Services Marketing Christopher Lovelock

by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - *

Implications of Service Processes:(6) Including People as Part of the ProductInvolvement in service delivery often entails contact with other peopleManagers should be concerned about employees appearance, social skills, technical skillsOther customers may enhance or detract from service experience--need to manage customer behavior

Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - *

The Services Marketing Mix


Elements of The Services Marketing Mix: 7Ps vs. the Traditional 4Ps

Rethinking the original 4PsProduct elementsPlace and timePromotion and educationPrice and other user outlaysAdding Three New ElementsPhysical environmentProcessPeople


The 7Ps: (1) Product ElementsAll Aspects of Service Performance that Create ValueCore product featuresboth tangible and intangible elementsBundle of supplementary service elementsPerformance levels relative to competitionBenefits delivered to customers (customers dont buy a hotel room, they buy a good nights sleep)Guarantees


The 7Ps:(2) Place and TimeDelivery Decisions: Where, When, and HowGeographic locations served Service schedules Physical channelsElectronic channelsCustomer control and convenienceChannel partners/intermediaries


The 7Ps:(3) Promotion and EducationInforming, Educating, Persuading, and Reminding CustomersMarketing communication toolsmedia elements (print, broadcast, outdoor, retail, Internet, etc.)personal selling, customer servicesales promotionpublicity/PRImagery and recognitionbrandingcorporate designContentinformation, advicepersuasive messagescustomer education/training


The 7Ps:(4) Price and Other User OutlaysMarketers Must Recognize that Customer Outlays Involve More than the Price Paid to SellerTraditional Pricing TasksSelling price, discounts, premiumsMargins for intermediaries (if any)Credit termsIdentify and Minimize Other Costs Incurred by UsersAdditional monetary costs associated with service usage (e.g., travel to service location, parking, phone, babysitting,etc.)Time expenditures, especially waiting Unwanted mental and physical effortNegative sensory experiences


The 7Ps:(5) Physical Environment

Designing the Servicescape and providing tangibleevidence of service performancesCreate and maintaining physical appearancesbuildings/landscapinginterior design/furnishingsvehicles/equipmentstaff grooming/clothingsounds and smellsother tangibles Select tangible metaphors for use in marketing communications


7Ps:(6) Process

Method and Sequence in Service Creation and DeliveryDesign of activity flowsNumber and sequence of actions for customersProviders of value chain componentsNature of customer involvementRole of contact personnelRole of technology, degree of automation


The 7Ps:(7) PeopleManaging the Human Side of the Enterprise The right customer-contact employees performing tasks welljob designrecruiting/selectiontrainingmotivationevaluation/rewardsempowerment/teamworkThe right customers for the firms missionfit well with product/processes/corporate goalsappreciate benefits and value offeredpossess (or can be educated to have) needed skills (co-production)firm is able to manage customer behavior


Managing the 7Ps Requires Collaboration between Marketing, Operations, and HR Functions (Fig. 1.7)


Chapter 2Consumer Behavior in Service Encounters


Where Does the Customer Fit in aService Organization? (Fig. 2.1)

Consumers rarely involved in manufacture of goods but often participate in service creation and deliveryChallenge for service marketers is to understand how customers interact with service operationsFlowcharting clarifies how customer involvement in service encounters varies with type of process - see Fig. 2-1:People processing (e.g., motel stay): customer is physically involved throughout entire processPossession processing (e.g., DVD repair): involvement may be limited to drop off of physical item/description of problem and subsequent pick upMental stimulus processing (e.g., weather forecast): involvement is mental, not physical; here customer simply receives output and acts on itInformation processing (e.g., health insurance): involvement is mental - specify information upfront and later receive documentation of coverage


High-Contact and Low-Contact Services

High Contact ServicesCustomers visit service facility and remain throughout service deliveryActive contact between customers and service personnelIncludes most people-processing servicesLow Contact ServicesLittle or no physical contact with service personnelContact usually at arms length through electronic or physical distribution channelsNew technologies (e.g. Web) help reduce contact levels


Levels of Customer Contact with Service Organizations (Fig. 2.2)Emphasizes encounters with service personnelEmphasizes encounters with equipmentHighLow Internet BankingSubway


Managing Service Encounters--1

Service encounter: A period of time during which customers interact directly with a serviceMoments 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


Managing Service Encounters--2

Service success often rests on performance of junior contact personnelMust train, coach, role model desired behaviorThoughtless or badly behaved customers can cause problems for service personnel (and other customers)Must educate customers, clarify what is expected, manage behavior


The Purchase Process for Services(Adapted from Fig. 2-3)

Prepurchase StageAwareness of needInformation searchEvaluation of alternative service suppliersService Encounter StageRequest service from chosen supplierService deliveryPostpurchase StageEvaluation of service performanceFuture intentions


Perceived Risks in Purchasing and Using Services (Table 2.1)

Functional unsatisfactory performance outcomesFinancial monetary loss, unexpected extra costsTemporal wasted time, delays lead to problemsPhysical personal injury, damage to possessionsPsychological fears and negative emotionsSocial how others may think and reactSensory unwanted impacts to any of five senses


Factors that Influence Customer Expectations of Services (Fig. 2.4)Source: Adapted from Zeithaml, Parasuraman & Berry


Components of Customer Expectations

Desired Service Level: wished-for level of service quality that customer believes can and should be deliveredAdequate Service Level: minimum acceptable level of service Predicted Service Level: service level that customer believes firm will actually deliverZone of Tolerance: range within which customers are willing to accept variations in service delivery


Intangible Attributes, Variability, and Quality Control Problems Make Services Hard to Evaluate

Search attributes Tangible characteristics that allow customers to evaluate a product before purchaseExperience attributes Characteristics that can be experienced when actually using the serviceCredence attributes Characteristics that are difficult to evaluate confidently even after consumptionGoods tend to be higher in search attributes, services tend to be higher in experience and credence attributesCredence attributes force customers to trust that desired benefits have been delivered


How Product Attributes Affect Ease of Evaluation) (Fig. 2.5)Source: Adapted from Zeithaml


Customer Satisfaction is Central to the Marketing ConceptSatisfaction defined as attitude-like judgment following a service purchase or series of service interactionsCustomers have expectations prior to consumption, observe service performance, compare it to expectationsSatisfaction judgments are based on this comparisonPositive disconfirmation if better than expectedConfirmation if same as expectedNegative disconfirmation if worse than expectedSatisfaction reflects perceived service quality, price/quality tradeoffs, personal and situational factorsResearch shows links between customer satisfaction and a firms financial performance


Customer Delight:Going Beyond Satisfaction

Research shows that delight is a function of 3 componentsUnexpectedly high levels of performanceArousal (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


A Service Business is a System Comprising Three Overlapping SubsystemsService Operations (front stage and backstage)Where inputs are processed and service elements created. Includes facilities, equipment, and personnelService Delivery (front stage)Where final assembly of service elements takes place and service is delivered to customersIncludes 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


Service Marketing System: (1) High Contact Service--e.g., Hotel (Fig. 2.7)Service Operations SystemBackstage(invisible)Front Stage(visible)Service Delivery SystemOther Contact PointsService Marketing System


Service Marketing System: (2) Low Contact Service--e.g., Credit Card (Fig. 2.8)TechnicalCoreMailSelf ServiceEquipmentPhone, Fax, Web site etc. TheCustomerService Operations System

Service Delivery SystemOther Contact PointsBackstage(invisible)Front Stage(visible)AdvertisingMarket Research SurveysRandom ExposuresFacilities, PersonnelWord of MouthService Marketing System


Service as Theater All the worlds 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


The Dramaturgy of Service Delivery

Service dramas unfold on a stage--settings may change as performance unfolds Many service dramas are tightly scripted, others improvisedFront-stage personnel are like members of a castLike actors, employees have roles, may wear special costumes, speak required lines, behave in specific waysSupport comes from a backstage production teamCustomers are the audiencedepending on type of performance, may be passive or active


Role and Script Theories

Role: A set of behavior patterns learned through experience and communicationRole 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 deliverySome scripts (e.g. teeth cleaning) are routinized, others flexible Technology change may require a revised scriptManagers should reexamine existing scripts to find ways to improve delivery, increase productivity, enhance experiences


Chapter 3Positioning Services in Competitive Markets


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 competitorsRather than attempting to compete in an entire market, firm must focus efforts on those customers it can serve bestMust decide how many service offerings with what distinctive (and desired) characteristics


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


Basic Focus Strategies for Services (Fig. 3.1)BREADTH OF SERVICE OFFERINGSNUMBER OF MARKETS SERVEDNarrowManyFewWide

Service

Focused Unfocused (Everything for everyone)Market Focused Fully Focused (Service and market focused) Source: Robert Johnston


Four Principles of Positioning Strategy

1. Must establish position for firm or product in minds of customers2. Position should be distinctive, providing one simple, consistent message3. Position must set firm/product apart from competitors4. Firm cannot be all things to all people--must focus Jack Trout


Uses of Positioning in Marketing Management (Table 3.1)

Understand relationships between products and marketscompare to competition on specific attributesevaluate products ability to meet consumer needs/expectationspredict demand at specific prices/performance levelsIdentify market opportunitiesintroduce new productsredesign existing productseliminate non-performing products Make marketing mix decisions, respond to competitiondistribution/service deliverypricingcommunication


Possible Dimensions for Developing Positioning Strategies

Product attributesPrice/quality relationshipsReference to competitors (usually shortcomings)Usage occasionsUser characteristicsProduct class


Developing a Market Positioning Strategy (Fig. 3.3) Size Composition Location TrendsMarketingAction Plan MARKET ANALYSIS

INTERNAL ANALYSIS

Resources Reputation Constraints ValuesCOMPETITIVEANALYSIS- Strengths Weaknesses Current Positioning Define, AnalyzeMarket SegmentsSelect Target SegmentsTo ServeArticulateDesired Position in MarketSelect Benefitsto Emphasize to CustomersAnalyze Possibilities forDifferentiationSource: Adapted from Michael R. Pearce


Positioning of Hotels in Belleville:Price vs. Service Level (Fig. 3.4)ExpensiveShangri-LaHigh Service Moderate ServiceGrandRegencySheratonItaliaCastleAlexander IVAirport PlazaPALACEAtlantic Less Expensive


Positioning of Hotels in Belleville: Location vs. Physical Luxury (Fig. 3.5)High LuxuryShopping District and Convention CentreShangri-LaModerate LuxuryFinancial DistrictInner SuburbsGrandRegencySheratonItaliaCastleAlexander IVAirport PlazaPALACEAtlantic


Positioning after New Hotel Construction: Price vs. Service Level (Fig. 3.6)ExpensiveShangri-LaHigh Service Moderate ServiceHeritageMandarinNew GrandMarriottContinentalRegencySheratonItaliaAlexander IVAirport PlazaPALACEAtlanticNo action?Action?Less ExpensiveCastle


Positioning after New Hotel Construction: Location vs. Physical Luxury (Fig. 3.7)High LuxuryShangri-LaFinancial DistrictInner SuburbsHeritageMandarinNew GrandMarriottContinentalRegencySheratonItaliaAlexander IVAirport PlazaPALACEAtlanticNo action?Action?Moderate LuxuryCastleShopping District and Convention Centre


Positioning Maps Help Managers to Visualize StrategyPositioning maps display relative performance of competing firms on key attributesResearch provides inputs to development of positioning mapsChallenge 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 segmentsPredictions can be made of how positions may change in the light of new developments in the futureSimple graphic representations are often easier for managers to grasp than tables of data or paragraphs of proseCharts and maps can facilitate a visual awakening to threats and opportunities and suggest alternative strategic directions


Chapter 4Creating the Service Product


Key Steps in Service Planning:Matching Opportunities to Resources

Must relate marketing opportunities to firms resources (physical, financial, technological, human)Identify, evaluate firms marketing assetsCustomer portfolio/lifetime value (customer equity)Market knowledgeMarketing implementation skillProduct lineCompetitive positioning strategiesBrand reputation (brand equity)Identify, evaluate firms operating assets Physical facilities, equipmentTechnology and systems (especially IT)Human resources (numbers, skills, productivity)Leverage through alliances and partnershipsPotential for customer self serviceCost structure


Operating Assets(Facilities/Equipment, IT Systems, People, Op. Skills, Cost Structure)Service Design Involves Matching Marketing Concept with Operations Concept (Fig. 4.1)Corporate Objectivesand Resources Service Delivery ProcessMarketing Assets(Customer Base, Mkt. Knowledge, Implementation Skills, Brand Reput.)Service Marketing Concept

Benefits to customer from core/ supplementary elements, style, service level, accessibility

User costs/outlays incurredPrice/other monetary costsTimeMental and physical effortNeg. sensory experiences

Service Operations Concept

Nature of processesGeographic scope of opsSchedulingFacilities design/layoutHR (numbers, skills)Leverage (partners, self-service)Task allocation: front/backstage staff; customers as co-producers


Understanding the Components of the Augmented Service Product


Shostacks Molecular Model of a Total Market Entity - Passenger Airline Service (Fig. 4-2)DistributionPriceMarketing Positioning (Weighted toward evidence) Source: Shostack KEY Tangible elements Intangible elementsService frequencyVehicleTransportPre- and post-flight serviceFood and drinkIn-flight service


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 coreIn mature industries, core products often become commoditiesSupplementary services help to differentiate core products and create competitive advantage by:facilitating use of the core serviceenhancing the value and appeal of the core


Core and Supplementary Product Design: What Do We Offer and How Do We Create and Deliver It?CoreSchedulingProcessService Level Customer RoleSupplementaryservices offeredand how createdand deliveredDelivery Concept For Core Product


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?


Core and Supplementary Services in a Luxury Hotel (Offering Guests Much More than a Cheap Motel!)


What Happens, When, and in What Sequence? The Time Dimension in the Augmented Service ProductPreVisitReservationTime Frame of an Overnight Hotel Stay(real-time service use)


The Flower of Service:Categorizing Supplementary Services (Fig. 4-5)CoreInformationConsultationOrder-TakingHospitalityPaymentBillingExceptionsSafekeeping Facilitating elements Enhancing elementsKEY:


Facilitating Services - Information (Table 4.1)CoreCustomers often requireinformation about how toobtain and use a product orservice. They may alsoneed reminders anddocumentation


Facilitating Services - Order-Taking(Table 4.2)Many goods and services must be ordered or reservedin advance. Customers need to know what is available andmay want to secure commitment to deliveryCore


Facilitating Services - Billing(Table 4.3)How much do I owe you?Customers deserve clear, accurate and intelligiblebills and statements Core


Facilitating Services - Payment(Table 4.4)Customers may pay faster and more cheerfully if youmake transactions simpleand convenient for themCore


Enhancing Services - Consultation(Table 4.5)Value can be added to goods and services byoffering advice andconsultation tailored toeach customersneeds and situationCore


Enhancing Services - Hospitality(Table 4.6)Customers who invest time and effort in visiting abusiness and using itsservices deserve to betreated as welcome guests (after all, marketing invitedthem there!)Core


Enhancing Services - Safekeeping(Table 4.7)Customers prefer not toworry about looking afterthe personal possessions that they bring with themto a service site.

They may also want deliveryand after-sales services forgoods that they purchaseor rentCore


Enhancing Services - Exceptions(Table 4.8)Customers appreciate some flexibility in a businesswhen they make special requests. They expect itwhen not everything goesaccording to planCore


Branding Service Products


Service Branding: Clarifying Distinctive Service Offerings

Marriott Hotel BrandsMarriott HotelsMarriott ResortsCourtyard by MarriottFairfield InnsResidence InnsSpringHill SuitesTownePlace SuitesMarriott Vacation Clubs International

British Airways BrandsIntercontinental FirstClub WorldWorld Traveller PlusWorld TravellerEuropeanClub EuropeEuro-TravellerUK DomesticShuttle


Branding a High-Tech, B2B Product Line:A Family of Brands at Sun Microsystems

Corporate umbrella brand Sun MicrosystemsProduct line brand (system support services) Sun Spectrum SupportSub-brands (4 levels of support service programs)PlatinumGoldSilverBronze


Sun Spectrum Support: Sub-branding Highlights Four Service Levels

Sub-branding clarifies service levels offered at different feesPlatinum: Mission Critical On-site service 24/7, two-hour response; telephone support 24/7, onsite parts replacement; additional services availableGold: Business Critical Onsite service Mon-Fri 8am-8pm, four-hour response; telephone support 24/7; onsite parts replacementSilver: Basic Support Onsite service Mon-Fri 8am-5pm, four-hour response; telephone support Mon-Fri 8am-8pm; onsite parts replacementBronze: Self Support Phone support Mon-Fri 8am-5pm; parts replacement by courier


New Service Development


New Service Development:A Hierarchy of New Service CategoriesMajor service innovations--new core products for previously undefined marketsMajor process innovations--using new processes to deliver existing products and offer extra benefitsProduct line extensions--additions to current product linesProcess line extensions--alternative delivery proceduresSupplementary service innovations--adding new or improved facilitating or enhancing elementsStyle changes--visible changes in service design or scripts


New Service Development: Physical Goods as Source of Service Ideas

Customers can rent goodsuse and return for a fee instead of purchasing themCustomers can hire personnel to operate their own or rented equipmentAny new durable product may create need for after-sales services (possession processing)ShippingInstallationProblem-solving and consulting adviceCleaning MaintenanceRepairUpgradingDisposal


Creating Services as Substitutes for Owning and/or Using Goods (Fig. 4-7) Perform theWork OneselfHire Someoneto Do the WorkOwn a Physical GoodRent the Useof a Physical Good Hire a taxi or limousine Send work to secretarial service Rent car and drive it Rent word processor and type Hire chauffeur to drive car Hire typist to use word processor Drive own car Type on own word processor


Service Development through Delivery Options: Alternative Meal Service Formats (Fig. 4-8)HomeDeliveryOrder food,give addressDriver ringsdoorbellPay driver,take foodEatTelephone RestaurantDrive-InRestaurant(Take Out)See signOrder viamicrophoneGet meal atpickup, payDrive away,eat laterStop car atorder pointFast-FoodRestaurant(Eat In)See signPark andenterOrder meal, and payPick upmealFind tableand eatClear tableand leaveHomeCateringArrange to meet caterer

Plan meal, pay depositFood and staff arriveMeal ispreparedand servedEatStaff cleans up; pay


Elements of a Hotel Offering: Trading off Room Price vs. Features/Services

External building design and featuresRoom featuresFood-related servicesLounge facilitiesServices (e.g., reception)Leisure facilitiesSecuritypeople/systems


Success Factors in New Service DevelopmentMarket synergyGood fit between new product and firms image/resourcesAdvantage vs. competition in meeting customers needsStrong support from firm during/after launchFirm understands customer purchase decision behaviorOrganizational factorsStrong interfunctional cooperation and coordinationInternal marketing to educate staff on new product and its competitionEmployees understand importance of new services to firmMarket research factorsScientific studies conducted early in development processProduct concept well defined before undertaking field studies


Chapter 5Designing the Communications Mix for Services


Advertising Implications for Overcoming Intangibility (Fig. 5-1)

Problem Advertising Strategy Generality - objective claimsDocument physical system capacity Cite past performance statistics - subjective claimsPresent actual service delivery incidentNonsearchabilityPresent customer testimonials Cite independently audited performanceAbstractnessDisplay typical customers benefiting ImpalpabilityDocumentary of step-by-step process,Case history of what firm did for customerNarration of customers subjective experienceSource: Mittal and Baker


Other Communications Challenges in Services MarketingFacilitate customer involvement in production prepare customers for service experience and demonstrate rolesteach customers about new technologies, new featuresHelp customers to evaluate service offeringsprovide tangible or statistical clues to service performancehighlight quality of equipment and facilitiesemphasize employee qualifications, experience, professionalismSimulate or dampen demand to match capacityprovide information about timing of peak, off-peak periodsoffer promotions to stimulate off-peak demandPromote contribution of service personnel help customers understand service encounterhighlight expertise and commitment of backstage personnel


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?


Common Educational and Promotional Objectives in Service Settings (Table 5-2)

Create memorable images of specific companies and their brandsBuild awareness/interest for unfamiliar service/brandBuild preference by communicating brand strengths and benefitsCompare service with competitors offerings and counter their claimsReposition service relative to competitionStimulate demand in off-peak and discourage during peak


Educational and Promotional Objectives (cont.)

Encourage trial by offering promotional incentivesReduce uncertainty/perceived risk by providing useful info and adviceProvide reassurance (e.g., promote service guarantees)Familiarize customers with service processes before useTeach customers how to use a service to best advantageRecognize and reward valued customers and employees


Word-of-mouth(other customers) Marketing Communications Mix for Services(Fig. 10.4)Personal CommunicationsSelling Customer service Training AdvertisingBroadcast Print Internet Outdoor Direct mailSales PromotionSampling Coupons Sign-up rebates Gifts Prize promotionsPublicity &Public RelationsPress releases/kits Press conferences Special events SponsorshipInstructional MaterialsWeb sites Manuals Brochures Video- audiocassettes Software CD-ROM Voice mailSignage Interior decor Vehicles Equipment Stationery UniformsCorporate DesignTelemarketingWord of mouthTrade Shows,ExhibitionsMedia-initiatedcoverage*Key: * Denotes communications originating from outside the organization


Originating Sources of Messages Received by a Target Audience (Fig. 5-5)AUD IENCE


What is Brand Equity and Why Does It Matter?(From Berry, Cultivating Brand Equity) Definition: A set of assets and liabilities linked to a brands name and symbol that adds to (or subtracts from) the perceived value of the productInsightsBrand equity can be positive or negativePositive brand equity creates marketing advantage for firm plus value for customerPerceived value generates preference and loyaltyManagement of brand equity involves investment to create and enhance assets, remove liabilities


A Service Branding Model: How Communications + Experience Create Brand EquityFirms Presented Brand (Sales, Advertising, PR)What Media, Intermediaries,Word-of-Mouth Say re: FirmCustomers Experience with Firm Awareness of Firms Brand Meaning Attached To Firms BrandFirmsBrand EquitySource: Adapted from L. L. Berry ( Fig. 1)Marketer-controlled communicationsUncontrolled brand communications


Marketing Communication and the Internet (1)

International in ScopeAccessible from almost anywhere in the worldSimplest form of international market entryInternet ApplicationsPromote consumer awareness and interestProvide information and consultationFacilitate 2-way communications through e-mail and chat roomsStimulate product trialEnable customers to place ordersMeasure effectiveness of specific advertising/promotional campaigns


Marketing Communications and the Internet (2)

Web Site design considerations Memorable address that is actively promotedRelevant, up-to-date content (text, graphics, photos)Contain information that target users will perceive as useful/interestingEasy navigationFast downloadInternet advertisingBanners and buttons on portals and other websites seek to draw online traffic to own siteLimits to effectivenessexposure (eyeballs) may not lead to increases in awareness/preference/salesHence, advertising contracts may tie fees to marketing relevant behavior (e.g., giving personal info or making purchase)


Chapter 6Pricing and Revenue Management


What Makes Service Pricing Strategy Different (and Difficult)?No ownership of services--hard for firms to calculate financial costs of creating an intangible performanceVariability 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 fasterDelivery through physical or electronic channels--may create differences in perceived value


Objectives of Pricing StrategiesRevenue and profit objectivesSeek profitCover costsPatronage and user base-related objectivesBuild demandBuild a user base


The Pricing Tripod (Fig. 6.1)


Three Main Approaches to PricingCost-Based PricingSet prices relative to financial costs (problem: defining costs)Competition-Based PricingMonitor competitors pricing strategy (especially if service lacks differentiation)Who is the price leader? (one firm sets the pace)

Value-BasedRelate price to value perceived by customer


Activity-Based Costing: Relating Activities to the Resources They ConsumeManagers need to see costs as an integral part of a firms effort to create value for customersWhen looking at prices, customers care about value to themselves, not what production costs the firmTraditional cost accounting emphasizes expense categories, with arbitrary allocation of overheadsABC management systems examine activities needed to create and deliver service (do they add value?)Must link resource expenses to:variety of products producedcomplexity of productsdemands made by individual customers


Perceived BenefitsTimeeEffortNet Value = (Benefits Outlays) (Fig. 6.3)Perceived Outlays


Enhancing Gross ValuePricing Strategies to Reduce Uncertaintyservice guaranteesbenefit-driven (pricing that aspect of service that creates value)flat rate (quoting a fixed price in advance)

Relationship Pricingnon-price incentivesdiscounts for volume purchasesdiscounts for purchasing multiple services

Low-cost LeadershipConvince customers not to equate price with qualityMust keep economic costs low to ensure profitability at low price


Paying for Service:The Customers PerspectiveCustomer expenditures on service comprise both financial and non-financial outlaysFinancial costs:price of purchasing serviceexpenses associated with search, purchase activity, usageTime expendituresPhysical effort (e.g., fatigue, discomfort)Psychological burdens (mental effort, negative feelings)Negative sensory burdens (unpleasant sensations affecting any of the five senses)


Determining the Total Costs of a Service to the Consumer (Fig. 6.4)PriceRelated Monetary CostsTime CostsPhysical CostsPsychological CostsSensory CostsNecessary follow-upProblemsolvingOperating CostsIncidental ExpensesPurchase andUse CostsSearch CostsAfter Costs


Trading off Monetary and Non- Monetary Costs (Fig. 6.5)Which clinic would you patronize if you needed a chest x-ray (assuming all three clinics offer good quality) ?Price $85Located 15 min away by car or transit Next available appointment is in 1 weekHours: Monday Friday, 8am 10pm Estimated wait at clinic is about 30 - 45 minutes

Clinic BPrice $125 Located next to your office or college Next appointment is in 1 day Hours: Mo Sat, 8am 10pm By appointment - estimated wait at clinic is about 0 to 15 minutes Clinic CClinic APrice $45Located 1 hour away by car or transit Next available appointment is in 3 weeksHours: Monday Friday, 9am 5pm Estimated wait at clinic is about 2 hours


Increasing Net Value by Reducing Non-financial Costs of ServiceReduce time costs of service at each stageMinimize unwanted psychological costs of service Eliminate unwanted physical costs of serviceDecrease unpleasant sensory costs of service


Revenue Management: Maximizing Revenue from Available Capacity at a Given TimeBased on price customization - charging different customers (value segments) different prices for same productUseful in dynamic markets where demand can be divided into different price buckets according to price sensitivityRequires rate fences to prevent customers in one value segment from purchasing more cheaply than willing to payRM uses mathematical models to examine historical data and real time information to determinewhat prices to charge within each price buckethow many service units) to allocate to each bucket


The Strategic Levers of Revenue (Yield) Management


Dealing with Common Customer Conflicts Arising from Revenue Management


Price Elasticity (Fig. 6.6)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.


Key Categories of Rate Fences (Table 6.2)

Rate Fences Examples Physical (Product-related) Fences Basic Product Class of travel (Business/Economy class) Size and furnishing of a hotel room Seat location in a theatre Amenities Free breakfast at a hotel, airport pick up etc. Free golf cart at a golf course Service Level Priority wait listingIncrease in baggage allowances Dedicated service hotlines Dedicated account management team


Key Categories of Rate Fences (Table 6.2 contd)

Non Physical FencesTransaction Characteristics Time of booking or reservation Requirements for advance purchase Must pay full fare two weeks before departure Location of booking or reservation Passengers booking air tickets for an identical route in different countries are charged different prices Flexibility of ticket usage Fees/penalties for canceling or changing a reservation (up to loss of entire ticket price) Non refundable reservation fees



Non Physical Fences (contd)Consumption Characteristics Time or duration of use Early bird special in restaurant before 6pmMust stay over on Sat for airline, hotel Must stay at least five days Location of consumption Price depends on departure location, esp in international travel Prices vary by location (between cities, city centre versus edges of city)



Non Physical Fences (contd)Buyer Characteristics Frequency or volume of consumption Member of certain loyalty-tier with the firm get priority pricing, discounts or loyalty benefitsGroup membership Child, student, senior citizen discounts Affiliation with certain groups (e.g. Alumni) Size of customer group Group discounts based on size of group


Relating Price Buckets and Fences to the Demand Curve (Fig. 6.7)


Ethical Concerns in PricingCustomers are vulnerable when service is hard to evaluate or they dont observe workMany services have complex pricing scheduleshard to understand difficult to calculate full costs in advance of serviceUnfairness and misrepresentation in price promotionsmisleading advertisinghidden chargesToo many rules and regulationscustomers feel constrained, exploitedcustomers unfairly penalized when plans change


Pricing Issues: Putting Strategy into Practice (Table 6.3)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?


Consumption follows the Timing of Payments (Research Insight 6.1)Source: John Gourville and Dilip Soman, Pricing and the Psychology of Consumption, Harvard Business Review, September 2002, 90-96.


Chapter 7(5)Distributing Services


Applying the Flow Model of Distribution to ServicesInformation and promotion flowNegotiation flowProduct flowDistribution embraced three interrelated elements


Information and Physical Processes of the Augmented Service Product (Fig. 7.1)


Using Websites for Service DeliverySafekeepingTrack package movementsCheck repair statusCORE: Use Web to deliver information-based core servicesConsultationConduct e-mail dialogUse expert systemsOrder-TakingMake/confirm reservationsSubmit applicationsOrder goods, check status HospitalityRecord preferencesBillingReceive billMake auction bidCheck account statusExceptionsMake special requestsResolve problemsPaymentPay by bank cardDirect debitInformationRead brochure/FAQ; get schedules/directions; check prices


Options for Service DeliveryCustomer goes to the service provider (or intermediary)Service provider goes to the customerInteraction at arms length (via the Internet, telephone, fax, mail, etc.)There are 3 types of interactions between customers and service firms


Method of Service Delivery (Table 7.1)

Availability of Service Outlets Nature of Interaction between Customer and Service Organization Single Site Multiple Sites Customer goes to service organization Theater Barbershop Bus service Fast-food chain Service organization goes to customer House painting Mobile car wash Mail delivery Auto club road service Customer and service organization transact at arms lengthCredit card company Local TV station Broadcast networkTelephone company


Place vs. CyberspacePlace - customers and suppliers meet in a physical environment Cyberspace - customers and suppliers do business electronically in virtual environment created by phone/internet linkages

Required for people processing servicesOffers live experiences, social interaction, e.g., food services More emphasis on eye-catching servicescape, entertainment Ideal for info-based servicesSaves time Facilitates information gathering May use express logistics service to deliver physical core products


24/7 - Factors Encouraging Extended Operating Hours (Mgt Memo 7.1)

Economic pressure from consumersChanges in legislationEconomic incentives to improve asset utilizationAvailability of employees to work nights, weekendsAutomated self-service


Technology Revolutionizes Service Delivery: Some ExamplesSmart mobile telephones to link users to InternetVoice recognition softwareAutomated kiosks for self-service (e.g. bank ATMs)Web sites provide informationtake orders and accept paymentdeliver information-based servicesSmart cards that can act as electronic wallets


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 itemsBetter prices than in bricks-and-mortar storesBroad selection


Splitting Responsibilities for Delivering Supplementary Services (Fig. 7.2)As created by originating firmAs enhanced by distributorAs experienced by customer


FranchisingResources are limitedLong-term commitment of store managers is crucialLocal knowledge is importantFast growth is necessary to pre-empt competitionFranchising is a fast growth strategy, when


Service Process and Market EntryPeople Processing Services Export the service concept Import customersTransport 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


Barriers to International Trade in ServicesOperating 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 firmsDomestic preference policies Legal restrictions Lack of broadly-agreed accounting standards Cultural differences (esp. for entertainment industry)


Forces for Internationalization

Market driversCompetition driversTechnology driversCost driversGovernment driversImpact will vary by service type (people, possessions, information)


Modes of InternationalizationExport information-based servicestransmit via electronic channels store in physical media, ship as merchandise

Use third parties to market/deliver service conceptlicensing agentsbrokersfranchisingalliance partnersminority joint ventures

Control service enterprise abroaddirect investment in new businessbuyout of existing business


Impact of Globalization Drivers on Different Service Categories (Table 7.2)

Globalization Drivers People Processing Possession Processing Information Based Competition Simultaneity of production and consumption limits leverage of foreign competitive advantage, but management systems can be globalizedTechnology drives globalization of competitors with technical edge.Highly vulnerable to global dominance by competitors with monopoly or competitive advantage in information.Market People differ economically and culturally, so needs for service and ability to pay may vary. Level of economic developments impacts demand for services to individually owned goods Demand for many services is derived to a significant degree from economic and educational levels.


Impact of Globalization Drivers on Different Service Categories (Table 7.2, contd)

Globalization Drivers People Processing Possession Processing Information Based Technology Use of IT for delivery of supplementary services may be a function of ownership and familiarity with technology.Need for technology- based service delivery systems depends on possessions requiring service and the cost trade-offs in labor substitution Ability to deliver core services through remote terminals may be a function of investment in computerization etc. Cost Variable labor rates may impact on pricing in labor-sensitive services. Variable labor rates may favor low-cost locations.Major cost elements can be centralized & minor cost elements localized. Government Social policies (e.g., health) vary widely and may affect labor cost etc. Policies may decrease/increase cost & encourage/discourage certain activities Policies may impact demand and supply and distort pricing


Chapter 8

Designing and Managing Service Processes


Developing a Blueprint Some Basic Advice

Identify key activities in creating and delivering the serviceDistinguish between front stage (what customers experience) and back stageChart activities in sequenceShow how interactions between customers and employees are supported by backstage activities and systems Establish service standards for each step Identify potential fail pointsFocus initially on big picture (later, can drill down for more detail in specific areas)


Service Blueprinting: Key Components

1. Define standards for frontstage activities2. Specify physical evidence 3. Identify principal customer actions4. ------------line of interaction (customers and front stage personnel)--------5. Front stage actions by customer-contact personnel6. ------------line of visibility (between front stage and backstage)--------------7. Backstage actions by customer contact personnel8. Support processes involving other service personnel9. Support processes involving ITWhere appropriate, show fail points and risk of excessive waits


Simplified Example: Blueprinting a Hotel Visit(extract only) PhysicalEvidence Customer Actions Employee Actions Face-to-face Front Stage Phone ContactBackstage

MakereservationRep. records, confirmsArrive, valet parkCheck-in at reception Doorman greets, valet takes car Enter data Valet Parks Car Make up Room Register guest data Receptionist verifies, gives key to roomGo to room Hotel exterior, lobby,employees, keyElevator, corridor,room, bellhopLine of InteractionLine of Visibility


Improving Reliability of Processes by Failure Proofing

Analysis of reasons for failure often reveals opportunities for failure proofing to reduce/eliminate risk of errorsErrors include:treatment errorshuman failures during contact with customerstangible errorsfailures in physical elements of serviceFail-safe procedures include measures to prevent omission of tasks or performance of tasks incorrectlyin wrong ordertoo slowlynot needed or specifiedNeed fail-safe methods for both employees and customers


Process Redesign: Principal Approaches(Table 8-1)

Eliminating non-value-adding stepsShifting to self-serviceDelivering direct serviceBundling servicesRedesigning physical aspects of service processes


Customers as Co-Producers:Levels of Participation in Service Production

Low Employees and systems do all the workMedium Customer inputs required to assist providerProvide needed information, instructionsMake personal effortMay share physical possessionsHigh Customer works actively with provider to co-produce the service


Self Service Technologies (SSTs)

Self-service is ultimate form of customer involvement in service productionCustomers undertake specific activities using facilities or systems provided by service supplierCustomers time and effort replace those of employeesConcept is not newself-serve supermarkets date from 1930s, ATMs and self-serve gas pumps from 1970sToday, customers face wide array of SSTs to deliver information-based services, both core and supplementaryMany companies seek to divert customers from employee contact to Internet-based self-service


Service Firms as Teachers: Well-trained Customers Perform Better

Firms must teach customers roles as co-producers of serviceCustomers need to know how to achieve best resultsEducation can be provided through:BrochuresAdvertisingPosted instructionsMachine-based instructionsWebsites, including FAQsService providersFellow customers

Employees must be well-trained to help advise, assist customers


Managing Customers as Partial Employeesto Increase Productivity and Quality

1. Analyze customers present roles in the business and compare to managements ideal2. Determine if customers know how to perform and have necessary skills3. Motivate customers by ensuring that will be rewarded for performing well4. Regularly appraise customers performance; if unsatisfactory, consider changing roles or termination


The Problem of Customer Misbehavior Identifying and Managing JaycustomersWhat is a jaycustomer? A customer who behaves in a thoughtless or abusive fashion, causing problems for the firm itself, employees, other customersWhy do jaycustomers matter?Can disrupt processesAffect service qualityMay spoil experience of other customersWhat should a firm do about them?Try to avoid attracting potential jaycustomersInstitute preventive measures Control abusive behavior quicklyTake legal action against abusersBUT firm must act in ways that dont alienate other customers


Six Types of Jaycustomer

Thief seeks to avoid paying for serviceRule breaker ignores rules of social behavior and/or procedures for safe, efficient use of serviceBelligerent angrily abuses service personnel (and sometimes other customers) physically and/or emotionallyFamily Feuders fight with other customers in their partyVandal deliberately damages physical facilities, furnishings, and equipmentDeadbeat fails to pay bills on timeCan you think of others? How should firms deal with each of these problems?


Chapter 9

Balancing Demand and Capacity


Relating Demand to Capacity:Four Key Concepts

Excess demand: too much demand relative to capacity at a given timeExcess capacity: too much capacity relative to demand at a given timeMaximum capacity: upper limit to a firms ability to meet demand at a given timeOptimum capacity: point beyond which service quality declines as more customers are serviced


Variations in Demand Relative to Capacity(Fig. 9-1)VOLUME DEMANDEDTIME CYCLE 1TIME CYCLE 2Maximum Available CapacityOptimum Capacity (Demand and Supply Well Balanced Low Utilization (May Send Bad Signals)Demand exceeds capacity (business is lost)Demand exceeds optimum capacity (quality declines)Excess capacity (wasted resources)CAPACITY UTILIZED


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 workPublic/private infrastructuree.g., highways, airports, electricity


Alternative Capacity Management Strategies

Level capacity (fixed level at all times)Stretch and shrinkoffer 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 serviceChase demand (adjust capacity to match demand)schedule downtime in low demand periods use part-time employeesrent or share extra facilities and equipmentcross-train employeesFlexible Capacity (vary mix by segment)


Predictable Demand Patterns and Their Underlying Causes (Table 9-1)Predictable Cycles of Demand Levels dayweekmonth yearother

Underlying Causes of Cyclical Variationsemploymentbilling or tax payments/refundspay daysschool hours/holidaysseasonal climate changespublic/religious holidaysnatural cycles (e.g. coastal tides)


Causes of Seemingly Random Changes in Demand Levels

WeatherHealth problemsAccidents, Fires, CrimeNatural disastersQuestion: which of these events can be predicted?


Alternative Demand Management Strategies (Table 9-2)

Take no actionlet customers sort it outReduce demand higher pricescommunication promoting alternative timesIncrease demandlower pricescommunication, including promotional incentivesvary product features to increase desirabilitymore convenient delivery times and placesInventory demand by reservation systemInventory demand by formalized queueing


Hotel Room Demand Curves by Segment and by Season (Fig. 9-2)Bh = business travelers in high season Bl = business travelers in low season Th = tourist in high season Tl = tourist in low seasonBh Bh Bl Bl ThTh Tl Tl Price per Room NightQuantity of Rooms Demanded at Each Price by Travelers in Each Segment in Each SeasonNote: hypothetical example


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 timeManage customer behavior and perceptions of waitInstall a reservations system


Alternative Queuing Configurations (Fig. 9-4)Single line, single server, single stageSingle line, single servers at sequential stagesParallel lines to multiple serversDesignated lines to designated serversSingle line to multiple servers (snake)Take a number (single or multiple servers)282921202423302531262732


Tailoring Queuing Systems to Market Segments: Criteria for Allocation to Designated Lines

Urgency of jobemergencies vs. non-emergenciesDuration of service transactionnumber of items to transactcomplexity of taskPayment of premium priceFirst class vs. economyImportance of customerfrequent users/loyal customers vs. others


Ten Propositions on the Psychology of Waiting Lines (Table 9-3)1.Unoccupied time feels longer 2.Preprocess/postprocess waiting feel longer than in-process3.Anxiety makes waiting seem longer4.Uncertain waiting is longer than known, finite waiting5.Unexplained waiting seems longer6.Unfair waiting is longer than equitable waiting 7.People will wait longer for more valuable services8.Waiting alone feels longer than in groups9.Physically uncomfortable waiting feels longer10. Waiting seems longer to new or occasional usersSources: Maister; Davis & Heineke; Jones & Peppiatt


Benefits of Effective Reservations Systems

Controls and smoothes demandPre-sells serviceInforms and educates customers in advance of arrivalCustomers avoid waiting in line for service (if service times are honored)Data capture helps organizations prepare financial projections


Characteristics of Well-designed Reservations Systems

Fast and user friendly for customers and staffCan answer customer questionsOffers options for self service (e.g. Web)Accommodates preferences (e.g., room with view)Deflects demand from unavailable first choices to alternative times and locationsIncludes strategies for no-shows and overbookingrequiring deposits to discourage no-showscanceling unpaid bookings after designated timecompensating victims of over-booking


Setting Capacity Allocation Sales Targets for a Hotel by Segment and Time Period (Fig. 9-5)Out of commission for renovationExecutive service guestsTransient guestsWeekend packageGroups and conventionsAirline contracts100%50% Week 7 (Low Season) MNights:TuTimeWThFSSnExecutive service guestsTransient guests W/EpackageGroups (no conventions)Airline contractsWeek 36 (High Season)MTuWThFSSnCapacity (% rooms)


Information Needed for Demand and Capacity Management Strategies

Historical data on demand level and composition, noting responses to marketing variablesDemand forecasts by segment under specified conditionsFixed and variable cost data, profitability of incremental salesSite-by-site demand variationsCustomer attitudes towards queuingCustomer evaluations of quality at different levels of capacity utilization


Chapter 10Planning the Service Environment


The Purpose of Service EnvironmentsThe 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 experiencesHelps the firm to create a distinctive image & positioning that is unique.


Comparison of Hotel Lobbies (Figure 10.1)Four Seasons Hotel, New York Orbit Hotel and Hostel, Los Angeles The servicescape is part of the value proposition!


The Mehrabian-Russell Stimulus-Response Model (Figure 10.2)Response Behaviors:Approach/ Avoidance & Cognitive ProcessesEnvironmental Stimuli & Cognitive ProcessesDimensions of Affect:Pleasure and Arousal


The Mehrabian-Russell Stimulus-Response ModelSimple and fundamental model of how people respond to environmentsPeoples conscious and unconscious perceptions and interpretation of the environment influence how they feel in that environmentFeelings, rather than perceptions or thoughts drive behaviorTypical outcome variable is approach or avoidance of an environment, but other possible outcomes can be added to the model as well


The Russell Model of Affect


The Russell Model of AffectEmotional 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 environmentArousal 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)


Drivers of AffectAffect can be caused by perceptions and cognitive processes of any degree of complexity. Simple Cognitive Processes, Perception of Stimulitangible cues (of service quality)consumer satisfactionComplex Cognitive Processesaffective charged schemata processingattribution processesThe 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.


Behavioral Consequence of Affect Basically, pleasant environments result in approach, and unpleasant environments result in avoidanceArousal acts as an amplifier of the basic effect of pleasure on behavior 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


An Integrated Framework Bitners ServiceScape Model (Figure 10.4)Environmental DimensionsPerceived ServiceScape

AmbientConditions

Space/Function

Signs,Symbols & ArtefactsHolistic Environ- mentModeratorsInternal ResponsesBehaviour


An Integrated Framework Bitners ServiceScape Model(cont)Identifies the main dimensions in a service environment and views them holisticallyCustomer and employee responses classified under, cognitive, emotional and psychological which would in turn lead to overt behavior towards the environmentKey to effective design is how well each individual dimension fits together with everything else


Dimensions of the Service EnvironmentAmbient 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) Service environments are complex and have many design elements. The main dimensions in the servicescape model includes:


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 ArtifactExplicit or implicit signals to communicate the firms image, help consumers find their way and to convey the rules of behavior


Impact of Music on Restaurant Diners (Table 10-2)


The Effects of Scents on the Perceptions of Store Environments (Table 10-3)

Evaluation Unscented Environment Mean RatingsScented Environment Mean Ratings Difference Store EvaluationNegative/positive 4.655.24+0.59Outdated/modern3.764.72+0.96Store Environment Unattractive/attractive4.124.98+0.86Drab/colorful 3.634.72+1.09Boring/Stimulating 3.754.40+0.65


The Effects of Scents on the Perceptions of Store Environmen

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