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Service Marketing Study Notes: Chapter One: 1. And 2. Why Study Services? How important is the service sector in our economy, and what are its principle industries? Service sector is increasing around the world with both developed and emerging economies Total for services reaches almost 71% of the value of GDP in Canada Most new jobs are created by services in Canada

Service Markets are shaped by: 1. Government policies: Changes in regulations Privatization New rules protecting customers, employees and the environment New agreements on trade and services 2. Social Changes: Rising consumer expectations More affluence Consumers short on time Increased desire for experiences vs. things Rising consumer ownership of technology ie. Computers, smartphones Easier access to information Immigration Growing but aging population 3. Business Trends: Push to increase shareholder value Emphasis on productivity and cost savings Manufacturers add value through service and sell services More strategic alliances and outsourcing Focus on quality and customer satisfaction Growth of franchising Marketing emphasis on non-profits

4. Advances on Information Technology: Growth of the internet Greater bandwidth Compact mobile equipment Wireless networking Faster more powerful software Digitization of graphics, text, audio and video 5. Globalization: More companies operating on a transnational basis Increased international travel International mergers and alliances Offshoring of customer service Foreign competitors invade domestic markets Success hinges on: 1. Understanding customers and competitors 2. Viable business models 3. Creation of value for both customers and the firm

3. what exactly is a service, and how should it be conceptualized and defined? Five categories within the non-ownership framework: 1. Rented-goods services: enable customers to obtain temporary rights to exclusive use of a physical good that they prefer not to own eg. Boats 2. Defined space and place rentals: customers obtain use of a defined portion of a larger space in a building, vehicle, or other area, sharing its use with other customers under varying levels of privacy eg. Hotel room, seat in an airplane 3. Labour and expertise rentals: customers hire other people to perform the work that they either choose not to do for themselves or are unable to do because they lack the necessary expertise, tools or skills. Eg. Plumber 4. Access to shared physical environments: may be located indoors, outdoors or both eg. Theme parks, zoos, museums 5. Systems and networks: access and usage: customers rent the right to participate in a specified network such as telecommunications, utilities and banking. In many instances two or more of these categories can be combined. When you take a taxi you are hiring both the driver and a vehicle. Service product: refers to the core output (intangible) Services (historical definition): Adam Smith distinguished between what he termed unproductive and productive labour in his book The Wealth of Nations in 1776. He determined that productive labour produced goods that could be stored after production and exchanged for money or other items of value. Unproductive labour however honorable, useful, or necessary created services that perished at the time of production and therefore did not contribute to wealth.

Services (current definition): economic activities offered by one party to another, most commonly employing time-based performances to bring about desired results in recipients themselves or in objects or other assets for which purchasers have responsibility. In exchange for their money, time, and effort, service customers expect to obtain value from access to goods, labour, professional skills, facilities, networks, and systems but they do not normally take ownership of any of the physical elements involved.

4. What distinctive marketing challenges do services present relative to goods? EIGHT COMMON DIFFERENCES BETWEEN SERVICES AND GOODS: 1. Most service products cannot be inventoried - perishability 2. Intangible elements usually dominate the value creation harder to evaluate and distinguish from competitors 3. Services are often difficult to visualize and understand customers perceive greater risk and uncertainty 4. Customers may be involved in co-production customers interact with providers equipment, facilities and systems 5. People may be part of the service experience appearance, attitude and behavior of service personnel and other customers can shape the experience and affect satisfaction 6. Operational inputs and outputs tend to vary more widely harder to maintain consistency, and service quality or to lower costs through higher productivity 7. The time factor often assumes great importance customers dislike wasting time waiting, want service at times that are convenient 8. Distribution may take place through nonphysical channels information based services can be delivered through electronic channels such as internet or voice telecommunications

5. Why do services need an expanded marketing mix, comprising of 8Ps rather than 4 Ps? THE 8 PS OF SERVICE MARKETING 1. Product elements Embrace all aspects of service performance that create value, Core product responds to customers primary need Help customers use core product through array of supplementary service elements Creates a service concept that offers value to customers and satisfies better than competitors

2. Place and time Delivery decisions: Where, When, How Geographic locations served, Service schedules, Physical channels, Electronic channels, Customer control and convenience, Channel partners / intermediaries 3. Price and other user outlays Traditional pricing tasks: o Selling price, discounts, premiums o Margins for intermediaries (if any) o Credit terms Service marketers must recognize that customer outlays involve more than price paid to seller Identify and minimize other costs incurred by users: o Costs associated with service usage (e.g., travel to service location, parking, phone, babysitting, etc.) o Time expenditures, especially waiting o Unwanted mental and physical effort o Negative sensory experiences 4. Promotion and education Informing, educating, persuading, reminding customers Marketing communication tools Media elements (print, broadcast, outdoor, retail, the Internet, etc.) Personal selling, customer service Sales promotion Publicity/PR Imagery and recognition Branding Corporate design Content Information, advice Persuasive messages Customer education/training


Processes How firm does things may be as important as what it does Customers often involved in processes, especially when acting as co-producers of service Process involves choices of method and sequence in service creation and delivery o Design of activity flows o Number and sequence of actions for customers o Nature of customer involvement o Role of contact personnel o Role of technology, degree of automation Badly designed processes waste time, create poor experiences, and disappoint customers 6. Physical Environment Design servicescape and provide tangible evidence of service performances Create and maintain physical appearances o Buildings/landscaping o Interior design/furnishings

o Vehicles/equipment o Staff grooming/clothing o Sounds and smells o Other tangibles Manage physical cues carefully can have profound impact on customer impressions

7. People Interactions between customers and employees influence perceptions of service quality Need the right customer-contact employees, performing tasks well o Job design o Recruiting o Training o Motivation Need the right customers for firms mission o Contribute positively to experience of other customers o Possessor can be trained to have needed skills (co-production) o Can shape customer roles and manage customer behaviour 8. Productivity Productivity and quality must work hand in hand Improving productivity key to reducing costs Improving and maintaining quality essential for building customer satisfaction and loyalty Ideally, strategies should be sought to improve both productivity and quality simultaneouslytechnology often the key o Technology-based innovations have potential to create high payoffs o But, must be user friendly and deliver valued customer benefits

The framework for developing a services marketing strategy: 1. Understanding the customer: how they search for information, how they behave in specific environments, how they choose their supplier 2. Building the service model: create a value proposition utilizing the developed service concept and select physical and electronic channels for the service delivery. Develop a business model and set prices allowing for your target profit margin. Educate consumers and position your service against competitors 3. Manage the customer interface: Design and manage service processes, balance demand against productive capacity, plan the service environment and manage service employees for competitive advantage 4. Implement profitable service strategies: create customer relationships and build loyalty, plan for service recovery and create customer feedback systems, continuously improve service quality and productivity, organize for change management and service leadership

7 CHAPTER TWO: 1. What are the four broad categories of services? And why does each pose such distinctive service-management challenges? FOUR BROAD CATEGORIES OF SERVICES (PROCESSING): 1. People processing: services directed at peoples bodies. The customer must be prepared to co-operate actively with the service operation. Managers need to pay attention not only to the service output but also to the service process from the standpoint of the customer. Tangible actions. Ie. Health care, beauty salons 2. Possession Processing: services directed at physical possessions. The output should be a satisfactory solution to the customers problem. The customers involvement is usually limited to dropping off the item that needs processing, requesting the service, explaining the service requirements, and later returning to pick the item up and pay the bill. In such instances production and consumption can be seen as separable. Tangible actions. Ie. Laundry and dry cleaning. 3. Mental Stimulus Processing: services directed at peoples minds. Requires investment of time and some degree of mental effort on the customers part. They need only be mentally in communication with the information that is being presented. Due to customers position of dependency and potential manipulation strong ethical standards and oversight must be present. Intangible actions. Ie. Education 4. Information Processing: services directed at intangible assets. Has been revolutionized by computers, it is the most intangible form of service output but it may be transformed into more enduring, tangible forms such as letters, cds, books or reports. Intangible actions. Ie. Accounting.

2. What is the three-stage model of service consumption? And which perspectives help us to understand and better manage consumer behavior at each stage?

THE THREE-MODEL STAGE OF SERVICE CONSUMPTION: 1. THE PREPURCHASE STAGE: (1) Awareness of a need need arousal, seek solution (2) Information search Clarify needs, Explore solutions Identify alternative service products and suppliers (3) Evaluation of alternatives (solutions and suppliers) Review supplier information (advertising, brochures, websites) Review information from third parties (published reviews, blogs, satisfaction ratings) Discuss options with service personnel Get advice and feedback from third party advisors, other customers Make decision on service purchase 2. SERVICE ENCOUNTER STAGE (1) Request service from chosen supplier or initiate self-service (payment may be upfront or billed later) (2) Service delivery by personnel or self-service Service encounters range from high- to low-contact (high contact include airline, GOOD restaurant, nursing home) (LOW include cable tv, internet banking) Understanding the servuction system Service marketing systems: high-contact and low-contact Role and script theories Theatre as a metaphor for service delivery: An integrative perspective Implications for customer participation in service creation and delivery 3. POST-ENCOUNTER STAGE (1) Evaluation of service performance (2) Future intentions Customers have expectations prior to consumption, observe service performance, compare it to expectations o Positive disconfirmation if better than expected o Confirmation if same as expected o Negative disconfirmation if worse than expected Research shows links between customer satisfaction and a firms financial performance

Evaluation in advance of purchase is a result of attributes: i. ii. Search attributes: tangible characteristics that customers can evaluate prior to purchase ie. Price, parking, menu Experience attributes: such as reliability, ease of use, and customer support that inexperienced users can only discern during delivery and consumption ie. Atmosphere in a restaurant Credence attributes: characteristics that some customers find hard to evaluate even after the consumption often related to the benefits delivered. Ie. How well did the dental hygienist clean your teeth?


9 3. What perceived risk do customers face in selecting, purchasing, and using services? And how can firms reduce consumer risk perceptions? TYPES OF PERCIEVED RISK IN PURCHASING AND USING SERVICES: 1. Functional risk: unsatisfactory performance outcomes 2. Financial risk: monetary loss, unexpected costs 3. Temporal risk: wasting time, consequences of delays 4. Physical risk: personal injury or damage to possessions 5. Psychological risk: personal fears and emotions 6. Social risk: how others will think and react 7. Sensory: unwanted effects on the five senses How might an individual handle perceived risk? 1. Seek info form personal sources (family, friends) 2. Rely on a firm with a good reputation 3. Look for guarantees or warrantees 4. Visit service facilities, try aspects before purchase 5. Examine tangible clues or other physical evidence 6. Use the web to compare service offerings/ independent reviews How can service suppliers reduce perceived risk? 1. Offer performance warrantees 2. Money-back guarantees 3. Encourage prospective customers to view brochures, website and videos 4. Encourage prospective customers to visit the facility before purchasing 5. Institute visible safety procedures 6. Train staff to be empathetic to customers 7. Have an automated message about anticipated problems 8. Give customers access to online info about the status of an order

10 4. How do customers from expectations of service? Customers evaluate service quality by comparing what they expected with what they perceive they received from a particular supplier. Zone of tolerance: a range of service within which customers dont pay explicit attention to service performance. The size of the zone of tolerance can increase or decrease for individual customers depending on such factors as competition, price, or importance of specific service attributes, each of which can influence the level of adequate service levels. Desired service: the type of service customers hopes to receive. A wished for level a combination of what customers believe can and should be delivered in the context of their personal needs. Predicted service: the level of service that customers actually anticipate receiving. Service encounter is the moment of truth

Servuction system: (combines the terms service and production) Christopher Lovelock describes the part of the service organizations physical environment that is visible to customers, contact personnel, other customers and very importantly the customer in person. He expanded this framework to embrace three overlapping elements: service operations, service delivery and other contact points. Service operations: where inputs are processed and the elements of the service product are created Service delivery: where final assembly of these elements take place and the product is delivered to the customer, often in the presence of other customers Other contact points: which embraces all points of contact with customers including advertising, billing, and market research.

11 Service marketing system: the visible part of service operations, service delivery, and other contact points. This represents all the many different ways the customer may learn about and encounter the organization in question. 5. How do role theory and script theory help understand consumer behavior during the service encounter? Role theories: if viewed from a theatrical perspective, both employees and customers act out their parts in the performance according to predetermined roles. Which can be defined as a set of behavior patterns learned through experience and communication, to be performed by an individual in a certain social interaction in order to attain maximum effectiveness in goal accomplishment. Employees must perform their roles with reference to customer expectations or risk dissatisfying or losing customers altogether. Customers must play by the rules or risk causing problems for the firm, its employees and even other customers. Script theories: a service script specifies the actions that customers and employees are expected to perform. Scripts are sequences of behavior that both employees and customers are expected to learn and follow during service delivery. Customers learn scripts through experience, education and communication with others. Theatre as a metaphor: service delivery consist of a series of events that customers experience as performance. Service facilities contain a stage on which the drama unfolds. Some stages have minimal props others are more elaborate, some are tightly scripted (passport officials) and some are more improvisational (teaching university). Front stage personnel are members of the cast (actors) and supported by the back stage production team. Costumes are uniforms. Delight: is a function of three components: 1. Unexpectedly high levels of performance 2. Arousal (excitement, surprise) and 3. Positive affect (pleasure, joy, happiness)

12 CHAPTER THREE: What do we mean by a service product? When customers purchase a manufactured good such as a camera, a commodity such as diesel or an agricultural product such as a bag of potatoes, they take a title to physical objects. Even though there are physical elements, there is a big portion of the price but the value added by services (labour and special equipment used). A service product comprises all elements of the service performance, both physical and intangible that creates value for customers.

Core product: the component that supplies the central, problem-solving benefits that customers seek. Supplementary services: these elements augment the core product, both facilitating its use and enhancing its value and appeal The flower of service: supplementary services play one of two roles. Facilitating supplementary services are either required for service delivery or aid in the use of the core product. Enhancing supplementary services add extra value for customers. Facilitating Services: 1. Information 2. Order-taking 3. Billing 4. Payment Enhancing Services: 5. Consultation 6. Hospitality 7. Safekeeping 8. Exceptions Product: implies a defined and consistent bundle of output and also the ability to differentiate one bundle of output from another.

13 2. What insights can we obtain from flowcharting service usage? Helps management visualize the customers total service experience Useful for distinguishing between core product itself and service elements that supplement core Restaurants: Food and beverage (core) Reservations (supplementary services) Nature of customer involvement with service organizations varies by type of service: People processing Possession processing Mental Stimulus processing Information processing

14 3. How should we categorize supplementary services that surround core products, and how do they add value for customers?

Not every core product is surrounded by all eight supplementary elements Nature of product helps to determine: Which supplementary services must be offered Which might usefully be added to enhance value and ease of use People-processing and high-contact services have more supplementary services Market positioning strategy determines which supplementary services should be included Firms with different levels of service often add extra supplementary services for each upgrade in service level

Customers often require information about how to obtain and use a product or service. Examples of elements: Directions to service site, Schedule/service hours, Prices, Conditions of sale Usage instructions. Oder Taking: Customers need to know what is available and may want to secure commitment to delivery. The process should be fast and smooth. Examples of elements: Applications, Order entry, Reservations and check-in Billing: How much do I owe you? Bills should be clear, Accurate, and intelligible. Examples of elements: Periodic statements of account activity Machine display of amount due PAYMENT: Customers may pay faster and more cheerfully if you make transactions simple and convenient for them. Examples of elements: Self service payment, Direct to payee or intermediary Automatic deduction

15 Consultation: Value can be added to goods and services by offering advice and consultation tailored to each customers needs and situation. Examples of elements: Customized advice, Personal counseling, Management consulting Hospitality: Customers who invest time and effort in visiting a business and using its services deserve to be treated as welcome guests after all, marketing invited them! Examples of elements: Greeting, Waiting facilities and amenities Food and beverages, Toilets and washrooms, Security Safekeeping: Customers prefer not to worry about looking after the personal possessions that they bring with them to a service site. Examples of elements: Looking after possessions customers bring with them Caring for goods purchased (or rented) by customers Exceptions: Customers appreciate some flexibility when they make special requests and expect responsiveness when things dont go according to plan. Examples of elements: Special requests in advance, Complaints or compliments, Problem solving, Restitution 4. Why should firms create separate brand names for their different products? The spectrum of branding alternatives: 1. Branded house corporate branding: applies its name to multiple offerings often in unrelated fields ie. Virgin group 2. Sub-brands: the master brand is the primary frame of reference but the product itself has a distinctive name too ie. Air Canada Jazz 3. Endorsed brands: where the product brand dominates but the corporate name is still featured ie. Delta Sault Ste. Marie 4. House of brands individual product branding: ie. Proctor and Gamble, they have over 80 packaged goods promoted under their own branded name A HIERARCHY OF NEW SERVICE CATEGORIES: 1. Major service innovations: new products for markets that have not been previously defined eg. FedEx new overnight delivery system 2. Major process innovations: consist of using new processes to deliver existing core products in new ways, with additional benefits eg. Athabasca University competes with other Canadian universities by delivering undergraduate and graduate programs in a non-traditional way. 3. Product-line extensions: are additions to current product lines by existing firms. Eg. Air Canada launched a new separate low cost division called Zip in 2002 in Calgary 4. Process-line extensions: are less innovative than process innovations, but often represent distinctive new ways of delivering existing products, either with the intent of offering more convenience and a different experience for existing customers, or of attracting new customers who find the traditional

16 approach unappealing eg. Canadian tire launched Canadiantire.ca in 2001 to further expand the business from bricks and mortar stores. 5. Supplementary service innovations: take the form of adding new facilitating or enhancing service elements to an existing core service or of significantly improving an existing supplementary service eg. Adding a parking lot, agreeing to take credit cards 6. Service improvements: involve modest changes in the performance of current products including improvements to either the core product or to existing supplementary services. Eg. TD trust staying open on Saturday 7. Style changes: represent the simplest type of innovation, typically involving no changes in either processes or performance. Eg. Repainting retail branches, change in uniforms. Reengineering: involves analyzing and redesigning processes to achieve faster and better performance. To reduce overall process time, analysts must identify each step, measure how long it takes, look for opportunities to speed it up (or even eliminate it all together) and cut out dead time. Goods and services may become a competitive substitute when they offer the same key benefits. Many service alternatives can be built around owning a good and doing to work oneself. Each alternative is based on choosing between ownership and rental of the necessary physical goods and between performing the self-service or hiring another person to perform the necessary tasks. See 3.12 on page 97 5.What are the main approaches to designing new services? THREE FACTORS CONTRIBUTING MOST TO SUCCESS IN NEW SERVICE DEVELOPMENT: 1. Market synergy: the new product fit well with the existing image of the firm, provided an advantage over competing products in terms of meeting customer need and received strong support during and after the launch from the firm and its branches. The firm had a good understanding of its customers purchasing decision behavior 2. Organizational factors: there was a strong inter-functional co-operation and co-ordination; development personnel were fully aware of why they were involved and of the importance of new products to the company. 3. Market research factors: detailed and scientifically designed market research studies were conducted early in the development process with a clear idea of the type of information to be obtained; a good definition of the product concept was developed before undertaking field surveys.


CHAPTER FOUR: 1. How can services be distributed? What are the main modes of distribution? IN SERVICES DISTRIBUTION EMBRACES THREE INTERRELATED ELEMENTS: 1. Information and promotion flow: distribution of information and promotion materials relating to the service offer. The objective is to get the customer interested in buying the service. 2. Negotiation flow: reaching an agreement on the service features and configuration, and the terms of the offer so that a purchase contract can be closed. The objective is to sell the right to use a service. 3. Product Flow: Many services especially those involving a people or physical possession processing, require physical facilities for delivery. Here, distribution strategy requires development of a network of local sites. For information-processing services (internet banding, online learning) the product flow can be undertaken via electronic channels, employing one or more centralized sites. INFORMATION AND PHYSICAL PROCESSES OF THE AUGMENTED SERVICE PRODUCT Information processes of the supplementary services flower: 1. 2. 3. 4. Information website, brochure, schedules, directions, prices Consultation -- conduct email dialog, use expert systems Order taking make/confirm reservations Hospitality record preferences

Physical processes of the supplementary services flower: 5. 6. 7. 8. Safekeeping track package movements Exceptions make special requests, solve problems Billing receive bill, make auction bid, check account status Payment pay by bank card, direct debit

Distribution options for customers: Customers visit the site: Multiple sites: bus service, fast food chain Single site: theatre, barbershop Service providers go to their customers: Multiple sites: mail delivery, auto club service Single site: house painting, mobile car wash Customer and service organization transact remotely (at arms length): Multiple sites: broadcast network, telephone company

18 Single site: credit card company, local TV station DRIVERS OF CHANNELS TO PROVIDE SERVICE TO CONSUMERS: 1. For complex and high-perceived risk services, people tend to rely on personal channels eg. Prefer face to face interaction when obtaining a mortgage 2. Individuals with higher confidence and knowledge about a service and/or the channel are more likely to use impersonal and self-service channels 3. Consumers with a high need for personal interaction are less likely to be motivated to try out self-service channels 4. Customers who look for instrumental aspects of a transaction prefer more convenience and this often means the use of self-service channels 5. Convenience is a key driver of channel choice to the majority of consumers. Service convenience means saving time and effort rather than saving money. A customers search for convenience is not just confined to the purchase of core products but also extends to convenient times and places. 3. What are the implications for a firm delivering through both physical and electronic channels? HOW TO LOCATE YOUR SERVICE: Service should be delivered in a bricks and mortar context convenience is key to customers. Firms should make it easier for people to access frequently purchased services facing active competition ie. Quick restaurant. Locational constraints: Geographical and climate constraints: need to locate a ski hill where theres mountains Operational requirements (noise, environmental): airports Economies of scale: hospitals Use of ministores has increased this involves creating numerous small service factories to maximize geographical coverage. Ie. Atms Locating in multi purpose facilities convenient for customer as it is close to where they work or live When should the service be delivered: this depends on what your service offering includes perhaps 24/7 or mall hours. SERVICE DELIVERY INNOVATIONS FACILITATED BY TECHNOLOGY: 1. Development of smart cellphones, and PDAs and Wi-Fi high speed internet technology that can link users to the internet wirelessly 2. Use of voice recognition technology that allows customers to give information and request simply by speaking into a microphone 3. Creation of websites that provide information, take orders, and even serve as a delivery channel for information based services

19 4. Commercialization of smart cards containing a microchip that can store detailed information about the customer and act as an electronic purse containing digital money. The Internet facilitates five categories of flow: 1. 2. 3. 4. 5. Information Negotiation Service Transactions Promotion

4. What roles should intermediaries play in distributing services?

Popular way to expand delivery of effective service concept Franchising is a fast growth strategy, when o Resources are limited o Long-term commitment of store managers is crucial o Local knowledge is important o Fast growth is necessary to pre-empt competition Study shows significant attrition rate among franchisors in the early years of a new franchise system o One-third of all systems fail within first 4 years o Three-fourths of all franchisors cease to exist after 12 years Disadvantages of franchising o Some loss of control over delivery system and, thereby, over how customers experience actual service o Effective quality control is important yet difficult o Conflict between franchisees may arise especially as they gain experience Alternative: license another supplier to act on the original suppliers behalf to deliver core product, for example: o Trucking companies, Banks selling insurance products

20 5. What are the drivers of globalization services and what are there distribution? Integrating mobile phones into the service delivery can be used as a means to: 1. Access services 2. Alert customers to opportunities or problems by delivering the right information or interaction at the right time 3. Update information in real time to ensure that it is continuously accurate and relevant Challenges to distribution in large and diverse domestic markets: 1. Physical logistics due to distances involved and multiple time zones 2. Languages: ie. Canada has two official languages English and French effects hiring policies, marketing efforts 3. Growth in proportion of immigrants who speak neither English or French How service processes affect international market entry: People-processing services: require direct contact with the customer 1. Export the service concept: acting alone or in partnership with local suppliers establishes a service factory in another country. The objective may be to reach out to new customers or follow existing corporate or individual customers to new locations. 2. Import customers: customers form other countries are invited to come to a service factory with distinctive appeal or competences in the firms home country 3. Transport customers to new locations: in the case of passenger transportation, embarking on international service takes the form of opening to routes to desired destinations Possession-processing services: require an ongoing local presence regardless of whether customers drop off items at the service facility or personnel visit the customers site Information-based services: includes mental-processing services and informationprocessing services. They can be distributed internationally in one of three ways: 1. Export the service to a local service factory: the service can be made available in a local facility that customers visit. 2. Import customers: customers may travel abroad to visit a specialist facility in which case the service takes on the characteristics of people processing service 3. Export the information via telecommunications and transform it locally: rather than ship object based services from their country of origin, the data can be downloaded from that country for physical production in local markets.


BARRIERS TO INTERNATIONAL TRADE IN SERVICES: Are slowly diminishing 1. Many countries require bilateral agreements on establishing new routes (flights) 2. Administrative delays 3. Refusal of immigration offices to provide work permits 4. Heavy taxes on foreign firms 5. Domestic-preference policies designed to protect local suppliers 6. Legal restrictions on operational and marketing procedures 7. Lack of broadly agreed upon accounting standards for services

22 CHAPTER FIVE: 1. What are the three main foundations to pricing a service?

Cost Based PricingAlternative objectives to pricing: Revenue and profit objectives: 1. Seek profit: Make the largest possible contribution or profit Achieve a specific target level but do not seek to maximize profits Maximize revenue from a fixed capacity by varying prices and target segments over time 2. Cover costs: Cover fully allocated costs including institutional overhead Cover costs of providing one particular service excluding overhead Cover incremental costs of selling one extra unit to one extra customer Patronage and User-Base objectives: 3. Build demand: Maximize demand (when capacity is not a constraint) subject to achieving a minimum level of revenues Achieve full capacity utilization, especially when high capacity utilization adds to the value created for all customers (ie. Full house at a basketball game) 4. Build a user base: Simulate trial and error adoption of a service. This is especially important to new services with high infrastructure costs and for membership-type services that generate significant revenues from their continued use after adoption Build market share and or a large user base. Especially if there are significant economies of scale that can lead to a competitive cost advantage.

23 The foundations to pricing can be described as a tripod, with costs to the provider, competition and value to the customer as the three legs Activity based costing (ABC): recognize that virtually all activities that take place within a firm directly or indirectly support the production, marketing and delivery of goods and services. ABC systems link resource expenses to the variety and complexity of goods and services produced not just to their physical volume. If implemented well ABC yields reasonably accurate cost information about service business activities and processes and about the costs of creating specific types of services, performing activities in different locations or serving specific customers Loss leaders: services sold at less than full cost to attract customers who will then be tempted to buy profitable service offerings from the same organization in the future. Price competition intensifies with: 1. 2. 3. 4. Increasing number of competitors Increasing number of substituting offers Wider distribution of competitor and or substitution offers Increasing surplus capacity in the industry

Competition-based Pricing- Service industries are not competitive when one or more of the following circumstances are present: 1. Non-price related costs of using competing alternatives is high (we save you time and effort) 2. Personal relationships matter (hair styling, dentist) 3. Switching costs are high (cellphone providers) 4. Time and location specificity reduce choice Value pricing: no customer will pay more for a service than he or she thinks its worth. Determine the value customers place on your service and price accordingly. You can enhance gross value by adding benefits to the core product and by enhancing supplementary services. You can reduce uncertainty in the customer by including benefit driven pricing and flat rate pricing. Relationship pricing: give customer both price and non-price incentives to consolidate their business with a single supplier. Ie. Discounts on large purchases, you share with the customer the economies of scale. Cost leadership: the balancing of cost with value ie. WestJet

24 3. How to customers perceive the non-monetary costs of obtaining service, and what might service providers do to reduce them? Managing the perception of value included reducing related monetary and nonmonetary costs. Non-monetary costs that can be managed include: 1. Time costs: time spend on one activity represents and opportunity cost because it might have been spend more profitably elsewhere 2. Physical costs: fatigue, discomfort etc. 3. Psychological costs: such as mental discomfort, perceived risk, cognitive dissonance, feelings of inadequacy and fear 4. Sensory costs: relate to unpleasant sensations relating to any of the five senses

25 4. How does revenue management improve profitability? Revenue management: aka yield management involves setting prices according to predicted demand levels among different market segments. The least sensitive segment is the first to be allocated capacity; paying the highest price; other segments follow at progressively lower prices. This practice has been most effective when applied to operations characterized by one or more of the following: relatively fixed capacity, a high fixed-cost structure, perishable inventory, variable and uncertain demand, or varying customer price sensitivity. Price elasticity: how sensitive demand is to changes in price is computed by percentage of change in demand divided by percentage of change in price. If a small change in price has a big impact on sales the product is said to be price elastic. If a change in price has little effect on sales the product is said to be price inelastic. RM charges more for customers booking service closer to time of consumption instead of on a first come first served basis o Charge different value segments different prices for same product Predicts how many customers will use a given service at a specific time at each of several different price levels and then allocates capacity at each level or price bucket If booking pace for a higher-paying segment is stronger than expected, additional capacity is allocated to this segment and taken away from the lowest- paying segment Rate fences allow customers to self segment on the basis of service characteristics and willingness to pay. This helps companies restrict lower prices to customers willing to accept certain restrictions

5. What are some key ethical concerns today about service pricing strategies? Price customization: that is charging different customers different prices for what is in effect the same product. Rate fences can be physical (different seat in a theatre) or non-physical (weekday afternoon golf rates) ETHICAL CONCERNS IN SERVICE PRICING: 1. Pricing schedules are too complex (why is my phone bill so high) 2. Companies pile on fees (cell phone providers system access, 911 etc.) How to design fairness into revenue management: 1. Design price schedules and fences that are clear, logical and fair 2. Use high published prices and frame fences as discounts 3. Communicate consumer benefits of revenue management 4. Use bundling to hide discounts ie. Plane tickets

26 5. Take care of loyal customers 6. Use service recovery to compensate for overbooking (give people 300 bucks instead of taking the flight) o Design clear, logical, and fair price schedules and fences o Use high published prices and present fences as opportunities for discounts rather than quoting lower prices and using fence as basis to impose surcharges o Communicate consumer benefits of revenue management o Use bundling to hide discounts o Take care of loyal customers o Use service recovery to compensate for overbooking 6. What are the seven questions marketers need to answer before designing an effective pricing schedule? 1. How much to charge? Industry average, costs 2. What basis for pricing? Weight, time, each one different?, resources consumed, etc. 3. Who should collect payment? ORG, intermediary, commission. 4. Where should payment be made? Location where delivered, outlet, purchasers home. 5. When should payment be made? Delivery, certain days of week, before getting it. 6. How should payment be made? Cash, token, cheque, credit card, vouchers. 7. How to communicate prices? Advertising, signs, display, salesppl.