Services Marketing Christopher Lovelock

Chapter 1
Introduction to
Services Marketing
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1-
How Important is the Service Sector in
Our Economy?
 In most countries, services add more economic value

than agriculture, raw materials and manufacturing
combined
 In developed economies, employment is dominated by
service jobs and most new job growth comes from
services
 Jobs range from high-paid professionals and technicians
to minimum-wage positions
 Service organizations can be any size—from huge global
corporations to local small businesses
 Most activities by government agencies and nonprofit
organizations involve services
Services dominate the United States Economy:
GDP by Industry, 2001 (Fig. 1.1)
Agriculture, Forestry,
Mining, Construction 8%
Finance, Insurance,
Real Estate
Manufacturing 14% 20%
Government Wholesale and

(mostly services) Retail Trade
13% 16%
Other Services 11% Transport, Utilities,

SERVICES Communications
Business Health 8%
Services 6%
5%
Source: Bureau of Economic Analysis, November 2002
Changing Structure of Employment
as Economic Development Evolves (Fig. 1.2)
Share of
Employment
Agriculture
Services
Industry
Time, per Capita Income Source: IMF, 1997
Some Service Industries Profiled by NAICS but Not
Identified by SIC Codes
 Casino Hotels  HMO Medical Centers
 Continuing Care Retirement  Industrial Design Services

Communities
 Investment Banking and
 Diagnostic Imaging Centers Securities Dealing
 Diet and Weight Reducing  Management Consulting Services

Centers
 Satellite Telecommunications
 Environmental Consulting
 Telemarketing Bureaus
 Gold Courses and Country Clubs
 Temporary Help Services
 Hazardous Waste Collection
Internal Services
 Service elements within an organization that facilitate

creation of--or add value to--its final output
 Includes:
 accounting and payroll administration
 recruitment and training
 legal services
 transportation
 catering and food services
 cleaning and landscaping
 Increasingly, these services are being outsourced
Major Trends in Service Sector (Fig. 1.3)
 Government Policies (e.g., regulations, trade agreements)

 Social Changes (e.g., affluence, lack of time, desire for
experiences)
 Business Trends
 Manufacturers offer service
 Growth of chains and franchising
 Pressures to improve productivity and quality
 More strategic alliances
 Marketing emphasis by nonprofits
 Innovative hiring practices
 Advances in IT (e.g., speed, digitization, wireless, Internet)
 Internationalization (travel, transnational companies)
Some Impacts of Technological Change
 Radically alter ways in which service firms do business:

 with customers (new services, more convenience)
 behind the scenes (reengineering, new value chains)
 Create relational databases about customer needs and

behavior, mine databanks for insights
 Leverage employee capabilities and enhance mobility
 Centralize customer service—faster and more responsive
 Develop national/global delivery systems
 Create new, Internet-based business models
Marketing Relevant
Differences Between
Goods and Services
Defining the Essence of a Service
 An act or performance offered by one party to another

 An economic activity that does not result in ownership
 A process that creates benefits by facilitating a desired
change in:
 customers themselves
 physical possessions
 intangible assets
Distinguishing Characteristics of Services
(Table 1.1)
 Customers do not obtain ownership of services

 Service products are ephemeral and cannot be inventoried
 Intangible elements dominate value creation
 Greater involvement of customers in production process
 Other people may form part of product experience
 Greater variability in operational inputs and outputs
 Many services are difficult for customers to evaluate
 Time factor is more important--speed may be key
 Delivery systems include electronic and physical channels
Marketing Implications - 1
 No ownership
 Customers obtain temporary rentals, hiring of personnel, or access
to facilities and systems
 Pricing often based on time
 Customer choice criteria may differ for renting vs. purchase--may
include convenience, quality of personnel
 Can’t own people (no slavery!) but can hire expertise and labor
 Services cannot be inventoried after production

 Service performances are ephemeral—transitory, perishable
Exception: some information-based output can be recorded
in electronic/printed form and re-used many times
 Balancing demand and supply may be vital marketing strategy
 Key to profits: target right segments at right times at right price
 Need to determine whether benefits are perishable or durable
 Customers may be involved in production process

 Customer involvement includes self-service and cooperation with
service personnel
 Think of customers in these settings as “partial employees”
 Customer behavior and competence can help or hinder productivity,
so marketers need to educate/train customers
 Changing the delivery process may affect role played by customers
 Design service facilities, equipment, and systems with customers in
mind: user-friendly, convenient locations/schedules
 Intangible elements dominate value creation
 Understand value added by labor and expertise of personnel
 Effective HR management is critical to achieve service quality
 Make highly intangible services more “concrete” by creating and
communicating physical images or metaphors and tangible clues
Value Added by Tangible vs Intangible Elements in
Goods and Services (Fig. 1.4)
Hi
Salt
Soft drinks
CD Player
Golf clubs
New car
Tailored clothing
Tangible Elements
Furniture rental
Fast food restaurant
Plumbing repair
Office cleaning
Health club
Airline flight
Retail banking
Insurance
Weather forecast
Lo Intangible Elements Hi
 Other people are often part of the service product

 Achieve competitive edge through perceived quality of employees
 Ensure job specs and standards for frontline service personnel reflect
both marketing and operational criteria
 Recognize that appearance and behavior of other customers can
influence service experience positively or negatively
 Avoid inappropriate mix of customer segments at same time
 Manage customer behavior (the customer is not always right!)
 Greater variability in operational inputs and outputs

 Must work hard to control quality and achieve consistency
 Seek to improve productivity through standardization, and by training
both employees and customers
 Need to have effective service recovery policies in place because it is
more difficult to shield customers from service failures
 Often difficult for customers to evaluate services

 Educate customers to help them make good choices, avoid risk
 Tell customers what to expect, what to look for
 Create trusted brand with reputation for considerate, ethical
behavior
 Encourage positive word-of-mouth from satisfied customers
 Time factor assumes great importance

 Offer convenience of extended service hours up to 24/7
 Understand customers’ time constraints and priorities
 Minimize waiting time
 Look for ways to compete on speed
 Distribution channels take different forms

 Tangible activities must be delivered through physical channels
 Use electronic channels to deliver intangible, information-based
elements instantly and expand geographic reach
Important Differences Exist
among Services
Four Categories of Services
Employing Different Underlying Processes (Fig. 1.5)
What is the Who or What is the Direct Recipient of the Service?

Nature of the
DIRECTED AT PEOPLE DIRECTED AT POSSESSIONS
Service Act?
TANGIBLE People Processing Possession Processing
ACTS
e.g., airlines, hospitals, e.g., freight, repair, cleaning,
haircutting, restaurants hotels, landscaping, retailing,
fitness centers recycling
INTANGIBLE Mental Stimulus Information Processing

ACTS (directed at intangible assets)
Processing
e.g., broadcasting, consulting, e.g., accounting, banking,

education, psychotherapy insurance, legal, research
Implications of Service Processes
(1) Seeking Efficiency May Lower Satisfaction
Processes determine how services are created/delivered—

process change may affect customer satisfaction
 Imposing new processes on customers, especially

replacing people by machines, may cause dissatisfaction
 New processes that improve efficiency by cutting costs
may hurt service quality
 Best new processes deliver benefits desired by customers
 Faster
 Simpler
 More conveniently
 Customers may need to be educated about new

procedures and how to use them
Implications of Service Processes:
(2) Designing the Service Factory
People-processing services
require customers to visit the
“service factory,” so:
 Think of facility as a “stage” for service
performance
 Design process around customer
 Choose convenient location
 Create pleasing appearance, avoid
unwanted noises, smells
 Consider customer needs--info,
parking, food, toilets, etc.
(3) Evaluating Alternative Delivery Channels
For possession-processing, mental-stimulus processing, or

information processing services, alternatives include:
1. Customers come to the service factory

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

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

supply, business may be lost
2. If demand is low, productive
capacity is wasted
Potential solutions:
- Manage demand
- Manage capacity
(5) Applying Information Technology
All services can benefit from IT,

but mental-stimulus processing
and information-processing
services have the most to gain:
 Remote delivery of information-
based services “anywhere, anytime”
 New service features through
websites, email, and internet (e.g.
, information, reservations)
 More opportunities for self-service
 New types of services
(6) Including People as Part of the Product
Involvement in service
delivery often entails
contact with other people
 Managers should be concerned
about employees’ appearance,
social skills, technical skills
 Other customers may enhance
or detract from service
experience--need to manage
customer behavior
The Services
Marketing Mix
Elements of The Services Marketing Mix:
“7Ps” vs. the Traditional “4Ps”
Rethinking the original 4Ps

 Product elements
 Place and time
 Promotion and education
 Price and other user outlays
Adding Three New Elements
 Physical environment
 Process
 People
The 7Ps:
(1) Product Elements
All Aspects of Service Performance that Create Value
 Core product features—both tangible and intangible

elements
 Bundle of supplementary service elements

 Performance levels relative to competition
 Benefits delivered to customers (customers don’t buy a
hotel room, they buy a good night’s sleep)
 Guarantees
The 7Ps:
(2) Place and Time
Delivery Decisions: Where, When, and How

 Geographic locations served
 Service schedules
 Physical channels
 Electronic channels
 Customer control and convenience
 Channel partners/intermediaries
The 7Ps:
(3) Promotion and Education
Informing, Educating, Persuading, and Reminding Customers

 Marketing communication tools
 media elements (print, broadcast, outdoor, retail, Internet, etc.)
 personal selling, customer service
 sales promotion
 publicity/PR
 Imagery and recognition

 branding
 corporate design
 Content
 information, advice
 persuasive messages
 customer education/training
The 7Ps:
(4) Price and Other User Outlays
Marketers Must Recognize that Customer Outlays Involve

More than the Price Paid to Seller
Traditional Pricing Tasks
 Selling price, discounts, premiums
 Margins for intermediaries (if any)
 Credit terms
Identify and Minimize Other Costs Incurred by Users
 Additional monetary costs associated with service usage (e.g., travel to
service location, parking, phone, babysitting,etc.)
 Time expenditures, especially waiting
 Unwanted mental and physical effort
 Negative sensory experiences
The 7Ps:
(5) Physical Environment
Designing the Servicescape and providing tangible

evidence of service performances
 Create and maintaining physical appearances
 buildings/landscaping
 interior design/furnishings
 vehicles/equipment
 staff grooming/clothing
 sounds and smells
 other tangibles
 Select tangible metaphors for use in marketing

communications
7Ps:
(6) Process
Method and Sequence in Service Creation and Delivery

 Design of activity flows
 Number and sequence of actions for customers
 Providers of value chain components
 Nature of customer involvement
 Role of contact personnel
 Role of technology, degree of automation
The 7Ps:
(7) People
Managing the Human Side of the Enterprise

 The right customer-contact employees performing tasks
well
 job design
 recruiting/selection
 training
 motivation
 evaluation/rewards
 empowerment/teamwork
 The right customers for the firm’s mission

 fit well with product/processes/corporate goals
 appreciate benefits and value offered
 possess (or can be educated to have) needed skills (co-production)
 firm is able to manage customer behavior
Managing the 7Ps Requires Collaboration between
Marketing, Operations, and HR Functions (Fig. 1.7)
Operations Marketing
Management Management
Customers
Human Resources
Management
Chapter 2
Consumer Behavior in
Service Encounters
Where Does the Customer Fit in a
Service Organization? (Fig. 2.1)
 Consumers rarely involved in manufacture of goods but
often participate in service creation and delivery
 Challenge for service marketers is to understand how
customers interact with service operations
 Flowcharting clarifies how customer involvement in service
encounters varies with type of process - see Fig. 2-1:
 People processing (e.g., motel stay): customer is physically involved
throughout entire process
 Possession processing (e.g., DVD repair): involvement may be limited to drop
off of physical item/description of problem and subsequent pick up
 Mental stimulus processing (e.g., weather forecast): involvement is mental,
not physical; here customer simply receives output and acts on it
 Information processing (e.g., health insurance): involvement is mental -
specify information upfront and later receive documentation of coverage
High-Contact and Low-Contact Services
High Contact Services

 Customers visit service facility and remain throughout
service delivery
 Active contact between customers and service personnel
 Includes most people-processing services
Low Contact Services
 Little or no physical contact with service personnel
 Contact usually at arm’s length through electronic or
physical distribution channels
 New technologies (e.g. Web) help reduce contact levels
Levels of Customer Contact with Service
Organizations (Fig. 2.2)
Emphasizes encounters
High with service personnel
N ur sing Home
HairCut
4- Star Hotel
Management Consulting
G ood Restaur ant
Teleph one Bank ing
Airline Tra vel (Econ.)
Retail Bank in g Car Repair

Motel Insurance
Dr y Cleaning
Fast Food
Movie Theater
Cable TV
Subway
• Internet Banking
Mail Based Repairs
Emphasizes encounters Internet-based Low

with equipment Services
Managing Service Encounters--1
 Service encounter: A period of time during which customers

interact directly with a service
 Moments of truth: Defining points in service delivery where

customers interact with employees or equipment
 Critical incidents: specific encounters that result in

especially satisfying/dissatisfying outcomes for either
customers or service employees
Managing Service Encounters--2
 Service success often rests on performance of junior

contact personnel
 Must train, coach, role model desired behavior
 Thoughtless or badly behaved customers can cause
problems for service personnel (and other customers)
 Must educate customers, clarify what is expected, manage
behavior
The Purchase Process for Services
(Adapted from Fig. 2-3)
Prepurchase Stage
 Awareness of need
 Information search
 Evaluation of alternative service suppliers
Service Encounter Stage
 Request service from chosen supplier
 Service delivery
Postpurchase Stage
 Evaluation of service performance
 Future intentions
Perceived Risks in
Purchasing and Using Services (Table 2.1)
 Functional – unsatisfactory performance outcomes
 Financial – monetary loss, unexpected extra costs
 Temporal – wasted time, delays lead to problems
 Physical – personal injury, damage to possessions
 Psychological – fears and negative emotions
 Social – how others may think and react
 Sensory – unwanted impacts to any of five senses
Factors that Influence
Customer Expectations of Services (Fig. 2.4)
Explicit & Implicit

Personal Needs Service Promises
Word-of-Mouth
Desired Service Past Experience
Beliefs about
What Is Possible
ZONE
OF
TOLERANCE
Perceived Service
Alterations
Adequate Service Predicted Service
Situational Factors
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 delivered
 Adequate Service Level: minimum acceptable level of

service
 Predicted Service Level: service level that customer

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

to accept variations in service delivery
Intangible Attributes, Variability, and Quality Control
Problems Make Services Hard to Evaluate
 Search attributes – Tangible characteristics that allow

customers to evaluate a product before purchase
 Experience attributes – Characteristics that can be
experienced when actually using the service
 Credence attributes – Characteristics that are difficult to
evaluate confidently even after consumption
 Goods tend to be higher in search attributes, services tend
to be higher in experience and credence attributes
 Credence attributes force customers to trust that desired
benefits have been delivered
How Product Attributes Affect
Ease of Evaluation) (Fig. 2.5)
Most Goods Most Services
Easy Difficult
to evaluate to evaluate
Clothing
Haircut
Foods
Chair
Education
Restaurant meals
Motor vehicle
Computer repair
Entertainment
Lawn fertilizer
Legal services
Complex surgery
High in search High in experience High in credence
attributes attributes attributes
Source: Adapted from Zeithaml
Customer Satisfaction is Central to the Marketing
Concept
 Satisfaction defined as attitude-like judgment following a

service purchase or series of service interactions
 Customers have expectations prior to consumption,
observe service performance, compare it to expectations
 Satisfaction judgments are based on this comparison
 Positivedisconfirmation if better than expected
 Confirmation if same as expected
 Negative disconfirmation if worse than expected
 Satisfaction reflects perceived service quality, price/quality

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

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

mundane services?
 Progressive Insurance has found ways to positively surprise

customers with customer-friendly innovations and
extraordinary customer service
A Service Business is a System Comprising Three
Overlapping Subsystems
Service Operations (front stage and backstage)

 Where inputs are processed and service elements created.
 Includes facilities, equipment, and personnel
Service Delivery (front stage)
 Where “final assembly” of service elements takes place
and service is delivered to customers
 Includes customer interactions with operations and other
customers
Service Marketing (front stage)
 Includes service delivery (as above) and all other contacts
between service firm and customers
Service Marketing System:
(1) High Contact Service--e.g., Hotel (Fig. 2.7)
Service Marketing System

Service Delivery System Other Contact Points
Advertising
Service Operations System Other
Customers Sales Calls
Interior & Exterior Market Research
Facilities Surveys
Billing / Statements
Technical Equipment The
Core Customer Miscellaneous Mail,
Phone Calls, Faxes, etc.
Service People Random Exposure to
Facilities / Vehicles
Other Chance Encounters
Backstage Front Stage
Customers with Service Personnel
(invisible) (visible)
Word of Mouth
Service Marketing System:
(2) Low Contact Service--e.g., Credit Card (Fig. 2.8)
Service Marketing System

Service Delivery System Other Contact Points
Service Operations System
Advertising
Mail
Market Research
The Surveys
Technical Self Service
Core Equipment Customer Random Exposures
Facilities, Personnel
Phone, Fax,
Web site Word of Mouth
etc. Front Stage
Backstage (visible)
(invisible)
Service as Theater
“ All the world’s a stage and all

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

performance unfolds
 Many service dramas are tightly scripted, others improvised
 Front-stage personnel are like members of a cast
 Like actors, employees have roles, may wear special
costumes, speak required lines, behave in specific ways
 Support comes from a backstage production team
 Customers are the audience—depending on type of
performance, may be passive or active
Role and Script Theories
 Role: A set of behavior patterns learned through experience

and communication
 Role congruence: In service encounters, employees and
customers must act out defined roles for good outcomes
 Script: A sequence of behavior to be followed by employees
and customers during service delivery
 Some scripts (e.g. teeth cleaning) are routinized, others flexible
 Technology change may require a revised script
 Managers should reexamine existing scripts to find ways to improve
delivery, increase productivity, enhance experiences
Chapter 3
Positioning 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
competitors
 Rather than attempting to compete in an entire market, firm
must focus efforts on those customers it can serve best
 Must decide how many service offerings with what
distinctive (and desired) characteristics
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 OFFERINGS
Narrow Wide
Unfocused
Service
Many Focused
(Everything
for everyone)
NUMBER
OF MARKETS
SERVED
Fully Focused
Market
(Service and
Focused
Few market focused)
Source: Robert Johnston
Four Principles of Positioning Strategy
1. Must establish position for firm or product in minds of

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

consistent message
3. Position must set firm/product apart from competitors
4. Firm cannot be all things to all people--must focus
Jack Trout
Uses of Positioning in
Marketing Management (Table 3.1)
 Understand relationships between products and markets

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

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

 distribution/service delivery
 pricing
 communication
Possible Dimensions for Developing Positioning
Strategies
 Product attributes
 Price/quality relationships
 Reference to competitors (usually shortcomings)
 Usage occasions
 User characteristics
 Product class
Developing a
Market Positioning Strategy (Fig. 3.3)
- Size
MARKET Define, Analyze
- Composition
ANALYSIS Market Segments
- Location
- Trends
Select
Target Segments
To Serve
INTERNAL - Resources
Marketing
- Reputation Articulate
ANALYSIS Desired Position Action
- Constraints
- Values in Market Plan
Select Benefits
to Emphasize
to Customers
- Strengths
COMPETITIVE - Weaknesses Analyze
ANALYSIS - Current Possibilities for
Positioning Differentiation
Source: Adapted from Michael R. Pearce
Positioning of Hotels in Belleville:
Price vs. Service Level (Fig. 3.4)
Expensive
Grand
Regency
PALACE
Shangri-La
High Moderate
Service Atlantic Service
Sheraton
Italia
Castle
Alexander IV
Airport Plaza
Less Expensive
Positioning of Hotels in Belleville:
Location vs. Physical Luxury (Fig. 3.5)
High Luxury
Regency
Grand
Shangri-La
Sheraton
PALACE
Financial Shopping District Inner
District and Convention Centre Suburbs
Castle Italia
Alexander IV
Atlantic
Airport Plaza
Moderate Luxury
Positioning after New Hotel Construction:
Price vs. Service Level (Fig. 3.6)
Expensive
Mandarin
New Grand Heritage
Marriott
Continental
Action?
Regency PALACE
Shangri-La
High No action? Moderate
Service Service
Atlantic
Sheraton
Italia
Castle
Alexander IV
Less Expensive Airport Plaza
Positioning after New Hotel Construction: Location
vs. Physical Luxury (Fig. 3.7)
High Luxury
Mandarin
New Grand
Continental Heritage
Marriott Regency
Sheraton Shangri-La
Action?
PALACE
Financial No action? Shopping District Inner

District and Convention Centre Suburbs
Castle Italia
Alexander IV
Atlantic
Airport Plaza
Moderate Luxury
Positioning Maps Help Managers to
Visualize Strategy
 Positioning maps display relative performance of competing
firms on key attributes
 Research provides inputs to development of positioning maps
 Challenge is to ensure that
 attributes employed in maps are important to target segments
 performance of individual firms on each attribute accurately
reflects perceptions of customers in target segments
 Predictions can be made of how positions may change in the light
of new developments in the future
 Simple graphic representations are often easier for managers to
grasp than tables of data or paragraphs of prose
 Charts and maps can facilitate a “visual awakening” to threats
and opportunities and suggest alternative strategic directions
Chapter 4
Creating the
Service Product
Key Steps in Service Planning:
Matching Opportunities to Resources
 Must relate marketing opportunities to firm’s resources

(physical, financial, technological, human)
 Identify, evaluate firm’s marketing assets
 Customer portfolio/lifetime value (customer equity)
 Market knowledge
 Marketing implementation skill
 Product line
 Competitive positioning strategies
 Brand reputation (brand equity)
 Identify, evaluate firm’s operating assets
 Physical facilities, equipment
 Technology and systems (especially IT)
 Human resources (numbers, skills, productivity)
 Leverage through alliances and partnerships
 Potential for customer self service
 Cost structure
Service Design Involves Matching Marketing
Concept with Operations Concept (Fig. 4.1)
Corporate Objectives
and Resources
Marketing Assets Operating Assets

(Customer Base, Mkt. Knowledge, (Facilities/Equipment, IT Systems,
Implementation Skills, Brand Reput.) People, Op. Skills, Cost Structure)
Service Marketing Concept Service Operations Concept

•Benefits to customer from core/
•Nature of processes
supplementary elements, style, •Geographic scope of ops
service level, accessibility •Scheduling
•User costs/outlays incurred •Facilities design/layout
•Price/other monetary costs •HR (numbers, skills)
•Time •Leverage (partners, self-service)
•Mental and physical effort •Task allocation: front/backstage
•Neg. sensory experiences staff; customers as co-producers
Service Delivery
Process
Understanding the
Components of the
Augmented Service Product
Shostack’s Molecular Model of a Total Market Entity
- Passenger Airline Service (Fig. 4-2)
Distribution
Price
Vehicle
Service
frequency
Transport In-flight
service
Pre- and
post-flight Food
service and
drink
KEY
Tangible elements
Intangible elements
Marketing Positioning
(Weighted toward evidence) Source: Shostack
Core Products and Supplementary Services
 Most firms offer customers a package of benefits:

 core product (a good or a service)
 supplementary services that add value to the core
 In mature industries, core products often become

commodities
 Supplementary services help to differentiate core products
and create competitive advantage by:
 facilitating use of the core service
 enhancing the value and appeal of the core
Core and Supplementary Product Design:
What Do We Offer and How Do We Create and Deliver It?
Supplementary Delivery Concept

services offered For Core Product
and how created Scheduling Process
and delivered
Core
Service Customer
Level Role
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 Product
Reservation
Parking Get car
Check in Check out

USE ROOM Phone
USE GUESTROOM OVERNIGHT
Porter
Pay TV Room service

Meal
Pre Time Frame of an Overnight Hotel Stay

Visit (real-time service use)
The Flower of Service:
Categorizing Supplementary Services (Fig. 4-5)
Information
Payment Consultation
Billing Core Order-Taking
Exceptions Hospitality
KEY:
Facilitating elements Safekeeping
Enhancing elements
Facilitating Services - Information
(Table 4.1)
Customers often require

information about how to
obtain and use a product or
Core service. They may also
need reminders and
documentation
Facilitating Services - Order-Taking
(Table 4.2)
Many goods and services

must be ordered or reserved
in advance. Customers need
Core
to know what is available and
may want to secure
commitment to delivery
Facilitating Services - Billing
(Table 4.3)
“How much do I owe you?”

Customers deserve clear,
Core accurate and intelligible
bills and statements
Facilitating Services - Payment
(Table 4.4)
Customers may pay faster

and more cheerfully if you
Core make transactions simple
and convenient for them
Enhancing Services - Consultation
(Table 4.5)
Value can be added to

goods and services by
offering advice and
Core
consultation tailored to
each customer’s
needs and situation
Enhancing Services - Hospitality
(Table 4.6)
Customers who invest time

and effort in visiting a
business and using its
Core services deserve to be
treated as welcome guests
(after all, marketing invited
them there!)
Enhancing Services - Safekeeping
(Table 4.7)
Customers prefer not to

worry about looking after
the personal possessions
that they bring with them
Core to a service site.
They may also want delivery
and after-sales services for
goods that they purchase
or rent
Enhancing Services - Exceptions
(Table 4.8)
Customers appreciate some

flexibility in a business
when they make special
Core requests. They expect it
when not everything goes
according to plan
Branding
Service Products
Service Branding:
Clarifying Distinctive Service Offerings
 Marriott Hotel Brands  British Airways Brands

 Marriott Hotels Intercontinental
 Marriott Resorts  First
 Courtyard by Marriott  Club World
 World Traveller Plus
 Fairfield Inns  World Traveller
 Residence Inns
European
 SpringHill Suites  Club Europe
 TownePlace Suites  Euro-Traveller
 Marriott Vacation Clubs UK Domestic
International  Shuttle
Branding a High-Tech, B2B Product Line:
A Family of Brands at Sun Microsystems
 Corporate umbrella brand

 Sun Microsystems
 Product line brand (system support services)
 Sun Spectrum Support
 Sub-brands (4 levels of support service programs)
» Platinum
» Gold
» Silver
» Bronze
Sun Spectrum Support:
Sub-branding Highlights Four Service Levels
Sub-branding clarifies service levels offered at different fees

 Platinum: “Mission Critical”
On-site service 24/7, two-hour response;
telephone support 24/7, onsite parts replacement;
additional services available
 Gold: “Business Critical”
Onsite service Mon-Fri 8am-8pm, four-hour response;
telephone support 24/7; onsite parts replacement
 Silver: “Basic Support”
Onsite service Mon-Fri 8am-5pm, four-hour response;
telephone support Mon-Fri 8am-8pm; onsite parts replacement
 Bronze: “Self Support”
Phone support Mon-Fri 8am-5pm; parts replacement by courier
New Service
Development
New Service Development:
A Hierarchy of New Service Categories
 Major service innovations--new core products for

previously undefined markets
 Major process innovations--using new processes to
deliver existing products and offer extra benefits
 Product line extensions--additions to current product lines
 Process line extensions--alternative delivery procedures
 Supplementary service innovations--adding new or
improved facilitating or enhancing elements
 Style changes--visible changes in service design or scripts
New Service Development:
Physical Goods as Source of Service Ideas
 Customers can rent goods—use and return for a fee—

instead of purchasing them
 Customers can hire personnel to operate their own or
rented equipment
 Any new durable product may create need for after-sales
services (possession processing)
 Shipping
 Installation
 Problem-solving and consulting advice
 Cleaning
 Maintenance
 Repair
 Upgrading
 Disposal
Creating Services as Substitutes for
Owning and/or Using Goods (Fig. 4-7)
Own a Physical Good Rent the Use

of a Physical Good
• Drive own car •Rent car and drive it

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

to Do the Work • Hire typist to use word processor • • Send work to secretarial
service
Service Development through Delivery Options:
Alternative Meal Service Formats (Fig. 4-8)
Fast-Food
Restaurant See sign Park and Order meal, Pick up Find table Clear table
(Eat In) enter and pay meal and eat and leave
Drive-In See sign Stop car at Order via Get meal at Drive away,
Restaurant order point microphone pickup, pay eat later
(Take Out)
Home Telephone Order food, Driver rings Pay driver,

Delivery take food Eat
Restaurant give address doorbell
Home Arrange to Plan meal, Food and Meal is Staff cleans

Catering meet caterer pay deposit staff arrive prepared Eat up; pay
and served
Elements of a Hotel Offering:
Trading off Room Price vs. Features/Services
 External building design

and features
 Room features
 Food-related services
 Lounge facilities
 Services (e.g., reception)
 Leisure facilities
 Security—people/systems
Success Factors in New Service Development
 Market synergy
 Good fit between new product and firm’s image/resources
 Advantage vs. competition in meeting customers’ needs
 Strong support from firm during/after launch
 Firm understands customer purchase decision behavior
 Organizational factors
 Strong interfunctional cooperation and coordination
 Internal marketing to educate staff on new product and its
competition
 Employees understand importance of new services to firm
 Market research factors

 Scientific studies conducted early in development process
 Product concept well defined before undertaking field studies
Chapter 5
Designing the
Communications Mix
for Services
Advertising Implications for
Overcoming Intangibility (Fig. 5-1)
Problem Advertising Strategy

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

Cite independently audited performance
 Abstractness Display typical customers benefiting
 Impalpability Documentary of step-by-step process,

Case history of what firm did for customer
Narration of customer’s subjective experience
Source: Mittal and Baker
Other Communications Challenges
in Services Marketing
 Facilitate customer involvement in production

 prepare customers for service experience and demonstrate roles
 teach customers about new technologies, new features
 Help customers to evaluate service offerings
 provide tangible or statistical clues to service performance
 highlight quality of equipment and facilities
 emphasize employee qualifications, experience, professionalism
 Simulate or dampen demand to match capacity
 provide information about timing of peak, off-peak periods
 offer promotions to stimulate off-peak demand
 Promote contribution of service personnel
 help customers understand service encounter
 highlight expertise and commitment of backstage personnel
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 brands
 Build awareness/interest for unfamiliar service/brand
 Build preference by communicating brand strengths and
benefits
 Compare service with competitors’ offerings and counter
their claims
 Reposition service relative to competition
 Stimulate demand in off-peak and discourage during peak
Educational and Promotional Objectives (cont.)
 Encourage trial by offering promotional incentives

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

 Familiarize customers with service processes before use
 Teach customers how to use a service to best advantage
 Recognize and reward valued customers and employees
Marketing Communications Mix for Services
(Fig. 10.4)
Personal Publicity & Instructional Corporate

Advertising Sales Promotion
Communications Public Relations Materials Design
Press
Selling Broadcast Sampling Web sites Signage
releases/kits
Customer Press Interior decor

Print Manuals
service Coupons conferences
Sign-up Special
Training Internet Brochures Vehicles
rebates events
Video-
Telemarketing Outdoor Gifts Sponsorship Equipment
audiocassettes
Word-of-mouth Prize Trade Shows, Software

Word
(otherof mouth
customers) Direct mail
promotions Exhibitions CD-ROM Stationery
Media-initiated
* coverage
Voice mail Uniforms
Key: * Denotes communications originating from outside the organization
Originating Sources of Messages Received by a
Target Audience (Fig. 5-5)
Messages originating
within the organization
Front-line staff
n
r o d uctio Service outlets
P nels
C h a n A
Mark U
e Advertising
Chan ting D
nels Sales promotions
Direct marketing I
Personal selling E
Public relations N
C
Word of mouth E
Messages originating
Media editorial
outside the organization
What is Brand Equity and Why Does It Matter?
(From Berry, “Cultivating Brand Equity”)
Definition: A set of assets and liabilities linked to a brand’s
name and symbol that adds to (or subtracts from) the
perceived value of the product
Insights
 Brand equity can be positive or negative
 Positive brand equity creates marketing advantage for
firm plus value for customer
 Perceived value generates preference and loyalty
 Management of brand equity involves investment to
create and enhance assets, remove liabilities
A Service Branding Model:
How Communications + Experience Create Brand Equity
Marketer-controlled communications
Firm’s Presented Brand Awareness of

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

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

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

 Memorable address that is actively promoted
 Relevant, up-to-date content (text, graphics, photos)
 Contain information that target users will perceive as useful/
interesting
 Easy navigation
 Fast download
 Internet advertising
 Banners and buttons on portals and other websites seek to draw
online traffic to own site
 Limits to effectiveness—exposure (“eyeballs”) may not lead to
increases in awareness/preference/sales
 Hence, advertising contracts may tie fees to marketing relevant
behavior (e.g., giving personal info or making purchase)
Chapter 6
Pricing 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 performance
 Variability of inputs and outputs--how can firms define a
“unit of service” and establish basis for pricing?
 Many services hard for customers to evaluate--what are
they getting in return for their money?
 Importance of time factor--same service may have more
value to customers when delivered faster
 Delivery through physical or electronic channels--may
create differences in perceived value
Objectives of Pricing Strategies
 Revenue and profit objectives

 Seek profit
 Cover costs
 Patronage and user base-related objectives

 Build demand
 Build a user base
The Pricing Tripod (Fig. 6.1)
Pricing Strategy
Competition
Costs Value to customer
Three Main Approaches to Pricing
 Cost-Based Pricing
 Set prices relative to financial costs (problem:
defining costs)
 Competition-Based Pricing
 Monitor competitors’ pricing strategy
(especially if service lacks differentiation)
 Who is the price leader? (one firm sets the pace)
 Value-Based
 Relate price to value perceived by customer
Activity-Based Costing: Relating Activities to the
Resources They Consume
 Managers need to see costs as an integral part of a firm’s

effort to create value for customers
 When looking at prices, customers care about value to
themselves, not what production costs the firm
 Traditional cost accounting emphasizes expense categories,
with arbitrary allocation of overheads
 ABC management systems examine activities needed to
create and deliver service (do they add value?)
 Must link resource expenses to:
 variety of products produced
 complexity of products
 demands made by individual customers
Net Value = (Benefits – Outlays)
(Fig. 6.3)
Effort Time
e
Perceive Perceived
d Outlays
Benefits
Enhancing Gross Value
 Pricing Strategies to Reduce Uncertainty

 service guarantees
 benefit-driven (pricing that aspect of service that creates value)
 flat rate (quoting a fixed price in advance)
 Relationship Pricing
 non-price incentives
 discounts for volume purchases
 discounts for purchasing multiple services
 Low-cost Leadership
 Convince customers not to equate price with quality
 Must keep economic costs low to ensure profitability at low price
Paying for Service:
The Customer’s Perspective
Customer “expenditures” on service comprise both

financial and non-financial outlays
 Financial costs:
 price of purchasing service
 expenses associated with search, purchase activity, usage
 Time expenditures
 Physical effort (e.g., fatigue, discomfort)
 Psychological burdens (mental effort, negative feelings)
 Negative sensory burdens (unpleasant sensations affecting any
of the five senses)
Determining the Total Costs of a Service
to the Consumer (Fig. 6.4)
Search Costs Price Operating Costs
Related Monetary
Costs Incidental
Expenses
Time Costs
Purchase and
Physical Costs
Use Costs
Psychological
Costs
Sensory Costs
Necessary
After Costs follow-up
Problem
solving
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) ?
Clinic A Clinic B Clinic C
= Price $45 = Price $85 = Price $125
= Located 1 hour away = Located 15 min away = Located next to your
by car or transit by car or transit office or college
= Next available = Next available = Next appointment is
appointment is in 3 appointment is in 1 in 1 day
weeks week = Hours: Mo –Sat, 8am
= Hours: Monday – = Hours: Monday – – 10pm
Friday, 9am – 5pm Friday, 8am – 10pm = By appointment -
= Estimated wait at = Estimated wait at estimated wait at
clinic is about 2 hours clinic is about 30 - 45 clinic is about 0 to 15
minutes minutes
Increasing Net Value by Reducing
Non-financial Costs of Service
 Reduce time costs of service at each stage

 Minimize unwanted psychological costs of service
 Eliminate unwanted physical costs of service
 Decrease unpleasant sensory costs of service
Revenue Management: Maximizing Revenue from
Available Capacity at a Given Time
 Based on price customization - charging different

customers (value segments) different prices for same
product
 Useful in dynamic markets where demand can be divided
into different price buckets according to price sensitivity
 Requires rate fences to prevent customers in one value
segment from purchasing more cheaply than willing to pay
 RM uses mathematical models to examine historical data
and real time information to determine
 what prices to charge within each price bucket
 how many service units) to allocate to each bucket
The Strategic Levers of
Revenue (Yield) Management
Price
Fixed Variable
Quadrant 1: Quadrant 2:
Duration
Predictable Movies Hotel Rooms

Stadiums/Arenas Airline Seats
Function Space Rental Cars
Cruise Lines
Quadrant 3: Quadrant 4:
Unpredictable Restaurants Continuing Care
Golf Courses Hospitals
Dealing with Common Customer Conflicts Arising
from Revenue Management
Customer conflict can arise from: Marketing tools to reduce

customer conflicts:
= Perceived Unfairness & Perceived = Fenced Pricing
Financial Risk Associated with = Bundling
Multi-Tier Pricing and Selective = Categorising
Inventory Availability = High Published Price
= Unfulfilled Inventory Commitment = Well designed Customer Recovery
Programme for Oversale
= Unfulfilled Demand of Regular = Preferred Availability Policies
Customers
= Unfulfilled Price Expectation of = Offer Lower Displacement Cost
Group Customers Alternatives
= Change in the Nature of the = Physical Segregation & Perceptible
Service Extra Service
= Set Optimal Capacity Utilisation Level
Price Elasticity (Fig. 6.6)
Price per Di
unit of De
service
De
Di
Quantity of Units Demanded
De : Demand is price elastic. Small changes in price lead to big changes in demand.
Di : Demand for service is price inelastic. Big changes have little impact on demand.
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 listing
Increase in baggage allowances
Dedicated service hotlines
Dedicated account management team
Key Categories of Rate Fences (Table 6.2 cont’d)
Non Physical Fences

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

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

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

Buyer Characteristics
Frequency or volume  Member of certain loyalty-tier with the firm
of consumption get priority pricing, discounts or loyalty
benefits
Group membership  Child, student, senior citizen discounts
 Affiliation with certain groups (e.g. Alumni)
Size of customer  Group discounts based on size of group
group
Relating Price Buckets and Fences to the Demand
Curve (Fig. 6.7)
Price per
Seat
First Class
Full Fare Economy (No Restrictions)
One-Week Advance Purchase

One-Week Advance Purchase, Saturday Night Stayover
3-Week Advance Purchase, Saturday Night Stayover
3-Week Adv. Prchs, Sat. Night Stay., $100 for Changes
3-Wk Adv. Prchs, Sat. Night Stay, No changes/refunds
Late Sales through Consolidators/ Internet,
no refunds
Capacity Capacity
of 1st-class of Aircraft
Cabin
No. of Seats Demanded
Ethical Concerns in Pricing
 Customers are vulnerable when service is hard to evaluate

or they don’t observe work
 Many services have complex pricing schedules
 hard to understand
 difficult to calculate full costs in advance of service
 Unfairness and misrepresentation in price promotions
 misleading advertising
 hidden charges
 Too many rules and regulations
 customers feel constrained, exploited
 customers unfairly penalized when plans change
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)
Annual Payment Plan Quarterly Payment Plan

Health Club Visits
Frequency of
Semiannual Payment Plan Monthly Payment Plan

Health Club Visits
Frequency of
Time Line Time Line

Source: John Gourville and Dilip Soman, “Pricing and the Psychology of Consumption,”
Harvard Business Review, September 2002, 90-96.
Chapter 7(5)
Distributing Services
Applying the Flow Model of Distribution to Services
Distribution embraced three interrelated elements
 Information and promotion flow

 Negotiation flow
 Product flow
Information and Physical Processes of the
Augmented Service Product (Fig. 7.1)
Information
Processes
Information
Order-
Billing Core Taking
Safekeeping
Physical
Processes
Using Websites for Service Delivery
Information
Read brochure/FAQ; get schedules/
directions; check prices
Pay by bank card Conduct e-mail dialog
Direct debit Use expert systems
Billing Order-Taking
Receive bill Core Make/confirm reservations
Make auction bid Submit applications
Check account status Order goods, check status
Make special requests
Resolve problems Record preferences
Safekeeping
Track package movements
Check repair status
CORE: Use Web to deliver information-based core services
Options for Service Delivery
There are 3 types of interactions between customers and

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

 Service provider goes to the customer
 Interaction at arm’s length (via the Internet, telephone, fax,
mail, etc.)
Method of Service Delivery (Table 7.1)
Availability of Service Outlets

Nature of Single Site Multiple Sites
Interaction between
Customer and
Service Organization
Customer goes to service Theater Bus service
organization
Barbershop Fast-food chain
Service organization goes House painting Mail delivery
to customer
Mobile car wash Auto club road service
Customer and service Credit card company Broadcast network
organization transact at
arm’s length Local TV station Telephone company
Place vs. Cyberspace
 Place - customers and  Required for people processing

suppliers meet in a physical services
environment  Offers live experiences, social
interaction, e.g., food services
 More emphasis on eye-catching
servicescape, entertainment
 Cyberspace - customers  Ideal for info-based services

and suppliers do business  Saves time
electronically in virtual
 Facilitates information gathering
environment created by
phone/internet linkages  May use express logistics service
to deliver physical core products
“24/7” - Factors Encouraging
Extended Operating Hours (Mgt Memo 7.1)
Economic pressure from

consumers
Changes in legislation
Economic incentives to
improve asset utilization
Availability of employees to
work nights, weekends
Automated self-service
Technology Revolutionizes Service Delivery: Some
Examples
 Smart mobile telephones to link users to Internet

 Voice recognition software
 Automated kiosks for self-service (e.g. bank ATMs)
 Web sites
 provide information
 take orders and accept payment
 deliver information-based services
 Smart cards that can act as “electronic wallets”
E-Commerce:
Factors that Attract Customers to Virtual Stores
 Convenience (24-hour availability, save time, effort)

 Ease of obtaining information on-line and searching for
desired items
 Better prices than in bricks-and-mortar stores

 Broad selection
Splitting Responsibilities for Delivering
Supplementary Services (Fig. 7.2)
As created by As enhanced As experienced

originating firm by distributor by customer
Core + = Core
Franchising
Franchising is a fast growth strategy, when
 Resources are limited

 Long-term commitment of store managers is crucial
 Local knowledge is important
 Fast growth is necessary to pre-empt competition
Service Process and Market Entry
 People Processing Services

 Export the service concept
 Import customers
 Transport customers to new locations
 Possession Processing Services

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

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

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

 transmit via electronic channels
 store in physical media, ship as merchandise
 Use third parties to market/deliver service concept

 licensing agents
 brokers
 franchising
 alliance partners
 minority joint ventures
 Control service enterprise abroad

 direct investment in new business
 buyout of existing business
Impact of Globalization Drivers on Different Service
Categories (Table 7.2)
Globalization People Processing Possession Information

Drivers Processing Based
Competition Simultaneity of Technology drives Highly vulnerable to
production and globalization of global dominance by
consumption limits competitors with competitors with
leverage of foreign technical edge. monopoly or
competitive advantage, competitive
but management advantage in
systems can be information.
globalized
Market People differ Level of economic Demand for many
economically and developments services is derived to
culturally, so needs for impacts demand for a significant degree
service and ability to services to from economic and
pay may vary. individually owned educational levels.
goods
Impact of Globalization Drivers on Different Service
Categories (Table 7.2, cont’d)
Globalization People Processing Possession Information

Drivers Processing Based
Technology Use of IT for delivery of Need for technology- Ability to deliver core
supplementary services based service delivery services through
may be a function of systems depends on remote terminals
ownership and possessions requiring may be a function
familiarity with service and the cost of investment in
technology. trade-offs in labor computerization etc.
substitution
Cost Variable labor rates may Variable labor rates Major cost elements
impact on pricing in may favor low-cost can be centralized &
labor-sensitive services. locations. minor cost elements
localized.
Government Social policies (e.g., Policies may Policies may impact
health) vary widely and decrease/increase demand and supply
may affect labor cost etc. cost & encourage/ and distort pricing
discourage certain
activities
Chapter 8
Designing and Managing

Service Processes
Developing a Blueprint – Some Basic Advice
 Identify key activities in creating and

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

2. Specify physical evidence
3. Identify principal customer actions
4. ------------line of interaction (customers and front stage personnel)------
--
5. Front stage actions by customer-contact personnel
6. ------------line of visibility (between front stage and backstage)------------
--
7. Backstage actions by customer contact personnel
8. Support processes involving other service personnel
9. Support processes involving IT
Where appropriate, show fail points and risk of excessive waits
Simplified Example: Blueprinting a Hotel Visit
(extract only)
Physical Hotel exterior, lobby, Elevator, corridor,

Evidence employees, key room, bellhop
Make Arrive, Check-in Go to
Customer
Stage
reservation valet park at reception room

Actions
Line of
Interaction
Employee Doorman Receptionist
Actions
Front
greets, valet verifies, gives

Face-to-face takes car key to room
Phone
Contact Rep.
records,
confirms
Line of
Visibility
Valet Make up
Backstage
Parks Car Room
Enter Register
data guest data
Improving Reliability of Processes
by Failure Proofing
 Analysis of reasons for failure often reveals opportunities

for failure proofing to reduce/eliminate risk of errors
 Errors include:
 treatment errors—human failures during contact with customers
 tangible errors—failures in physical elements of service
 Fail-safe procedures include measures to prevent

omission of tasks or performance of tasks
 incorrectly
 in wrong order
 too slowly
 not needed or specified
 Need fail-safe methods for both employees and customers

Process Redesign: Principal Approaches
(Table 8-1)
 Eliminating non-value-adding steps

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

 Medium – Customer inputs required to assist provider
 Provide needed information, instructions
 Make personal effort
 May share physical possessions
 High – Customer works actively with provider to

co-produce the service
Self Service Technologies (SSTs)
 Self-service is ultimate form of customer involvement in

service production
 Customers undertake specific activities using facilities or systems
provided by service supplier
 Customer’s time and effort replace those of employees
 Concept is not new—self-serve supermarkets date from

1930s, ATMs and self-serve gas pumps from 1970s
 Today, customers face wide array of SSTs to deliver
information-based services, both core and supplementary
 Many companies seek to divert customers from employee
contact to Internet-based self-service
Service Firms as Teachers:
Well-trained Customers Perform Better
 Firms must teach customers roles

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

help advise, assist customers
Managing Customers as Partial Employees
to Increase Productivity and Quality
1. Analyze customers’ present roles in the business and

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

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

performing well
4. Regularly appraise customers’ performance; if

unsatisfactory, consider changing roles or termination
The Problem of Customer Misbehavior – Identifying
and Managing “Jaycustomers”
What is a jaycustomer?
A customer who behaves in a thoughtless or abusive
fashion, causing problems for the firm itself, employees,
other customers
Why do jaycustomers matter?

 Can disrupt processes
 Affect service quality
 May spoil experience of other customers
What should a firm do about them?
 Try to avoid attracting potential jaycustomers
 Institute preventive measures
 Control abusive behavior quickly
 Take legal action against abusers
 BUT firm must act in ways that don’t alienate other
customers
Six Types of “Jaycustomer”
 Thief – seeks to avoid paying for service

 Rule breaker – ignores rules of social behavior and/or procedures for
safe, efficient use of service
 Belligerent – angrily abuses service personnel (and sometimes other
customers) physically and/or emotionally
 Family Feuders – fight with other customers in their party
 Vandal – deliberately damages physical facilities, furnishings, and
equipment
 Deadbeat – fails to pay bills on time
Can you think of others?
How should firms deal with each of these problems?
Chapter 9
Balancing Demand
and Capacity
Relating Demand to Capacity:
Four Key Concepts
 Excess demand: too much demand relative to capacity at a

given time
 Excess capacity: too much capacity relative to demand at a

given time
 Maximum capacity: upper limit to a firm’s ability to meet

demand at a given time
 Optimum capacity: point beyond which service quality

declines as more customers are serviced
Variations in Demand Relative to Capacity
(Fig. 9-1)
VOLUME DEMANDED
Demand exceeds capacity
(business is lost)
CAPACITY UTILIZED
Maximum Available Demand exceeds

Capacity optimum capacity
(quality declines)
Optimum Capacity
(Demand and Supply
Well Balanced
Excess
Low Utilization (wasted
capacity
(May Send Bad Signals) resources)
TIME CYCLE 1 TIME CYCLE 2
Defining Productive Capacity
in Services
 Physical facilities to contain customers

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

 Stretch and shrink
 offer inferior extra capacity at peaks (e.g. bus/metro standees)
 vary seated space per customer (e.g. elbow room, leg room)
 extend/cut hours of service
 Chase demand (adjust capacity to match demand)

 schedule downtime in low demand periods
 use part-time employees
 rent or share extra facilities and equipment
 cross-train employees
 Flexible Capacity (vary mix by segment)
Predictable Demand Patterns and
Their Underlying Causes (Table 9-1)
Predictable Cycles Underlying Causes of

of Demand Levels Cyclical Variations
 day  employment
 week  billing or tax payments/
 month refunds
 year
 pay days
 other
 school hours/holidays
 seasonal climate changes
 public/religious holidays
 natural cycles
(e.g. coastal tides)
Causes of Seemingly Random Changes in Demand
Levels
 Weather
 Health problems
 Accidents, Fires, Crime
 Natural disasters
Question: which of these
events can be predicted?
Alternative Demand Management Strategies (Table
9-2)
 Take no action
 let customers sort it out
 Reduce demand
 higher prices
 communication promoting alternative times
 Increase demand
 lower prices
 communication, including promotional incentives
 vary product features to increase desirability
 more convenient delivery times and places
 Inventory demand by reservation system

 Inventory demand by formalized queueing
Hotel Room Demand Curves by Segment
and by Season (Fig. 9-2)
Price per
Room Night
Bl Bh
Th Bh = business travelers in high season
Bl = business travelers in low season
Tl Th = tourist in high season
Tl = tourist in low season
Th
Bh
Bl Tl
Quantity of Rooms Demanded at Each Price
by Travelers in Each Segment in Each Season Note: 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 time

 Manage customer behavior and perceptions of wait
 Install a reservations system
Alternative Queuing Configurations (Fig. 9-4)
Single line, single server, single stage
Single line, single servers at sequential stages
Parallel lines to multiple servers
Designated lines to designated servers
Single line to multiple servers (“snake”)
21
29
28
“Take a number” (single or multiple servers) 30 25
20
24
26
31 27
32 23
Tailoring Queuing Systems to Market Segments:
Criteria for Allocation to Designated Lines
 Urgency of job
 emergencies vs. non-emergencies
 Duration of service transaction

 number of items to transact
 complexity of task
 Payment of premium price

 First class vs. economy
 Importance of customer
 frequent users/loyal customers vs. others
Ten Propositions on the Psychology of Waiting
Lines (Table 9-3)
1.Unoccupied time feels longer

2.Preprocess/postprocess waiting feel longer than in-
process
3.Anxiety makes waiting seem longer
4.Uncertain waiting is longer than known, finite waiting
5.Unexplained waiting seems longer
6.Unfair waiting is longer than equitable waiting
7.People will wait longer for more valuable services
8.Waiting alone feels longer than in groups
9.Physically uncomfortable waiting feels longer
10. Waiting seems longer to new or occasional users
Sources: Maister; Davis & Heineke; Jones & Peppiatt
Benefits of Effective Reservations Systems
 Controls and smoothes demand

 Pre-sells service
 Informs and educates customers in advance of arrival
 Customers avoid waiting in line for service (if service times
are honored)
 Data capture helps organizations prepare financial

projections
Characteristics of Well-designed
Reservations Systems
 Fast and user friendly for customers and staff

 Can answer customer questions
 Offers options for self service (e.g. Web)
 Accommodates preferences (e.g., room with view)
 Deflects demand from unavailable first choices to
alternative times and locations
 Includes strategies for no-shows and overbooking
 requiring deposits to discourage no-shows
 canceling unpaid bookings after designated time
 compensating victims of over-booking
Setting Capacity Allocation Sales Targets for a
Hotel by Segment and Time Period (Fig. 9-5)
Week 7 Week 36
Capacity (% rooms) (Low Season) (High Season)
100%
Out of commission for renovation Executive service guests
Executive service
guests
Transient guests
Weekend
package
50% W/E
package
Transient guests
Groups and conventions
Groups (no conventions)
Airline contracts Airline contracts
Nights: M Tu W Th F S Sn M Tu W Th F S Sn
Time
Information Needed for Demand and Capacity
Management Strategies
 Historical data on demand level and composition, noting

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

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

that is unique.
Comparison of Hotel Lobbies
(Figure 10.1)
The servicescape is part of the value proposition!
Orbit Hotel and Hostel, Los Angeles
Four Seasons Hotel, New York
The Mehrabian-Russell Stimulus-Response Model
(Figure 10.2)
Response
Environmental Dimensions of Behaviors:
Stimuli & Cognitive Affect:
Approach/
Processes Pleasure and Avoidance &
Arousal Cognitive
Processes
The Mehrabian-Russell Stimulus-Response Model
 Simple and fundamental model of how people respond to

environments
 Peoples’ conscious and unconscious perceptions and

interpretation of the environment influence how they feel in
that environment
 Feelings, rather than perceptions or thoughts drive behavior

 Typical outcome variable is ‘approach’ or ‘avoidance’ of an
environment, but other possible outcomes can be added to
the model as well
The Russell Model of Affect
Arousing
Distressing
Exciting
Unpleasant Pleasant
Boring Relaxing
Sleepy
The Russell Model of Affect
 Emotional responses to environments can be described

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

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

“information load”, i.e., its degree of
 Novelty (unexpected, surprising, new, familiar) and
 Complexity (number of elements, extent of motion or change)
Drivers of Affect
 Affect can be caused by perceptions and cognitive

processes of any degree of complexity.
 Simple Cognitive Processes, Perception of Stimuli

 tangible cues (of service quality)
 consumer satisfaction
 Complex Cognitive Processes

 affective charged schemata processing
 attribution processes
The more complex a cognitive process becomes, the more

powerful its potential impact on affect.However, most service
encounters are routine. Simple processes can determine affect.
Behavioral Consequence of Affect
 Basically, pleasant environments result in approach, and

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

on 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 – Bitner’s ServiceScape
Model (Figure 10.4)
Environmental Moderators Internal Responses Behaviour
Dimensions
Holistic Cognitive
Environ- Emotional
ment Psychological
Ambient Approach
Conditions Employee or
Response Avoid
Moderator Employee
Responses
Space/ Social Interaction
Function Perceived Between
ServiceScape Customers &
Employees
Customer
Signs, Responses
Symbols & Customer Approach
Response or
Artefacts Cognitive
Moderator Avoid
Emotional
Psychological
An Integrated Framework – Bitner’s
ServiceScape Model(con’t)
 Identifies the main dimensions in a service environment

and views them holistically
 Customer and employee responses classified under,

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

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

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

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

and arousal but also increase anxiety, cool colors reduce
arousal but can elicit peacefulness and calm)
Dimensions of the Service Environment (con’t)
 Spatial Layout and Functionality

 Layout refers to size and shape of furnishings and the ways it is
arranged
 Functionality is the ability of those items to facilitate
performance
 Signs, Symbols and Artifact

 Explicit or implicit signals to communicate the firm’s image,
help consumers find their way and to convey the rules of
behavior
Impact of Music on Restaurant Diners
(Table 10-2)
Restaurant Fast-beat Slow-beat Difference between

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

food
Spending on $21.62 $30.47 +$8.85 +41%
beverages
Total spending $76.74 $86.28 +$9.54 +12%
Estimated $48.62 $55.82 +$7.20 +15%

gross margin
The Effects of Scents on the Perceptions of Store
Environments (Table 10-3)
Evaluation Unscented Scented Difference

Environment Environment
Mean Ratings Mean Ratings
Store Evaluation
Negative/positive 4.65 5.24 +0.59
Outdated/modern 3.76 4.72 +0.96
Store Environment
Unattractive/ 4.12 4.98 +0.86
attractive
Drab/colorful 3.63 4.72 +1.09
Boring/Stimulating 3.75 4.40 +0.65
The Effects of Scents on the Perceptions of Store
Environments (Table 10-3)
Evaluation Unscented Scented Difference

Environment Environment
Mean Ratings Mean Ratings
Merchandise
Outdated/up- to-date 4.71 5.43 +0.72

style
Inadequate/adequate 3.80 4.65 +0.85
Low/high quality 4.81 5.48 +0.67
Low/high price 5.20 4.93 -0.27
Aromatherapy: The Effects of Fragrance on People
(Table 10-4)
Fragrance Aromath Aromathera Tradition Potential Psychological

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

agent, effect esp. for nervous
astringen people
t
Lavender Herbaceo Calming, Muscle Relaxing and calming,
us balancing, relaxant, helps create a homey and
soothing soothing comfortable feel
agent
Jasmine Floral Uplifting, Emollient Helps makes people feel
balancing soothing refreshed, joyful,
agent comfortable
Peppermin Minty Energizing, Skin Increase attention level
t stimulating cleanser and boosts energy
Common Associations and Human Responses to
Colors (Table 10-5)
Color Degree of Nature Common Association and

Warmth Symbol Human Responses to Color
Red Warm Earth High energy and passion; can

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

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

impact of environmental stimuli on behaviour, including:
 People density, crowding
 Lighting
 Sound/noise
 Scents and odours
 Queues
 No standard formula to designing the perfect combination

of these elements.
 Design from the customer’s perspective
 Design with a holistic view!
Tools to Guide in Servicescape Design
 Keen Observation of Customers’ Behavior and Responses to

the service environment by management, supervisors,
branch managers, and frontline staff
 Feedback and Ideas from Frontline Staff and Customers

using a broad array of research tools ranging from
suggestion boxes to focus groups and surveys.
 Field Experiments can be used to manipulate specific

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

physical evidence in the environment.
Chapter 11
Managing People
for Service Advantage
Frontline Service Personnel: Source of Customer
Loyalty and Competitive Advantage
 Frontline is an important source of differentiation and

competitive advantage. It is:
 a core part of the product
 the service firm
 the brand
 Frontline also drives customer loyalty, with employees

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

outside world
 Multiplicity of roles often results in service staff having to

pursue both operational and marketing goals
 Consider management expectations of restaurant servers:

 deliver a highly satisfying dining experience to their customers
 be fast and efficient at executing operational task of serving
customers
 do selling and cross selling, e.g. “We have some nice desserts to
follow your main course”
Role Stress in the Frontline
3 main causes of role stress:

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

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

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

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

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

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

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

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

 Costs of constant recruiting, hiring & training
 Lower productivity & lower sales of new workers
 Costs of disruptions to a service while a job remains unfilled
 Loss of departing person’s knowledge of business and customers
 Cost of dissatisfied customers
Cycle of Failure (Fig. 11.1)
Customer
turnover Repeat emphasis on
attracting new customers
Failure to develop
customer loyalty
Low profit
margins Narrow design of
jobs to accommodate
low skill level
High employee turnover;
poor service quality
No continuity in Use of technology Emphasis on

relationship for to control quality rules rather
customer Employee dissatisfaction; than service
poor service attitude
Payment of
low wages
le
yc
ee
C
Employees
oy
become bored pl Minimization of

Customer Em selection effort
dissatisfaction Minimization
of training
Employees can’t
respond to customer le
yc
problems
C
er
m
st o Source: Schlesinger and Heskett
Cu
Service Sabotage (Fig. 11-A)
‘Openness’ of Service Sabotage Behaviors

Routinized
Covert Overt
‘Normality’ of Service Sabotage Behaviors
Customary-Private Service Customer-Public Service

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

Sabotage Sabotage
e.g. Chef occasionally e.g. Waiters spilling soup onto
purposefully slowing down laps, gravy onto sleeves, or hot
Intermittent
orders plates into someone’s hands
Cycle of Mediocrity (Fig. 11.2)
Customers trade
horror stories
Other suppliers (if any)
seen as equally poor
Employees spend
working life
in environment
Employee of mediocrity
dissatisfaction
(but can’t easily quit) Emphasis
Narrow design on rules
of jobs vs. pleasing
customers
No incentive for Complaints met by
cooperative relationship Training emphasizes
indifference or Success =
to obtain better service hostility learning rules
not making
mistakes
Service not focused
Jobs are boring and on customers’ needs
repetitive; employees cle
y
unresponsive ee C Good
high
wages/benefits
job security
y
E mplo
Resentment at inflexibility and
lack of employee initiative; Promotion
and pay
cl e
complaints to employees increases based Initiative is
Cy
on longevity, discouraged er
lack of mistakes m
u sto
C
Customer dissatisfaction
Cycle of Success (Fig. 11.3)
Low
customer
turnover Repeat emphasis on
customer loyalty and
retention
Customer
loyalty
Higher
profit
margins
Broadened
Lowered turnover, job designs
high service quality
Continuity in
relationship with Train, empower frontline
customer Employee satisfaction, personnel to control quality
positive service attitude
cle
Cy
y Above average
ee
Extensive l o wages
training Emp
High customer Intensified
satisfaction selection effort
cle
Cy
mer
sto
Cu Source: Heskett and Schlesinger
How to Manage People for Service Advantage?
Staff performance is a function of both ability and motivation.

How can we get able service employees who are motivated to
productively deliver service excellence?
1. Hire the right people
2. Enable your people
3. Motivate and energize your people
Hire the Right People
“The old saying ‘People are your most

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

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

focused, marketing-like approach to recruitment
 Clarify what must be hired versus what can be taught
 Clarify nature of the working environment, corporate
values and style, in addition to job specs
 Ensure candidates have/can obtain needed qualifications
 Evaluate candidate’s fit with firm’s culture and values
 Fit personalities, styles, energies to the appropriate jobs
Select And Hire the Right People:
(1) Be the Preferred Employer
Create a large pool: “Compete for Talent Market Share”
 What determines a firm’s applicant pool?

 Positive image in the community as place to work
 Quality of its services
 The firm’s perceived status
 There is no perfect employee

 Different jobs are best filled by people with different skills, styles or
personalities
 Hire candidates that fit firm’s core values and culture
 Focus on recruiting naturally warm personalities
Select and Hire the Right People:
(2) How to Identify the Best Candidates
 Observe Behavior
 Hire based on observed behavior, not words you hear
 Best predictor of future behavior is past behavior
 Consider group hiring sessions where candidates given group tasks
 Personality Testing
 Willingness to treat co-workers and customers with courtesy,
consideration and tact
 Perceptiveness regarding customer needs
 Ability to communicate accurately and pleasantly
Select and Hire the Right People:
(3) How to Identify the Best Candidates
 Employ Multiple, Structured Interviews

 Use structured interviews built around job requirements
 Use more than one interviewer to reduce similar to me effects
 Give Applicants a Realistic Preview of the Job

 Chance to have “hands-on” with the job
 Assess how the candidates respond to job realities
 Allow candidates to self select themselves out of the job
Train Service Employees
 The Organizational Culture, Purpose and Strategy

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

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

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

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

Involvement pushes them down:
 Information about operating results and measures of

competitive performance
 Rewards based on organizational performance (e.g. profit

sharing, stock ownership)
 Knowledge/skills enabling employees to understand and

contribute to organizational performance
 Power to influence work procedures and organizational

direction (e.g. quality circles, self-managing teams)
Source: Bowen and Lawler
Levels of Employee Involvement
 Suggestion involvement
 Employee recommendation
 Job involvement
 Jobs redesigned
 Employees retrained
 Supervisors facilitate
 High involvement
 Information is shared
 Employees skilled in teamwork,
problem solving etc.
 Participate in decisions
 Profit sharing and stock ownership
Motivate and Energize the Frontline
Use the full range of available rewards effectively, including:
 Job content
 Feedback and recognition
 Goal accomplishment
The Inverted Organizational Pyramid (Fig. 11.5)
Customer Base
Top
Mgmt Frontline Staff
Middle
Mgmt
Middle Mgmt
Frontline & Top Mgmt
Staff Support Frontline
Traditional Organizational Inverted Pyramid with a

Pyramid Customer & Frontline Focus
Legend: = Service encounters, or ‘Moments of Truth.’
The Wheel of Successful HR in Service Firms (Fig.
11.6)
Leadership that:
Focuses the entire organization 1. Hire the
on supporting the frontline Right People
Fosters a strong service 3. Motivate & Energize Be the preferred
culture with passion for
service and productivity Your People employer & compete for
talent market share
Drives values that Utilize the full

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

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

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

 Action loyalty – exhibiting consistent repurchase behavior
Loyalty is Important to Profitability :
Index of Customer Profits over Time (Fig. 12.1)
(Year 1=100)
350 –
300
250
200
150
100
50
0
Year 1 Year 2 Year 3 Year 4 Year 5
Credit card Industrial laundry Industrial distribution Auto servicing

Based on data from Reichheld and Sasser
What Makes Loyal Customers More Profitable?
 Tend to spend more as relationship develops

 customer’s balances may grow
 may consolidate purchases to one supplier
 Cost less to serve

 less need for information and assistance
 make fewer mistakes
 Recommend new customers to firm (act as unpaid sales

people)
 Trust leads to willingness to pay regular prices vs. shopping

for discounts
Analyzing Why Customers Are More Profitable over
Time (Fig. 12.2)
Profit from price

premium
Profit from references
Profit from reduced

op. costs
Profit from increased
usage
Base Profit
1 2 3 4 5 6 7
Year Source: Reichheld and Sasser
Measuring Customer Equity:
Calculating Life Time Value of Each Customer
 Value at Acquisition
 revenues (application fee + initial purchase)
 Less costs (marketing +credit check + account set up)
 Annual Value (project for each year of relationship)

 revenues (annual fee + sales + service fees + value of referrals)
 Less costs (account management + cost of sales + write-offs)
 Net Present Value

 Determine anticipated customer relationship lifetime
 Select appropriate discount figure
 Sum anticipated annual values (future profits) at chosen discount
rate
 Customer Equity is total sum of NPVs of all current customers
Customer-Firm Relationship
Today’s marketers seek to develop long-term relationships

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

differentiated service levels to consumers and subsequently
tracking the relationship.
 Interaction Marketing: Usually in B2B context where people and

the social process also add mutually beneficial value.
 Network Marketing: Common in B2B context where companies

commit resources to develop positions in a network of
relationships with the stakeholders and relevant agencies.
Types of Relationships with Customers (Table 12.1)
Type of Relationship--Firm and Customer

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

Theater subscription Movie theater
Warranty repair Public transport
Basic Segmentation Issues:
Building an Appropriate Customer Portfolio
 Target customers whose needs match firm’s capabilities

 Focus on value of prospective customers within each
segment, not just numbers
 Avoid targeting customers who might abuse:
 our employees, facilities
 other customers
 Create a mix of segments to reduce risks of volatility during
swings of economic cycles
Service-Relevant Segmentation Variables
 Timing of service use (e.g., by hour, day, season)

 Level of skill and experience as co-producer/self-
server
 Preferred language in face-to-face contact
 Access to electronic delivery systems (e.g., Internet)
 Attitudes toward use of new service technologies
Identifying and Selecting Target Segments
(Mgt Memo 12.2)
User characteristics
 demographics
 psychographics
 geographic location
 benefits sought
User behavior
 when, where, how services used
 quantity/value of purchases
 frequency of use
 profitability of relationship
 sensitivity to marketing variables
Portfolio of Professional Assignments (Fig. 12.4)
Major, State-of-the-art challenges for the firm’s

principals that give the firm high visibility
Demanding client assignments offering a

“Pacesetters” learning experience for the firm’s most
experienced associates
Significant Projects Routine client projects shared

among principals and associates
“Bread and Butter” Projects

Entry-level tasks for new
associates or for research
assistants & paraprofessionals
Analytical Work on Project Data
The Customer Pyramid (Fig. 12.5)
Good Relationship
Customers
Which segment sees high value in
our offer, spends more with us over
Platinum time, costs less to maintain, and
spreads positive word-of-mouth?
Gold
Which segment costs us in time,

Iron
effort and money, yet does not
provide the return we want?
Which segment is difficult to do
Lead business with?
Poor Relationship
Customers
How Customers See Relational Benefits in Service
Industries (Research Insights 12.1)
 Confidence benefits
 less risk of something going wrong, less anxiety
 ability to trust provider
 know what to expect
 get firm’s best service level
 Social benefits
 mutual recognition, known by name
 friendship, enjoyment of social aspects
 Special treatment benefits

 better prices, discounts, special deals unavailable to others
 extra services
 higher priority with waits, faster service
The Customer Satisfaction-Loyalty Relationship (Fig.
12.6)
Apostle
100
Zone of Affection
80
Loyalty (Retention)
Near Apostle
60 Zone of Indifference
40 Zone of Defection
20
Terrorist 0
1 2 3 4 5
Very Neither Very
dissatisfied Dissatisfied satisfied Satisfied Satisfied
nor dissatisfied
Satisfaction
The Wheel of Loyalty (Fig. 12.7)
3. Reduce 1. Build a
Churn Drivers Foundation
for Loyalty
Conduct churn diagnostic
Segment the market
Address key churn drivers
Be selective in acquisition
Enabled through: Implement complaint
handling & service Use effective tiering of
 Frontline staff
service.
 Account recovery Customer
managers
 Membership
Increase switching
costs
Loyalty Deliver quality service.
programs
 CRM
Systems 2. Create Loyalty
Bonds
Build higher level Deepen the
bonds relationship
Give loyalty
rewards
Rewarding Value of Use, Not Just Frequency at
British Airways (Best Practice in Action 12.2)
 Dedicated reservations
 Reservations assurance
 Priority waitlist and standby
 Advance notification of delays

exceeding 4 hours
 Upgraded check-in
 Preferred boarding
 Special services assistance
 Bonus air miles
 Upgrade for two
Drivers of Service Switching (Fig. 12.9)
Service Failure / Recovery Value Proposition
Core Service Failure

• Service Mistakes Pricing
• Billing Errors • High Price
• Service Catastrophe • Price Increases
• Unfair Pricing
Service Encounter Failures • Deceptive Pricing
•
•
Uncaring
Impolite
Service Inconvenience
•
•
Unresponsive
Unknowledgeable
Switching • Location/Hours
• Wait for Appointment
• Wait for Service
Response to Service Failure
• Negative Response
Competition
• No Response
• Found Better Service
• Reluctant Response
Others
Involuntary Switching Ethical Problems
• Customer Moved • Cheat • Unsafe
• Provider Closed • Hard Sell • Conflict of Interest
Common CRM Applications (Mgt Memo 12.2)
 Signifies the whole process by which relationships with

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

and allow firms to better understand and segment the
customers etc. Applications include:
 Data collection
 Data analysis
 Sales force automation
 Marketing automation
 Call center automation
Customer Relationship Strategies with CRM
Systems: Key Questions
 How should our value proposition change to increase customer

loyalty?
 How much customization or one-to-one marketing and service
delivery is appropriate and profitable?
 What is the incremental profit potential of increasing share of
wallet with current customers? How much does this vary by
customer tier and/or segment?
 How much time and resource can we allocate to CRM right now?
 If we believe in CRM, why have we not taken steps in that
direction before? What can we do today to develop customer
relationship without spending on technology?
Chapter 13
Customer Feedback and

Service Recovery
American Customer Satisfaction Index:
Selected Industry Scores, 2002
Score 100
(Max = 100)
90 85
79 80 79
80 74 76
71 71 70
70 66 65 62
60
50
40
30
20
10
% Change 0 3.7% 1.3% 0.0% 1.3% 2.8% 0.0% 0.0% 8.2% 2.9% -2.6% 4.8% 3.3%
2002 vs 2001
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Key Questions for Managers to Ask about Customer
Complaining Behavior
 Why do customers complain?

 What proportion of unhappy customers complain?
 Why don’t unhappy customers complain?
 Who is most likely to complain?
 Where do customers complain?
Courses of Action Open to a Dissatisfied Customer
(Figure 13.1)
Complain to the
service firm
Take some form Complain to a third

of public action party
Take legal action to

Service Encounter is Take some form of seek redress
Dissatisfactory private action
Defect (switch
provider)
Take no action
Negative word-of-
mouth
Any one or a combination of

these responses is possible
Dimensions of Perceived Fairness in Service
Recovery Process (Figure 13.2)
Complaint Handling & Service Recovery

Process
Justice Dimensions of the Service Recovery Process
Procedural Interactive Outcome

Justice Justice Justice
Customer Satisfaction with the

Service Recovery
Source: Tax and Brown
Proportion of Unhappy Customers Who Buy Again
Depending on the Complaint Process
100 95%
90 82%
80 70%
70
60 54%
46%
50
37%
40
30 19%
20 9%
10
0
Customer did not Complaint was Complaint Complaint was
complain not resolved was resolved resolved quickly
Problem cost > $100 Problem cost $1 - 5

Source: TARP study
Impact of Effective Service Recovery
on Retention
No
Problem
84%
Problem,
but effectively 92%
resolved
Problem 46%
Unresolved
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Customer Retention
Source: IBM-Rochester study
Components of an Effective Service Recovery
System (Figure 13.3)
Strategies to Reduce Customer Complaint Barriers
(Table 13.1)
Complaint Barriers for Dissatisfied Strategies to Reduce These Barriers

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

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

complain
 Plan recovery procedures
 Teach recovery skills to relevant personnel
 Empower personnel to use judgment and skills to
develop recovery solutions
Guidelines for Effective
Problem Resolution (Management Memo 13.1)
 Act fast  Give benefit of doubt

 Admit mistakes but don’t be  Clarify steps to solve problem
defensive
 Keep customers informed of
 Understand problem from progress
customer’s viewpoint
 Consider compensation
 Don’t argue
 Persevere to regain goodwill
 Acknowledge customer’s
feelings
Service Guarantees Help Promote and Achieve
Service Loyalty
Force firms to focus on what

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

attribute is covered
 Multiattribute-specific guarantee – a few important
service attributes are covered
 Full-satisfaction guarantee – all service aspects covered
with no exceptions
 Combined guarantee – like the full-satisfaction, adding
explicit minimum performance standards on important
attributes
The Hampton Inn 100% Satisfaction Guarantee
(Figure 13.4)
 What are the benefits of such

a guarantee?
 Are there any downsides?
Key Objectives of Effective Customer Feedback
Systems
 Assessment and benchmarking of service quality

and performance
 Customer-driven learning and improvements
 Creating a customer-oriented service culture
Building a Customer Feedback System
 Total market surveys

 Post-transaction surveys
 Ongoing customer surveys
 Customer advisory panels
 Employee surveys/panels
 Focus groups
 Mystery shopping
 Complaint analysis
 Capture of service
operating data
Strengths and Weakness of Key Customer Feedback
Collection Tools (Table 13.3)
Selection of a cocktail of effective customer feedback

collection tools.
Multi-level Measurement Represen- Potential
Action- First Hand Cost
Collection Tools Service Process Specific able
tative, for Service
Learning Effective
Satisfaction Satisfaction Feedback Reliable Recovery
Total Market Survey (inclu.

competitors)
Annual Survey on overall
satisfaction
Transactional Survey
(process specific)
Service Feedback Cards
(process specific)
Mystery Shopping
(service testers)
Unsolicited Feedback Recd
(Online feedback system)
Focus Group Discussions
Service Reviews
Meets Requirements: Fully Moderate Little/Not at all
Entry Points for Unsolicited Feedback
 Employees serving customers face-to-face or by phone

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

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

experience
Product-Based: Quality is precise and measurable
User-Based: Quality lies in the eyes of the beholder
Manufacturing- Quality is conformance to the firm’s developed

Based: specifications
Value-Based: Quality is a trade-off between price and value
Dimensions of Service Quality
 Tangibles
 Reliability
 Responsiveness
 Assurance
 competence,
 courtesy
 credibility
 security
 Empathy
 access
 communication
 understanding of customer
Seven Service Quality Gaps (Fig. 14.1)
Customer needs CUSTOMER

and expectations
1. Knowledge Gap
Management definition
of these needs
MANAGEMENT
2. Standards Gap
Translation into
design/delivery specs
3. Delivery Gap
Execution of 4. I.C.Gap Advertising and
design/delivery specs sales promises
5. Perceptions Gap 6. Interpretation Gap

Customer perceptions Customer interpretation
of product execution of communications
7. Service Gap
Customer experience
relative to expectations
Prescriptions for Closing Service Quality Gaps (Table
14.3)
 Knowledge: Learn what customers expect--conduct

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

be counted, timed or measured through audits
 typically operational processes or outcomes
 e.g. how many trains arrived late?
 Soft measures refer to standards and measures that

cannot easily be observed and must be collected by talking
to customers, employees or others
 e.g. SERVQUAL, surveys, and customer advisory panels.
 Control charts are useful for displaying performance over

time against specific quality standards.
Hard Measures of Service Quality
 Control charts to monitor

a single variable
 Service quality indexes

 Root cause analysis
(fishbone charts)
 Pareto analysis
Composition e of FedEx’s
Service Quality Index (SQI) (Table 14.4)
Weighting No of Daily
Failure Type X =
Factor Incidents Points
Late Delivery – Right Day 1
Late Delivery – Wrong Day 5
Tracing request unanswered 1
Complaints reopened 5
Missing proofs of delivery 1
Invoice adjustments 1
Missed pickups 10
Lost packages 10
Damaged packages 10
Aircraft Delays (minutes) 5
Overcharged (packages missing label) 5
Abandoned calls 1
Total Failure Points (SQI) = XXX,XXX

Control Chart: Percent of Flights
Leaving within 15 Minutes of Schedule (Fig. 14.2)
100%
90%
80%
70%
60%
J F M A M J J A S O N D
Month
Tools to Address Service Quality Problems
 Fishbone diagrams: A cause-and-effect diagram to identify

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

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

one to identify fail points in both the frontstage and
backstage.
Cause and Effect Chart for
Airline Departure Delays (Fig. 14.3)
Facilities, Frontstage
Front-Stage
Procedure
Procedures
Equipment Personnel
Personnel
Aircraft late to Gate agents Delayed check-in

Arrive late gate cannot process fast procedure
Oversized bags enough
Mechanical Acceptance of late
Customers Failures passengers
Customers Late/unavailable
Late pushback airline crew
Delayed
Departures
Late food Late cabin
service cleaners
Other Causes Poor announcement of
Weather Late baggage departures
Air traffic
Late fuel Weight and balance sheet
late
Materials,
Materials, Backstage Information
Supplies
Supplies Personnel
Analysis of Causes of
Flight Departure Delays (Fig. 14.4)
4.9
All stations, excluding
15.3% 23.1% %
Chicago-Midway Hub
19%
33.3%
15.4% 11.7%
9.5%
23.1% 8.7%
23.1% 33.3%
11.3% 53.3%
Newark 15% Washington Natl.
Late passengers Late weight and balance sheet

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

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

from being related to productivity improvement programs
When Does Improving Service Reliability Become
Uneconomical? (Fig. 14.5)
Satisfy Target
100% Customers Through
Service Recovery
Service Reliability
Optimal Point of
Reliability: Cost of
Failure = Service
Recovery
Satisfy Target
Customers Through
Service Delivery as
A B C D Planned
Investment
Small Cost, Large Cost, Assumption: Customers are equally (or even
Large Improvement Small Improvement more) satisfied with the service recovery provided
than with a service that is delivered as planned.
Productivity in a Service Context
 Productivity measures amount of output produced

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

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

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

(e.g., how long employee takes to perform specific task)
 Problem: focus on inputs rather than outcomes
 May ignore variations in quality or value of service
 Effectiveness: degree to which firm is meeting its goals

 Cannot divorce productivity from quality/customer satisfaction
 Productivity: financial valuation of outputs to inputs

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

variations in quality or value of service
 That is, they focus on outputs rather than outcomes, and stress
efficiency but not effectiveness.
 Firms that are more effective in consistently delivering

outcomes desired by customers can command higher
prices. Furthermore, loyal customers are more profitable.
 Measures with customers as denominator include:

 profitability by customer
 capital employed per customer
 shareholder equity per customer
Questions to Ask When Developing Strategies to
Improve Service Productivity
 How to transform inputs into outputs efficiently?

 Will improving productivity hurt quality?
 Will improving quality hurt productivity?
 Are employees or technology the key to productivity?
 Can customers contribute to higher productivity?
Operations-driven vs. Customer-driven Actions to
Improve Service Productivity
Operations-driven strategies Customer-driven strategies

Control costs, reduce waste Change timing of customer
Set productive capacity to demand
match average demand
Automate labor tasks Involve customers more in
production
Upgrade equipment and
systems Ask customers to use third
Train employees parties
Leverage less-skilled
employees through expert
systems
Backstage and Frontstage Productivity Changes:
Implications for Customers
 Backstage improvements can ripple to the front stage and

affect customers
 e.g., new printing peripherals may affect appearance of bank
statements.
 Front-stage productivity enhancements are especially

visible in high contact services.
 Some may just require passive acceptance by customers
 Others require customers to change their scripts and behavior.
Overcoming Customers’ Reluctance to Accept
Changes in Environment and Behavior
 Develop customer trust

 Understand customers’ habits and expectations
 Pretest new procedures and equipment
 Publicize the benefits
 Teach customers to use innovations and promote trial
 Monitor performance, continue to seek improvements
Six Sigma Methodology to Improve and Redesign
Customer Service Processes
Process Improvement Process Design/Redesign

Define Identify the problem Identify specific or broad problems
Define requirements Define goal/change vision
Set goals Clarify scope & customer requirements
Measure Validate problem/process Measure performance to requirements
Refine problem/goal Gather process efficiency data
Measure key steps/inputs
Analyze Develop causal hypothesis Identify best practices
Identify root causes Assess process design
Validate hypothesis Refine requirements
Improve Develop ideas to measure Design new process
root causes Implement new process, structures and
Test solutions systems
Measure results
Control Establish measures to Establish measures & reviews to
maintain performance maintain performance
Correct problems if needed Correct problems if needed
Chapter 15
Organizing for Service

Leadership
Customer-Led versus Market-Oriented
Philosophies of Management
 Firms may lose market leader position if listen too closely to

current customers
 Service leadership requires curiosity, risk taking
 Customer-led businesses focus on understanding expressed
desires of customers in currently served markets
 Market-oriented businesses commit to understand current/
latent customer desires plus competitors’ plans, capabilities
 Scan market more broadly, have longer-term focus
 Work closely with lead users (windows to future vs. anchors to
past)
 Combine traditional research with experimentation, observation
 Conclusion: Pursue customer satisfaction, but set limits on
being led by customers, especially during rapid change
The Service Profit Chain (Fig. 15.1)
Internal External
Operating strategy and Service Target Market
service delivery system concept
Loyalty
EMPLOYEES CUSTOMERS
Satisfaction Revenue
Productivity Growth
Service
& Output Satisfaction Loyalty
Quality Value
Capability
Profitability
Service
Quality
• Workplace design
• Job design Quality and productivity • Lifetime value
• Selection and development improvements yield • Retention
• Rewards and recognition higher service quality • Repeat business
• Information and communication and lower costs • Referral
• Tools for serving customers
Causal Links in the Service Profit Chain (Table 15.1)
 Customer loyalty drives profitability and growth

 Customer satisfaction drives customer loyalty
 Value drives customer satisfaction
 Employee productivity and retention drive value
 Employee loyalty drives productivity
 Employee satisfaction drives loyalty and productivity
 Internal quality drives employee satisfaction
 Top management leadership underlies chain’s success
Integrating Three Functional Imperatives
(recap from Chapter 1)
Marketing Human Resources

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

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

 Cross functional taskforces
 New tasks and new people
 Process management teams
 Gain-sharing programs
The Search for Synergy:
A Top Management Perspective
What do we want?
What do our employees, What do our

intermediaries, and
customers want?
other partners want?
What can we do?
From Losers to Leaders:
Moving Up the Service Performance Ladder
Service Leaders
 Crème de la crème of their respective industries
 Names synonymous with outstanding service, customer delight
Service Professionals
 Clear positioning strategy
 Sustained reputation for meeting customer expectations
 Service Non-entities
 Traditional operations mindset
 Rudimentary marketing, often emphasizing price discounts
 Service Losers
 Only survive because of lack of viable alternatives in marketplace
Achieving Service Leadership by Focusing on Role
of Each Functional Area
 Marketing: move from tactical to innovative and

strategic
 Operations: move from reactive/cost oriented to

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

cost workers to quality of employees as strategic
advantage
Leadership for Change Management Involves Eight
Stages
 Create sense of urgency to develop impetus for change

 Put together strong team to direct process
 Create appropriate vision of where organization must go
 Communicate new vision broadly
 Empower employees to act on vision
 Produce sufficient short term results to create credibility
 Build momentum to tackle tougher problems
 Anchor new behaviors in the organizational culture
Source: John Kotter
Leadership Qualities Needed in Service
Organizations
 Vision, charisma, persistence, high expectations, expertise,

empathy, persuasiveness, integrity
 Ability to visualize quality of service as foundation for
competing
 Believe in people who work for the firm, make good
communications a priority
 Possess a natural enthusiasm for the business, teach it to
others, pass on nuances, secrets, crafts of operating
 Cultivate leadership qualities of others in organization
 Use values to navigate firms through difficult times
Transformational Leadership May Require Changing
Corporate Culture
 Corporate Culture:
 Shared perceptions regarding what is important
 Shared values about what is right and wrong
 Shared understanding about what works and what doesn’t
 Shared beliefs about why these things are important
 Shared styles of working and relating to others
 Climate for Service--Tangible working environment atop

underlying culture. Influential factors include:
 Shared perceptions concerning practices, procedures and types of
behaviors that get rewarded
 Clarity about mission and values, level of commitment to common
purpose
 Flexibility: freedom to innovate, sense of responsibility, standards

Services Marketing Christopher Lovelock

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Services Marketing Christopher Lovelock

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Chapter 1

 In most countries, services add more economic value

Government Wholesale and

Other Services 11% Transport, Utilities,

Time, per Capita Income Source: IMF, 1997

 Casino Hotels  HMO Medical Centers

 Continuing Care Retirement  Industrial Design Services

 Diet and Weight Reducing  Management Consulting Services

 Service elements within an organization that facilitate

 Government Policies (e.g., regulations, trade agreements)

 Radically alter ways in which service ﬁrms do business:

 Create relational databases about customer needs and

 An act or performance offered by one party to another

 Customers do not obtain ownership of services

 Services cannot be inventoried after production

 Customers may be involved in production process

 Other people are often part of the service product

 Greater variability in operational inputs and outputs

 Often difﬁcult for customers to evaluate services

 Time factor assumes great importance

 Distribution channels take different forms

What is the Who or What is the Direct Recipient of the Service?

INTANGIBLE Mental Stimulus Information Processing

e.g., broadcasting, consulting, e.g., accounting, banking,

Processes determine how services are created/delivered—

 Imposing new processes on customers, especially

 Customers may need to be educated about new

For possession-processing, mental-stimulus processing, or

1. Customers come to the service factory

When capacity to serve is

1. If demand is high and exceeds

All services can beneﬁt from IT,

Rethinking the original 4Ps

All Aspects of Service Performance that Create Value

 Core product features—both tangible and intangible

 Bundle of supplementary service elements

Delivery Decisions: Where, When, and How

Informing, Educating, Persuading, and Reminding Customers

 Imagery and recognition

Marketers Must Recognize that Customer Outlays Involve

Designing the Servicescape and providing tangible

 Select tangible metaphors for use in marketing

Method and Sequence in Service Creation and Delivery

Managing the Human Side of the Enterprise

 The right customers for the ﬁrm’s mission

High Contact Services

Retail Bank in g Car Repair

Emphasizes encounters Internet-based Low

 Service encounter: A period of time during which customers

 Moments of truth: Deﬁning points in service delivery where

 Critical incidents: speciﬁc encounters that result in

 Service success often rests on performance of junior

 Functional – unsatisfactory performance outcomes

 Financial – monetary loss, unexpected extra costs

 Temporal – wasted time, delays lead to problems

 Physical – personal injury, damage to possessions

 Psychological – fears and negative emotions

 Social – how others may think and react

 Sensory – unwanted impacts to any of ﬁve senses

Explicit & Implicit

Source: Adapted from Zeithaml, Parasuraman & Berry

 Desired Service Level: wished-for level of service quality

 Adequate Service Level: minimum acceptable level of

 Predicted Service Level: service level that customer