The Experience Economy

CHAPTER OBJECTIVES
This chapter provides an introduction to the field of services marketing.

The chapter discusses the basic differences between goods and

services and the factors necessary for the creation of the service

experience. In addition, the chapter clearly establishes the need for

services marketing education.

After reading this chapter, you should be able to:

• define the term 'service' and understand the basic differences

between goods and services
• discuss the factors that create the customer's service experience
• comprehend the driving forces behind the increasing demand for
services marketing knowledge
• understand the unique characteristics of services: intangibility,
inseparability, heterogeneity, and perishability
• briefly discuss the marketing problems associated with the
intangibility, inseparability, heterogeneity and perishability of services
and the possible solutions
• discuss the expanded marketing mix for services.
 Distinctive Holiday Homes is a worldwide
destination club with a business model similar to
a private country club, where a limited number
of members have virtually unlimited access to a
global portfolio of exquisitely maintained, luxurious
vacation homes, lodges, apartments and yachts,
complete with their own personal concierge and
use of a luxury vehicle and amenities. This is
achieved by maintaining a member-to-destinations
ratio of 6: 1, thereby purposely underutilising each
property to ensure high availability.
Distinctive Holiday Homes properties are
in the finest resort locations, including beach,
mountain, leisure and city destinations selected
throughout the Americas, Europe and the Asia­
Pacific region. For example, the Lady K (based
in Greece and Turkey) is a 26-metre (370-square
metre) luxury motor yacht with four elegant
staterooms, and which provides an all-inclusive
vacation experience for groups up to eight people.
The yacht holiday features four crew, including
a chef, in addition to activities such as kayakin b'
a manages the member's service experience thr
snorkelling, cycling and waterskiing. Other, land-.
based holiday destinations provide access to their
own unique variety of activities such as golfing,
shopping, theatres, spas, beaches, skiing, hunting,
hiking, fishing, sailing and horseback riding.
furnished dining and living areas. In addition,
special touches are thoughtfully included,
as designer linen, bathrobes and oversized
towels, fine tableware, flat-screen televisions,
equipment, access to broadband Internet an
TV services. Each destination is fully stocked
the guests' favourite food and beverages, as w
books, magazines, games, movies, music and
equipment.
Distinctive Holiday Homes is committ
delivering exceptional five-star concierge ser
for all members and their guests. Guest ser
include travel arrangements; reservations
selected activities such as dining, golfing or s
shopping services that ensure that the kitch
fully stocked when guests arrive; cleaning ser
and in-residence concierge services. In add
Distinctive Holiday Homes offers (at addi
cost) air travel through an optional privat
service.
Clearly, Distinctive Holiday Homes effec
the bundle of benefits it provides. Furthermo
does so at a price point lower than its compet
Source: Distinctive Holiday Homes,
distinctiveholidayhomes.com, viewed 16 January
 goods to service competition. Traditional goods-producing industries such as the
automotive industry are now placing greater emphasis on the service aspects of
their businesses, such as low annual percentage rate (APR) financing, attractive
lease arrangements, bumper-to-bumper factory warranties, low maintenance
guarantees and free shuttle services and courtesy vehicles for customers.
Simultaneously, less emphasis is being placed on the tangible aspects of
vehicles such as fuel consumption, acceleration and vehicle styling. Similarly,
the personal computer industry promotes in-home repairs, 24-hour customer
sen'ice and leasing arrangements, while the television industry highlights the
benefits of digital service, pay-per-view alternatives and family-safe viewing
options.
Overall, this 'global services era' is characterised by:
• economies and labour force figures that are dominated by the service sector
• greater customer involvement in strategic business decisions
• products that are increasingly market-focused and much more responsive to the
changing needs of the marketplace
• the development of technologies that assist customers and employees in the
provision of services
• employees who have been prOvided with more discretionary freedom to develop
customised solutions to special customer requests and to solve customer
complaints on the spot with minimal inconvenience
service imperative • the emergence of new service industries and the 'service imperative', where the
Reflects the view intangible aspects of the product are more and more becoming the key features
that the intangible
that differentiate products in the marketplace.
aspects of products
are becoming the It is clear that the service sectors in many countries are no longer
key features that manufacturing's poor cousin. Services provide the bulk of the wealth and
differentiate the are an important source of employment and exports for many countries. In
product in the addition, there are countless examples of organisations using the 'service
marketplace. imperative' to drive their business forward to profit and growth. lV[any of these
are highlighted in the services in action boxes located throughout the remainder of
the text.
its competitors.
The distinction between goods and services is further obscured by
organisations that conduct business on both sides of the fence. For example,
the Mitsubishi Corporation, weLl known for its production of motor vehicles
and involvement in the fields of energy, metals, machinery and chemicals, also
generates a significant percentage of its revenue from service-related business
entities in the areas of information, financing and logistics 2 Other examples
include General Electric and IBM, generally thought of as major goods producers,
who now generate more than half of their revenues from services (see the 'B2B
services in action' box). This transition from goods producer to service provider can
be found to varying degrees throughout much of the industrial sector.

B2B SERVICES IN ACTION

IBM: From boxes to services
Traditional manufacturing
organisations are increasingly
reorienting themselves around
services. In these cases, the
manufacturing organisation is basing its marketing
strategy on the philosophy that by serving customers
well through supplementary services, the value of the
tangible core product ('the box') is enhanced. illM is
an example of such a firm.
When most people think about IBM, they think
about its celebrated history as the manufacturer of
tangible products such as the typewriter, personal
computers, workstations, notebooks, desktops,
servers, printing systems and other assorted
accessories. However, in recent years, illM
transitioned itself from being a manufacturer
provider of business consulting and techno
services, IBM business services have been devel
to assist small and medium businesses to tran
their 'technology investments into business v
reduce costs, increase productivity, and de
technical resources'. For example, IBM an
corporate partners offer a number of services to
small and large business customers that are desi
to:
• boost workplace efficiency
• build a flexible infrastructure
• enhance financial management
 These differences are discussed in detail later in this chapter and throughout the
remainder of this text.

The scale of market entities

scale of market An interesting perspective regarding the differences between goods and services
entities is provided by the scale of market entities 3 The scale of market entities presented
The scale that in Figure 1.1 displays a continuum of products based on their tangibility, where
displays a range of
goods are tangible dominant and services are intangible dominant. The core benefit
products along a
continuum based on a tangible dominant product typically involves a physical possession that contains
their tangibility. service elements to a lesser degree. For example, an automobile is a tangible
tangible dominant dominant product that provides transportation. As the product becomes more
Goods that possess and more tangible dominant, fewer service aspects are apparent (e.g. salt). In
physical properties contrast, intangible dominant products do not involve the physical possession of
that can be felt, tasted
a product and can only be experienced. Like the automobile, an airline provides
and seen prior to the
consumer's purchase transportation, but the customer does not physically possess the plane. The airline
decision. customer experiences the flight; consequently, service aspects dominate the
intangible dominant product's core benefit and tangible elements are present, but to a lesser degree.
Services that lack the In comparison, fast-food businesses which contain both a goods and service
physical properties
component fall in the middle of the continuum.
that can be sensed
by consumers prior to The scale of market entities reveals two important lessons. First, there really
the purchase decision. may be no such thing as a pure product or pure service. Products are a bundle of
tangible and intangible elements that combine to varying degrees. Second, the
tangible aspects of an intangible dominant product and the intangible aspects of a
tangible dominant product are an important source of product differentiation and
marketing myopia
new revenue streams. For example, businesses that produce tangible dominant
Condition of
organisations products and ignore the service aspects of their product offering are overlooking
that define their a vital component of their businesses. By defining their businesses too narrowly,
businesses too these organisations have developed classic cases of marketing myopia. For example
narrowly. the typical family pizza restaurant may myopically view itself as being in the pizza
business and primarily focus on the pizza product itself. However, a broader view
the business recognises that it is providing the consumer with a reasonably priced
food product in a convenient format surrounded by an experience that has been
deliberately created for the targeted consumer. Interestingly, adding service aspects
to a product often transforms the product from a commodity into an experience,
and by doing so, increases the revenue-producing opportunities of the product
dramatically.
For example, when priced as a raw commodity, Arabica coffee beans are
worth little more than A$4. 50 per ki logram. 4 However, when processed,
packaged and sold in the supermarket as a good, the price of coffee jumps to
about 30 cents per cup. When that same cup is sold at a cafe, the coffee takes
on more service aspects and sells for about A$3. 50 per cup depending upon
the size of the cup. In the ultimate act of added value, when that same cup of
coffee is sold within the compelling experience of a five-star restaurant or within
the unique environment of a cafe such as Starbucks, the customer gladly pays
up to A$6 per cup. In this instance, the whole process of ordering, creation and
consumption becomes 'a pleasurable, even theatrical' experience. Hence,
economic value, like the coffee bean, progresses from commodities to goods to
services to experiences. In the previous example, coffee is transformed from a
raw commodity valued at approximately A$4. 50 per kilogram to one valued at
A$6 per cup.

The service experience

Because of the intangible nature of service products, service knowledge is
acquired differently than knowledge pertaining to goods. For example, consumers
can sample tangible dominant products such as soft drinks and biscuits prior to
purchase. In contrast, a consumer cannot sample an intangible dominant product
such as a haircut, a surgical procedure or a consultant's advice prior to purchase.
Hence, service knowledge is gained through the experience of receiving the actual
 the workers; and they will also generally not use Surf in the presence of other
service delivery consumers. In contrast, restaurant customers are physically present in the 'service
model factory' where the food is produced, and these customers interact with the workers
A model used to who prepare and serve the food as well as with the management staff who run the
illustrate the factors
restaurant. Moreover, restaurant customers consume the service in the presence
that influence the
service experience, of other restaurant patrons where they may influence one another's service
including those that experience. One model that illustrates factors that influence the service experienc
are visible to the and service delivery is depicted in Figure 1.2. This model (known as the service
consumer and those delivery model) basically explains how service is delivered and consists of four
that are not.
factors that directly influence customers' service experiences:

FIGURE 1.2 THE SERVICE DELIVERY MODEL

Source: Adapted from E. Langeard. J. Bateson, C, Lovelock & P. Eiglier. Marketing of Services: New Insights from Consumers and
Managers, Report No 81-104, Cambridge, MA, Marketing Sciences Institute, 1981.
 such as furnishings and business equipment
• other physical evidence; for example, signs, symbols and personal artefacts such
as family pictures and personal collections.
The use of physical evidence varies according to the type of service
organisation. Service organisations such as hospitals, resorts and childcare centres
use physical evidence extensively as they design facilities and other tangibles
associated with the service. In contrast, service organisations such as insurance
agencies and courier companies are much less reliant on physical evidence.
Regardless of the variation in usage, all service organisations need to recognise the
importance of managing the servicescape because of its role in:
• packaging the service
• facilitating the service delivery process
• socialising customers and employees
• differentiating the service organisation from its competitors.

Contact personnel and service

providers
Contact personnel are employees other than the primary service provider who brieAy contact p
Employee
interact with the customer. Typical examples of contact personnel are parking
the prima
attendants, receptionists and hotel porters. In contrast, service providers are the provider w
primary prOviders of the core service, such as a waiter or waitress, dentist, physician interact w
or university lecturer. customer.
Unlike the consumption of goods, the consumption of services often takes service p
The prima
place where the service is produced (e.g., in a dentist's office, restaurant or
of a core
hairdresser) or where the service is proVided, such as at the consumer's residence
such as a
or workplace (e.g., lawn mowing, house painting or cleaning services). Regardless waitress,
of the service delivery location, interactions between consumers and contact physician
personnel or service providers are commonplace. As a result, service personnel have lecturer.
a dramatic impact on the service experience.
 establishments such as restaurants, hotels, airlines and medical centres serve
multiple customers simultaneously. Other customers who are present in the
'service factory' can have a profound impact on an individual's service experience.
Research has shown that the presence of other customers can either enhance or

Hertz is addressing travellers'

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impact of 'other customers' with
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Invisible organisation and systems
During service delivery, the benefits derived by a customer are influenced by their
interaction with the servicescape, contact personnel and/or service providers, and
other customers. The benefits are therefore derived from an interactive process
tnat takes place throughout the service experience. Of course, the visible
components of service organisations cannot exist in isolation; rather, they have
to be supported by invisible components. For example, Toll, a leading provider
of integrated logistics services in the Asia-Pacific region, operates an extensive
network of over 700 sites in 45 countries across the world. Its highly visible road
fleets, ships, air freight capacity and rail rolling stock are supported by behind­
the-scenes operational activities and technology that the customer seldom sees,
including sophisticated computing and information technology that records and
tracks deliveries. 7
The invisible organisation and systems reflect tne rules, regulations and invisible
processes upon which the organisation is based. As a result, although they are and syste
invisible to the customer, they can nave a profound effect on the consumer's That part
that reflec
service experience. The invisible organisation and systems determine factors such
rules, reg
as information forms to be completed by customers, the number of employees processes
working in the organisation at any given time, and the policies of the organisation the organ
regarding countless decisions that may range from the substitution of menu items based.
to wnether the organisation accepts the Seniors Card for senior citizens' discounts.
The four components presented in Figure 1.2 combine to create the experience
for the consumer, and it is the service experience that creates the bundle of
benefits for the consumer. Moving beyond simply delivering service to creating a
memorable 'experience' is the focus of many service organisations in the pursuit of
competitive advantage (see the 'Beyond service to experience' box). Consumers are
an integral part of the service process. Their participation may be active or passive,
but they are always involved in the service delivery process. This has a significant
effect on the nature of the services marketing task and provides a number of
challenges that are not typically faced by manufacturers of physical goods.
business called GeeksZU Fundamentally, GeeksZU is
an on-site computer repair service - not too exciting!
However, GeeksZU have developed a concept that goes
beyond simply providing technical computing support.
GeeksZU makes light of the stereotypical'geek' image of
computer technicians. They boast that their technicians
are a 'special breed' with both the appropriate technical
service'. This high level of service is augmente
with a company website that provides a newslette
tips and ideas, and numerous testimonials from
customers delighted with the exceptional servic
they have received.
Source: Geeks2U, www.geeks2U.com.a
viewed 17 January 200

Why study services?

There are two compelling reasons for studying the marketing of services as distinc
from the marketing of physical goods. First, over the last 40 years, substantial
changes have taken place in the global business environment. Emerging service
sectors (profit and non-profit) are nO\'I' dominating economies that were once
known for their industrial manufacturing strength. Coinciding with the tremendou
growth in the global service economy, the demand for individuals who command
services marketing expertise is also greatly expanding. Currently, aU but one of the
50 highest paying jobs in the service economy require a university degree (air traff
controller is the exception)8 The economic importance and growth of the service
sector will be discussed further in Chapter 2.
The second reason for studying services marketing is due to key differences
between goods and services marketing. Practitioners in the services field have quick
learned that traditional marketing strategies and managerial models, with their
foundation in the goods-producing manufacturing sector, do not always apply to the
unique service industries. In the beginning, the work towards accumulating services
marketing knowledge was slow. In fact, not until 1970 was services marketing even
considered an academic field. It then took 12 more years before the nrst internation
conference on services marketing was held in the United States, in 1982 9 One of th
reasons this field was slow to grow within the academic community was that many
be intangible because they are performances rather than objects. They cannot be Adistingui
characteris
touched or seen in the same manner as goods. Rather, they are experienced, and
services th
consumers' judgements about them tend to be more subjective than objective.
them unab
Inseparability of production and consumption refers to the fact that whereas goods touched or
are first produced, then sold and then consumed, services are sold first, and then the same m
produced and consumed Simultaneously. For example, an airline passenger first physical go
purchases a ticket and then flies, consuming the in-flight service as it is produced. inseparab
A distingui
Heterogeneity refers to the potential for service performance to vary from one
characteris
service transaction to the next. Services are produced by people; consequently, services th
variability is inherent in the production process. This lack of consistency cannot be the interco
eliminated as easily as it can be with goods. Finally, perishability means that services among the
cannot be saved, unused capacity in services cannot be reserved, and services provider, th
themselves cannot be inventoried.!' Consequently, perishability leads to formidable involved in
the service
challenges relating to the balancing of supply and demand.
customers
This section of the text focuses on each of these four unique characteristics service ex
that differentiate tne marketing of services from the marketing of goods. heterogen
rmplications arising from these unique characteristics are explored and possible A distingui
solutions are discussed. characteris
services th
the variatio
consistenc

Intangibility: the primary service tra

the next.
perishabili

source of difference A distingui

characteris
services in
Of the four unique characteristics that distinguish goods from services, intangibility
cannot be
is the primary source from which the other three characteristics emerge. As their unuse
discussed previously, services are defined as performances, deeds and efforts, cannot be
whereas goods are defined as objects, devices and things. As a result of their and they c
intangibility, services cannot be seen, felt, tasted or touched in the same manner as inventoried
physical goods can be sensed.
Marketing problems caused by
intangibility
As a result of the intangibility of services, a number of marketing chalJenges arise
that are not normally faced when marketing tangible goods. More specifically, the
challenges include:
• the lack of service inventories
• the lack of patent protection
• the difficulties involved in displaying and communicating the attributes of the
service to its intended target market
• the special challenges involved in the pricing of services.
The following sections briefly address these chaJlenges and offer possible
solutions to minimise their effects.

Lack of service inventories

Because of their intangibility, services cannot be inventoried. As a result, supplies
of services cannot be stored as buffers against periods of high demand. For
example, movie seats that are not sold for the afternoon screening cannot be adde
to the cinema for the evening show. Service providers are limited in how much
they can seJl by how much they can produce; consequently, customers may have
wait for the desired services. This inability to maintain an inventory (the perishab
characteristic of services) translates into ongoing supply and demand problems.

Lack of patent protection

Because of the property of intangibility, services are not patentable. \Nhat is
there to patent? Human labour and effort are not protected by patents.
Organisations sometimes advertise that their processes are patented; however,
the reality is that the tangible machinery involved in the process is protected, not
Difficulty in pricing services
Typically, the price of a product is based on cost-plus pricing. This means that the
producer calculates the cost of producing the product and adds a predetermined
mark-up to that figure. The challenge involved in the pricing of services is that
there is no cost of goods sold. The primary cost of producing a service is labour.
For example, let's say you are very competent in the field of mathematics. Taking
notice of your expertise in the field, a student who is struggling with his maths
assignments wants to hire you as a tutor. \;\Jhat would you charge per hour)
What are the costs involved? It is very difficult to place a value on your time. For
example, how much money could you make doing something else and what are the
opportunity costs associated with not being able to enjoy your free time) Typically,
you would most likely charge something comparable to the fees charged by other
tutors. The problem is that it still does not answer the original question; that is,
how was this competitive-based price originally calculated?

Possible solutions to intangibility

problems
Marketing practitioners have implemented a number of strategies in an attempt to
offset or minimise the marketing challenges posed by intangibility. These strategies
include:
• the use of tangible clues to help 'tangibilise' the service
• the use of personal sources of information to help spread the word about service
alternatives
• the creation of strong organisational images to reduce the amount of perceived
risk associated with service purchases.
Although marketers may not be totally capable of eliminating the effects of
intangibility, strategies such as these have provided innovative solutions for many
service industries.
 The use of personal sources of information
Because consumers of services lack any objective means of evaluating them, they
often rely on the subjective evaluations of friends, family and a variety of other
personal sources opinion leaders. Hence, in purchasing services, personal sources of information
Sources such as (e.g., "vord of mouth and referrals) become more important to consumers than
friends, family and non-personal sources such as the mass media (e.g., television, radio and the Yellow
other opinion leaders
Pages). One strategy often used to stimulate word-of-mouth advertising is to offer
whom consumers use
to gather information incentives to existing customers to tell their friends about a service organisation's
about a service. offerings. For example, Dodo, a broadband supplier, rewards existing customers f
non-personal sources referrals by plaCing a reward on their account. Service marketing organisations m
Sources such as also simulate personal communication or word of mouth using mass media. Mass
mass advertising that
advertising that features customer testimonials can be very effective. For example
consumers use to
gather information funeral insurance companies frequently feature real people in their advertisemen
about a service. explaining how their funeral insurance was a blessing when they were dealing wit
the unexpected death of a loved one.

Creation of a strong organisational image

The intangibility of services and the lack of objective sources of information to
evaluate services mean that the amount of perceived risk associated with service
purchases is generally greater than their goods counterparts. In an attempt to
organisational image combat the higher levels of perceived risk, some service organisations have spent
The perception an great deal of effort, time and money in developing a strong organisational image. A
organisation presents well-known and respected corporate image can also reduce the reliance on person
to the public; if sources of information when making service provider choices. For example, when
well known and
moving to a new area, a customer may bypass personal referrals and automatically
respected, it lowers
the perceived risk of
seek out the nearest nationwide insurance agent, such as AAiVII, for their home a
potential customers car insurance needs based on the insurer's strong organisational image. In this ca
making service AAMl, through image development and subsequent brand awareness nationwide
provider choices. has developed a differential advantage. Table 1.1 summarises the marketing
problems and possible solutions for minimising the challenges of intangibility.
an actual customer while producing goods in a secluded factory, service providers
are often in constant contact with their customers and must construct their service
operations with the customer's physical presence in mind. This interaction between
customer and service provider defines a critical incident. Critical incidents represent critical in
the greatest opportunity for both gains and Josses in regard to customer satisfaction A specific
between
and retention.
and a ser

Marketing problems caused by

inseparability
The inseparable nature of services poses a number of unique challenges for
marketing practitioners, including:
• the execution of the service, which often requires the physical presence of the
service provider
• customer involvement in the service delivery process
• services often being a shared experience among a number of customers
• issues pertaining to the mass production of services.
Each of these cha]]enges is briefly discussed below.

Physical connection of the service provider

to the service
For the production of many services to occur, the service provider must be
physically present to deliver the service. For example, dental services require the
physical presence of a dentist or dental technician, and in-home services such as
carpet cleaning require a service provider to complete the work. Because of the
intangibility of services, the service provider becomes a tangible clue on which
at least part of the customer's evaluation of the service experience is based.
Service providers are evaluated based on their use of language, clothing, personal
hygiene and interpersonal communication skills. For example, wearing uniforms
or conforming to a dress code is often required of service employees to reAect
professionalism. Restaurants place their most articulate and attractive personnel
in customer contact positions such as waiting staff or bartenders. Personnel who
do not have these skills or attributes are typically employed in areas that are less
visible to the consumer such as the kitchen.
Employee satisfaction and customer satisfaction are directly related.
Dissatisfied employees who are visible to customers will translate into lower
consumer perceptions of the organisation's performance. The importance of
employee satisfaction within service organisations cannot be overemphasised.
Customers will never be the number one priority in a company where employees
are treated poorly. Hence, employees should be viewed and treated as internal
customers of the service organisation.

Involvement of the customer in the production

process
The second defining characteristic of inseparability (simultaneous production and
consumption) is that the customer is involved in the production process. Howeve
the levels of customer involvement may vary from:
• a requirement that the customer be physically present to receive the service,
such as a dental service, haircut or surgery
• a need for the customer to be present only to start and stop the service, such a
dry cleaning and vehicle repair
• a need for the customer to only be mentally present, such as in participation in
an online university course.
Each scenario reAects different levels of customer contact and, as a result,
each service delivery system should be designed differently.
Typically, as customer contact increases, the efficiency of the service operatio
decreases. The customer has a direct impact on the type of service desired, the
length of the service delivery process and the cycle of service demand. Attempting
becomes a key player in the service production process and can directly influence
the outcome of the process itself. The failure of the patient to accurately explain
their symptoms will likely lead to an unsatisfactory service experience. The
customer may blame the service provider, even though the service provider fulfilled
his or her part of the transaction.
Another issue directly related to the consumer's presence in the service
factory concerns the appearance of the service factory itself. VVhen the consumer
is required to be present, the service factory becomes a key tangible clue in the
formation of consumer perceptions regarding service quality.

Involvement of other customers in the production

process
The presence of other customers during the service encounter is the third defining
characteristic of inseparability. Because production and consumption occur
simultaneously, several customers often share a common service experience. This
'shared experience' can be negative, neutral or positive.
Restaurants provide an ideal setting for examples of potential negative events,
including families with young children sharing the same space with adult couples
seeking a quiet dining experience, intoxicated customers interacting with sober
patrons, and the occasional lovers' quarrel that spills over into the aisles. Overall,
the primary challenge concerns effectively managing different market segments
with different needs within a single service environment. Such wiJJ be the case if
the use of mobile phones is eventually approved on airlines. Some passengers wilJ
see the addition of this service as overwhelmingly positive while others will view it
as irritating noise poJ]ution.
The impact of 'other customers' is not always negative. For example, audience
reaction in the form of laughter or screams of terror enhances the viewing
experience at a cinema. Similarly, a crowded pub facilitates the opportunity for
social interaction, while a happy crowd makes a concert an even more pleasurable
event.
 problems
Similar to the solutions proposed for intangibility, marketing practitioners have
developed a number of strategies in the attempt to offset or minimise the marketi
challenges posed by inseparability. These strategies include:
• an increased emphasis on the selection and training of customer contact
personnel to ensure that the right types of employees are in the right jobs
• the implementation of customer management strategies that facilitate a
positive service encounter for all customers sharing the same service
experience
• the use of multisite locations to offset the mass-production challenges posed b
inseparability.

Selecting and training customer contact personne

Contact personnel exhibit variations in behaviour that cannot be controlled by
the service process. The attitudes, moods and emotions of contact personnel are
visible to the customer and can affect the service experience for better or worse
(see the 'Global services in action' box) 12 As a result of the frequency and depth
selection and training of interactions between service providers and consumers, selection of service
A strategy that personnel with superior communication and interpersonal skills is critical. In
minimises the impact
addition, training personnel once they are on the job is also necessary. For example
of inseparability by
hiring and educating Air New Zealand provides both pre-service and on-the-job training and has said
employees in such that the 'training and development of people within Air New Zealand is integral to
a way that the the success of the business, and the relationship with our customers in the qualit
customer's service and service provided'.13
experience is positive
Critics of service quality have focused on 'robotic' responses by staff who
and the employees
are properly equipped
have been trained in using the technology associated with the business, but not
to handle customers in dealing with different types of customers. Experts in service quality believe
and their needs. that employees must also be trained in 'soft' management skills such as reliability,
responsiveness, empathy, assurance and managing the tangibles that surround the
service.
relationships. For example, the Russian airline
Aeroflot actually ran an advertising campaign that
attempted to justify its poor customer service: 'We
don't smile because we are serious about making
you happy'. However, times are changing. In May
2004, Russian border guards, known for their
stoicism, were ordered to smile. The Bienvenue en
France campaign that urged French taxi drivers to
be friendlier to tourists was another example of the
efforts being made to improve European customer
service.
One of the most ambitious programs aimed at
The focus of the London Development Agen
now firmly directed towards further raising custo
service standards in preparation for the Lo
2012 Olympic Games and Paralympics. A r
titled World Class Customer Service ... [or 2012
beyond, which was published in December
evaluated 'the effectiveness of existing trai
programmes', identified 'best practice', and m
'recommendations for future provision'.
Sources: 'Don't mention the war', Economist, vol. 37
8389,21 August 2004, p. 47; London Development Ag
viewed 12 March 2009, www.lda.go

improving service standards occurred in London,

Customer management
The problems created by inseparability can also be minimised through effective
customer management. For example, the provision of separate smoking rooms in customer
some Asian international airports (spatial separation) is an example of one way to managem
A strategy
minimise the impact on non-smoking passengers. Restaurant reservation systems
service p
may help smooth out the demand created by traditional eating cycles. Providing can imple
home-delivery services may eliminate the need for many customers to be minimise
physically present within the service factory, thereby increasing the organisation's of insepa
operating efficiencies. Finally, isolating the technical core of the business from such as s
the customer allows for customer involvement while limiting the customer's smokers
smokers
direct impact on the organisation's operations For example, the typical dry
European
cleaning business is designed so that customers are attended to at the front
counter; meanwhile, the core operation is located in an area of the building where
customers are not permitted.
 Characteristic Marketing problems Possible solutions
Inseparability • Physical connection of • Selecting and training
the service provider to public contact personnel
the service • Consumer management
• Involvement of the • Use of multisite locations
customer in the
production process
• Involvement of other
customers in the
production process
• Special challenges in
mass production of
services

Heterogeneity
Heterogeneity concerns the variation in consistency from one service transaction
or encounter to the next. Service encounters occur in real time and consumers are
present within the Factory, so if something goes wrong during the service process,
it is too late to institute quality-control measures before the service reaches
the customer. Indeed, the customer (or other customers who share the service
experience with the primary customer) may be part of the quality problem. For
example, if something goes wrong during a customer's hotel stay, the hotel manag
cannot ask the customer to leave the hotel, re-enter and begin the experience agai
Heterogeneity makes it impossible for service organisations to achieve 100
per cent-perfect quality on an ongoing basis. Manufacturing operations may also
have problems achieving this sort of target, but they can isolate mistakes (defects)
and correct them over time, as mistakes tend to reoccur at the same points in the
process. In contrast, many errors in service operations are one-time events; For
example, the waiter who drops a plate of food in a customer's lap creates a service
failure that can be neither foreseen nor corrected ahead of time. 14
 Consistency of service can also vary when interacting with the same service
provider on a daily basis. For example, most McDonald's franchises have helpful
and smiling employees, but some may employ individuals who act like robots. Not
only can this be said for different franchises, but the same is true within a Single
franchise on a daily basis because of the different personalities and fluctuating
moods of individuals.

Marketing problems caused by

heterogeneity
The major obstacles presented by heterogeneity translate into the fact that
service standardisation and quality control are difflcult to achieve. Many service
organisations employ a multitude of front-line service providers. Each employee
has a different personality and interacts with customers differently. In addition,
each employee may act differently from one day to the next as a result of mood
changes as well as numerous other factors. For example, waiting staff in restaurants
frequently acknowledge that the quality of interaction between themselves and
customers may vary from table to table.
The marketing problems created by heterogeneity are particu larly frustrating.
A service organisation could produce the best product in the world, but if an
employee is having a 'bad day', a customer's perceptions may be adversely affected.
The service organisation may never have another opportunity to serve that
customer. For example, the purchaser of a Gloria Jean's Coffees franchise may pay
between A$300 000 and A$450 000 for the franchise and the right to sell a 'proven
product'. However, each individual franchise's success really relies on the 16-year­
old employees behind the counter who directly interact \.vith customers. Can you
imagine the person who has just spent A$450 000 for their franchise trying to sleep
at night while thinking that his or her livelihood depends on the 'kids' behind the
counter) It does l
customer's exact the provider can demand higher prices which, in turn, may lead to higher profit
specifications. margins.
The downside of providing customised services is threefold:
1. Customers may not be willing to pay the higher prices associated with
customised services.
2. Customised services take extra time to provide and deliver, and the customer
may not have the luxury of waiting for the final product.
3. Customers may not be willing to face the uncertainty associated with
customised services.
So, do customers prefer customised services over standardised services)
Intuitively, most providers believe that customers would prefer customised
products; however, the real answer is, 'it depends'. If price, speed of delivery and
consistency of performance are issues, the customer will probably be more satisfie
with a standardised service.

Standardisation
standardisation The goal of standardisation is to produce a consistent service product From one
To produce a transaction to the next. Service organisations can attempt to standardise their
consistent service
service through intensive training of their service providers to reduce variations
product from one
in performance. However, despite all the training in the world, employees
transaction to the
next. ultimately will continue to vary somewhat from one transaction to the next. One
way to eliminate this variance is to replace human labour with machines that
minimise customer contact (e.g., automatic teller machines (ATIVls), automated
car washes).
On the positive side, standardisation leads to lower consumer prices,
consistency of performance and faster service delivery. However, some consumer
groups believe that standardisation sends the message that the organisation
does not really care about individual consumer needs and may be attempting to
distance itself from th.e customer. Perceived distancing is particularly an issue
as organisations are increaSingly replacing human labour with machines such as
The fourth and nnal unique characteristic that distinguishes goods from services
is perishability. Perishability refers to the fact that services cannot be saved, their
unused capacity cannot be reserved, and they cannot be inventoried. Unlike goods
that can be stored and sold at a later date, services that are not sold when they
become available cease to exist. For example, hotel rooms that go unoccupied for
the evening cannot be stored and used the next night. Likewise, service providers
such as dentists, lawyers and hairdressers cannot regain the time lost from an
empty client appointment book or cancellations.
The inability to inventory creates profound difficulties for marketing services.
When dealing with tangible goods, the ability to create an inventory means that the
production and consumption of goods can be separated in time and space. In other
words, a good can be produced in one locality and transported to another for sale.
Similarly, a good can be produced in January and not released into the channels of
distribution until June. In contrast, most services are consumed in real time at the
point of production.

Marketing problems caused by

perishability
Without the benent of carrying an inventory, matching demand and supply within
most services organisations is a major challenge. For example, try to imagine being
the manager who schedules cashiers at a supermarket. Although he or she can
estimate the times of the day that the store will experience increased demand, that
demand may fluctuate widely within any IS-minute interval. Now try to imagine
forecasting demand for a hospital's emergency room, an entertainment theme
park or a ski resort. Demand can be 'guesstimated' but will rarely be exact. Simply
stated, consumer demand for many services at any given time is unpredictable. The
lack of inventories and the need for the service provider to be present lead to four
possible demand and supply scenarios.
 of mouth.

Lower demand than optimal supply level

As we discussed earlier, providing the exact number of supermarket cashiers
needed at any given time is a challenge. One solution would be to staff each
checkout line with a full-time cashier; however, this strategy would result in an
inefficient deployment of the supermarket's resources. During times when demand
is below optimal capacity, resources are underutilised (e.g., cashiers are standing
around) and operating costs are needlessly increased.

Demand and supply at optimal levels

The optimal scenario is to have demand match supply. In this scenario, service
quality is maintained as customers do not wait in long lines and employees are
utilised to their optimal capacity.

Possible solutions to perishability

problems
Service demand and supply is difficult to balance. Therefore, service organisations
have developed strategies that attempt to manage supply and demand. The
creative pricing
strategies presented here are pOSSible solutions to the difficulties associated with
Pricing strategies
often used by service the perishability of services.); vVe commence with strategies focusing on managing
organisations to help demand.
smooth demand
fluctuations, such Demand strategy: creative pricing
as offering 'matinee'
Creative pricing strategies are often used by service organisations to help smooth
prices or 'early-bird
specials' to shift demand fluctuations. For example, offering price reductions in the form of
demand from peak to 'early-bird specials' and 'matinees' have worked well for restaurants and cinemas,
non-peak periods. respectively. At the same time, some service organisations are willing to offer price
reductions to attract customers during non-peak hours. By shifting demand to othe
Demand strategy: reservation systems
Another common strategy used to reduce fluctuations in demand is to implement
a reservation system. Reserviltions reduce the customer's risk of not receiving the reservati
service and minimise the time spent waiting in line. Reservation systems also A strateg
aHow service organisations to prepare in advance for a known quantity of demand, smooth d
fluctuatio
resulting in improved service.
consume
Despite the advilntages of a reservation system, a host of disadvantages request a
accompany this strategy. First, someone must maintain the reservation system, the organ
which adds additional cost to the service operation. Next, customers do not always services
show up on time or sometimes fiJil to show up at all. As a result, the operation ends particula
up with unutilised supply and lost revenue. For example, some golfers may reserve
a tee-off time at two diHerent golf courses and/or at different times on the same
dily Depending on their whims and which golf course they decide to play that
particular day, the golfers choose which tee-off time to use, leaving the other golf
course holcling the tee for a group that does not show up. Given that a round of golf
can be very expensive - for example, an 18-hole round of golf at the Royal Pines
Resort on the Gold Coast costs A$240 per person - the other golf course may have
lost a substantial sum of money that it could have otherwise collected by filling the
spot with another group.
Another drilwback of reservation systems is that they offer to the customer
an implied guarantee that the service will be available at a specified time, thereby
increasing the customer's expectations. All too often, this implied guarantee is not
met. for example, customers with earlier appointments may show up late, causing
a chain reaction of delayed appointments for the rest of the day. Similarly, the
rate at which restaurant tables turn over is difficult to determine and is further
compounded by the size of the party sitting at a table compared with the size of the
party waiting for a table. fvledical doctors may schedule as many as four patients at
the same appointment time in an attempt to serve patient demand. Hence, despite
the use of a reserviltion system, customers may still end up waiting and become
non-peak demand
development The effects of perishability can also be modified by developing non-peak demand.
A strategy in which Non-peak demand development utilises service downtime to prepare in advance
service providers use
for peak periods and/or to market to different market segments with different
their downtime to
prepare in advance demand patterns. Consequently, non-peak demand development can reduce the
for peak periods or effects of perishability in two ways. First, employees can be cross-trained during
by marketing to a non-peak demand periods to perform a variety of other duties during peak demand
different segment periods (e.g., dish-washing personnel may be trained to set up and clear tables).
that has a different In addition, the tangibles associated with the service (such as refreshments on
demand pattern than
an aeroplane) can be prepared prior to the service encounter. Second, non-peak
the organisation's
traditional market demand can also be developed to generate additional revenues by marketing
segment. to a different market segment that has a different demand pattern than the
organisation's traditional segment. For example, golf courses have filled non-peak
demand by marketing to housewives, senior citizens and shift workers. In addition
part-time employees to managing demand, the service marketing organisation can seek to balance
Employees who demand and supply by more carefully managing supply.
typically assist during
peak demand periods
and who generally
Supply strategy: part-time employee utilisation
work fewer than 40 The use of part-time employees makes additional supply available during peak
hours per week. demand periods. For example, retailers use part-time employees to increase their
supply of service during holiday periods. The advantages of employing part-time
workers as opposed to adding additional full-time staff include lower labour costs
capacity sharing and a Aexible labour force that can be employed when needed, On the negative
Strategy to increase side, using part-time employees sometimes causes consumers to associate the
the supply of service organisation with lesser job skills, and lack of motivation and organisational
by forming a type of
commitment lead to lower levels of service.
co-op among service
providers that permits
co-op members to Supply strategy: capacity sharing
expand their supply of Another method of increasing the supply of service is capacity sharing. Capacity
service as a whole. sharing involves forming a type of service cooperative with other service prOViders,
thus permitting the cooperative to expand its supply of service as a whole, For
third parties is evidenced by the airlines' Willingness to pay commissions to travel and ther
agencies for booking flights. costs an
However, the use of third parties may expose customers to competitive
offerings as well. Many third parties such as travel agents represent a variety
of suppliers. A customer who intended to book a flight on Qantas may end up
taking a Singapore Airlines flight because of a more compatible schedule ancl/
or a less expensive fare. This type of competitive information would not have
been available if the passenger had contacted Qantas directly to make the flight
reservation.

Supply strategy: increase in customer

participation
Another method for increasing the supply of service available is to encourage
customer participation in which the customer performs part of the service. For custom
example, at Sizzler restaurants, customers create their own salad from the 'salad particip
bar', serve their own dessert from the 'dessert bar', refill their glass from the 'soft A supply
increase
drink bar' and make their own hot beverage at the 'beverage bar'. Other examples
of servic
include getting customers to fill up their own cars with petrol at the service station, the cust
complete their own banking transactions at ATMs or online, and bag their own part of t
groceries at some supermarkets (e.g., ALDI). Self-service frees up the employees to
provide other services.
Altogether, a number of advantages and disadvantages are associated with
customer participation (see the 'E-services in action' box). The willingness of
customers to provide their own service is generally a function of convenience, price
and customisation. For example, ATMs offer the customer the convenience of 24­
hour banking, while the bagging of groceries is generally accompanied by lower
grocery prices.
In contrast, customer participation may also be associated with a number
of disadvantages that predominantly concern loss of control. In many
instances, the more the customer becomes a major player in the production
conduct tasks other than servicing customers face­
to-face. Self-service is to the service sector what mass
production is to manufacturing - a process used to
develop products more cheaply and on a massive
scale.
Despite the apparent advantages associated
with SSTs, not everyone is thrilled by them. Many
question the true motivations of companies that
utilise SSTs. Is the primary goal to provide improved
whether it's a website or a tracking service, will b
determined by the benefit it provides to the custome
SSTs that truly benefit only the company will motiva
customers to defect to more fulfilling alternativ
providers.
Source: 'Do it yourself', Economist, vol. 372, no. 8393,
September 2004, p. 1

of the service, the less control the service organisation is able to maintain over
the quality of the service provided. For example, the doctor who instructs a
patient to administer his or her own medicine relinquishes control over the
outcome of the prescribed care. Quality control may also suHer as a result of
confused customers who decrease the efficiency of the operating system. For
example, customers who are waiting in line behind someone who is using an
ATM for the first time may experience the negative effects of the new customer's
learning curve.
The loss of quality control may also be accompanied by a loss of control over
operating costs. Self-service, particularly in the food industry, is associated with
waste as a result of abuse of the system. Customers often take more food than they
would normally order and may consume or share food with non-paying friends.
Finally, increasing customer participation may be interpreted by some customers as
the service organisation's attempt to distance itself from the customer. As a result,
the image of an uncaring, unresponsive and out-of-touch service organisation
may develop, driving many customers away to fuJl-service competitors. Table 1.4
provides a list of possible solutions to the various marketing problems posed by
perishability
The expanded marketing expanded
mix for s
mix for services The expa
marketing
To this point, we have discussed the unique characteristics of services, n<lmely services
intangibility, inseparability, heterogeneity and perishability, and related mmketing people, p
impJications and possible solutions Given these differences, the traditional and phys
marketing mix for physical goods comprising the four Ps of product. pricing, in additio
traditiona
promotion and placement is insufficient to address the scope of decision making
of produc
required for effective services-marketing management. To this end, an expanded promotion
marketing mix for services has been developed that also includes people, processes placemen
and physical evidence elements. people
The people element of the expanded marketing mix for services includes The peop
service employees, the immediate customers and other customers within the of the exp
marketing
service environment who impact on service delivery, customer satisfaction and
services
perceptions of service quality. The addition of the people element reflects the service e
inseparability dimension in which the service is simultaneously produced and the imme
consumed, and where the service recipient is typically present within the service customer
factory and interacts directly with the service provider: hence the need to carefully customer
processe
manage interactions between service personnel and customers, as well as to
The proc
manage interactions invoJving customers when other customers are also present. In element o
particular, the attitudes and skills of the service personnel impact on perceptions expanded
of service quality, and thus the need to carefully recruit, select, train, support mix for se
and reward service-minded employees who possess the required technical and includes
interpersonal skills. Moreover, the service organisation needs to educate and train delivery a
systems,
both service personnel and customers in their scripts and roles in order to deliver
concerns
customer satisfaction in which
The processes element of the expanded marketing mix for services includes the is produc
service deJively and operating systems, and concerns the way in which the service delivered
is produced and delivered. The processes element recognises the importance of
expanded marketing
ambience, layout, signage and so on) and service personnel (e.g., appearance and
mix for services
concerns the tangible dress), as well as company websites, advertising, stationery, invoices and so on
evidence, including \Vhen the customer interacts either directly or indirectly with the service marketin
the appearance of the organisation, these tangible elements influence the way in which the service is
service environment delivered and provide important clues for evaluating service quality.
or servicescape,
The inclusion of the people, processes and physical evidence elements in
service personnel and
other tangibles. the services marketing mix 8ddresses the challenges arising from the unique
characteristics of services. The expanded marketing mix for services more
adequately covers the key decisions that need to be made when developing an
effective integrated marketing mix, as required for attracting and maintaining a
loyal customer base, and delivering customer satisfaction and the desired levels of
service quality.

Summary
Services permeate every aspect of our lives;
consequently, the need for services marketing
knowledge is greater today than ever before, The
distinction between goods and services is often
not perfectly clear. In general, goods are defined
as objects, devices or things, whereas services are
defined as deeds, efforts or performances. Very few,
if any, products can be classified as pure services
or pure goods. The scale of market entities in
Figure 1,1 (see page 7) illustrates how assorted
goods and services vary according to their tangibility.
When a consumer purchases a service, he or
she purchases an experience. The four components
of service delivery create the experience for the
consumer - the servicescape. service providers and
contact personnel. other customers, and the invisib
organisation and systems. In turn. the service
experience delivers a bundle of benefits to the
consumer. In contrast to the production of goods.
service consumers are an integral part of the servic
production process.
The major differences between the marketing
of goods and the marketing of services are
most commonly attributed to four distinguishing
characteristics - intangibility, inseparability,
heterogeneity and perishability. This chapter has
discussed the marketing challenges presented
by these four characteristics and possible
process. Strategies developed to minimise the
challenges of inseparability include the selective
screening and thorough training of customer contact
personnel, the implementation of strategies that
attempt to manage customers throughout the
service experience, and the use of multisite facilities
to overcome the inseparability difficulties associated
with centralised mass production.
Heterogeneity pertains to the variability inherent
in the service delivery process. The primary
marketing problem associated with heterogeneity is
that standardisation and quality control are difficult
for a service marketing organisation to provide
on a regular basis. Service organisations typically
react to heterogeneity in two diverse ways. Some
organisations try to standardise performance by
Key terms
benefit concept, 8
capacity sharing, 28
complementary services, 28
contact personnel, 9
creative pricing, 26
critical incident, 17
customer management, 21
customer participation, 29
customisation, 24
expanded marketing mix for services, 31
factories in the field, 22
goods, 5
heterogeneity, 13
pricing strategies, reservation systems, staging
demand through complementary services and
developing non-peak demand periods. Supply­
management strategies include using part-time
employees, capacity sharing, third-party utilisatio
and increasing customer participation in the
production process.
Finally in this chapter. we discussed the
expanded marketing mix for services that more
accurately reflects the range of decisions that ne
to be made for service products. The expanded
marketing mix for services includes the decision
areas of people, processes and physical evidenc
which more adequately address the unique
characteristics of services: intangibility, inseparab
heterogeneity and perishability.
inseparability, 13
intangibility, 13
intangible dominant, 6
inVisible organisation and systems, 11
marketing myopia, 6
multisite locations, 22
non-peak demand development, 28
non-personal sources, 16
organisational image, 16
part-time employees, 28
people, 31
perishability, 13
personal sources, 16
marketing, 30 September 2009.

Discussion Questions
I. Distinguish the following terms: goods,
of intangibility? Of the companies that have
services and products.
active!) attempted to minimise these effects
2. Why is it difficult to distinguish bNween have some done a better job than others?
many goods and selvices? Use the scale of Justify your opinion.
market entities (see Figure I. I on page 7) and 8, Using an example, discuss the main
examples to explain your ans\\er. implications of having the customer involved
3. Discuss the relevance of the scale of market in the production process.
entities to the concept of 'marketing myopia', 9. Discuss the reasons why the centralised mas
Provide an example of a service industry that production of services is limited,
has suffered as a result of 'marketing myopia'. 10, Using a fast-food restaurant as an example,
4. Utilising the model of the service experience discuss why standardisation and quality
presented in Figure 1.2 (see page R) describe control are difficult to maintain throughout
a typical classroom experience. How would the service delivery process.
the model change if you described an 1I. Which is better for consumers: ( I) a
experience at a local restaurant ~ customised service, or (2) a standardised
5. Rriefly describe how the unique service service? Justify your opinion. Use the examp
characteristics of intangibility, inseparability, of a fitness centre or gym to illustrate your
heterogeneity and perishability apply to an answer.
accounting firm. 12. What arc the Iimil<Jtions associated \\ ith
6. Why is the pricing of services particularly
a service marketing organisation's inability
difficult in comparison with the pricing of
to maintain inventories? Ilow might these
goods?
limitations be minimis{'d?
7. \Vhat strategies has the insurance industry 13. Discuss the rationale underpinning the
utilised in attempting to minimise the effects expanded marketing mix for services.