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Classifying Services to Gain Strategic Marketing Insights

By Christopher H. Lovelock

Presented by Sandra Lamprecht

Objective
To generate greater sophistication within the realm of service marketing by segmenting services into clusters that share certain relevant marketing characteristics.

Previous Work Classification of Goods

Hunt (1976)

Emphasized the usefulness of classification schemes in marketing Most famous and enduring attempt to classify goods Classification of convenience, shopping, and specialty goods Helped managers to:

Copeland (1923)

Better understand consumer needs and behavior Provided insight into the management of retail distribution systems

Classification of Goods Cont.

Bucklin (1963)
Revised and refined Copelands original classification Provided important strategic guidelines for retailers

Classification of Goods Cont.

Other Classification schemes:

Durable vs. non-durable goods

Durability is relative to purchase frequency and, therefore, is important for the development of distribution and communications strategies

Consumer goods vs. industrial goods

Relates to types of goods purchased and product evaluation (purchasing procedures and usage behaviors)

Previous Work Classification of Services

Shostack (1977), Bateson (1979), Berry (1980)

Argued that there are significant distinctions between services and goods and have proposed several generalizations for management practices Believe that the differences that lie between goods and services have no meaningful strategic implications Stated the importance of recognizing that the service sector, escpecially in the US, is becoming increasingly competitive

Enis & Roering (1981)

Langeard et al. (1981)

Classification of Services Cont.

Judd (1964) - classification in accordance with ownership

1) Rented goods services- right to own and use a good for a defined time 2) Owned goods services- owned by customer (repair or improvement of goods, custom creation) 3) Nongoods services- experiential possessions or personal experiences 1 & 2 are specific in the services they encompass 3 is very broad and ignores select services- banking, accounting, insurance, legal advice

Classification of Services Cont.

Rathmell (1874) Getting to know how ones business operates

1) Type of seller 2) Type of buyer 3) Buying motives 4) Buying practice 5) Degree of regulation This classification has no specific application to services and, therefore, could also be used to classify goods

Classification of Services Cont.

Shostack (1977), Sasser et al (1978) recognizing the composition of each product package
Physical Goods

Intangible Services

Package

Identified the proportion of physical goods relative to the amount of intangible services within Emphasizes that there are few pure goods / services

Classification of Services Cont.

Hill (1977) Emphasizes the nature of service benefits and, in 5, variations in the service delivery/consumption environment

1) Services affecting persons vs. those effecting goods 2) Permanent vs. temporary effects of the service 3) Reversibility vs. nonreversability of those effects 4) Physical effects vs. mental effects 5) Individual vs. collective services

Classification of Services Cont.

Thomas (1978) Equipment based vs. People based, helps to understand product attributes

1) Primarily equipment based:

A) Automated- car wash B) Monitored by unskilled operators- movie theatre C) Operated by skilled personnel- airlines A) Unskilled labor- lawn care B) Skilled labor- repair work C) Professional staff- lawyers, dentists

2) Primarily people based:

Operational rather than marketing oriented

Classification of Services Cont.

Chase (1978) Levels of customer contact Extent of customer contact required in service

1) High contact- health care, hotels, restaurants 2) Low contact- wholesaling, postal service Product variability is harder to control in high contact services because customers exert more influences on timing of demand and service features due to greater involvement in the service process

Classification of Services Cont.

Kotler (1980) Synthesizes previous work, recognizes difference in purpose of service organizations
1) People based vs. equipment based 2) Extent to which the clients presence is necessary 3) Meets personal need vs. business needs 4) Public vs. private , For-profit vs. nonprofit

Classification of Services Cont.

Lovelock (1980) Synthesizes previous classifications and adds new schemes

1) Basic demand characteristics:

Object served- personal vs. property Extent of demand / supply imbalances Discrete vs. continuous relationship between customers and providers

2) Service content and benefits:

Extent of physical goods content Extent of personal service content Single service vs. bundle service Timing and duration of benefits

3) Service delivery procedures:

Multi-site vs. single-site delivery Allocation of capacity- reservations or first come first serve Independent vs. collective consumption Time defined vs. task defined transactions Extent to which customers must be present during service delivery

Defining objects served = most fundamental classification scheme Suggests valuable marketing insights would come from combining two or more classification schemes in a matrix

Methodology
Builds on past research by examining characteristics of services that transcend industry boundaries and are different in degree or kind from the categorization schemes traditionally applied to manufacturing goods. Five Classification Schemes were selected and examined on two dimensions- reflecting Lovelocks early conclusions

Five Classification Schemes

Nature of the service act Mode of delivery

Nature of demand and supply

Services
Organization / Customer relations

Level of customization & judgment for the service provider

What is the nature of the service act?

Service= a deed, act or performance (Berry 1980) Fundamental issues of services:
At whom, or what, is the act direct? Is the act tangible or intangible

Nature of Service Act

What is the nature of the service act?
Tangible Actions

Who or what is the direct recipient of the service?

People
Services directed at peoples bodies -restaurants, haircutting, beauty salons

Things
Services directed at goods and other physical possessions -freight transport, laundry/dry cleaning

Intangible Actions Services directed at peoples mind -education, theatres

Services direct at intangible assets -banking, legal services

What type of relationship does the service organization have with the customer?
Relationships Ongoing relationships- customers receive service on a continuing basis Possible membership relationship- ex) family doctor, phone plans No formal relationship Delivery Continuous basis- ex) public goods (police protection, broadcasts) Each transaction is recorded and charged separately Marketers tend to be less informed about their customersanonymous consumer Profitability & customer convenience are central to how a service will be priced 1) Single periodic charge / Flat rate- simple, usually for services offered on an ongoing basis. Ex) insurance, public goods 2) Price per service administered- more complex, more fair for the less frequent customers. Ex) pay phone 3) Base fee + incremental charges

Organization / Customer Relationships

Type of relationship between the service organization and the customer Nature of service delivery Continuous delivery system Membership relationship Ex) college enrollment, insurance, banking No formal relationship Ex) police protection, radio station, public highway

Discrete Transactions

Ex) transit pass, Ex) pay phone, car long-distance phone rental, restaurant, calls movie theater

How much room is there for customization and judgment on the part of the service provider?
Customer is often involved in the production process allows for tailoring of the service to meet the needs of the individual customer Concerns: The extent to which the characteristics of the service allows them to be customized How much judgment customer contact personnel are able to exercise in defining the nature of the service received by the individual customer Types of services: Wide choice of options Contact personnel is limited- mobile phone providers Contact personnel has freedom- locus of control shifts from user to supplier, these people often give advice- professional such as doctors Standardization Contact personnel is limited- public transport Contact personnel has freedom- educators (different teachers teach the same course different ways)

Customization vs. Judgment

Extent to which service characteristics are customized
Extent to which customer contact personnel exercise judgment in meeting individual customer needs

High

Low

High

Ex) legal services, taxi service, real estate agents, plumber Ex) hotel service, telephone service

Ex) preventative health programs, education (large class) Ex) public transportation, fast food restaurants, movie theaters

Low

What is the nature for the demand and supply for the service?
Finished services cannot be inventoried Demand exceeds supply on a particular day = excess business may be lost Demand and supply imbalances are not found in all services

Nature of Demand & Supply Extent of demand fluctuations over time

Extent to which supply is constrained Peak demand can usually be met without a major delay Wide Narrow

Could use increases in demand outside of peak periods Ex) electricity, telephone, natural gas Must try to smooth demand to match capacity- must both stimulate and discourage demand Ex) theatres, hotels/motels, restaurants

Must decide whether to seek cont. growth in demand & capacity or maintain status quo Ex) banking, insurance, legal services A growing organization that may need temporary demarketing until capacity can be reach to meet current needs Ex) services similar to those in above field but with insufficient capacity

Peak demand regularly exceeds capacity

How is the service delivered?

Nature of the interaction between the customer and the service organization:

Customer goes to service organization Service organization comes to customer Customer and service organization transact at arms length Single site Multiple site

Availability of service outlets:

Service Delivery
Nature of interaction between customer and service organization

Availability of service outlets

Single Site Multiple Site

Customer goes to Ex) theatre, service organization barbershop Service Ex) lawn care organization comes service, pest control to customer service, taxi Customer and Ex) credit card service organization company, local t.v. transact at arms station length (mail or ecommunications)

Ex) bus service, fast food chain Ex) mail deliver, AAA emergency repairs

Ex) broadcast network, telephone company

Conclusion
Service sector is becoming increasingly competitive partly due to the partial or complete deregulation of several major service industries As competition intensifies within the service sector, the development of more effective marketing efforts becomes essential for survival The 5 matrixes will help managers:

Identify how those factors shape marketing problems and opportunities and, therefore, how they should affect the nature of the marketing tasks Recognize similarities between their industry and other industries to help them look beyond their immediate competitors for new ideas as to how to resolve marketing problems

Limitations
These matrixes can only provide a guideline for service companies to become more aware of their customers and the type of service they actually provide It does not provide a simple clear outline as to how to market a specific service effectively Every service in every market is different and unique, even services within the same market differ The customer and market are always changing

Management Implications
Nature of the service act:

Answers questions such as: A) Does the customer need to be physically present? 1) Throughout the service delivery? 2) Only to initiate / terminate the service transaction? 3) Not at all Customer satisfaction will be influenced by interactions they have with personnel, nature of facilities, characteristic of other customers, questions of location and schedule convenience B) Does the customer need to be mentally present during service delivery? If so can it be maintained across physical distance (mail or ecommunications)? C) In what ways is the target of the service act modified by the receipt of the service? How does the customer benefit from the modifications? To develop a better understanding of the nature of the service product and the core benefits it offers Managers of service organizations may be able to identify opportunities for alternative, more convenient forms of service delivery- ex) Britains Open Universitys use of t.v. and radio broadcasts

Organization / Customer Relations

Membership relationships:

Company knows who its current customers are, their addresses, their preferences, their opinions on the service provided, Valuable for segmentation purposes & targeted marketing May be offered discount rates in return for continuous patronage Usually result in customer loyalty to a particular provider. Ex) Rewards cards, Costco membership Helps ensure repeat business Task= build sales and revenues through membership but avoid required membership and freezing out customers. Ex) Best Buy w/ Reward Zone Allows for better decisions in regard to pricing

Level of Customization & Judgment

Most senior managers have come up through operations and, therefore, may require executive education programs to given them the necessary perspective on marketing to make balanced decisions Customization is not necessarily important for success sometimes the image of customization is enough.

Many people share the same experience. People share the same service facility but still have some custom treatment. Ex) airlines use your name

Customers like to know in advance what they are buying

Professional services the professional diagnosis the nature of the situation- can divide into two segments (diagnosis and implementation) to easy customer worries

Marketing focus on process of client-provider interactions. Ex) statement of qualifications

Levitt (1972,1976)

Industrialization > Customization if

Speed + Consistency + Price Savings > benefits which yield from the ability to customize

The industrialization of a service in order to take advantage of the economies of mass production may increase consumer satisfaction if speed, consistency, and price savings hold a higher value than service customization

Nature of Demand and Supply

Managing demand in services because fluctuations can be sharp and there is no buffer of inventory between supply and demand Manage demand

Hire seasonal or part time workers Renting extra facilities during peak periods

Determining the appropriate strategy:

1) What is the typical cycle period for these demand fluctuations?

Predictable- demand varies by hour of the day, day of week/month, season of year Random- no apparent pattern to demand fluctuations

2) What are the underlying causes of these demand fluctuations?

Customer habits or preferences- could marketing change these? Actions by third parties- employers set working hrs. hence marking efforts might be directed at those employers Nonforcestable events- weather conditions, health symptoms

Managers need to know who or what is the target of the service to effectively choose these strategies.
Smooth out ups and downs of demand: Decrease demand:

Encourage customers to change their plans voluntarily- Offer discounts or added product value during times of low demand Ration demand through reservations or a queuing system New business development efforts should be targeted at prospective customers with a counter cyclical demand pattern. Ex) accounting firm has lots of business at the end of the year may find new business for the bulk of the year when it has relatively no business

Increase demand:

Mode of delivery

Customer has to come to the service

Convenience is lowest to the customer

Service comes to customer- when target of the service is immovable

More expensive for the service organization Ex) 800 numbers Not all services may be conducted at arms length but certain portions of that service may be

Transactions at arms length

Ex) make reservations by phone to go eat at a restaurant If it is possible, it is up to the manager to decide whether a third party will have the right to participate in the arms length step sometimes consumers see these middle men as more objective and knowledgeable and trust their guidance more than the service provider

Increasing the number of outlets

Increases convenience of access to customers but may raise issues of quality control (consistency of the service)

Work Cited
Lovelock, Christopher H. (1983). Classifying Services to Gain Strategic Marketing Insights. Journal of Marketing (pre-1986), 47(000003), 9. Retrieved January 31, 2008, from ABI/INFORM Global database. (Document ID: 66036482).