Lecture 5

Distributing services
through physical and
electronic channels

Based on Text Book Chapter 5

Five reflections from last week
 Customer satisfaction can be cumulative or
transaction specific
 Satisfaction equals performance minus expections
 The zone of indifference is where consumers will
tolerate the quality of service
 Service quality consists of five dimensions:
reliability, assurance, tangibles, empathy,
responsiveness
 The service quality gaps model identifies several
gaps or potential fail points in the service delivery
 Objectives
 List the four questions that form the foundation of any
service distribution strategy
 Describe how services can be distributed and their three
main modes of distribution
 Explain determinants of customers’ channel preferences
 Recognise the issues of delivering services through
electronic channels.
 Describe the key role of intermediaries in distributing
services
 Explain the special challenges of distributing services
internationally
 Describe the role of blueprinting in designing and
distributing services
Distribution of Core and Supplementary
services
 Many core services require a physical location. For example,
Club Med’s core service can only be consumed by guests at the
hotel site
 Three supplementary services are physical processes and
are suited to physical delivery Hospitality, Safekeeping,
Exceptions

 Five supplementary services are informational and may be

suited to electronic delivery Information, Order taking,
Billing, Payment, Consultation

Although the overall trend is to deliver supplementary services

digitally, there are many service firms for whom consultation (e.g.
hairdressing), order taking and payments (e.g. restaurants) or
billing (e.g. medical practices) are done in person.
 Distribution options for serving
customers
 Distribution depends on how much direct physical contact there is between
service firm and customer?

Service Process Extent of Examples

Category physical contact
People-processing Direct contact Hair salon, fast-food chain.
firms is essential
Possession- Depends on the Whereas the customer brings in the laptop
mobility of the for repairs, the air conditioning repairer goes
processing possession to the customer’s home or place of business.

Mental stimulus Can be done in person A university can offer on-site or

processing or via electronic delivery distance education
Information Typically offered as Stock Broker, internet bank, SEO
processing electronic delivery consultant

Where there is an option, the extent of direct physical contact between

supplier and customer depends on the firm’s positioning strategy. For
example:
• A hairdresser can opt to work out of a salon or offer a mobile service.
• Catering firms can offer on-site or in-home services (or both)
 Channel preferences vary between
consumers
 Different delivery channels offer customers a different service experience
 For example, banking services can be delivered via computer, mobile phone,
voice response, call centre, ATM or face-to-face
 Convenience (saving time and effort) is a key driver of channel choice for the
majority of consumers

Delivery Channel Is preferred when……

Personal Channels Services are perceived as being

high risk and/or complex
Or
Customers have social motives

Impersonal/self service Customers have

channels more confidence and
knowledge
 Assisting with Distribution:
Intermediaries and Franchisees
Intermediaries
 Aspects of the service delivery are
commonly outsourced to
intermediaries
 For example, hotels rely on travel
agents and booking agents to
promote, inform customers and
take reservations and payment
 The original service business
serves as the guardian of the
overall process to ensure a
consistent and seamless service
experience for customers
Franchisees
 When the core service is outsourced, this
is called Franchising. E.g. Subway
 Franchisors recruit entrepreneurs
(franchisees) to invest time and money to
run the business in a specific locality
 The franchisor provides the brand,
training, materials and national marketing
initiatives
 The franchisee runs the business and pays
a royalty to the franchisor
 The fastest growing franchise categories
are health and fitness, publications,
security and consumer services
Flowcharting

 Flowcharting …….
 Is a step-by-step map of the service
delivery process from the customer’s
perspective
 Empowers the firm to manage and control
individual parts of the service delivery
system
 Identifies weak points in service delivery
 Identifies opportunities for improving or
enhancing efficiencies in service delivery
 Helps to prevent service failures
Flowcharting – alternative versions
 Flowcharting for an existing service process is
referred to as ‘service mapping’
 Flowcharting for a new or revised service process
is called ‘service blueprinting’ (this includes ‘front
stage’ and backstage’, links between activities and
points of contact between staff and customers)
 Flowcharting identifies potential ‘fail points’ and
leads to contingency plans and appropriate service
recovery systems
 Three requirements for blueprinting to be effective:
 Must show time dimensions in diagrammatic form
 Must identify and handle errors, bottlenecks,
reiterations
 Must precisely define how much variation from
standards can be allowed without affecting customer
evaluations of quality and timeliness
First phase blueprint for upmarket
fine dining restaurant
 Lecture 5
Continued
Understanding costs and
developing pricing
strategy

Based on Text Book Chapter 6

 Objectives
 Describe the foundations of pricing strategy
 Formulate pricing objectives
 Define and distinguish different types of costs
 Formulate pricing strategies and policies
 Describe the significance of revenue management for
service firms
 Revenue and profit objectives
 Patronage and user-base related objectives
 Non-monetary pricing objectives
 Objectives of Pricing Services
Type of Objective Examples of how to meet objectives

Profit / Revenue objectives

• Financial Target. E.g. ROI
• Profit margins increase with
productivity gains, elimination of
wastage or price increases
• Revenue increases as price falls

Patronage and user-base objectives

• Appear to be successful by using price to
build a critical mass of users quickly
• Position and differentiate the firm
• Reward and retain loyal customers

Non-monetary objectives
• Cover costs
• Low fees to encourage participation
• Emphasize fairness, equity and affordability
Three Foundations of Pricing Strategy

Three Foundations of Pricing

Strategy
• 1. Costs set a floor to the price
• 2. Value to customer sets a ceiling
to the price
• 3. Competitors’ pricing determines
where between floor and ceiling the
price should be set
 Pricing: Value
 No customer pays more for a service than they think it’s
worth
 In the consumer’s mind……..
Value = expected benefit minus perceived cost of acquiring
the service
 Expected benefits = expertise, experience of service staff,
place and manner of service delivery, reputation of the firm,
bundle of service benefits etc.
 Perceived cost = money, time, effort, perceived risk etc.
 Customers who perceive value as ‘low price’ will respond well
to discounts and deals
 Customers who perceive value as ‘the quality I get for the
price I pay’ will respond well to prestige pricing
 Pricing: Value (continued)
Type of Value
Functional or instrumental
value
Hedonic or experiential
value
Symbolic or expressive
value
Cost or sacrifice value
Description
The service performs the desired function. E.g.
broadband service offers sufficient speed
The service delivers an emotional (skydiving),
social (facebook) or sensual (massage)
experience
Customers attach psychological meaning to a
service (sponsor a chid)
The net value of the service can be increased by
reducing the cost of purchase

Examples of how customer costs can be included into the

firm’s pricing strategy:
• Charge a higher price to customers who need the service urgently
• Charge more for higher levels of customer convenience
• Offer a money back guarantee for new customers
• Reduce fees to clients for whom financial and/or psychological risks are
high
 Pricing: Competitors
Price competition intensifies when:
1. The number of competitors increases
2. There is a rise in substituting offers
3. Wider distribution of competitor and/or substitution
offers Jetstar
Price
4. Increased surplus capacity in the industry Monitor

How can a firm reduce price competition?

• Emphasise the importance of time and effort savings
• Build strong relationships with customers
• Lock customers in with contracts and switching fees.
E.g. mobile phones
• Provide the service at locations and times that
competitors may overlook
Revenue management for Services
 Revenue management allocates perishable capacity units (e.g.
seats on a plane) to existing demand in a way that maximizes
revenue, not patronage
 The aim is to obtain the highest possible yield from each available
unit of capacity at any given point in time (sell the right capacity
unit to the right type of customer at the right time for the right
price)
 Create a price bucket – using databases on past travel patterns,
predict how many customers will use a given service at a specific
time within specified price levels. Block out the relevant capacity
at each level.

For example, how many cheap seats should be sold on any flight and how far in
advance of the flight date?
• Revenue management dictates that customers who are prepared to pay most for
their seat should be first to be allocated capacity
• But…customers willing to pay higher prices tend to book closer to the time of the
flight’s departure
• Therefore, retain high quality, sought-after seats for this segment at the final stage
of booking
Revenue management for Services

 For revenue management to work effectively requires two or more segments that
attach different value to the service and have different price elasticities

Price Elasticity (sensitivity of Price and product

demand to price changes)
Price elasticity = % change in demand
% change in price
Price elasticity > 1 (price sensitive)
Price elasticity < 1 (price insensitive)
discrimination
• Different customers are charged different
prices for the same product
• Rate Fences are built between high and
low-value customers so that high-value
buyers can’t take advantage of the low
price
• Physical fences refers to tangible service
product differences related to different
prices. E.g. Seats closer to the stage cost
more
• Non-physical fences refer to
consumption, transaction or buyer
characteristics. E.g. not being able to
change or cancel a booking
 Ethical considerations in service pricing
 Service pricing complexity makes it easy for
firms to engage in unethical behaviour. E.g.
mobile phone companies have a confusing
variety of plans. Are they used to confuse and
exploit the consumer?
 Imposing fees that have little to do with
usage. Car rental firms advertise basement
prices and add fees for insurance, excess km’s,
driver age, child seats, additional drivers etc.
What firms should do to include fairness into revenue management systems:

•Price schedules and fences should be clear, logical and fair

•Use high published prices and frame fences as discounts, not premiums. For example,
rather than levying $10 more for weekend haircuts, rather frame it as a $10 discount on
weekdays.
•Communicate the consumer benefits of revenue management. “Each customer can find
the value that best satisfies their needs”
•Don’t use ‘bundles’ to hide premium pricing
•Take care of loyal customers such as special treatment status at peak times
•Back up overbookings with a well-designed service recovery procedure
Lecture 5 continued

Balancing Productive
Capacity and Demand

Text Book Chapter 7

 Productive Capacity
 Productive Capacity: Utilize staff, labour, equipment and
facilities as productively as possible
 Minimize the risk of bottlenecks
 Balance equipment capacity with labour capacity
 Ensure staff are neither underworked or overworked
Adjusting capacity to match demand
Staffing Customers Service Supplier

Schedule downtime
Cross train Invite customers during low demand
staff to self serve

Incentivise Create flexible

customers to capacity.
Employ share. E.g. E.g. Reconfigure seats
part time Share a taxi in on an airline
staff peak hours

Rent or share extra

facilities or equipment
 Managing queues
 Rethink the design of the
queuing system. Express queue,
take a number, virtual-queue
 Install a reservation system
 Tailor the queuing system to
different market segments
 Manage customer behaviour
and perceptions of the wait
 Redesign process to shorten
the time of each transaction
Lecture 5

The End