Introduction To Services Marketing: Slide 1

Slide 1
Introduction to
Services Marketing
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1-1
Slide 2
How Important is the Service Sector in

Our Economy?
In most countries, services add more economic value than

agriculture, raw materials and manufacturing combined
In developed economies, employment is dominated

by service jobs and most new job growth comes from
services
Jobs range from high-paid professionals and technicians to
minimum-wage positions
Service organizations can be any size—from huge global
corporations to local small businesses
Most activities by government agencies and nonprofit
organizations involve services
2
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1-
Slide 3
Internal Services
Service elements within an organization that facilitate

creation of--or add value to--its final output
Includes:
accounting and payroll administration
recruitment and training
legal services
transportation
catering and food services
cleaning and landscaping
Increasingly, these services are being outsourced
Slide 4
Major Trends in Service Sector

Government Policies (e.g.., regulations, trade
agreements)
Social Changes (e.g.., affluence, lack of time, desire for
experiences)
Business Trends
Manufacturers offer service
Growth of chains and franchising
Pressures to improve productivity and quality
More strategic alliances
Marketing emphasis by nonprofits
Innovative hiring practices
Advances in IT (e.g.., speed, digitization, wireless,

Internet)
Internationalization (travel, transnational companies)
Slide 5
Some Impacts of Technological Change
Radically alter ways in which service firms do business:
with customers (new services, more convenience)

behind the scenes (reengineering, new value chains)
Create relational databases about customer needs and
behavior, mine databanks for insights
Leverage employee capabilities and enhance mobility
Centralize customer service—faster and more responsive
Develop national/global delivery systems
Create new, Internet-based business models
Slide 6
Marketing Relevant
Differences Between
Goods and Services
Slide 7
Defining the Essence of a Service
An act or performance offered by one party to another

An economic activity that does not result in ownership
A process that creates benefits by facilitating a desired

change in:
customers themselves
physical possessions
intangible assets
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1- 7
Slide 8
Distinguishing Characteristics of Services
Customers do not obtain ownership of services
Service products are ephemeral and cannot be inventoried

Intangible elements dominate value creation
Greater involvement of customers in production process
Other people may form part of product experience
Greater variability in operational inputs and outputs

Many services are difficult for customers to evaluate
Time factor is more important--speed may be key
Delivery systems include electronic and physical channels
Slide 9
Marketing Implications - 1
No ownership
Customers obtain temporary rentals, hiring of personnel,
or access to facilities and systems
Pricing often based on time
Customer choice criteria may differ for renting vs.
purchase--may include convenience, quality of personnel
Can’t own people (no slavery!) but can hire expertise and labor
Services cannot be inventoried after production
Service performances are ephemeral—transitory,
perishable Exception: some information-based
output can be recorded in electronic/printed form and re-used
many times
Balancing demand and supply may be vital marketing strategy
Key to profits: target right segments at right times at right price

Need to determine whether benefits are perishable or durable
Slide 10
Customers may be involved in production process

Customer involvement includes self-service and
cooperation with service personnel
Think of customers in these settings as “partial employees”
Customer behavior and competence can help or hinder
productivity, so marketers need to educate/train
customers
Changing the delivery process may affect role played by customers
Design service facilities, equipment, and systems with
customers in mind: user-friendly, convenient
locations/schedules
Intangible elements dominate value creation

Understand value added by labor and expertise of personnel
Effective HR management is critical to achieve service
quality Make highly intangible services more “concrete” by creating

and communicating physical images or metaphors and tangible
clues
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 10
Slide 11
Value Added by Tangible vs Intangible

Elements in Goods and Services
Hi
Salt
Soft drinks
CD Player
Golf clubs
New car
Tailored clothing
Tangible Elements
Furniture rental
Fast food restaurant
Plumbing repair
Office cleaning
Health club
Airline flight
Retail banking
Insurance
Lo Intangible Elements Weatherforecast
Hi
Slide 12
Other people are often part of the service product

Achieve competitive edge through perceived quality of employees
Ensure job specs and standards for frontline service personnel
reflect both marketing and operational criteria
Recognize that appearance and behavior of other customers
can influence service experience positively or negatively
Avoid inappropriate mix of customer segments at same time
Manage customer behavior (the customer is not always right!)
Greater variability in operational inputs and outputs
Must work hard to control quality and achieve consistency
Seek to improve productivity through standardization, and by
training both employees and customers
Need to have effective service recovery policies in place
because it is more difficult to shield customers from service failures
Slide 13
Often difficult for customers to evaluate services

Educate customers to help them make good choices, avoid risk
Tell customers what to expect, what to look for
Create trusted brand with reputation for considerate, ethical behavior
Encourage positive word-of-mouth from satisfied customers
Time factor assumes great importance
Offer convenience of extended service hours up to 24/7
Understand customers’ time constraints and priorities
Minimize waiting time
Look for ways to compete on speed
Distribution channels take different forms
Tangible activities must be delivered through physical channels
Use electronic channels to deliver intangible, information-
based elements instantly and expand geographic reach
Slide 14
Important Differences
Exist among Services
Slide 15
Four Categories of Services

Employing Different Underlying Processes
What is the Who or What is the Direct Recipient of the Service?
Nature of the
ServiceAct? DIRECTEDPEOPLE AT DIRECTEDPOSSESSIONSAT
TANGIB LE ACTS
People Processing Possession Processing
e.g.., airlines, hospitals, e.g.., freight, repair,
haircutting, restaurants cleaning, landscaping,
hotels, fitness centers retailing, recycling
INTANGIB LE
ACTS
Mental Stimulus Information Processing
Processing (directed at intangible assets)
e.g.., broadcasting,
consulting, education, e.g.., accounting, banking,
psychotherapy insurance, legal, research
Slide 16
Implications of Service Processes

(1) Seeking Efficiency May Lower Satisfaction
Processes determine how services are created/delivered—
process change may affect customer satisfaction
Imposing new processes on customers, especially
replacing people by machines, may cause dissatisfaction
New processes that improve efficiency by cutting costs
may hurt service quality
Best new processes deliver benefits desired by customers
Faster
Simpler
More conveniently
Customers may need to be educated about new
procedures and how to use them
Slide 17
Implications of Service Processes:

(2) Designing the Service Factory
People-processing services
require customers to visit the
“service factory,” so:
Think of facility as a “stage” for service
performance
Design process around customer
Choose convenient location
Create pleasing appearance, avoid
unwanted noises, smells
Consider customer needs--info,

parking, food, toilets,etc.
Slide 18

(3) Evaluating Alternative Delivery Channels
For possession-processing, mental-stimulus processing, or
information processing services, alternatives include:
1. Customers come to the service factory

2. Customers come to a retail office
3. Service employees visit customer’s home or workplace
4. Business is conducted at arm’s length through
- physical channels (e.g.., mail, courier service)
- electronic channels (e.g.., phone, fax, email, Web site)
Slide 19

(4) Balancing Demand and Capacity
When capacity to serve is

limited and demand varies
widely, problems arise because
service output can’t be stored:
1. If demand is high and

exceeds supply, business
may be lost
2. If demand is low,
productive capacity is
wasted
Potential solutions:
- Manage demand
- Manage capacity
Slide 20

(5) Applying Information Technology
All services can benefit from IT,
but mental-stimulus processing
and information-processing
services have the most to gain:
Remote delivery of
informationbased services
“anywhere, anytime”
New service features through
websites, email, and internet
(e.g.., information, reservations)
More opportunities for self-service
New types of services
Slide 21

(6) Including People as Part of the Product
Involvement in service
delivery often entails
contact with other people
Managers should be
concerned about employees’
appearance, social skills,
technical skills
Other customers may enhance
or detract from service
experience--need to manage
customer behavior
Slide 22
The Services
Marketing Mix
Slide 23
Elements of The Services Marketing Mix:

“7Ps” vs. the Traditional “4Ps”
Rethinking the original 4Ps

Product elements
Place and time
Promotion and education

Price and other user outlays
Adding Three New Elements

Physical environment
Process
People
Slide 24
The 7Ps:
(1) Product Elements
All Aspects of Service Performance that Create Value
Core product features—both tangible and intangible

elements
Bundle of supplementary service elements
Performance levels relative to competition
Benefits delivered to customers (customers don’t buy a

hotel room, they buy a good night’s sleep)
Guarantees
Slide 25
The 7Ps:
(2) Place and Time
Delivery Decisions: Where, When, and How
Geographic locations served
Service schedules
Physical channels
Electronic channels
Customer control and convenience
Channel partners/intermediaries
Slide 26
The 7Ps:
(3) Promotion and Education
Informing, Educating, Persuading, and Reminding Customers
Marketing communication tools
media elements (print, broadcast, outdoor, retail, Internet, etc.)
personal selling, customer service
sales promotion
publicity/PR
Imagery and
recognition branding
corporate design
Content
information, advice
persuasive messages
customer education/training
Slide 27
The 7Ps:
(4) Price and Other User Outlays
Marketers Must Recognize that Customer Outlays Involve
More than the Price Paid to Seller
Traditional Pricing Tasks
Selling price, discounts,
premiums Margins for
intermediaries (if any) Credit
terms
Identify and Minimize Other Costs Incurred by Users

Additional monetary costs associated with service usage (e.g.., travel
to service location, parking, phone, babysitting,etc.) Time
expenditures, especially waiting Unwanted mental and physical effort
Negative sensory experiences
Slide 28
The 7Ps:
(5) Physical Environment
Designing the Servicescape and providing tangible
evidence of service performances
Create and maintaining physical
appearances buildings/landscaping interior
design/furnishings vehicles/equipment staff
grooming/clothing sounds and smells other
tangibles
Select tangible metaphors for use in marketing

communications
Slide 29
7Ps:
(6) Process
Method and Sequence in Service Creation and Delivery
Design of activity flows
Number and sequence of actions for customers
Providers of value chain components
Nature of customer involvement
Role of contact personnel
Role of technology, degree of automation
Slide 30
The 7Ps:
(7) People
Managing the Human Side of the Enterprise
The right customer-contact employees performing tasks
well
job design
recruiting/selection
training motivation
evaluation/rewards
empowerment/teamwork
The right customers for the firm’s mission
fit well with product/processes/corporate goals
appreciate benefits and value offered
possess (or can be educated to have) needed skills (co-production)

firm is able to manage customer behavior
Slide 31
Managing the 7Ps Requires Collaboration between

Marketing, Operations, and HR Functions
Operations Marketing
Management Management
Customers
Human Resources
Management
Slide 32
Chapter 2
Consumer Behavior in
Service Encounters
Slide 33
Where Does the Customer Fit in a

Service Organization?
Consumers rarely involved in manufacture of goods but
often participate in service creation and delivery
Challenge for service marketers is to understand how
customers interact with service operations
Flowcharting clarifies how customer involvement in service

encounters varies with type of process -
People processing (e.g.., motel stay): customer is physically involved
throughout entire process
Possession processing (e.g.., DVD repair): involvement may be limited to
drop off of physical item/description of problem and subsequent pick up Mental
stimulus processing (e.g.., weather forecast): involvement is mental,
not physical; here customer simply receives output and acts on it Information
processing (e.g.., health insurance): involvement is mental specify
information upfront and later receive documentation of coverage
Slide 34
High-Contact and Low-Contact Services
High Contact Services

Customers visit service facility and remain throughout
service delivery
Active contact between customers and service personnel
Includes most people-processing services

Low Contact Services
Little or no physical contact with service personnel
Contact usually at arm’s length through electronic or
physical distribution channels
New technologies (e.g.. Web) help reduce contact
levels
Slide 35
Levels of Customer Contact with Service

Organizations
Slide 36
Managing Service Encounters--1
Service encounter: A period of time during which customers
interact directly with a service

Moments of truth: Defining points in service delivery where
customers interact with employees or equipment
Critical incidents: specific encounters that result in
especially satisfying/dissatisfying outcomes for either
customers or service employees
Slide 37
Managing Service Encounters--2
Service success often rests on performance of junior
contact personnel
Must train, coach, role model desired behavior
Thoughtless or badly behaved customers can cause
problems for service personnel (and other customers)
Must educate customers, clarify what is expected, manage
behavior
Slide 38
The Purchase Process for Services
Prepurchase Stage
Awareness of need
Information search
Evaluation of alternative service suppliers
Service Encounter Stage
Request service from chosen supplier
Service delivery
Postpurchase Stage
Evaluation of service performance
Future intentions
Slide 39
Perceived Risks in
Purchasing and Using Services
Functional – unsatisfactory performanceoutcomes
Financial – monetary loss, unexpected extra costs

Temporal – wasted time, delays lead to problems
Physical – personal injury, damage to possessions
Psychological – fears and negative emotions
Social – how others may think and react
Sensory – unwanted impacts to any of five senses
Slide 40
Factors that Influence

Customer Expectations of Services
Explicit & Implicit

Personal Needs ServicePromises
Word-of-Mouth
Desired Service Past Experience
Beliefs about
What IsPossible
ZONE
OF
TOLERANCE
PerceivedService
Alterations
AdequateService PredictedService
SituationalFactors
Source: Adapted from Zeithaml, Parasuraman & Berry
Slide 41
Components of Customer Expectations
Desired Service Level: wished-for level of service quality
that customer believes can and should be delivered

Adequate Service Level: minimum acceptable level of
service
Predicted Service Level: service level that customer

believes firm will actually deliver
Zone of Tolerance: range within which customers are

willing to accept variations in service delivery
Slide 42
Intangible Attributes, Variability, and Quality

Control Problems Make Services Hard to
Evaluate
Search attributes – Tangible characteristics that allow

customers to evaluate a product before purchase
Experience attributes – Characteristics that can be
experienced when actually using the service
Credence attributes – Characteristics that are difficult to
evaluate confidently even after consumption
Goods tend to be higher in search attributes, services tend
to be higher in experience and credence attributes
Credence attributes force customers to trust that desired
benefits have been delivered
Slide 43
How Product Attributes Affect

Ease of Evaluation
Most Goods Most Services
Easy Difficult
to evaluate to evaluate
Computerrepair
Education
Haircut
Clothing
Restaurant meals
Legal services
Complex surgery
Chair
Foods
Motor vehicle
Lawn fertilizer
Entertainment
High in search High in experience High incredence attributes
attributes attributes
Source: Adapted from Zeithaml
Slide 44
Customer Satisfaction is Central to the

Marketing Concept
Satisfaction defined as attitude-like judgment following a
service purchase or series of service interactions
Customers have expectations prior to consumption, observe
service performance, compare it to expectations
Satisfaction judgments are based on this comparison
Positive disconfirmation if better than expected
Confirmation if same as expected
Negative disconfirmation if worse than expected
Satisfaction reflects perceived service quality, price/quality

tradeoffs, personal and situational factors
Research shows links between customer satisfaction and a
firm’s financial performance
Slide 45
Customer Delight:
Going Beyond Satisfaction
Research shows that delight is a function of 3 components

Unexpectedly high levels of performance
Arousal (e.g.., surprise, excitement)
Positive affect (e.g.., pleasure, joy, or happiness)
Is it possible for customers to be delighted by very

mundane services?
Progressive Insurance has found ways to positively
surprise
customers with customer-friendly innovations and
extraordinary customer service
Slide 46
A Service Business is a System Comprising

Three Overlapping Subsystems
Service Operations (front stage and backstage)
Where inputs are processed and service elements
created.
Includes facilities, equipment, and personnel
Service Delivery (front stage)

Where “final assembly” of service elements takes place
and service is delivered to customers
Includes customer interactions with operations and other
customers
Service Marketing (front stage)
Includes service delivery (as above) and all other contacts
between service firm and customers
Slide 47
Service Marketing System:

(1) High Contact Service--e.g.., Hotel
Service Marketing System
Service Delivery System Other Contact Points
Advertising
Service Operations System Other
Customers Sales Calls
Interior & Exterior MarketResearch
Facilities Surveys
Technical Equipment The Billing / Statements

Core Customer Miscellaneous Mail,
Phone Calls, Faxes,etc.
Service People Random Exposure to
Facilities / Vehicles
Backstage Front Stage Other Chance Encounters

(invisible) (visible)
Customers with
Service Personnel Word of
Mouth
Slide 48
Service Marketing System:

(2) Low Contact Service--e.g.., Credit Card
Service Marketing System
Slide 49
Service as Theater
“ All the world’s a stage and all

the men and women merely
players. They have their exits
and their entrances and each
man in his time plays many
parts”
William Shakespeare
As You Like It
Slide 50
The Dramaturgy of Service Delivery
Service dramas unfold on a “stage”--settings may change as

performance unfolds
Many service dramas are tightly scripted, others improvised
Front-stage personnel are like members of a cast
Like actors, employees have roles, may wear special

costumes, speak required lines, behave in specific ways
Support comes from a backstage production team
Customers are the audience—depending on type of

performance, may be passive or active
Slide 51
Role and Script Theories
Role: A set of behavior patterns learned through experience

and communication
Role congruence: In service encounters, employees and

customers must act out defined roles for good outcomes
Script: A sequence of behavior to be followed by employees

and customers during service delivery
Some scripts (e.g.. teeth cleaning) are routinized, others flexible
Technology change may require a revised script
Managers should reexamine existing scripts to find ways to improve
delivery, increase productivity, enhance experiences
Slide 52
Chapter 3
Positioning Services in
Competitive Markets
Slide 53
Search for Competitive Advantage in Services

Requires Differentiation and Focus
Intensifying competition in service sector threatens
firms with no distinctive competence and
undifferentiated offerings
Slowing market growth in mature service industries means
that only way for a firm to grow is to take share from
competitors
Rather than attempting to compete in an entire market, firm
must focus efforts on those customers it can serve best
Must decide how many service offerings with what
distinctive (and desired) characteristics
Slide 54
Standing Apart from the Competition
A business must set itself apart from its competition.

To be successful it must identify and promote itself
as the best provider of attributes that are
important to target customers
GEORGE S. DAY
Slide 55
Basic Focus Strategies for Services
BREADTH OF SERVICE OFFERINGS
Narrow Wide
Unfocused
Many (Everything
Service
NUMBER foreveryone)
Focus ed
OFMARKETS
SERVED Few Fully Focused

Market
(Service and
Focus
marketfocused)
ed
Source: Robert Johnston
Slide 56
Four Principles of Positioning Strategy
1. Must establish position for firm or product in minds of

customers
2. Position should be distinctive, providing one simple,

consistent message
3. Position must set firm/product apart from competitors 4.

Firm cannot be all things to all people--must focus Jack
Trout
Slide 57
Uses of Positioning in
Marketing Management
Understand relationships between products and

markets compare to competition on specific attributes evaluate
product’s ability to meet consumer needs/expectations predict
demand at specific prices/performance levels
Identify market opportunities

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

competition distribution/service delivery pricing
communication
57
Slide 58
Possible Dimensions for Developing Positioning

Strategies
Product attributes
Price/quality relationships
Reference to competitors (usually shortcomings)

Usage occasions
User characteristics
Product class
Slide 59
Developing a
Market Positioning Strategy
- Size Define, Analyze
MARKET - Composition
ANALYSIS Market Segments
- Location
- Trends
Select
Target Segments
To Serve
INTERNAL - Resources
Marketing
- Reputation Articulate
ANALYSIS Desired Position Action
- Constraints
in Market Plan
- Values
Select Benefits
to Emphasize
to Customers
- Strengths
COMPETITIVE - Weaknesses Analyze
ANALYSIS - Current Possibilities for
Positioning Differentiation
Source: Adapted from Michael R. Pearce
Slide 60
Positioning of Hotels in Belleville:

Price vs. Service Level
Expensive
Grand
Regency
PALACE
Shangri-La
High Moderate
Service Service
Atlantic
Sheraton
Italia
Castle
Alexander IV
Airport Plaza
Less Expensive
Slide 61
Positioning of Hotels in Belleville:

Location vs. Physical Luxury
High Luxury
Regency
Grand
Shangri-La
Sheraton
PALACE
Financial Shopping District Inner
District and Convention Centre Suburbs
Castle Italia
Alexander IV
Atlantic
Airport Plaza
ModerateLuxury
Slide 62
Positioning after New Hotel Construction:

Price vs. Service Level
Expensive
Mandarin
New Grand Heritage
Mar iott
Continental
Ac tion?
Regency PALACE
Shangri-La
High Noaction? Moderate
Service Service
Atlantic
Sheraton
Italia
Castle
Alexander IV
Less Expensive Airport Plaza
Slide 63
Positioning after New Hotel Construction:

Location vs. Physical Luxury
High Luxury
Mandarin
New Grand
Continental Heritage
Mar iott Regency
Sheraton Shangri-La
Action?
PALACE
Financial No action? Shopping District Inner
District and Convention Centre Suburbs
Castle Italia
AlexanderIV
Atlantic
Airport Plaza
Moderate Luxury
Slide 64
Positioning Maps Help Managers to

Visualize Strategy
Positioning maps display relative performance of competing
firms on key attributes
Research provides inputs to development of positioning maps
Challenge is to ensure that attributes employed in maps are
important to target segments performance of individual firms on
each attribute accurately reflects perceptions of
customers in target segments Predictions can be made of
how positions may change in the light of new developments in
the future
Simple graphic representations are often easier for managers to
grasp than tables of data or paragraphs of prose
Charts and maps can facilitate a “visual awakening” to threats
and opportunities and suggest alternative strategic directions
Slide 65
Chapter 4
Creating the
Service Product
Slide 66
Key Steps in Service Planning:

Matching Opportunities to Resources
Must relate marketing opportunities to firm’s resources
(physical, financial, technological, human)
Identify, evaluate firm’s marketing assets
Customer portfolio/lifetime value (customer equity)
Market knowledge
Marketing implementation skill
Product line
Competitive positioning strategies
Brand reputation (brand equity)
Identify, evaluate firm’s operating assets
Physical facilities, equipment
Technology and systems (especially IT)
Human resources (numbers, skills, productivity)
Leverage through alliances and partnerships
Potential for customer self service
Cost structure
66
Slide 67
Slide 68
Understanding the
Components of the
Augmented Service
Product
Slide 69
Shostack’s Molecular Model of a Total Market

Entity - Passenger Airline Service
Distribution
Price
Vehicle
Service
frequency
Transport In-flight
service
Pre- and
post-flight Food
service and
drink
KEY
Tangible elements
Intangible elements
Mar
keting Positioning
(Weighted toward evidence) Source: Shostack
Slide 70
Core Products and Supplementary Services
Most firms offer customers a package of benefits:
core product (a good or a service) supplementary

services that add value to the core
In mature industries, core products often become
commodities
Supplementary services help to differentiate core products
and create competitive advantage by:

facilitating use of the core service
enhancing the value and appeal of the core
Slide 71
Core and Supplementary Product Design:

What Do We Offer and How Do We Create and Deliver
It?
Supplementary Delivery Concept

services offered For Core Product
and how created Scheduling Process
and delivered
Core
Service Customer
Level Role
Slide 72
What Should Be the Core and Supplementary

Elements of Our Service Product?
How is our core product defined and what supplementary
elements currently augment this core?
What product benefits create the most value for customers?
Is our service package differentiated from the competition in
ways that are meaningful to target customers?
What are current levels of service on the core product and
each of the supplementary elements?
Can we charge more for higher service levels on key
attributes (e.g.., faster response, better physical amenities,
easier access, more staff, superior caliber personnel)?
Alternatively, should we cut service levels and charge less?
Slide 73
Core and Supplementary Services in a Luxury Hotel

(Offering Guests Much More than a Cheap Motel!)
Reservation
Cashier Valet
Parking
Busi nesC
enter s Reception
A Bed fortheN
i ghtin an Baggage
Room
Servi ce El egantPri vateRo Servi ce
om with a
Bathroom
Wake-upC Coctai lB
all k
ar
Telephone Restaurant
Entertainment /S
ports/ Exercise
Slide 74
What Happens, When, and in What Sequence?

The Time Dimension in the Augmented Service Product
Reservation
Parking Get car
Check in Check out

USE ROOM Phone
USE GUESTROOMOVERNIGHT
Porter
Pay TV Roomservice
Meal
Pre Time Frame of an Overnight Hotel Stay

Visit (real-time service use)
Slide 75
The Flower of Service:

Categorizing Supplementary Services
Information
Payment Consultation
Core BillingOrder-
Taking
Exceptions Hospitality
KEY:
Facilitating elements Safekeeping
Enhancing elements
Slide 76
Facilitating Services - Information
Customers often require

information about how to
obtain and use a product or
Core service. They may also
need reminders and
documentation
Slide 77
Facilitating Services - Order-Taking
Many goods and services

must be ordered or reserved
in advance. Customers need
Core
to know what is available and
may want to secure
commitment to delivery
Slide 78
Facilitating Services - Billing
“How much do I owe

you?” Customers
deserve clear, accurate
Core
and intelligible bills and
statements
Slide 79
Facilitating Services - Payment
Customers may pay faster

and more cheerfully if you
make transactions simple
Core
and convenient for them
Slide 80
Enhancing Services - Consultation
Value can be added to

goods and services by
offering advice and
Core
consultation tailored to
each customer’s
needs and situation
Slide 81
Enhancing Services - Hospitality
Customers who invest time

and effort in visiting a
business and using its
Core
services deserve to be
treated as welcome guests
(after all, marketing invited
them there!)
Slide 82
Enhancing Services - Safekeeping
Customers prefer not to

worry about looking after
the personal possessions
Core
that they bring with them
to a service site.
They may also want
delivery and after-sales
services for goods that
they purchase or rent
Slide 83
Enhancing Services - Exceptions
Customers appreciate some

flexibility in a business
when they make special
Core requests. They expect it
when not everything goes
according to plan
Slide 84
Branding
Service Products
Slide 85
Service Branding:
Clarifying Distinctive Service Offerings
Marriott HotelBrands British AirwaysBrands

Marriott Hotels Intercontinental
Marriott Resorts First
Courtyard by Marriott Club World
Fairfield Inns World Traveller Plus
Residence Inns World Traveller
SpringHill Suites European
Club Europe
TownePlace Suites
Euro-Traveller
Marriott Vacation Clubs
UK Domestic
International
Shuttle
Slide 86
Sun Spectrum Support:

Sub-branding Highlights Four Service Levels
Sub-branding clarifies service levels offered at different fees

Platinum: “Mission Critical”
On-site service 24/7, two-hour response;
telephone support 24/7, onsite parts replacement;
additional services available
Gold: “Business Critical”
Onsite service Mon-Fri 8am-8pm, four-hour response;
telephone support 24/7; onsite parts replacement
Silver: “Basic Support”
Onsite service Mon-Fri 8am-5pm, four-hour response;
telephone support Mon-Fri 8am-8pm; onsite parts replacement
Bronze: “Self Support”
Phone support Mon-Fri 8am-5pm; parts replacement by courier
Branding a High-Tech, B2B Product Line:

A Family of Brands at Sun Microsystems
Corporate umbrella brand

Sun Microsystems
Product line brand (system support services)
Sun Spectrum Support
Sub-brands (4 levels of support service programs)
» Platinum
» Gold
» Silver
» Bronze
87
Slide 87
New Service
Development
Slide 88
New Service Development:

A Hierarchy of New Service Categories
Major service innovations--new core products for previously
undefined markets
Major process innovations--using new processes to
deliver existing products and offer extra benefits
Product line extensions--additions to current product lines
Process line extensions--alternative delivery procedures
Supplementary service innovations--adding new or

improved facilitating or enhancing elements
Style changes--visible changes in service design or scripts
Slide 89
New Service Development:

Physical Goods as Source of Service Ideas
Customers can rent goods—use and return for a fee—
instead of purchasing them
Customers can hire personnel to operate their own or
rented equipment
Any new durable product may create need for after-sales
services (possession processing)

Shipping
Installation
Problem-solving and consulting advice
Cleaning
Maintenance
Repair
Upgrading
Disposal
Slide 90
Creating Services as Substitutes for

Owning and/or Using Goods
Own a Physical Good Rent the Use
of a Physical Good
• Drive own car •Rent car and drive it

Perform the • Typeon own word • Rent word processor and
Work Oneself processor type
Hire Someone to • Hire chauffeur to drive car •• Hire a taxi or limousine

Do the Work
• Hiretypist to use •• Sendwork to
wordprocessor secretarialservice
Slide 91
Service Development through Delivery Options:

Alternative Meal Service Formats
F See sign Parkand enter Order meal, and pay P Fin C

a i d l
c ta e
s k ble a
t- an r
F d t
o eat a
u
o p
d
R
e m
s e
t a
a l
u Arrange to Stop car at
r meet order point
acaterer
Order via Get meal at
Driveaway,
n
microphon pickup,eat later
t e pay
(E
at See Driverrings Paydriver,Eat
sign doorbell take food
In)
Plan meal, Food and
paydeposit staff arrive
D Eat
ri
v
e- M
e
In
al
R is
e p
s re
t p
a ar
u e
r d
a a
n n
d
t se
( rv
T e
a d
k
e
O
u
t
Ho
me
De
liv
er
y
Ho
m
e
Ca
ter
in
g
Slide 92
Elements of a Hotel Offering:

Trading off Room Price vs. Features/Services
External building design
and features
Room features
Food-related services
Lounge facilities
Services (e.g.., reception)
Leisure facilities
Security—people/systems
Slide 93
Success Factors in New Service Development
Market synergy
Good fit between new product and firm’s image/resources
Advantage vs. competition in meeting customers’ needs
Strong support from firm during/after launch
Firm understands customer purchase decision behavior
Organizational factors
Strong interfunctional cooperation and coordination
Internal marketing to educate staff on new product and its
competition
Employees understand importance of new services to firm
Market research factors
Scientific studies conducted early in development process
Product concept well defined before undertaking field studies
Slide 94
Chapter 5
Communications Mix
for Services
Designing the
Slide 95
Advertising Implications for

Overcoming Intangibility
Problem Advertising Strategy

Generality
- objective claims Document physical system capacity
Cite past performance statistics
- subjective claims Present actual service delivery incident

Nonsearchability Present customer testimonials
Cite independently audited performance
Abstractness Display typical customers benefiting
Impalpability
Documentary of step-by-step process,
Case history of what firm did for customer
Narration of customer’s subjective experience

Source: Mittal and Baker
Slide 96
Other Communications Challenges

in Services Marketing
Facilitate customer involvement in production prepare
customers for service experience and demonstrate roles teach
customers about new technologies, new features
Help customers to evaluate service offerings
provide tangible or statistical clues to service performance
highlight quality of equipment and facilities emphasize
employee qualifications, experience, professionalism
Simulate or dampen demand to match capacity
provide information about timing of peak, off-peak periods
offer promotions to stimulate off-peak demand
Promote contribution of service personnel
help customers understand service encounter
highlight expertise and commitment of backstage personnel
Slide 97
Setting Clear Objectives: Checklist for

Marketing Communications Planning (“5 Ws”)
Who is our target audience?
What do we need to communicate and achieve?

How should we communicate this?
Where should we communicate this?
When do communications need to take place?
Slide 98
Common Educational and Promotional

Objectives in Service Settings
Create memorable images of specific companies and
their brands
Build awareness/interest for unfamiliar service/brand
Build preference by communicating brand strengths and

benefits
Compare service with competitors’ offerings and counter

their claims
Reposition service relative to competition
Stimulate demand in off-peak and discourage during peak
Slide 99
Educational and Promotional Objectives (cont.)
Encourage trial by offering promotional incentives

Reduce uncertainty/perceived risk by providing useful info
and advice
Provide reassurance (e.g.., promote service guarantees)

Familiarize customers with service processes before use
Teach customers how to use a service to best advantage
Recognize and reward valued customers and employees
Slide 100
Marketing Communications Mix for Services
Key: * Denotes communications originating from outside the organization
Slide 101
Originating Sources of Messages Received by a

Target Audience
A
U
D
I
E
N
C
E
within the organization

Front-line staff
Serviceoutlets
Advertising
Salespromotions
Directmarketing
Personalselling
Publicrelations
Word of mouth
Messages originating Mediaeditorial
Messages originating
outside the organization

Slide 102
What is Brand Equity and Why Does It Matter?

(From Berry, “Cultivating Brand Equity”)
Definition: A set of assets and liabilities linked to a brand’s
name and symbol that adds to (or subtracts from) the
perceived value of the product
Insights
Brand equity can be positive or negative
Positive brand equity creates marketing advantage for
firm plus value for customer
Perceived value generates preference and loyalty
Management of brand equity involves investment to
create and enhance assets, remove liabilities
Slide 103
A Service Branding Model:

How Communications + Experience Create Brand Equity
Marketer-controlled communications
Firm’s PresentedBrand Awarenessof

(Sales, Advertising, PR) Firm’s Brand
Uncontrolled brand communications
What Media, Intermediaries, Firm’s

Brand Equity
Word-of-Mouth Say re: Firm
Customer’s Experience Meaning Attached

with Firm To Firm’s Brand
Source: Adapted from L. L. Berry ( Fig. 1)
Slide 104
Marketing Communication and the Internet (1)
International in Scope
Accessible from almost anywhere in the world
Simplest form of international market entry
Internet Applications
Promote consumer awareness and interest
Provide information and consultation
Facilitate 2-way communications through e-mail and chat rooms
Stimulate product trial
Enable customers to place orders
Measure effectiveness of specific advertising/promotional
campaigns
Slide 105
Marketing Communications and the Internet (2)
Web Site design considerations

Memorable address that is actively promoted
Relevant, up-to-date content (text, graphics, photos)
Contain information that target users will perceive as
useful/interesting
Easy navigation
Fast download
Internet advertising
Banners and buttons on portals and other websites seek to draw
online traffic to own site
Limits to effectiveness—exposure (“eyeballs”) may not lead to
increases in awareness/preference/sales
Hence, advertising contracts may tie fees to marketing relevant
behavior (e.g.., giving personal info or making purchase)
Slide 106
Chapter 6
Pricing and Revenue
Management
Slide 107
What Makes Service Pricing Strategy Different

(and Difficult)?
No ownership of services--hard for firms to calculate
financial costs of creating an intangible performance
Variability of inputs and outputs--how can firms define a
“unit of service” and establish basis for pricing?
Many services hard for customers to evaluate--what
are they getting in return for their money?
Importance of time factor--same service may have more
value to customers when delivered faster
Delivery through physical or electronic channels--may
create differences in perceived value
Slide 108
Objectives of Pricing Strategies
Revenue and profit objectives

Seek profit
Cover costs
Patronage and user base-related objectives
Build demand
Build a user base
Slide 109
The Pricing Tripod
Costs Pricing Strategy

Value to customer
Competition
Slide 110
Three Main Approaches to Pricing
Cost-Based Pricing
Set prices relative to financial costs
(problem: defining costs)
Competition-Based Pricing
Monitor competitors’ pricing strategy
(especially if service lacks differentiation)
Who is the price leader? (one firm sets the pace)
Value-Based
Relate price to value perceived by customer
Slide 111
Activity-Based Costing: Relating Activities to the

Resources They Consume
Managers need to see costs as an integral part of a firm’s
effort to create value for customers
When looking at prices, customers care about value to
themselves, not what production costs the firm
Traditional cost accounting emphasizes expense
categories, with arbitrary allocation of overheads
ABC management systems examine activities needed to
create and deliver service (do they add value?)
Must link resource expenses
to: variety of products
produced complexity of
products
demands made by individual customers
Slide 112
Net Value = (Benefits – Outlays)
Slide 113
Enhancing Gross Value
Pricing Strategies to Reduce Uncertainty

service guarantees
benefit-driven (pricing that aspect of service that creates value)
flat rate (quoting a fixed price in advance)
Relationship Pricing non-price

incentives discounts for volume
purchases discounts for purchasing
multiple services
Low-cost Leadership
Convince customers not to equate price with quality
Must keep economic costs low to ensure profitability at low price
Slide 114
Paying for Service:

The Customer’s Perspective
Customer “expenditures” on service comprise both
financial and non-financial outlays
Financial costs:
price of purchasing service
expenses associated with search, purchase activity, usage
Time expenditures
Physical effort (e.g.., fatigue, discomfort)
Psychological burdens (mental effort, negative feelings)
Negative sensory burdens (unpleasant sensations affecting any of
the five senses)
Slide 115
Slide 116
Trading off Monetary and Non- Monetary Costs
Which clinic would you patronize if you needed a chest x-

ray (assuming all three clinics offer good quality)?
Clinic A Clinic C
Clinic B
 Price $45
 Price $85

 Price $125
Lo
 Located next to
cat
your office or
ed
college
1
 Next appointment
ho
is in 1 day
ur
 Hours: Mo –Sat,
aw
8am – 10pm
ay
  By appointment -
Lo estimated wait at
cat clinic is about 0 to
ed 15 minutes
15
mi
n
by
car
or
tra
nsi
t
aw
ay
by
car
or
 Next
available
transit
appoint
ment is
in 3 
Next
availabl
e
weeks
appoint
ment is
in 1 
Hours:
Monday –
week
Friday, 9am
– 5pm 
Hours:
Monday –

Est
im
ate
d
wai
t at
Fri
da
y,
8a
m
–
Slide 117
10
pm
clin
ic
is
abo
ut
2

Est
ima
ted
wai
t at
ho
urs
clin
ic
is
abo
ut
30 -
minut
Slide 118
Increasing Net Value by Reducing Non-

financial Costs of Service
Reduce time costs of service at each stage
Minimize unwanted psychological costs of service
Eliminate unwanted physical costs of service
Decrease unpleasant sensory costs of service
Slide 119
Revenue Management: Maximizing Revenue

from Available Capacity at a Given Time
Based on price customization - charging different customers
(value segments) different prices for same product
Useful in dynamic markets where demand can be divided
into different price buckets according to price sensitivity
Requires rate fences to prevent customers in one value
segment from purchasing more cheaply than willing to pay
RM uses mathematical models to examine historical data
and real time information to determine what prices

to charge within each price bucket how many
service units) to allocate to each bucket
Slide 120
The Strategic Levers of

Revenue (Yield) Management
Price
Fixed Variable
Predictable Quadrant 1: Quadrant 2:

Movies Hotel Rooms
Stadiums/Arenas Function Airline Seats Rental
Space Cars
noitaru D
Cruise Lines
Quadrant 3: Quadrant 4:
Unpredictable Restaurants Continuing Care
Golf Courses Hospitals
Slide 121
Dealing with Common Customer Conflicts

Arising from Revenue Management
Customer conflict can arise from: Marketing tools to reduce

customer conflicts:
 Perceived Unfairness & Perceived  Fenced Pricing
Financial Risk Associated with  Bundling
Multi-Tier Pricing and Selective  Categorising

InventoryAvailability  High PublishedPrice
 Unfulfilled Inventory Commitment  Well designed Customer Recovery
Programme for Over sale
 Unfulfilled Demand of Regular  Preferred AvailabilityPolicies
Customers
 Unfulfilled Price Expectation of  Offer Lower Displacement Cost
Group Customers Alternatives
 Change in the Nature of the  Physical Segregation & Perceptible
Service Extra Service
 Set Optimal Capacity Utilisation Level
Slide 122
Price Elasticity
Price per D
unit of D
i
service e
De
D
i
Quantity of Units Demanded
De : Demand is price elastic. Small changes in price lead to big changes in demand.
Di : Demand for service is price inelastic. Big changes have little impact on demand.
Slide 123
Key Categories of Rate Fences
Rate Fences Examples

Physical (Product-related) Fences
Class of travel (Business/Economy class)
Basic Product Size and furnishing of a hotelroom
Seat location in a theatre
Amenities Free breakfast at a hotel, airport pick upetc.

Free golf cart at a golfcourse
Service Level
Priority waitlisting
Increase in baggageallowances
Dedicated servicehotlines
Dedicated account managementteam
Slide 124
Non Physical Fences

Transaction Characteristics
Time of booking or Requirements for advance purchase
reservation Must pay full fare two weeks before departure
Location of booking or Passengers booking air tickets for an reservation

identical route in different countries are charged different prices
Flexibility of ticket Fees/penalties for canceling or changing a

usage reservation (up to loss of entire ticket price)
Non refundable reservationfees
Slide 125
Non Physical Fences (cont’d)

Consumption Characteristics
Time or durationof Early bird special in restaurant before 6pm use
Must stay over on Sat for airline,hotel
Must stay at least fivedays
Location of Price depends on departure location, esp. in

consumption international travel
Prices vary by location (between cities,city
center versus edges of city)
Slide 126
Non Physical Fences (cont’d)

Buyer Characteristics
Frequency or volume Member of certain loyalty-tier with the firm get of
consumption priority pricing, discounts or loyaltybenefits
Group membership Child, Affiliation with student, senior certain groups

citizendiscounts(e.g..Alumni)
Group discounts based on size of group

Size of customer
group
Slide 127
Relating Price Buckets and Fences to the

Demand Curve
Priceper One-
Seat Week
First Class
Full Fare Economy (No Restrictions)
One-Week Advance Purchase
Capacity Capacity
of 1st-class of Aircraft
Cabin
Advance Purchase, Saturday NightStayover
3-Week Advance Purchase, Saturday NightStayover
3-Week Adv. Prchs, Sat. Night Stay., $100 for Changes
3-Wk Adv. Prchs, Sat. Night Stay, Nochanges/refunds
Late Sales through Consolidators/
Internet, norefunds
No. of Seats Demanded

Slide 128
Ethical Concerns in Pricing
Customers are vulnerable when service is hard to evaluate

or they don’t observe work
Many services have complex pricing schedules
hard to understand
difficult to calculate full costs in advance of service
Unfairness and misrepresentation in price
promotions misleading advertising hidden charges
Too many rules and regulations
customers feel constrained, exploited
customers unfairly penalized when plans change
Slide 129
Pricing Issues:
Putting Strategy into Practice
How much to charge?
What basis for pricing?
Who should collect payment?
Where should payment be made?
When should payment be made?
How should payment be made?
How to communicate prices?

Slide 130
Consumption follows the Timing of Payments
Health ClubVisits
Annual Payment Plan Quarterly Payment Plan
Frequency of
Semiannual Payment Plan Monthly Payment Plan

Health ClubVisits
Frequency of
Time Line Time Line

Source: John Gourville and Dilip Soman, “Pricing and the Psychology of Consumption,”
Harvard Business Review, September 2002,90-96.
Slide 131
Chapter 7
Distributing Services
Slide 132
Applying the Flow Model of Distribution to

Services
Distribution embraced three interrelated elements
Information and promotion flow

Negotiation flow
Product flow
Slide 133
Information and Physical Processes of the

Augmented Service Product
Information
Payment Consultation
Order-
Billing Core
Taking
Safekeeping
Physical
Processes
Information
Processes
Slide 134
Using Websites for Service Delivery
Information
Read brochure/FAQ; get schedules/
directions; check prices
Core
PaymentConsultation
Pay by bank card Conduct e-mail dialog Direct debit Use
expert systems
BillingOrder-Taking
Receive bill Make/confirm reservations
Make auction bid Submit applications
Check account statusOrder goods, check status
Make special requests
Resolve problems Record preferences Safekeeping
Track package movements
Check repair status
CORE: Use Web to deliver information-based core services

Slide 135
Options for Service Delivery
There are 3 types of interactions between customers and

service firms
Customer goes to the service provider (or intermediary)

Service provider goes to the customer
Interaction at arm’s length (via the Internet, telephone, fax,
mail, etc.)
Slide 136
Method of Service Delivery
Availability of Service Outlets

Nature of Interaction Single Site Multiple Sites
between Customer and Service Organization
Customer goes to service Theater Busservice
organization
Barbershop Fast-food chain
Service organization goes Housepainting
Maildelivery to customer
Mobile car wash Auto club road service
Customer and service Credit cardcompany Broadcast network organization

transact at
arm’s length Local TV station Telephone company
Slide 137
Place vs. Cyberspace
Place - customers and Required for people processing

services
suppliers meet in a physical
environmentOffers live experiences, social
interaction, e.g.., food services
More emphasis on eye-catching

servicescape, entertainment
Cyberspace - customers Ideal for info-based

and suppliers do
services business Saves time
electronically in virtual Facilitates information
gathering environment created by
phone/internet linkagesMay to deliver use express physicallogistics
core service
products
Slide 138
“24/7” - Factors Encouraging

Extended Operating Hours
Economic pressure from

consumers
Changes in legislation
Economic incentives to
improve asset utilization
Availability of employees
to work nights, weekends
Automated self-service
Slide 139
Technology Revolutionizes Service Delivery:

Some Examples
Smart mobile telephones to link users to Internet
Voice recognition software
Automated kiosks for self-service (e.g.. bank
ATMs) Web sites provide information
take orders and accept payment
deliver information-based services
Smart cards that can act as “electronic wallets”
Slide 140
E-Commerce:
Factors that Attract Customers to Virtual Stores
Convenience (24-hour availability, save time, effort)
Ease of obtaining information on-line and searching for

desired items
Better prices than in bricks-and-mortar stores
Broad selection
Slide 141
Splitting Responsibilities for Delivering

Supplementary Services
As created by As enhanced As experienced originating firm by
distributor by customer
Core + = Core
Slide 142
Franchising
Franchising is a fast growth strategy, when
Resources are limited

Long-term commitment of store managers is crucial
Local knowledge is important
Fast growth is necessary to pre-empt competition
Slide 143
Service Process and Market Entry
People ProcessingServices
Export the service concept
Import customers
Transport customers to new locations
Possession Processing Services

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

Export the service to a local service factory
Import customers
Export the information via telecommunications and transform it
locally
Slide 144
Barriers to International Trade in Services
Operating successfully in international markets remains

difficult for certain services despite efforts of the WTO and
control relaxations
Barriers include
Refusal by immigration offices to issue work permits
Heavy taxes on foreign firms
Domestic preference policies
Legal restrictions
Lack of broadly-agreed accounting standards
Cultural differences (esp. for entertainment industry)
Slide 145
Forces for Internationalization
Market
drivers
Competition drivers
Technology drivers
Cost drivers
Government drivers
Impact will vary by service
type (people, possessions,
information)
Slide 146
Modes of Internationalization
Export information -based services

transmit via electronic channels
store in physical media, ship as merchandise
Use third parties to market/deliver service concept
licensing agents
brokers
franchising
alliance partners
minority joint ventures
Control service enterprise abroad
direct investment in new business
buyout of existing business
Slide 147
Impact of Globalization Drivers on Different

Service Categories
Globalization People Possession Information
Drivers Processing Processing Based
CompetitionSimultaneity of production and Technologyglobalization of drives

Highly vulnerable to global dominance by
consumption limits competitors with competitors with leverage
of foreign technical edge. monopoly or competitive advantage,
competitive
but management advantage in systems can be information.
globalized
Market People differ Level of economic Demand for many

economically and developments services is derived to culturally, so
needs for impacts demand for a significant degree service and ability
to services to from economic and pay may vary. individually owned
educational levels.
goods
Slide 148
Impact of Globalization Drivers on Different

Service Categories
Globalization People Possession Information

Drivers Processing Processing Based
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 ownership and
familiarity possessions requiring terminals may be a with technology.
service and the cost function of
trade-offs in labor investment in substitution
computerization etc.
Cost Variable labor rates may Variable labor rates Major cost elements impact on pricing
in may favor low-cost can be centralized & labor-sensitive services.
locations. minor cost elements
localized.
Government Social policies (e.g.., Policies may Policies may impact

health) vary widely and decrease/increase demand and supply
may affect labor cost etc. cost & and distort pricing
encourage/discourage
certain activities
Slide 149
Chapter 8
Designing and Managing
Service Processes
Slide 150
Developing a Blueprint – Some Basic Advice
Identify key activities in creating and

delivering the service
Distinguish between front stage (what
customers experience) and back stage
Chart activities in sequence
Show how interactions between customers
and employees are supported by backstage
activities and systems
Establish service standards for each step
Identify potential fail points
Focus initially on “big picture” (later, can drill
down for more detail in specific areas)
Slide 151
Service Blueprinting: Key Components
1. Define standards for frontstage activities

2. Specify physical evidence
3. Identify principal customer actions
4. ------------line of interaction (customers and front stage personnel)--------
5. Front stage actions by customer-contact personnel
6. ------------line of visibility (between front stage and backstage)--------------
7. Backstage actions by customer contact personnel
8. Support processes involving other service personnel
9. Support processes involving IT
Where appropriate, show fail points and risk of excessive waits
Slide 152
Slide 153
Improving Reliability of Processes

by Failure Proofing
Analysis of reasons for failure often reveals opportunities

for failure proofing to reduce/eliminate risk of errors
Errors include:
treatment errors—human failures during contact with customers
tangible errors—failures in physical elements of service
Fail-safe procedures include measures to prevent
omission of tasks or performance of tasks incorrectly in wrong
order too slowly not needed or specified
Need fail-safe methods for both employees and customers
Slide 154
Process Redesign: Principal Approaches
Eliminating non-value-adding steps

Shifting to self-service
Delivering direct service
Bundling services
Redesigning physical aspects of service processes
Slide 155
Customers as Co-Producers:
Levels of Participation in Service Production
Low – Employees and systems do all the work

Medium – Customer inputs required to assist provider
Provide needed information, instructions
Make personal effort
May share physical possessions
High – Customer works actively with provider to
co-produce the service
Slide 156
Self Service Technologies (SSTs)
Self-service is ultimate form of customer involvement in

service production
Customers undertake specific activities using facilities or systems
provided by service supplier
Customer’s time and effort replace those of employees
Concept is not new—self-serve supermarkets date from
1930s, ATMs and self-serve gas pumps from 1970s
Today, customers face wide array of SSTs to deliver
information-based services, both core and supplementary
Many companies seek to divert customers from employee
contact to Internet-based self-service
Slide 157
Service Firms as Teachers:

Well-trained Customers Perform Better
Firms must teach customers roles

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

help advise, assist customers
Slide 158
Managing Customers as Partial Employees

to Increase Productivity and Quality
1. Analyze customers’ present roles in the business and

compare to management’s ideal
2. Determine if customers know how to perform and have

necessary skills
3. Motivate customers by ensuring that will be rewarded for

performing well
4. Regularly appraise customers’ performance; if

unsatisfactory, consider changing roles or termination
Slide 159
The Problem of Customer Misbehavior –

Identifying and Managing “Jaycustomers”
What is a jaycustomer?
A customer who behaves in a thoughtless or abusive
fashion, causing problems for the firm itself, employees,
other customers
Why do jaycustomers matter?
Can disrupt processes
Affect service quality
May spoil experience of other customers
What should a firm do about them?
Try to avoid attracting potentialjaycustomers Institute
preventive measures
Control abusive behavior quickly
Take legal action against abusers
BUT firm must act in ways that don’t alienate other
customers
Slide 160
Six Types of “Jaycustomer”

Thief – seeks to avoid paying for service
Rule breaker – ignores rules of social behavior and/or procedures for
safe, efficient use of service

Belligerent – angrily abuses service personnel (and sometimes other
customers) physically and/or emotionally
Family Feuders – fight with other customers in their party
Vandal – deliberately damages physical facilities, furnishings, and
equipment
Deadbeat – fails to pay bills on time
Can you think of others?
How should firms deal with each of these problems?
Slide 161
Chapter 9
Balancing Demand
and Capacity
Slide 162
Relating Demand to Capacity:

Four Key Concepts
Excess demand: too much demand relative to capacity at a
given time
Excess capacity: too much capacity relative to demand at a

given time
Maximum capacity: upper limit to a firm’s ability to meet
demand at a given time
Optimum capacity: point beyond which service quality
declines as more customers are serviced
Slide 163
Variations in Demand Relative to Capacity

(Fig. 9-1)
VOLUME DEMANDED
Demand exceeds capacity
(business is lost)
CAPACITY UTILIZED
MaximumAvailable Demand exceeds

Capacity optimum capacity
(quality declines)
Optimum Capacity
(Demand and Supply
Well Balanced
Excess capacity
Low Utilization (wasted resources)
(May Send Bad Signals)
TIME CYCLE 1 TIME CYCLE 2

Slide 164
Defining Productive Capacity

in Services
Physical facilities to contain customers
Physical facilities to store or process goods

Physical equipment to process people, possessions, or
information
Labor used for physical or mental work
Public/private infrastructure—e.g., highways, airports,
electricity
Slide 165
Alternative Capacity Management Strategies
Level capacity (fixed level at all times)

Stretch and shrink
offer inferior extra capacity at peaks (e.g.. bus/metro standees)
vary seated space per customer (e.g.. elbow room, leg room)
extend/cut hours of service
Chase demand (adjust capacity to match
demand) schedule downtime in low demand periods
use part-time employees rent or share extra facilities and
equipment cross-train employees
Flexible Capacity (vary mix by segment)
Slide 166
Predictable Demand Patterns and

Their Underlying Causes
Predictable Cycles Underlying Causes of

of Demand Levels Cyclical Variations
day employment
week billing or tax
month payments/refunds
year
pay days
other
school hours/holidays
seasonal climate changes
public/religious holidays
natural cycles (e.g..
coastal tides)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 16 6
Slide 167
Causes of Seemingly Random Changes in

Demand Levels
Weather
Health problems
Accidents, Fires, Crime
Natural disasters
Question: which of these
events can be predicted?
Slide 168
Alternative Demand Management Strategies
Take no action
let customers sort it out
Reduce demand
higher prices
communication promoting alternative times
Increase demand
lower prices
communication, including promotional incentives
vary product features to increase desirability
more convenient delivery times and places
Inventory demand by reservation system
Inventory demand by formalized queueing
Slide 169
Hotel Room Demand Curves by Segment

and by Season
Price per
Room Night
Bl B
B= h business travelers in high
Th h season
Bl = business travelers in low
Tl season
T
B h
B h Tl
l
Th = tourist in high season
T = tourist in low season
Quantity of Rooms Demanded at Each Price by Travelers in Each Segment

in Each Season Note: hypothetical example
Slide 170
Avoiding Burdensome Waits for Customers
Add extra capacity so that demand can be met at most

times (problem: may add too many costs)
Rethink design of queuing system to give priority to certain

customers or transactions
Redesign processes to shorten transaction time

Manage customer behavior and perceptions of wait
Install a reservations system
Slide 171
Alternative Queuing Configurations

Single line, single server, single stage
Single line, single servers at sequential stages
Parallel lines to multiple servers
Designated lines to designated servers
Single line to multiple servers (“snake”)
“Take a number” (single or multiple servers)
Slide 172
Tailoring Queuing Systems to Market Segments:

Criteria for Allocation to Designated Lines
Urgency of job
emergencies vs. non-emergencies

Duration of service transaction
number of items to transact
complexity of task
Payment of premium price
First class vs. economy
Importance of customer
frequent users/loyal customers vs. others
Slide 173
Ten Propositions on the Psychology of Waiting

Lines
1. Unoccupied time feels longer
2. Preprocess/postprocess waiting feel longer than
inprocess
3. Anxiety makes waiting seem longer
4. Uncertain waiting is longer than known, finite waiting
5. Unexplained waiting seems longer
6. Unfair waiting is longer than equitable waiting
7. People will wait longer for more valuable services
8. Waiting alone feels longer than in groups
9. Physically uncomfortable waiting feels longer
10. Waiting seems longer to new or occasional users
Sources: Maister; Davis & Heineke; Jones & Peppiatt
Slide 174
Benefits of Effective Reservations Systems
Controls and smoothes demand
Pre-sells service
Informs and educates customers in advance of arrival
Customers avoid waiting in line for service (if service times

are honored)
Data capture helps organizations prepare financial

projections
Slide 175
Characteristics of Well-designed Reservations

Systems
Fast and user friendly for customers and staff

Can answer customer questions
Offers options for self service (e.g.. Web)
Accommodates preferences (e.g.., room with view)
Deflects demand from unavailable first choices to
alternative times and locations
Includes strategies for no-shows and
overbooking requiring deposits to discourage no-
shows canceling unpaid bookings after designated time
compensating victims of over-booking
Slide 176
Setting Capacity Allocation Sales Targets for a

Hotel by Segment and Time Period
Capacity (% rooms) (Low Season) (High Season)
100%
Out of commission for renovation Executive service guests
Executive service
guests
Transient guests
Weekend
package
50% W/E
package
Transient guests
Groups and conventions
Groups (no conventions)
Airline contracts Airline contracts
Nights: M Tu W Th F S Sn TimM Tu W Th F S Sn
e
Wee
k7 Week 36
Slide 177
Information Needed for Demand and

Capacity Management Strategies
Historical data on demand level and composition, noting
responses to marketing variables
Demand forecasts by segment under specified conditions
Fixed and variable cost data, profitability of incremental
sales
Site-by-site demand variations
Customer attitudes towards queuing
Customer evaluations of quality at different levels of
capacity utilization
Slide 178
Chapter 10
Planning the
Service Environment
Slide 179
The Purpose of Service Environments
The service environment influences buyer behaviour in 3 ways

Message-creating Medium: symbolic cues to communicate the
distinctive nature and quality of the service experience.
Attention-creating Medium: to make the servicescape stand out
from other competing establishments, and to attract
customers from target segments.
Effect-creating Medium: colors, textures, sounds, scents and
spatial design to enhance the desired service experience, and/or
to heighten an appetite for certain goods, services or
experiences
Helps the firm to create a distinctive image & positioning that

is unique.
Slide 180
Comparison of Hotel Lobbies
The servicescape is part of the value proposition!
Orbit Hotel and Hostel, Los Angeles
Four Seasons Hotel, New York
Slide 181
The Mehrabian-Russell Stimulus-Response

Model
Response
Environmental Dimensions of Behaviors:
Stimuli & Affect:Approach/
Processes
Cognitive Pleasure and Avoidance & ArousalCognitive
Processes
Slide 182
The Mehrabian-Russell Stimulus-Response

Model
Simple and fundamental model of how people respond to
environments
Peoples’ conscious and unconscious perceptions and
interpretation of the environment influence how they feel
in that environment
Feelings, rather than perceptions or thoughts drive behavior
Typical outcome variable is ‘approach’ or ‘avoidance’ of an
environment, but other possible outcomes can be added to
the model as well
Slide 183
The Russell Model of Affect
Arousing
Distressing
Exciting
Unpleasant Pleasant
Relaxing
Boring
Sleepy
Slide 184
The Russell Model of Affect
Emotional responses to environments can be described

along two main dimensions, pleasure and arousal.
Pleasure is subjective depending on how much the

individual likes or dislikes the environment
Arousal quality of an environment is dependent on its

“information load”, i.e., its degree of
Novelty (unexpected, surprising, new, familiar) and
Complexity (number of elements, extent of motion or change)
Slide 185
Drivers of Affect
Affect can be caused by perceptions and cognitive
processes of any degree of complexity.
Simple Cognitive Processes, Perception of
Stimuli tangible cues (of service quality)
consumer satisfaction
Complex Cognitive Processes affective
charged schemata processing
attribution processes
The more complex a cognitive process becomes, the more powerful
its potential impact on affect.However, most service encounters are
routine. Simple processes can determine affect.
Slide 186
Behavioral Consequence of Affect
Basically, pleasant environments result in approach, and

unpleasant environments result in avoidance
Arousal acts as an amplifier of the basic effect of pleasure

on behaviour
If the environment is pleasant, increasing arousal can lead

to excitement and stronger positive consumer response. If
the environment is unpleasant, increasing arousal level
will move consumers into the Distressing region
Feelings during the service encounter is also an important

driver of customer loyalty
Slide 187
Slide 188
An Integrated Framework – Bitner’s

ServiceScape Model(cont.)
Identifies the main dimensions in a service environment
and views them holistically
Customer and employee responses classified under,

cognitive, emotional and psychological which would in
turn lead to overt behavior towards the environment
Key to effective design is how well each individual

dimension fits together with everything else
Slide 189
Dimensions of the Service Environment
Service environments are complex and have many design

elements. The main dimensions in the servicescape
model includes:
Ambient Conditions
Music (e.g., fast tempo and high volume increase arousal
levels)
Scent (strong impact on mood, affect and evaluative

responses, purchase intention and in-store behavior)
Color (e.g., warm colors associated with elated mood states

and arousal but also increase anxiety, cool colors reduce
arousal but can elicit peacefulness and calm)
Slide 190
Dimensions of the Service Environment (cont.)
Spatial Layout and Functionality

Layout refers to size and shape of furnishings and the ways it is
arranged
Functionality is the ability of those items to facilitate
performance
Signs, Symbols and Artifact
Explicit or implicit signals to communicate the firm’s image, help
consumers find their way and to convey the rules of behavior
Slide 191
Impact of Music on Restaurant Diners
Restaurant Fast-beat Slow-beat Difference between

Patron Music Music Slow and Fast-beat
Behavior Environment Environment Environments
Absolute %
Difference Difference
Consumer time 45min 56min +11min +24%
spent at table
Spendingon $55.12 $55.81 +$0.69 +1% food

Spendingon $21.62 $30.47 +$8.85 +41% beverages
Total spending $76.74 $86.28 +$9.54 +12%
Estimated $48.62 $55.82 +$7.20 +15% gross margin
Slide 192
The Effects of Scents on the Perceptions of

Store Environments
Evaluation Unscented Scented Difference
Environment Environment
Mean Ratings Mean Ratings
Store Evaluation
Negative/positive 4.65 5.24 +0.59 Outdated/modern
3.76 4.72 +0.96
Store Environment
Unattractive/attracti 4.12 4.98 +0.86 ve
Drab/colorful 3.63 4.72 +1.09
Boring/Stimulating 3.75 4.40 +0.65
Slide 193
The Effects of Scents on the Perceptions of

Store Environments
Evaluation Unscented Scented Difference

Environment Environment
Mean Ratings Mean Ratings
Merchandise
Outdated/up- to-date 4.71 5.43 +0.72 style
Inadequate/adequate 3.80 4.65 +0.85
Low/high quality 4.81 5.48 +0.67 Low/high price 5.20

4.93 -0.27
Slide 194
Aromatherapy: The Effects of Fragrance on

People
Fragrance Aromath Aromather Tradition Potential Psychological

erapy apy Class al Use Impact on People
Orange Citrus Calming Soothing Calming and relaxing

agent, effect esp. for nervous
astringen people t
Lavender Herbaceo Calming, Muscle Relaxing and calming,
us balancing, relaxant, helps create a homey
and soothing soothing comfortable feel agent
Jasmine Floral Uplifting, Emollient Helps makes people
feel balancing soothing refreshed, joyful,
agent comfortable
Peppermint Minty Energizing, Skin Increase attentionlevel

stimulating cleanser and boosts energy
Slide 195
Common Associations and Human Responses

to Colors
Color Degree of Nature Common Association and
Warmth Symbol Human Responses to Color
Red Warm Earth High energy and passion; can

excite, stimulate, and increase
arousal and blood pressures
Orange Warmest Sunset Emotions,
expressions, and warmth
Green Cool Grass Nurturing, healingand and unconditional love

Trees
Blue Coolest Sky and Relaxation, serenity and loyalty
Ocean
Slide 196
Selection of Environmental Design Elements
There is a multitude of research on the perception and

impact of environmental stimuli on behaviour, including:
People density, crowding
Lighting
Sound/noise
Scents and odours
Queues
No standard formula to designing the perfect combination of
these elements.
Design from the customer’s perspective
Design with a holistic view!
Slide 197
Tools to Guide in Servicescape Design
Keen Observation of Customers’ Behavior and

Responses to the service environment by management,
supervisors, branch managers, and frontline staff
Feedback and Ideas from Frontline Staff and
Customers using a broad array of research tools
ranging from suggestion boxes to focus groups and
surveys.
Field Experiments can be used to manipulate specific

dimensions in an environment and the effects observed.
Blueprinting or Service Mapping - extended to include the

physical evidence in the environment.
Slide 198
Chapter 11
Managing People
for Service Advantage
Slide 199
Frontline Service Personnel: Source of

Customer Loyalty and Competitive Advantage
Frontline is an important source of differentiation and
competitive advantage. It is:
a core part of the
product the service firm
the brand
Frontline also drives customer loyalty, with employees

playing key role in anticipating customer needs,
customizing service delivery and building personalized
relationships
Slide 200
Boundary Spanning Roles
Boundary spanners link the inside of the organization to the

outside world
Multiplicity of roles often results in service staff having to
pursue both operational and marketing goals
Consider management expectations of restaurant servers:

deliver a highly satisfying dining experience to their customers
be fast and efficient at executing operational task of serving

customers
do selling and cross selling, e.g.. “We have some nice desserts to
follow your main course”
Slide 201
Role Stress in the Frontline
3 main causes of role stress:

Person vs. Role: Conflicts between what jobs require and
employee’s own personality and beliefs
Organization vs. Customer: Dilemma whether to follow

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

demand service staff intervention
Slide 202
Emotional Labor
“The act of expressing socially desired emotions during

service transactions” (Hochschild, The Managed Heart)
Three approaches used by

employees surface acting deep acting
spontaneous response
Performing emotional labor in response to society’s or

management’s display rules can be stressful
Good HR practice emphasizes selective recruitment,

training, counseling, strategies to alleviate stress
Slide 203
The Cycles of Failure, Mediocrity and Success
Too many managers make short-sighted assumptions about

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

Costs of constant recruiting, hiring & training
Lower productivity & lower sales of new workers
Costs of disruptions to a service while a job remains unfilled
Loss of departing person’s knowledge of business and customers
Cost of dissatisfied customers
Slide 204
Cycle of Failure
Customer
turnover Repeat emphasis on
attracting newcustomers
Failure todevelop
customerloyalty
Low profit
margins Narrow design of
jobs to accommodate
low skill level
High employeeturnover;
poor servicequality
Use of technology Emphasis on
No continuityin
relationship for to control quality rules rather
customer Employeedissatisfaction; than service
poor service attitude
Paymentof
low wages
Employees Minimizationof
become bored selection effort
Customer
dissatisfaction Minimization
of training
Employees can’t
respond to customer
problems
Source: Schlesinger and Heskett
Slide 205
Service Sabotage
Routinized
‘Openness’of Service Sabotage Behaviors
‘Normality’ of Service Sabotage Behaviors

Covert Overt
Customary-Private Service Customer -Public Service

Sabotage Sabotage
e.g.. Waiters serving smaller e.g.. Talking to guests like
servings, bad beer orsour wine young kids and puttingthem
down
Sporadic -Private Service Sporadic -Public Service

Sabotage Sabotage
e.g.. Chef occasionally e.g.. Waiters spilling soup onto

purposefully slowing down laps, gravy onto sleeves, or hot
orders plates into someone’s hands
Intermittent
Slide 206
Cycle of Mediocrity
Customerstrade
horror stories Other suppliers (if any) seen as equally
poor
Employees spend
working life
in environment
Employee
of mediocrity
dissatisfaction
Emphasis
(but can’t easilyquit)
Narrow design
vs.onpleasingrules of jobs
customers
No incentive for Complaints met by Training emphasizes

cooperative relationship indifference or Success =
learning rules
to obtain better service hostility not making
mistakes
Service not focused
Jobs are boring and on customers’needs repetitive;employees Good
wages/benefits unresponsive high job
E
Resentment at inflexibility and security lack of employee initiative;
Pandromopaytion
complaints to employees increases based Initiative is

on longevity, discouraged
lack of mistakes
Customer dissatisfaction
Slide 207
Cycle of Success
Low
customer
turnover Repeat emphasis on
customer loyaltyand
retention
Customer
loyalty
Higher
profit
margins
Broadened
Lowered turnover, job designs
high servicequality
Continuityin
relationshipwith Train, empower frontline
customer Employeesatisfaction, personnel to control quality
positive serviceattitude
Aboveaverage
Extensive wages
training
High customer Intensified
satisfaction selectioneffort
Source: Heskett andSchlesinger
Slide 208
How to Manage People for Service Advantage?
Staff performance is a function of both ability and

motivation. How can we get able service employees who are
motivated to productively deliver service excellence?
1. Hire the right people

2. Enable your people
3. Motivate and energize your people
Slide 209
Hire the Right People
“The old saying ‘People are your most

important asset’ is wrong.
The RIGHT people are your most

most important asset.”
Jim Collins
Slide 210
Recruitment
The right people are a firm’s most important asset: take a

focused, marketing-like approach to recruitment
Clarify what must be hired versus what can be taught
Clarify nature of the working environment, corporate values

and style, in addition to job specs
Ensure candidates have/can obtain needed qualifications

Evaluate candidate’s fit with firm’s culture and values
Fit personalities, styles, energies to the appropriate jobs
Slide 211
Select And Hire the Right People:

(1) Be the Preferred Employer
Create a large pool: “Compete for Talent Market Share”
What determines a firm’s applicant pool?

Positive image in the community as place to work
Quality of its services
The firm’s perceived status

There is no perfect employee
Different jobs are best filled by people with different skills, styles
or personalities
Hire candidates that fit firm’s core values and culture
Focus on recruiting naturally warm personalities

Slide 212
Select and Hire the Right People: (2)

How to Identify the Best Candidates
Observe Behaviour
Hire based on observed behavior, not words you hear
Best predictor of future behavior is past behavior
Consider group hiring sessions where candidates given group tasks

Personality Testing
Willingness to treat co-workers and customers with courtesy,
consideration and tact
Perceptiveness regarding customer needs
Ability to communicate accurately and pleasantly
Slide 213
Select and Hire the Right People: (3)

How to Identify the Best Candidates
Employ Multiple, Structured Interviews
Use structured interviews built around job requirements
Use more than one interviewer to reduce similar to me effects

Give Applicants a Realistic Preview of the Job
Chance to have “hands-on” with the job
Assess how the candidates respond to job realities
Allow candidates to self select themselves out of the job
Slide 214
Train Service Employees
The Organizational Culture, Purpose and Strategy

Promote core values, get emotional commitment to strategy
Get managers to teach “why”, “what” and “how” of job.
Interpersonal and Technical Skills

Both are necessary but neither is sufficient for optimal job
performance
Product/Service Knowledge
Staff’s product knowledge is a key aspect of service quality
Staff need to be able to explain product features and to position
products correctly
Slide 215
Factors Favoring Employee Empowerment
Firm’s strategy is based on competitive differentiation and on

personalized, customized service
Emphasis on long-term relationships vs. one-time transactions

Use of complex and non-routine technologies
Environment is unpredictable, contains surprises
Managers are comfortable letting employees work independently
for benefit of firm and customers
Employees seek to deepen skills, like working with others, and are
good at group processes
Slide 216
Control vs. Involvement Model of Management
Control concentrates 4 key features at top of organization;

Involvement pushes them down:
Information about operating results and measures of
competitive performance
Rewards based on organizational performance
(e.g.. profit sharing, stock ownership)
Knowledge/skills enabling employees to
understand and contribute to organizational
performance
Power to influence work procedures and
organizational direction (e.g.. quality circles, self-
managing teams)
Source: Bowen and Lawler
Slide 217
Levels of Employee Involvement
Suggestion involvement
Employee recommendation
Job involvement
Jobs redesigned
Employees retrained
Supervisors facilitate
High involvement
Information is shared
Employees skilled in
teamwork, problem solving
etc. Participate in decisions
Profit sharing and stock ownership
Slide 218
Motivate and Energize the Frontline
Use the full range of available rewards effectively,

including:
Job content
Feedback and recognition
Goal accomplishment
Slide 219
The Inverted Organizational Pyramid
Customer Base
Top
Mgmt
. Frontline Staff
Middle
Mgmt.
Middle Mgmt.
Frontline & TopMgmt.
Staff Support Frontline
Traditional Inverted Pyramid with a

Organizational Pyramid Customer & Frontline Focus
Legend: = Service encounters, or ‘Moments of Truth.’
Slide 220
The Wheel of Successful HR in Service Firms
Leadership that:
Focuses the entire organization 1. Hire the
on supporting the frontline Right People
Fosters a strong 3. Motivate & Be the preferred
service culture with
passion for service Energize Your People employer & compete
for talent market share
and productivity
Drives values that Utilize the full

Service Excellence Intensifythe
inspire, energize & Productivity selection
range of rewards process
and guide service
providers
2. Enable Your People
Empower Frontline
Build high performance service
delivery teams
ExtensiveTraining
Slide 221
Chapter 12
Managing Relationships
and Building Loyalty
Slide 222
Four Stages of Brand Loyalty in a Consumer
Cognitive loyalty – perception from brand attribute

information that one brand is preferable to its alternatives
Affective loyalty – developing a liking for the brand based

on cumulatively satisfying usage occasions
Conative loyalty – commitment to rebuying the same brand

Action loyalty – exhibiting consistent repurchase behavior
Slide 223
Loyalty is Important to Profitability :

Index of Customer Profits over Time
(Year 1=100)
350 –
300
250
200
150
100
50
0
Year 1 Year 2 Year 3 Year 4 Year 5
Creditcard Industriallaundry Industrialdistribution Autoservicing

Based on data from Reichheld andSasser
Slide 224
What Makes Loyal Customers More Profitable?
Tend to spend more as relationship

develops customer’s balances may grow
may consolidate purchases to one supplier
Cost less to serve less need for information
and assistance make fewer mistakes
Recommend new customers to firm (act as unpaid sales
people)
Trust leads to willingness to pay regular prices vs. shopping

for discounts
Slide 225
Analyzing Why Customers Are More Profitable

over Time
Profit from price

premium
Profit from references
Profit from reduced

op. costs
Profit from increased
usage
Base Profit
Year Source: Reichheld and Sasser
Slide 226
Measuring Customer Equity:

Calculating Life Time Value of Each Customer
Value at Acquisition
revenues (application fee + initial purchase)
Less costs (marketing +credit check + account set up)
Annual Value (project for each year of relationship)
revenues (annual fee + sales + service fees + value of referrals)
Less costs (account management + cost of sales + write-offs)
Net Present Value
Determine anticipated customer relationship lifetime
Select appropriate discount figure
Sum anticipated annual values (future profits) at chosen discount
rate
Customer Equity is total sum of NPVs of all current customers
Slide 227
Customer-Firm Relationship
Today’s marketers seek to develop long-term relationships

with customers. Relationship marketing includes:
Database Marketing: Involves the use of technology by delivering

differentiated service levels to consumers and subsequently
tracking the relationship.
Interaction Marketing: Usually in B2B context where people and
the social process also add mutually beneficial value.
Network Marketing: Common in B2B context where companies
commit resources to develop positions in a network of
relationships with the stakeholders and relevant agencies.
Slide 228
Types of Relationships with Customers
Type of Relationship--Firm and Customer

Nature of
Service Delivery
“Membership” No formal relationship
Continuous Cable TV Radio station
Insurance Police
College enrollment Lighthouse
Discrete transactions Subscriber phone Pay phone

Theater subscription Movie theater
Warranty repair Public transport
Slide 229
Basic Segmentation Issues:

Building an Appropriate Customer Portfolio
Target customers whose needs match firm’s capabilities

Focus on value of prospective customers within each
segment, not just numbers
Avoid targeting customers who might abuse:

our employees, facilities
other customers
Create a mix of segments to reduce risks of volatility during

swings of economic cycles
Slide 230
Service-Relevant Segmentation Variables
Timing of service use (e.g.., by hour, day, season)

Level of skill and experience as
co-producer/selfserver
Preferred language in face-to-face contact
Access to electronic delivery systems (e.g.., Internet)
Attitudes toward use of new service technologies
Slide 231
Identifying and Selecting Target Segments

(Mgt. Memo 12.2)
User
characteristics
demographics
psychographics
geographic location
benefits sought
User behavior
when, where, how
services used quantity/value of
purchases frequency of use
profitability of relationship
sensitivity to marketing
variables
Slide 232
Portfolio of Professional Assignments
Major, Major, StateState--ofof--thethe--art art

challenges challenges for for thethe firm’s firm’s
principals that principals that give the firm give the
firm highhighvisibilityvisibility
Demanding client Demanding client assignments assignments offering offeringa a

“Pacesetters” learning experience learning experience for the firm’s
for the firm’s most most experienced experienced

associatesassociates
Significant ProjectsRoutine client Routine client projects projectsshared shared
among principals among principals andandassociatesassociates
“Bread and Butter” Projects

EntryEntry--level tasks for level
tasks fornew new associates or for
research associates or for research
Analytical Work on Project Dataassistants assistants &&paraprofessionalsparaprofessionals
Slide 233
The CustomerPyramid
GoodRelationship
Customers
Which segment sees high value in
our offer, spendsmore with us over
Platinum time, costs less to maintain, and
spreads positiveword-of-mouth?
Gold
Which segment costs us in time,

Iron
effortand money, yet does not
provide the return we want?
Which segment is difficult to do
Lead businesswith?
Poor Relationship
Customers
Slide ©2004 by ChristopherLovelockand JochenWirtz Services Marketing5/E 1 - 233

Slide 234
How Customers See Relational Benefits in

Service Industries
Confidence benefits
less risk of something going wrong, less
anxiety ability to trust provider know what to
expect get firm’s best service level
Social benefits mutual
recognition, known by name
friendship, enjoyment of social aspects
Special treatment benefits
better prices, discounts, special deals unavailable to others
extra services
higher priority with waits, faster service
Slide 235
The Customer Satisfaction-Loyalty Relationship
Apostle
100
Zone of Affection
Loyalty Retention 80
Near Apostle
)
60 Zone ofIndifference
40 Zone of Defection
(
20
Terrorist 0
1 2 3 4 5
Very Neither Very
dissatisfied Dissatisfied satisfied Satisfied Satisfied
nordissatisfied
Satisfaction
Slide 236
Slide 237
Rewarding Value of Use, Not Just Frequency at

British Airways
Dedicated reservations
Reservationsassurance
Priority waitlistand standby
Advance notification of delays
exceeding 4hours
Upgradedcheck-in
Preferredboarding
Special services assistance
Bonus air miles
Upgrade for two
Slide 238
Slide 239
Common CRM Applications
Signifies the whole process by which relationships with

customers are built and maintained.
CRM as an enabler, offering a “unified customer interface”

and allow firms to better understand and segment the
customers etc. Applications include:
Data collection
Data analysis
Sales force automation
Marketing automation
Call center automation
Slide 240
Customer Relationship Strategies with CRM

Systems: Key Questions
How should our value proposition change to increase customer
loyalty?
How much customization or one-to-one marketing and service
delivery is appropriate and profitable?
What is the incremental profit potential of increasing share of
wallet with current customers? How much does this vary
by customer tier and/or segment?
How much time and resource can we allocate to CRM right now? If
we believe in CRM, why have we not taken steps in that
direction before? What can we do today to develop customer
relationship without spending on technology?
Slide 241
Chapter 13
Customer Feedback and
Service Recovery
Slide 242
American Customer Satisfaction Index:

Selected Industry Scores, 2002
85 79 80 79 74 71 71 66 70 76 65 62
Score 100
(Max =100)
90
80
70
60 50 40
30 20 10
% Change 0
3.7% 1.3% 0.0% 1.3% 2.8% 0.0% 0.0% 8.2% 2.9% -2.6% 4.8% 3.3%
2002 vs 2001
Industry:
Slide 243
Key Questions for Managers to Ask about

Customer Complaining Behavior
Why do customers complain?
What proportion of unhappy customers complain?
Why don’t unhappy customers complain?
Who is most likely to complain?
Where do customers complain?
Slide 244
Courses of Action Open to a Dissatisfied

Customer
Slide 245
Slide 246
Proportion of Unhappy Customers Who Buy

Again Depending on the Complaint Process
Slide 247
Impact of Effective Service Recovery

on Retention
No
Problem
84%
Problem,
but effectively 92%
resolved
Problem
46%
Unresolved
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Customer Retention
Source: IBM-Rochesterstudy
Slide 248
Components of an Effective Service Recovery

System
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Close the Loop via Feedback
Slide 249
Strategies to Reduce Customer Complaint

Barriers
Complaint Barriers for Strategies to Reduce These Barriers
Dissatisfied Customers
Inconvenience Make feedback easy and convenient by:
Difficult to find the right complaint Printing Customer Service
Hotline numbers,
procedure.e-mail and postal addresses on all
Effort, e.g.., writing a letter. customer communications materials.
Doubtful Pay Off Reassure customers that their feedback will be
Uncertain whether any action, and taken seriously and will pay
off by: what action will be taken by the Having service recovery
procedures in firm to address the issue the place, and communicating this to
customer is unhappy with.customers.
Featuring service improvements that resulted

from customer feedback.
Unpleasantness Make providing feedback a positive

Complaining customers fear that experience:
they may be treated rudely,Thank customers for their
feedback.
may have to hassle, orTrain the frontline not to hassle and make may
feel embarrassed to complain.customers feel comfortable.
Allow for anonymous feedback.
Slide 250
How to Enable Effective Service Recovery
Be proactive—on the spot, before customers

complain
Plan recovery procedures
Teach recovery skills to relevant personnel
Empower personnel to use judgment and skills to
develop recovery solutions
Slide 251
Guidelines for Effective

Problem Resolution
Act fast Give benefit of doubt
Admit mistakes but don’t Clarify steps to solve
be defensive problem
Understand problem from Keep customers informed
customer’s viewpoint of progress
Don’t argue Consider compensation
Acknowledge customer’s Persevere to regain
feelings goodwill
Slide 252
Service Guarantees Help Promote and Achieve

Service Loyalty
Force firms to focus on

what customers want
Set clear standards
Highlights cost of service
failures
Require systems to get &
act on, customer feedback
Reduce risks of purchase
and build loyalty
Slide 253
Types of Service Guarantees
Single attribute-specific guarantee – one key service

attribute is covered
Multiattribute-specific guarantee – a few important service
attributes are covered
Full-satisfaction guarantee – all service aspects covered
with no exceptions
Combined guarantee – like the full-satisfaction,
adding explicit minimum performance standards on
important attributes
Slide 254
The Hampton Inn 100% Satisfaction Guarantee

(Figure 13.4)
What are the benefits of

such a guarantee?
Are there any downsides?

Slide 255
Key Objectives of Effective Customer Feedback

Systems
Assessment and benchmarking of service quality
and performance
Customer-driven learning and improvements

Creating a customer-oriented serviceculture
Slide 256
Building a Customer Feedback System
Total market surveys

Post-transaction surveys
Ongoing customer
surveys
Customer advisory panels

Employee surveys/panels
Focus groups
Mystery shopping
Complaint analysis
Capture of service
operating data
Slide 257
Strengths and Weakness of Key Customer Feedback

Collection Tools
Selection of a cocktail of effective customer feedback

collection tools.
Slide 258
Entry Points for Unsolicited Feedback
Employees serving customers face-to-face or by phone

Intermediaries acting for original supplier
Managers contacted by customers at head/regional office
Complaint cards mailed or placed in special box
Complaints passed to company by third-party
recipients consumer advocates trade organizations
legislative agencies other customers
Slide 259
Chapter 14
Improving Service Quality

and Productivity
Slide 260
Importance of Productivity and Quality for

Service Marketers
Productivity
Helps to keep costs down
lower prices to develop market, compete better
increase margins to permit larger marketing
budgets raise profits to invest in service innovation
May impact service experience (must avoid negatives)
May require customer involvement, cooperation
Quality
Gain competitive advantage, maintain loyalty
Increase value (may permit higher margins)
Improve profits
Slide 261
Perspectives on Service Quality
Transcendental: Quality = excellence. Recognized only through

experience
Product-Based: Quality is preciseand measurable
User-Based: Quality lies in the eyes of the beholder
Manufacturing- Quality is conformanceto the firm’s developed

Based: specifications
Value-Based: Quality is a trade-off between price and value
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing5/E 1 - 261
Slide 262
Dimensions of Service Quality
Tangibles
Reliability
Responsiveness
Assurance
competence,
courtesy
credibility
security
Empathy
access
communication
understanding of customer
Slide 263
Seven Service Quality Gaps
Slide 264
Prescriptions for Closing Service Quality Gaps
Knowledge: Learn what customers expect--conduct

research, dialogue, feedback
Standards: Specify SQ standards that reflect
expectations Delivery: Ensure service performance
matches specs-consider roles of employees, equipment,
customers
Internal communications: Ensure performance levels match
marketing promises
Perceptions: Educate customers to see reality of service
delivery
Interpretation: Pretest communications to make sure
message is clear and unambiguous.
Slide 265
Hard and Soft Measures of Service Quality
Hard measures refer to standards and measures that

can be counted, timed or measured through audits
typically operational processes or outcomes e.g.. how many trains
arrived late?
Soft measures refer to standards and measures that
cannot easily be observed and must be collected by
talking to customers, employees or others
e.g.. SERVQUAL, surveys, and customer advisory panels.
Control charts are useful for displaying performance over
time against specific quality standards.
Slide 266
Hard Measures of Service Quality
Control charts to monitor

a single variable
Service quality indexes
Root cause analysis

(fishbone charts)
Pareto analysis
Slide 267
Composition e of FedEx’s
Service Quality Index (SQI)
Failure Type X =
WFactoreighting IncNo ideof nts
PDaily oints
Late Delivery – Right Day 1

Late Delivery – Wrong Day 5 Tracing request
unanswered 1
Complaints reopened 5
Missing proofs of delivery 1
Invoice adjustments 1
Missed pickups 10 Lost packages 10
Damaged packages 10
Aircraft Delays (minutes) 5
Overcharged (packages missing label) 5
Abandoned calls 1
Total Failure Points (SQI) = XXX,XXX

Slide 268
Control Chart: Percent of Flights

Leaving within 15 Minutes of Schedule
100%
90%
80%
70%
60%
J F M A M J J A S O N D
Month
Slide 269
Tools to Address Service Quality Problems
Fishbone diagrams: A cause-and-effect diagram to identify

potential causes of problems.
Pareto charts: Separating the trivial from the important.

Often, a majority of problems is caused by a minority of
causes i.e. the 80/20 rule.
Blueprinting: A visualization of service delivery. It allows

one to identify fail points in both the frontstage and
backstage.
Slide 270
Cause and Effect Chart for

Airline Departure Delays
Facilities, Frontstage Procedure
Equipment Personnel
Aircraftlate to Gate agents Delayedcheck-in

Arrive late gate cannot process procedure
Oversized bags Mechanical fast enough Acceptance of late
Customers Failures
passengers
st Late/unavailable
Late pushback airline crew
Delayed
Departures
Latefood Latecabin
service cleaners
OtherCauses Poor announcement of
Weather Late baggage departures
Airtraffic
Latefuel Weight andbalance
sheet late
Materials, Backstage Information

Supplies Personnel
Slide 271
Analysis of Causes of
Flight Departure Delays
4.9
All stations, excluding
15.3 % 23.1% %
Chicago-Midway Hub
19% 33.3%
15.4 % 11.7%
9.5 %
23.1% 8.7%
23.1% 33.3%
11.3% 53.3%
Newark 1 5% Washington Natl.
Late passengers Late weight and balance sheet

Waiting for pushback Late cabin cleaning / supplies
Waiting forfueling Other
Slide 272
Return on Quality (ROQ)
ROQ approach is based on four assumptions:

Quality is an investment
Quality efforts must be financially accountable
It’s possible to spend too much on quality
Not all quality expenditures are equally valid
Implication: Quality improvement efforts may benefit from

being related to productivity improvement programs
Slide 273
When Does Improving Service Reliability

Become Uneconomical?
SatisfyTarget
SatisfyTarget
100% Customers
Customers Through
Through
Service Reliability ServiceRecovery
ServiceRecovery
Optimal
OptimalPoint of
Pointof
Reliability:
Costof
Reliability: Costof
Failure
Failure==Service
Service
Recovery
Recovery
SatisfyTarget
SatisfyTarget
Customers
Customers Through
Through
Service Delivery
as
Service Delivery
as
A B C D Planned
Planned
Investment
SmallCost, Large Cost, Assumption: Customers areequally(or even
LargeImprovement SmallImprovement more) satisfiedwith the service recovery provided
than with a service that is delivered as planned.
Slide 274
Productivity in a Service Context
Productivity measures amount of output produced relative

to the amount of inputs.
Improvement in productivity means an improvement in

the ratio of outputs to inputs.
Intangible nature of many service elements makes it hard

to measure the productivity of service firms, especially for
information based services.
Slide 275
Efficiency, Effectiveness, and Productivity
Efficiency: comparison to a standard--usually time-based

(e.g.., how long employee takes to perform specific task)
Problem: focus on inputs rather than outcomes
May ignore variations in quality or value of service

Effectiveness: degree to which firm is meeting its goals
Cannot divorce productivity from quality/customer satisfaction
Productivity: financial valuation of outputs to inputs

Consistent delivery of outcomes desired by customers should
command higher prices
Slide 276
Measuring Service Productivity
Traditional measures of service output tend to ignore

variations in quality or value of service
That is, they focus on outputs rather than outcomes, and stress
efficiency but not effectiveness.
Firms that are more effective in consistently delivering
outcomes desired by customers can command higher
prices. Furthermore, loyal customers are more
profitable.
Measures with customers as denominator

include: profitability by customer capital
employed per customer shareholder equity per
customer
Slide 277
Questions to Ask When Developing Strategies

to Improve Service Productivity
How to transform inputs into outputs efficiently?
Will improving productivity hurt quality?

Will improving quality hurt productivity?
Are employees or technology the key to productivity?
Can customers contribute to higher productivity?
Slide 278
Operations-driven vs. Customer-driven Actions

to Improve Service Productivity
Operations-driven strategies Customer-driven strategies
Control costs, reduce waste Change timing of customer

Set productive capacity to demand match average
demand
Automate labor tasks Involve customers more in
production Upgrade equipment and
systems
Ask customers to use third Train employees
parties
Leverage less-skilled
employees through expert
systems
Slide 279
Backstage and Frontstage Productivity Changes:

Implications for Customers
Backstage improvements can ripple to the front stage and
affect customers
e.g.., new printing peripherals may affect appearance of bank
statements.
Front-stage productivity enhancements are especially

visible in high contact services.
Some may just require passive acceptance by customers
Others require customers to change their scripts and behavior.
Slide 280
Overcoming Customers’ Reluctance to Accept

Changes in Environment and Behavior
Develop customer trust
Understand customers’ habits and expectations
Pretest new procedures and equipment
Publicize the benefits
Teach customers to use innovations and promote trial
Monitor performance, continue to seek improvements
Slide 281
Six Sigma Methodology to Improve and

Redesign Customer Service Processes
Process Improvement Process Design/Redesign
Define Identifythe problem Identify specific or broadproblems
Definerequirements Define goal/changevision
Setgoals Clarify scope & customerrequirements
Measure Validateproblem/process Measure performance torequirements
Refineproblem/goal Gather process efficiencydata
Measure keysteps/inputs
Analyze Develop causalhypothesis Identify bestpractices
Identify root causes Assess processdesign
Validatehypothesis Refinerequirements
Improve Develop ideas tomeasure Design newprocess

root causes Implement new process, structuresand
Testsolutions systems
Measure results
Control Establish measures to Establish measures & reviewsto maintain performance
maintain performance
Correct problems ifneeded Correct problems ifneeded
Slide 282
Chapter 15
Organizing for Service
Leadership
Slide 283
Customer-Led versus Market-Oriented

Philosophies of Management
Firms may lose market leader position if listen too closely to
current customers
Service leadership requires curiosity, risk taking
Customer-led businesses focus on understanding expressed
desires of customers in currently served markets
Market-oriented businesses commit to understand current/ latent
customer desires plus competitors’ plans, capabilities
Scan market more broadly, have longer-termfocus
Work closely with lead users (windows to future vs. anchors to
past)
Combine traditional research with experimentation,
observation Conclusion: Pursue customer satisfaction, but
set limits on being led by customers, especially during rapid
change
Slide 284
The Service Profit Chain
Internal E x te rn a l
Operating strategy and Service Target Market
service delivery system con cept
Loyalty
EMPLOYEES CUSTOMERS
Satisfaction Revenue
Produc tiv Growth
ity & Ser vi
Satisfaction Loyalty
Output ce
Quality Value Profitabili ty
Se rvi
ce
Quality
•
Workplacedesign
• Job design Quality andproductivity • Lifetimevalue
• Selection anddevelopment improvementsyield • Retention
• Rewards andrecognition higher servicequality • Repeatbusiness
• Information and communication and lower costs • Referral
• Tools for servingcustomers
Slide 285
Causal Links in the Service Profit Chain
Customer loyalty drives profitability and growth

Customer satisfaction drives customer loyalty
Value drives customer satisfaction
Employee productivity and retention drive value
Employee loyalty drives productivity
Employee satisfaction drives loyalty and productivity
Internal quality drives employee satisfaction
Top management leadership underlies chain’s
success
Slide 286
Integrating Three Functional Imperatives
Marketing Human Resources

Imperative Imperative
Customers
Operations
Imperative
Slide 287
Defining Three Functional Imperatives
Marketing Imperative
Target “right” customers and build relationships
Offer solutions that meet their needs
Define quality package with competitive advantage
Operations Imperative
Create, deliver specified service to target customers
Adhere to consistent qualitystandards
Achieve high productivity to ensure acceptable costs
Human Resource Imperative

Recruit and retain the best employees for each job
Train and motivate them to work well together
Achieve both productivity and customer satisfaction
Slide 288
Reducing Intra-Organizational Tension
Transfers and cross training

Cross functional taskforces
New tasks and new people
Process management teams
Gain-sharing programs
Slide 289
The Search for Synergy:

A Top Management Perspective
What do we want?
What do our
employees,
intermediaries, and What do our
customers want?
other partners
want?
What can we do?

Slide 290
From Losers to Leaders:

Moving Up the Service Performance Ladder
ServiceLeaders
Crème de la crème of their respective industries
Names synonymous with outstanding service, customer delight
Service Professionals
Clear positioning strategy
Sustained reputation for meeting customer expectations
ServiceNon-entities
Traditional operations mindset
Rudimentary marketing, often emphasizing price discounts
Service Losers
Only survive because of lack of viable alternatives in marketplace
Slide 291
Achieving Service Leadership by Focusing on

Role of Each Functional Area
Marketing: move from tactical to innovative and
strategic
Operations: move from reactive/cost oriented

to focused, innovative, well coordinated with
marketing and HR
Human Resources: move from tight control of

lowcost workers to quality of employees as
strategic advantage
Slide 292
Leadership for Change Management Involves

Eight Stages
Create sense of urgency to develop impetus for change
Put together strong team to direct process
Create appropriate vision of where organization must go
Communicate new vision broadly
Empower employees to act on vision
Produce sufficient short term results to create credibility
Build momentum to tackle tougher problems
Anchor new behaviors in the organizational culture
Source: John Kotter
Slide 293
Leadership Qualities Needed in Service

Organizations
Vision, charisma, persistence, high expectations,
expertise, empathy, persuasiveness, integrity
Ability to visualize quality of service as foundation for
competing
Believe in people who work for the firm, make good
communications a priority
Possess a natural enthusiasm for the business, teach it
to others, pass on nuances, secrets, crafts of operating
Cultivate leadership qualities of others in organization
Use values to navigate firms through difficult times
Slide 294
Transformational Leadership May Require

Changing Corporate Culture
Corporate Culture:
Shared perceptions regarding what is important
Shared values about what is right and wrong
Shared understanding about what works and what doesn’t
Shared beliefs about why these things are important
Shared styles of working and relating to others
Climate for Service--Tangible working environment atop
underlying culture. Influential factors include:
Shared perceptions concerning practices, procedures and types of
behaviors that get rewarded
Clarity about mission and values, level of commitment to common
purpose
Flexibility: freedom to innovate, sense of responsibility, standards

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Slide 1

How Important is the Service Sector in

In most countries, services add more economic value than

In developed economies, employment is dominated

Service elements within an organization that facilitate

Major Trends in Service Sector

Advances in IT (e.g.., speed, digitization, wireless,

Internationalization (travel, transnational companies)

Some Impacts of Technological Change

Radically alter ways in which service firms do business:

with customers (new services, more convenience)

Defining the Essence of a Service

An act or performance offered by one party to another

A process that creates benefits by facilitating a desired

Distinguishing Characteristics of Services

Customers do not obtain ownership of services

Service products are ephemeral and cannot be inventoried

Greater variability in operational inputs and outputs

Key to profits: target right segments at right times at right price

Customers may be involved in production process

Intangible elements dominate value creation

quality Make highly intangible services more “concrete” by creating

Value Added by Tangible vs Intangible

Other people are often part of the service product

Often difficult for customers to evaluate services

Four Categories of Services

Implications of Service Processes

Implications of Service Processes:

Consider customer needs--info,

Implications of Service Processes:

1. Customers come to the service factory

Implications of Service Processes:

When capacity to serve is

1. If demand is high and

Implications of Service Processes:

Implications of Service Processes:

Elements of The Services Marketing Mix:

Rethinking the original 4Ps

Promotion and education

Adding Three New Elements

Core product features—both tangible and intangible

Benefits delivered to customers (customers don’t buy a

Identify and Minimize Other Costs Incurred by Users

Select tangible metaphors for use in marketing

appreciate benefits and value offered

possess (or can be educated to have) needed skills (co-production)

Managing the 7Ps Requires Collaboration between

Where Does the Customer Fit in a

Flowcharting clarifies how customer involvement in service

High-Contact and Low-Contact Services

High Contact Services

Includes most people-processing services

Levels of Customer Contact with Service

Managing Service Encounters--1

Service encounter: A period of time during which customers

interact directly with a service

Managing Service Encounters--2

Service success often rests on performance of junior

The Purchase Process for Services

Financial – monetary loss, unexpected extra costs

Factors that Influence

Explicit & Implicit

Source: Adapted from Zeithaml, Parasuraman & Berry