that new vision broadly
 Recruit and retain the best employees for each job  Names synonymous with outstanding service, customer delight
 Train and motivate them to work well together  Service delivery is seamless process organized around customers
 Achieve both productivity and customer satisfaction  Employees empowered and committed to firm’s values and goals
Source: John Kotter
Leading a Service Organization
Individual Leadership Qualities Evolution versus Turnaround (2)
Involves Eight Stages (2)
 Empowering employees to act on that vision  Visualize quality of service as foundation for  Hurdles that leaders face in reorienting and
competing
formulating strategy
 Producing sufficient short-term results to create credibility  Able to believe in their employees and make  Cognitive hurdles
and counter cynicism communicating with them a priority
 Resource hurdles
 Love of the business
 Building momentum and using that to tackle tougher  Motivational hurdles
change problems  Driven by a set of core values that they  Political hurdles
infuse into the organization
 Anchoring new behaviours in organizational culture  Need not be charismatic, but has to be
 Turning around an organization that has limited
principled resources requires concentrating those resources
where the need and the likely payoffs are greatest
 Must have personal humility blended with
intensive professional will, ferocious
resolve, and willingness to give credit to  A firm’s search for growth often involves expansion—
others but take blame themselves even diversification into new lines of business
Source: John Kotter
Leadership versus Management Role Modeling Desired Behaviour
 Leadership  “Management by walking around”

 Concerned with development of vision and strategies, and
empowerment of people to overcome obstacles—make vision happen  Provides insights to both backstage and front-stage operations
 Emphasis on emotional and spiritual resources  The ability to observe and meet both employees and customers, and
 Works through people and culture opportunity to see how corporate strategy is implemented on the
front line
 Produces useful change, especially non-incremental change
 Management
Change Management  This approach may lead to a recognition that changes are
needed in that strategy
 Involves keeping current situation operating through planning,
budgeting, organizing, staffing, controlling, and problem solving
 Emphasizes physical resources—raw materials, technology, capital
 A risk of prominent leaders becoming too externally
focused at the risk of their internal effectiveness
 Works through hierarchy and systems
 Keeps current system functioning
Setting Direction versus Planning Evolution versus Turnaround (1) Leadership, Culture, and Climate (1)
 Planning - management process, designed to produce  Evolution involves continual mutations designed to ensure  Leadership traits are needed of everyone in supervisory or
orderly results, doesn’t produce change the survival of the fittest managerial positions, including those heading teams
 Planning follows and complements direction setting, serving as useful  Effective communication is essential for a leader
reality check and road map for strategic execution  Top management must proactively evolve the focus and strategy of
the firm to take advantage of changing conditions and the advent of
new technologies  Organizational culture
 Setting direction - creating and articulating visions and
strategies that describe a business, technology, or  Shares perceptions or themes regarding what is important in the
corporate culture in terms of the long term  Turnaround situations are where leaders seek to bring organization
distressed organizations back from the brink of failure and  Shares values about what is right or wrong
 Many of best visions and strategies combine basic insights and translate
them into realistic competitive strategy set them on a healthier course  Shares understanding about what works and what doesn’t work
 Shares beliefs, and assumptions about why these things are
 Example: Amex important
 Can be advantageous to bring in a new CEO from outside the  Shares styles of working and relating to others
organization
Leadership, Culture, and Climate (2)
 Organizational climate
 The tangible surface layer on top of the
organization’s underlying culture
 Factors of influence:
― Flexibility, responsibility, standards that people set,
perceived aptness of rewards, clarity people have
about mission and values, level of commitment to a
common purpose
 Creating a new climate for service, based

on understanding of what is needed for
market success, may require
 Radical rethinking of HRM activities,
operational procedures, and the firm’s reward
and recognition policies
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Differences, Implications, and

 Businesses sell and market the core service product

 Distribution may take  Electronic channels or  Create user-friendly,

Value Added by Physical, Intangible Elements

 Services non-ownership framework  Most new jobs are generated by services

Differences, Implications, and

The 8Ps of Services Marketing: The 8Ps of Services Marketing:

 Geographic locations served  Customers often involved in processes, especially when

 Channel partners/intermediaries  Badly designed processes waste time, create poor

The 8Ps of Services Marketing: The 8Ps of Services Marketing:

The 8Ps of Services Marketing:

 Productivity and quality must work hand in hand People Processing

 Improving productivity key to reducing costs  Customers must:

A Framework for Developing Effective Differences among Services Affect

Implementing Profitable Service Strategies

Mental Stimulus Processing

§ Physical presence of recipients Service Encounter

§ Core content of services is

Information Processing Service Encounter Stage: Overview

Prepurchase Stage: Overview High Versus Low Contact Services

 Service marketers must manage the ways customers

Designing a Service Concept

Core and Supplementary Services at Luxury Hotel

 A service product comprises all elements of service Reservation

Customers often require

The Flower of Service: The Flower of Service:

 Applications  Customized advice

 To develop product policy and pricing strategy, managers

 Firms that compete on a low-cost, no-frills basis needs

The Flower of Service: A Hierarchy of

Range from major innovations to simple style changes:

The Flower of Service: A Hierarchy of

 Purpose of branding is to establish a mental picture of the

Services as Substitutes for Goods Six Options for Service Delivery

Channel Preferences Vary

 For complex and high-perceived risk services, people rely

 Individuals with greater confidence and knowledge about a

 Convenience is a key driver of channel choice

Service Delivery Innovations

 Technological Innovations  Disadvantages of franchising

Splitting Responsibilities For

Factors Favoring Adoption of Impact of Globalization Drivers on

How Service Processes Affect

 Export information-based services

 Harder to calculate financial costs than a manufactured  Customers evaluate competition

Competition-Based Pricing Defining Total User Costs

 When customers don’t see a difference between Money Purchase

 Price competition is reduced when Physical effort Incidental

 Time and location specificity reduce choice Sensory

Rate Fences Examples Nonphysical Fences (cont’d)

Relating Price Buckets and Fences to

Time of booking or  Requirements for advance purchase 1 - week advance purchase

different prices 3-week advance purchase, Saturday night stay,

Capacity of 1st No. of seats Capacity of aircraft

Revenue Management (RM) Key Categories of Rate Fences

 If booking pace for a higher-paying segment is stronger than expected,

 Abstractness Display typical customers benefiting

Difference between communications Accenture Promotes Ability to Turn

Source: Courtesy of Accenture

Pricing Issues: Using Metaphors to

 Difficult to communicate service benefits to customers,

Source: Courtesy DHL Express Singapore

Help Customers to Evaluate