Services Marketing Christopher Lovelock

Chapter 1
Introduction to
Services Marketing
Slide 2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1- 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 sizefrom huge global

corporations to local small businesses
Most activities by government agencies and nonprofit

organizations involve services
1- 2
Services dominate the United States Economy:

GDP by Industry, 2001 (Fig. 1.1)
Agriculture, Forestry,
Mining, Construction 8%
Finance, Insurance,
Real Estate
20%
Manufacturing 14%
Government
(mostly services)
13%
Wholesale and
Retail Trade
16%
Other Services 11%

SERVICES
Business Health
Services
6%
5%
Transport, Utilities,
Communications
8%
Source: Bureau of Economic Analysis, November 2002

1- 3
Changing Structure of Employment

as Economic Development Evolves (Fig. 1.2)
Share of
Employment
Agriculture
Services
Industry
Time, per Capita Income

Source: IMF, 1997
1- 4
Some Service Industries Profiled by NAICS but

Not Identified by SIC Codes
Casino Hotels
Continuing Care Retirement
Communities
Diagnostic Imaging Centers

Diet and Weight Reducing
Centers
Environmental Consulting
Gold Courses and Country
Clubs
Hazardous Waste Collection

HMO Medical Centers

Industrial Design Services
Investment Banking and
Securities Dealing
Management Consulting
Services
Satellite Telecommunications
Telemarketing Bureaus
Temporary Help Services
1- 5
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

1- 6
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)
1- 7
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 servicefaster and more responsive
Develop national/global delivery systems
Create new, Internet-based business models
1- 8
Marketing Relevant
Differences Between
Goods and Services
1- 9
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
1 - 10
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
1 - 11
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
Cant own people (no slavery!) but can hire expertise and labor
Services cannot be inventoried after production

Service performances are ephemeraltransitory, 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
1 - 12
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
1 - 13
Value Added by Tangible vs Intangible Elements

in Goods and Services (Fig. 1.4)
Hi
Salt
Tangible Elements
Soft drinks
CD Player
Golf clubs
New car
Tailored clothing
Furniture rental
Lo
Fast food restaurant

Plumbing repair
Office cleaning
Health club
Airline flight
Retail banking
Insurance
Weather forecast
Intangible Elements
Hi
1 - 14
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
1 - 15
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
1 - 16
Important Differences
Exist among Services
1 - 17
Four Categories of Services

Employing Different Underlying Processes (Fig. 1.5)
What is the
Nature of the
Service Act?
TANGIBLE
ACTS
INTANGIBLE
ACTS
Who or What is the Direct Recipient of the Service?

DIRECTED AT
PEOPLE
DIRECTED AT
POSSESSIONS
People Processing
Possession Processing
e.g., airlines, hospitals,

haircutting, restaurants
hotels, fitness centers
e.g., freight, repair,

cleaning, landscaping,
retailing, recycling
Information
Processing
Mental Stimulus
Processing
(directed at intangible
e.g., broadcasting, consulting, e.g., accounting,
assets) banking,
education, psychotherapy
insurance, legal, research
1 - 18
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
1 - 19
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.
1 - 20

(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 customers home or workplace
4. Business is conducted at arms length through
- physical channels (e.g., mail, courier service)
- electronic channels (e.g., phone, fax, email, Web site)
1 - 21

(4) Balancing Demand and Capacity
When capacity to serve is
limited and demand varies
widely, problems arise because
service output cant 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
1 - 22

(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 informationbased services anywhere,
anytime
New service features through
websites, email, and internet
(e.g., information, reservations)
More opportunities for self-service
New types of services
1 - 23

(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
1 - 24
The Services
Marketing Mix
1 - 25
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
1 - 26
The 7Ps:
(1) Product Elements
All Aspects of Service Performance that Create Value
Core product featuresboth tangible and intangible

elements
Bundle of supplementary service elements

Performance levels relative to competition
Benefits delivered to customers (customers dont buy a
hotel room, they buy a good nights sleep)
Guarantees
1 - 27
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
1 - 28
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
1 - 29
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
1 - 30
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
1 - 31
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
1 - 32
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 firms 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
1 - 33
Managing the 7Ps Requires Collaboration between

Marketing, Operations, and HR Functions (Fig. 1.7)
Operations
Management
Marketing
Management
Customers
Human Resources
Management
1 - 34
Chapter 2
Consumer Behavior in
Service Encounters
1 - 35
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
1 - 36
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 arms length through electronic or
physical distribution channels
New technologies (e.g. Web) help reduce contact levels

1 - 37
Levels of Customer Contact with Service

Organizations (Fig. 2.2)
Emphasizes encounters
with service personnel
High
Nursing Home
HairCut
4-Star Hotel
Management Consulting
Good Restaurant
Telephone Banking
Airline Travel (Econ.)
Retail Banking
Car Repair
Motel
Insurance
Dry Cleaning
Fast Food
Movie Theater
Cable TV
Subway
Internet Banking
Emphasizes encounters
with equipment
Mail Based Repairs

Internet-based
Services
Low
1 - 38
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
1 - 39
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
1 - 40
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
1 - 41
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
1 - 42
Factors that Influence

Customer Expectations of Services
Personal Needs
Desired Service
Beliefs about
What Is Possible
(Fig. 2.4)
Explicit & Implicit

Service Promises
Word-of-Mouth
Past Experience
ZONE
OF
TOLERANCE
Perceived Service
Alterations
Adequate Service
Predicted Service
Situational Factors
Source: Adapted from Zeithaml, Parasuraman & Berry

1 - 43
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
1 - 44
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
1 - 45
How Product Attributes Affect

Ease of Evaluation) (Fig. 2.5)
High in search
attributes
Complex surgery
Legal services
Education
Computer repair
Most Services
Entertainment
Haircut
Lawn fertilizer
Restaurant meals
Foods
Motor vehicle
Chair
Easy
to evaluate
Clothing
Most Goods
Difficult
to evaluate
High in experience High in credence

attributes
attributes
Source: Adapted from Zeithaml
1 - 46
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

Positive disconfirmation 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

firms financial performance
1 - 47
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
1 - 48
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
1 - 49
Service Marketing System:

(1) High Contact Service--e.g., Hotel (Fig. 2.7)
Service Marketing System
Service Delivery System
Service Operations System
Other
Customers
Interior & Exterior

Facilities
Technical
Core
Equipment
The
Customer
Service People
Backstage
(invisible)
Front Stage
(visible)
Other
Customers
Other Contact Points

Advertising
Sales Calls
Market Research
Surveys
Billing / Statements
Miscellaneous Mail,
Phone Calls, Faxes, etc.
Random Exposure to
Facilities / Vehicles
Chance Encounters
with Service Personnel
Word of Mouth
1 - 50
Service Marketing System:

(2) Low Contact Service--e.g., Credit Card (Fig. 2.8)
Service Marketing System
Service Delivery System
Service Operations System
Other Contact Points
Advertising
Mail
Technical
Core
Self Service
Equipment
The
Customer
Phone, Fax,
Web site etc.
Backstage
(invisible)
Market Research
Surveys
Random Exposures
Facilities, Personnel
Word of Mouth
Front Stage
(visible)
1 - 51
Service as Theater
All the worlds a stage and all

the men and women merely
players. They have their exits
and their entrances and each
man in his time plays many
parts
William Shakespeare
As You Like It
1 - 52
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 audiencedepending on type of
performance, may be passive or active
1 - 53
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
1 - 54
Chapter 3
Positioning Services in
Competitive Markets
1 - 55
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
1 - 56
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
1 - 57
Basic Focus Strategies for Services
(Fig. 3.1)
BREADTH OF SERVICE OFFERINGS
Narrow
Service
Focused
Many
NUMBER
OF MARKETS
SERVED
Few
Fully Focused
(Service and
market focused)
Wide
Unfocused
(Everything
for everyone)
Market
Focused
Source: Robert Johnston

1 - 58
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
1 - 59
Uses of Positioning in
Marketing Management (Table 3.1)
Understand relationships between products and markets

compare to competition on specific attributes
evaluate products 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
1 - 60
Possible Dimensions for Developing Positioning

Strategies
Product attributes
Price/quality relationships
Reference to competitors (usually shortcomings)
Usage occasions
User characteristics
Product class
1 - 61
Developing a
Market Positioning Strategy (Fig. 3.3)
MARKET
ANALYSIS
- Size
- Composition
- Location
- Trends
Define, Analyze
Market Segments
Select
Target Segments
To Serve
INTERNAL
ANALYSIS
- Resources
- Reputation
- Constraints
- Values
Articulate
Desired Position
in Market
Marketing
Action
Plan
Select Benefits
to Emphasize
to Customers
COMPETITIVE
ANALYSIS
- Strengths
- Weaknesses
- Current
Positioning
Analyze
Possibilities for
Differentiation
Source: Adapted from Michael R. Pearce
1 - 62
Positioning of Hotels in Belleville:

Price vs. Service Level (Fig. 3.4)
Expensive
Grand
Regency
High
Service
PALACE
Shangri-La
Sheraton
Atlantic
Moderate
Service
Italia
Less Expensive
Castle
Alexander IV
Airport Plaza
1 - 63
Positioning of Hotels in Belleville:

Location vs. Physical Luxury (Fig. 3.5)
High Luxury
Regency
Grand
Shangri-La
Sheraton
PALACE
Financial
District
Shopping District
and Convention Centre
Inner
Suburbs
Italia
Castle
Alexander IV
Atlantic
Airport Plaza
Moderate Luxury
1 - 64
Positioning after New Hotel Construction:

Price vs. Service Level (Fig. 3.6)
Expensive
Mandarin
New Grand Heritage
Marriott
Continental
Action?
Regency
High
Service
PALACE
Shangri-La
No action?
Moderate
Service
Atlantic
Sheraton
Italia
Less
Expensive
Castle
Alexander IV
Airport Plaza
1 - 65
Positioning after New Hotel Construction:

Location vs. Physical Luxury (Fig. 3.7)
High Luxury
Mandarin
New Grand
Heritage
Regency
Marriott
Sheraton Shangri-La
Continental
Action?
PALACE
Financial
District
No action? Shopping District

and Convention Centre
Castle
Inner
Suburbs
Alexander IV
Atlantic
Italia
Airport Plaza
Moderate Luxury
1 - 66
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
1 - 67
Chapter 4
Creating the
Service Product
1 - 68
Key Steps in Service Planning:

Matching Opportunities to Resources
Must relate marketing opportunities to firms resources

(physical, financial, technological, human)
Identify, evaluate firms marketing assets
Customer portfolio/lifetime value (customer equity)

Market knowledge
Marketing implementation skill
Product line
Competitive positioning strategies
Brand reputation (brand equity)
Identify, evaluate firms 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
1 - 69
Service Design Involves Matching Marketing

Concept with Operations Concept (Fig. 4.1)
Corporate Objectives
and Resources
Marketing Assets
Operating Assets
(Customer Base, Mkt. Knowledge,

Implementation Skills, Brand Reput.)
(Facilities/Equipment, IT Systems,
People, Op. Skills, Cost Structure)
Service Marketing Concept
Service Operations Concept
Benefits to customer from core/

supplementary elements, style,
service level, accessibility
Nature of processes
Geographic scope of ops
Scheduling
Facilities design/layout
HR (numbers, skills)
Leverage (partners, self-service)
Task allocation: front/backstage
staff; customers as co-producers
User costs/outlays incurred

Price/other monetary costs
Time
Mental and physical effort
Neg. sensory experiences
Service Delivery
Process
1 - 70
Understanding the
Components of the
Augmented Service Product
1 - 71
Shostacks Molecular Model of a Total Market

Entity - Passenger Airline Service (Fig. 4-2)
Distribution
Price
Vehicle
Service
frequency
Transport
Pre- and
post-flight
service
In-flight
service
Food
and
drink
KEY
Tangible elements
Intangible elements
Marketing Positioning
(Weighted toward evidence)
Source: Shostack
1 - 72
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
1 - 73
Core and Supplementary Product Design:

What Do We Offer and How Do We Create and Deliver It?
Supplementary
services offered
and how created
and delivered
Delivery Concept
For Core Product
Scheduling
Process
Core
Service
Level
Customer
Role
1 - 74
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?

1 - 75
Core and Supplementary Services in a Luxury Hotel

(Offering Guests Much More than a Cheap Motel!)
R e s e r v a tio n
C a s h ie r
V a le t
P a r k in g
B u s in e s s
C e n te r
Ro o m
S e r v ic e
R e c e p tio n
A B e d fo r th e
N ig h t in a n
E le g a n t P r iv a te
R o o m w ith a
B a th r o o m
W a ke-up
C a ll
Te le p h o n e
Baggage
S e r v ic e
C o c k ta il
Bar
E n te r ta in m e n t/
S p o r ts / E x e r c is e
R e s ta u r a n t
1 - 76
What Happens, When, and in What Sequence?

The Time Dimension in the Augmented Service Product
Reservation
Parking
Get car
Check in
USE ROOM
Check out
Phone
USE GUESTROOM OVERNIGHT
Porter
Meal
Pre
Visit
Pay TV
Room service
Time Frame of an Overnight Hotel Stay

(real-time service use)
1 - 77
The Flower of Service:

Categorizing Supplementary Services (Fig. 4-5)
Information
Payment
Billing
Consultation
Core
Exceptions
KEY:
Facilitating elements
Enhancing elements
Order-Taking
Hospitality
Safekeeping
1 - 78
Facilitating Services - Information

(Table 4.1)
Core
Customers often require

information about how to
obtain and use a product or
service. They may also
need reminders and
documentation
1 - 79
Facilitating Services - Order-Taking

(Table 4.2)
Core
Many goods and services

must be ordered or reserved
in advance. Customers need
to know what is available and
may want to secure
commitment to delivery
1 - 80
Facilitating Services - Billing

(Table 4.3)
Core
How much do I owe you?

Customers deserve clear,
accurate and intelligible
bills and statements
1 - 81
Facilitating Services - Payment

(Table 4.4)
Core
Customers may pay faster

and more cheerfully if you
make transactions simple
and convenient for them
1 - 82
Enhancing Services - Consultation

(Table 4.5)
Core
Value can be added to

goods and services by
offering advice and
consultation tailored to
each customers
needs and situation
1 - 83
Enhancing Services - Hospitality

(Table 4.6)
Core
Customers who invest time

and effort in visiting a
business and using its
services deserve to be
treated as welcome guests
(after all, marketing invited
them there!)
1 - 84
Enhancing Services - Safekeeping

(Table 4.7)
Core
Customers prefer not to

worry about looking after
the personal possessions
that they bring with them
to a service site.
They may also want delivery
and after-sales services for
goods that they purchase
or rent
1 - 85
Enhancing Services - Exceptions

(Table 4.8)
Core
Customers appreciate some

flexibility in a business
when they make special
requests. They expect it
when not everything goes
according to plan
1 - 86
Branding
Service Products
1 - 87
Service Branding:
Clarifying Distinctive Service Offerings
Marriott Hotel Brands
British Airways Brands
Marriott Hotels
Marriott Resorts
Intercontinental
First
Club World
World Traveller
World Traveller
Courtyard by Marriott
Fairfield Inns
Residence Inns
SpringHill Suites
TownePlace Suites
Marriott Vacation Clubs
International
Plus
European
Club Europe
Euro-Traveller
UK Domestic
Shuttle
1 - 88
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
1 - 89
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

1 - 90
New Service
Development
1 - 91
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

1 - 92
New Service Development:

Physical Goods as Source of Service Ideas
Customers can rent goodsuse 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
1 - 93
Creating Services as Substitutes for

Owning and/or Using Goods (Fig. 4-7)
Own a Physical Good
Perform the
Work Oneself
Hire Someone
to Do the Work
Rent the Use

of a Physical Good
Drive own car
Rent car and drive it
Type on own word processor
Rent word processor and type
Hire chauffeur to drive car
Hire a taxi or limousine
Hire typist to use word processor
Send work to secretarial service
1 - 94
Service Development through Delivery Options:

Alternative Meal Service Formats (Fig. 4-8)
Fast-Food
Restaurant
(Eat In)
Drive-In
Restaurant
(Take Out)
See sign
Park and
enter
Order meal,
and pay
Pick up
meal
Find table
and eat
Drive away,
eat later
See sign
Stop car at
order point
Order via
microphone
Get meal at
pickup, pay
Home
Delivery
Telephone
Restaurant
Order food,
give address
Driver rings
doorbell
Pay driver,
take food
Eat
Home
Catering
Arrange to
meet caterer
Plan meal,
pay deposit
Food and
staff arrive
Meal is
prepared
and served
Eat
Clear table
and leave
Staff cleans
up; pay
1 - 95
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
Securitypeople/systems
1 - 96
Success Factors in New Service Development
Market synergy
Good fit between new product and firms 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
1 - 97
Chapter 5
Designing the
Communications Mix
for Services
1 - 98
Advertising Implications for

Overcoming Intangibility (Fig. 5-1)
Problem
Advertising Strategy
Generality
- objective claims
- subjective claims
Document physical system capacity

Cite past performance statistics
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 customers subjective experience
Source: Mittal and Baker
1 - 99
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
1 - 100
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?
1 - 101
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
1 - 102
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
1 - 103
Marketing Communications Mix for Services

(Fig. 10.4)
Personal
Communications
Advertising
Sales Promotion
Publicity &
Public Relations
Instructional
Materials
Sampling
Press
releases/kits
Web sites
Coupons
Press
conferences
Manuals
Corporate
Design
Selling
Broadcast
Customer
service
Print
Training
Internet
Sign-up
rebates
Special
events
Brochures
Vehicles
Telemarketing
Outdoor
Gifts
Sponsorship
Videoaudiocassettes
Equipment
Direct mail
Prize
promotions
Trade Shows,
Exhibitions
Software
CD-ROM
Stationery
Media-initiated
coverage
Voice mail
Uniforms
Word-of-mouth
Word
mouth
(otherof
customers)
Signage
Interior decor
Key: * Denotes communications originating from outside the organization
1 - 104
Originating Sources of Messages Received by a

Target Audience (Fig. 5-5)
Messages originating
within the organization
Front-line staff
n
uctio
d
o
r
P
nels
n
a
h
C
M a rk
Chan eting
nels
Service outlets
Advertising
Sales promotions
Direct marketing
Personal selling
Public relations
A
U
D
I
E
N
C
E
Word of mouth
Messages originating
outside the organization
Media editorial
1 - 105
What is Brand Equity and Why Does It Matter?

(From Berry, Cultivating Brand Equity)
Definition: A set of assets and liabilities linked to a brands
name and symbol that adds to (or subtracts from) the
perceived value of the 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
1 - 106
A Service Branding Model:

How Communications + Experience Create Brand Equity
Marketer-controlled communications
Firms Presented Brand

(Sales, Advertising, PR)
Awareness of
Firms Brand
Uncontrolled brand communications
Firms
Brand Equity
What Media, Intermediaries,

Word-of-Mouth Say re: Firm
Customers Experience
with Firm
Meaning Attached
To Firms Brand
Source: Adapted from L. L. Berry ( Fig. 1)
1 - 107
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
1 - 108
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 effectivenessexposure (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)
1 - 109
Chapter 6
Pricing and Revenue

Management
1 - 110
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
1 - 111
Objectives of Pricing Strategies
Revenue and profit objectives

Seek profit
Cover costs
Patronage and user base-related objectives

Build demand
Build a user base
1 - 112
The Pricing Tripod (Fig. 6.1)
Pricing Strategy
Costs
Competition
Value to customer
1 - 113
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
1 - 114
Activity-Based Costing: Relating Activities to

the Resources They Consume
Managers need to see costs as an integral part of a firms

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
1 - 115
Net Value = (Benefits Outlays)

(Fig. 6.3)
EffortTime
Perceived
Outlays
Perceived
Benefits
1 - 116
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
1 - 117
Paying for Service:

The Customers 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)
1 - 118
Determining the Total Costs of a Service

to the Consumer (Fig. 6.4)
Price
Search Costs
Related Monetary
Costs
Time Costs
Purchase and
Use Costs
Operating Costs
Incidental
Expenses
Physical Costs
Psychological
Costs
Sensory Costs
After Costs
Necessary
follow-up
Problem
solving
1 - 119
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
ClinicAA
Clinic
ClinicBB
Price
Price$45
$45
Located
Located11hour
houraway
away
by
bycar
caror
ortransit
transit
Next
Nextavailable
available
appointment
appointmentis
isin
in33
weeks
weeks
Hours:
Hours:Monday
Monday
Friday,
Friday,9am
9am5pm
5pm
Estimated
Estimatedwait
waitat
at
clinic
clinicisisabout
about22
hours
hours
Price
Price$85
$85
Located
Located15
15min
min
away
awayby
bycar
caror
or
transit
transit
Next
Nextavailable
available
appointment
appointmentis
isin
in11
week
week
Hours:
Hours:Monday
Monday
Friday,
Friday,8am
8am10pm
10pm
Estimated
Estimatedwait
waitat
at
clinic
clinicisisabout
about30
30-45
45minutes
minutes
Clinic
ClinicCC
Price
Price$125
$125
Located
Locatednext
nextto
to
your
youroffice
officeor
or
college
college
Next
Nextappointment
appointment
is
isin
in11day
day
Hours:
Hours:Mo
MoSat,
Sat,
8am
8am10pm
10pm
By
Byappointment
appointment-estimated
estimatedwait
waitat
at
clinic
clinicis
isabout
about00to
to
15
15minutes
minutes
1 - 120
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
1 - 121
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
1 - 122
The Strategic Levers of

Revenue (Yield) Management
Price
Duration
Fixed
Predictable
Variable
Quadrant 1:
Quadrant 2:
Movies
Hotel Rooms
Stadiums/Arenas
Airline Seats
Function Space
Rental Cars
Cruise Lines
Unpredictable
Quadrant 3:
Quadrant 4:
Restaurants
Continuing Care
Golf Courses
Hospitals
1 - 123
Dealing with Common Customer Conflicts

Arising from Revenue Management
Customer conflict can arise from:
Perceived Unfairness & Perceived
Financial Risk Associated with

Multi-Tier Pricing and Selective
Inventory Availability
Marketing tools to reduce

customer conflicts:
Fenced Pricing
Bundling
Categorising
High Published Price
Unfulfilled Inventory Commitment
Well designed Customer Recovery
Unfulfilled Demand of Regular
Preferred Availability Policies
Customers
Unfulfilled Price Expectation of
Group Customers
Change in the Nature of the
Service
Programme for Oversale
Offer Lower Displacement Cost
Alternatives
Physical Segregation & Perceptible
Extra Service
Set Optimal Capacity Utilisation Level
1 - 124
Price Elasticity (Fig. 6.6)
Price per
unit of
service
Di
De
Di
De
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.
1 - 125
Key Categories of Rate Fences (Table 6.2)

Rate Fences
Examples
Physical (Product-related) Fences

Basic Product
Amenities
Service Level
Class of travel (Business/Economy class)

Size and furnishing of a hotel room
Seat location in a theatre
Free breakfast at a hotel, airport pick up etc.
Free golf cart at a golf course
Priority wait listing
Increase in baggage allowances
Dedicated service hotlines
Dedicated account management team
1 - 126
Key Categories of Rate Fences (Table 6.2 contd)
Non Physical Fences

Transaction Characteristics
Time of booking or
reservation
Location of booking or
reservation
Flexibility of ticket
usage
Requirements for advance purchase

Must pay full fare two weeks before departure
Passengers booking air tickets for an
identical route in different countries are
charged different prices
Fees/penalties for canceling or changing a

reservation (up to loss of entire ticket price)
Non refundable reservation fees
1 - 127
Non Physical Fences (contd)

Consumption Characteristics
Time or duration of
use
Early bird special in restaurant before 6pm

Must stay over on Sat for airline, hotel
Must stay at least five days
Location of
consumption
Price depends on departure location, esp in

international travel
Prices vary by location (between cities, city
centre versus edges of city)
1 - 128
Non Physical Fences (contd)

Buyer Characteristics
Frequency or volume
of consumption
Member of certain loyalty-tier with the firm get
Group membership
Child, student, senior citizen discounts

Affiliation with certain groups (e.g. Alumni)
Size of customer
group
Group discounts based on size of group
priority pricing, discounts or loyalty benefits
1 - 129
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
of 1st-class
Cabin
Capacity
of Aircraft
No. of Seats Demanded
1 - 130
Ethical Concerns in Pricing
Customers are vulnerable when service is hard to evaluate

or they dont 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
1 - 131
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?
1 - 132
Consumption follows the Timing of Payments
Frequency of
Health Club Visits
Annual Payment Plan
Quarterly Payment Plan
Frequency of
Health Club Visits
(Research Insight 6.1)
Semiannual Payment Plan
Monthly Payment Plan
Time Line
Time Line
Source: John Gourville and Dilip Soman, Pricing and the Psychology of Consumption,
Harvard Business Review, September 2002, 90-96.
1 - 133
Chapter 7(5)
Distributing Services
1 - 134
Applying the Flow Model of Distribution to

Services
Distribution embraced three interrelated elements
Information and promotion flow

Negotiation flow
Product flow
1 - 135
Information and Physical Processes of the

Augmented Service Product (Fig. 7.1)
Information
Processes
Payme
nt
Information
Consultation
Billing
Core
OrderTaking
Exceptio
Hospitality
ns
Safekeeping
Physical
Processe
s
1 - 136
Using Websites for Service Delivery

Information
Read brochure/FAQ; get schedules/
directions; check prices
Consultation
Payment
Conduct e-mail dialog

Use expert systems
Pay by bank card

Direct debit
Billing
Receive bill
Make auction bid
Check account status
Core
Exceptions
Make special requests
Resolve problems
Order-Taking
Make/confirm reservations
Submit applications
Order goods, check status
Hospitality
Record preferences
Safekeeping
Track package movements

Check repair status
CORE: Use Web to deliver information-based core services

1 - 137
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 arms length (via the Internet, telephone, fax,
mail, etc.)
1 - 138
Method of Service Delivery (Table 7.1)

Availability of Service Outlets
Nature of Interaction Single Site
between Customer
and Service
Organization
Customer goes to service
organization
Service organization goes
to customer
Customer and service
organization transact at
arms length
Theater
Barbershop
House painting
Mobile car wash
Credit card company
Local TV station
Multiple Sites
Bus service
Fast-food chain
Mail delivery
Auto club road service
Broadcast network
Telephone company
1 - 139
Place vs. Cyberspace

Place - customers and
Required for people processing

services
Offers live experiences, social
interaction, e.g., food services
More emphasis on eye-catching
servicescape, entertainment
Cyberspace - customers
Ideal for info-based services

Saves time
Facilitates information gathering
May use express logistics service
to deliver physical core
products
suppliers meet in a physical

environment
and suppliers do business

electronically in virtual
environment created by
phone/internet linkages
1 - 140
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
1 - 141
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
1 - 142
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
1 - 143
Splitting Responsibilities for Delivering

Supplementary Services (Fig. 7.2)
As created by
originating firm
Core
As enhanced
by distributor
As experienced
by customer
Core
1 - 144
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
1 - 145
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
1 - 146
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)
1 - 147
Forces for Internationalization
Market drivers
Competition drivers
Technology drivers
Cost drivers
Government drivers
Impact will vary by service
type (people, possessions,
information)
1 - 148
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
1 - 149
Impact of Globalization Drivers on Different

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

services is derived to
a significant degree
from economic and
educational levels.
1 - 150
Impact of Globalization Drivers on Different

Service Categories (Table 7.2, contd)
Globalization People
Drivers
Processing
Possession
Processing
Information
Based
Technology
Use of IT for delivery of

supplementary services
may be a function of
ownership and familiarity
with technology.
Need for technologybased service delivery

systems depends on
possessions requiring
service and the cost
trade-offs in labor
substitution
Ability to deliver
core services
through remote
terminals may be a
function of
investment in
computerization etc.
Cost
Variable labor rates may

impact on pricing in
labor-sensitive services.
Variable labor rates

may favor low-cost
locations.
Major cost elements

can be centralized &
minor cost elements
localized.
Government
Social policies (e.g.,

Policies may
health) vary widely and
decrease/increase
may affect labor cost etc. cost &
encourage/discourage
certain activities
Policies may impact

demand and supply
and distort pricing
1 - 151
Chapter 8
Designing and Managing

Service Processes
1 - 152
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)
1 - 153
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
1 - 154
Simplified Example: Blueprinting a Hotel Visit

(extract only)
Hotel exterior, lobby,

employees, key
Stage
Physical
Evidence
Front
Line of
Interaction
Make
Customer reservation
Actions
Employee
Actions
Face-to-face
Phone
Contact
Backstage
Line of
Visibility
Arrive,
valet park
Check-in
at reception
Doorman
greets, valet
takes car
Receptionist
verifies, gives
key to room
Elevator, corridor,
room, bellhop
Go to
room
Rep.
records,
confirms
Make up
Room
Valet
Parks Car
Enter
data
Register
guest data
1 - 155
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 errorshuman failures during contact with customers
tangible errorsfailures 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

1 - 156
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
1 - 157
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
1 - 158
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
Customers time and effort replace those of employees
Concept is not newself-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
1 - 159
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
1 - 160
Managing Customers as Partial Employees

to Increase Productivity and Quality
1. Analyze customers present roles in the business and
compare to managements 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
1 - 161
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 dont alienate other
customers
1 - 162
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?
1 - 163
Chapter 9
Balancing Demand
and Capacity
1 - 164
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 firms ability to meet

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

declines as more customers are serviced
1 - 165
Variations in Demand Relative to Capacity

(Fig. 9-1)
VOLUME DEMANDED
Demand exceeds capacity
(business is lost)
CAPACITY UTILIZED
Demand exceeds
optimum capacity
(quality declines)
Maximum Available
Capacity
Optimum Capacity
(Demand and Supply
Well Balanced
Excess capacity
(wasted resources)
Low Utilization
(May Send Bad Signals)
TIME CYCLE 1
TIME CYCLE 2
1 - 166
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 infrastructuree.g., highways, airports,
electricity
1 - 167
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)

1 - 168
Predictable Demand Patterns and

Their Underlying Causes (Table 9-1)
Predictable Cycles
of Demand Levels
day
week
month
year
other
Underlying Causes of
Cyclical Variations
employment
billing or tax
payments/refunds
pay days
school hours/holidays
seasonal climate changes
public/religious holidays
natural cycles
(e.g. coastal tides)
1 - 169
Causes of Seemingly Random Changes in

Demand Levels
Weather
Health problems
Accidents, Fires, Crime
Natural disasters
Question: which of these
events can be predicted?
1 - 170
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
1 - 171
Hotel Room Demand Curves by Segment

and by Season (Fig. 9-2)
Price per
Room Night
Bl
Bh
Bh = business travelers in high season
Th
Bl = business travelers in low season

Tl
Th = tourist in high season

Tl = tourist in low season
Bl
Bh
Th
Tl
Quantity of Rooms Demanded at Each Price

by Travelers in Each Segment in Each Season
Note: hypothetical example

1 - 172
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
1 - 173
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)
Take a number (single or multiple servers)
25
30
31
26
32
29
28
27
21
20
24
23
1 - 174
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
1 - 175
Ten Propositions on the Psychology of Waiting

Lines (Table 9-3)
1. Unoccupied time feels longer
2. Preprocess/postprocess waiting feel longer than inprocess
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
1 - 176
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
1 - 177
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
1 - 178
Setting Capacity Allocation Sales Targets for a

Hotel by Segment and Time Period (Fig. 9-5)
Capacity (% rooms)
Week 7
Week 36
(Low Season)
100%
Out of commission for renovation
(High Season)
Executive service guests
Executive service
guests
Transient guests
50%
Weekend
package
Transient guests
W/E
package
Groups and conventions

Groups (no conventions)
Airline contracts
Nights:M
Tu
Th
Airline contracts
F
Sn
Time
Tu
Th
Sn
1 - 179
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
1 - 180
Chapter 10
Planning the
Service Environment
1 - 181
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.
1 - 182
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
1 - 183
The Mehrabian-Russell Stimulus-Response

Model (Figure 10.2)
Environmental
Stimuli &
Cognitive
Processes
Dimensions of
Affect:
Pleasure and
Arousal
Response
Behaviors:
Approach/
Avoidance &
Cognitive
Processes
1 - 184
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
1 - 185
The Russell Model of Affect
Arousing
Distressing
Exciting
Unpleasant
Pleasant
Relaxing
Boring
Sleepy
1 - 186
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)
1 - 187
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.
1 - 188
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
1 - 189
An Integrated Framework Bitners

ServiceScape Model (Figure 10.4)
Environmental
Dimensions
Ambient
Conditions
Space/
Function
Signs,
Symbols &
Artefacts
Moderators
Holistic
Environment
Internal Responses
Cognitive
Emotional
Psychological
Employee
Response
Moderator
Employee
Responses
Perceived
ServiceScape
Customer
Response
Moderator
Customer
Responses
Cognitive
Emotional
Psychological
Behaviour
Approach
or
Avoid
Social Interaction
Between
Customers &
Employees
Approach
or
Avoid
1 - 190
An Integrated Framework Bitners

ServiceScape Model(cont)
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
1 - 191
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)
1 - 192
Dimensions of the Service Environment (cont)
Spatial Layout and Functionality

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

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

behavior
1 - 193
Impact of Music on Restaurant Diners

(Table 10-2)
Restaurant
Patron
Behavior
Fast-beat
Slow-beat
Difference between
Music
Music
Slow and Fast-beat
Environment Environment Environments
Absolute
Difference
%
Difference
Consumer time
spent at table
45min
56min
+11min
+24%
Spending on
food
$55.12
$55.81
+$0.69
+1%
Spending on
beverages
$21.62
$30.47
+$8.85
+41%
Total spending
$76.74
$86.28
+$9.54
+12%
Estimated
gross margin
$48.62
$55.82
+$7.20
+15%
1 - 194
The Effects of Scents on the Perceptions of

Store Environments (Table 10-3)
Evaluation
Unscented
Scented
Environment Environment
Mean Ratings Mean Ratings
Difference
Store Evaluation
Negative/positive
4.65
5.24
+0.59
Outdated/modern
3.76
4.72
+0.96
Unattractive/attracti
ve
4.12
4.98
+0.86
Drab/colorful
3.63
4.72
+1.09
Boring/Stimulating
3.75
4.40
+0.65
Store Environment
1 - 195
The Effects of Scents on the Perceptions of

Store Environments (Table 10-3)
Evaluation
Unscented
Environment
Mean Ratings
Scented
Environment
Mean Ratings
Difference
Outdated/up- to-date
style
4.71
5.43
+0.72
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
Merchandise
1 - 196
Aromatherapy: The Effects of Fragrance on

People (Table 10-4)
Fragrance
Aromath Aromather
erapy
apy Class
Tradition Potential Psychological

al Use
Impact on People
Orange
Citrus
Soothing Calming and relaxing

agent,
effect esp. for nervous
astringen people
t
Lavender
Herbaceo Calming,
us
balancing,
soothing
Muscle
relaxant,
soothing
agent
Jasmine
Floral
Uplifting,
balancing
Emollient Helps makes people feel

soothing refreshed, joyful,
agent
comfortable
Energizing,
stimulating
Skin
cleanser
Peppermint Minty
Calming
Relaxing and calming,

helps create a homey and
comfortable feel
Increase attention level

and boosts energy
1 - 197
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
and
Trees
Nurturing, healing and

unconditional love
Blue
Coolest
Sky and Relaxation, serenity and loyalty

Ocean
1 - 198
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 customers perspective

Design with a holistic view!
1 - 199
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.
1 - 200
Chapter 11
Managing People
for Service Advantage
1 - 201
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
1 - 202
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
1 - 203
Role Stress in the Frontline

3 main causes of role stress:
Person vs. Role: Conflicts between what jobs require and
employees 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
1 - 204
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 societys or

managements display rules can be stressful
Good HR practice emphasizes selective recruitment,

training, counseling, strategies to alleviate stress
1 - 205
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 persons knowledge of business and customers
Cost of dissatisfied customers
1 - 206
Cycle of Failure (Fig. 11.1)

Customer
turnover
Low profit
margins
High employee turnover;

poor service quality
Use of technology Emphasis on

to control quality rules rather
than service
Payment of
low wages
No continuity in
relationship for
Employee dissatisfaction;
customer
poor service attitude
Employees cant
respond to customer
problems
yc
le
Minimization of
pl
Em
selection effort
Minimization
of training
C
Customer
dissatisfaction
Employees
become bored
Narrow design of
jobs to accommodate
low skill level
oy
ee
C
yc
le
Failure to develop
customer loyalty
Repeat emphasis on
attracting new customers
er
m
o
st
Cu
Source: Schlesinger and Heskett
1 - 207
Routinized
Openness of Service Sabotage Behaviors

Covert
Overt
Customary-Private Service
Sabotage
e.g. Waiters serving smaller
servings, bad beer or sour wine
Intermittent
Normality of Service Sabotage Behaviors
Service Sabotage (Fig. 11-A)
Customer-Public Service
Sabotage
e.g. Talking to guests like
young kids and putting them
down
Sporadic-Private Service
Sabotage
Sporadic-Public Service
Sabotage
e.g. Chef occasionally

purposefully slowing down
orders
e.g. Waiters spilling soup onto

laps, gravy onto sleeves, or hot
plates into someones hands
1 - 208
Cycle of Mediocrity (Fig. 11.2)

Customers trade
horror stories
Other suppliers (if any)

seen as equally poor
Employee
dissatisfaction
(but cant easily quit)
No incentive for
cooperative relationship
to obtain better service
Employees spend
working life
in environment
of mediocrity
Emphasis
on rules
Narrow design vs.
pleasing
of jobs
customers
Complaints met by
indifference or
hostility
Cy
cle
Training emphasizes
Success =
learning rules
not making
mistakes
Service not focused
on customers needs
Jobs are boring and
le
c
repetitive; employees
y
unresponsive
e C Good wages/benefits
e
high job
oy
Empl
security
Resentment at inflexibility and
Promotion
lack of employee initiative;
and pay
complaints to employees
increases based Initiative is
on longevity, discouraged er
m
lack of mistakes
sto
Cu
Customer dissatisfaction
1 - 209
Cycle of Success (Fig. 11.3)

Low
customer
turnover
Customer
loyalty
Repeat emphasis on
customer loyalty and
retention
Higher
profit
margins
Lowered turnover,
high service quality
Train, empower frontline

personnel to control quality
ee
Cy
cle
Continuity in
relationship with
customer Employee satisfaction,
positive service attitude
Broadened
job designs
Above average
loy
wages
p
Em
Intensified
selection effort
er
m
o
st
Cu
Cy
cle
High customer
satisfaction
Extensive
training
Source: Heskett and Schlesinger
1 - 210
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
1 - 211
Hire the Right People
The
Theold
oldsaying
sayingPeople
Peopleare
areyour
yourmost
most
important
importantasset
assetis
iswrong.
wrong.
The
TheRIGHT
RIGHTpeople
peopleare
areyour
yourmost
most
most
mostimportant
important asset.
asset.
Jim Collins
1 - 212
Recruitment
The right people are a firms 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 candidates fit with firms culture and values
Fit personalities, styles, energies to the appropriate jobs
1 - 213
Select And Hire the Right People:

(1) Be the Preferred Employer
Create a large pool: Compete for Talent Market Share
What determines a firms applicant pool?

Positive
Quality
The
image in the community as place to work
of its services
firms perceived status
There is no perfect employee

Different
jobs are best filled by people with different skills, styles or

personalities
Hire
candidates that fit firms core values and culture
Focus
on recruiting naturally warm personalities
1 - 214
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
Ability
regarding customer needs
to communicate accurately and pleasantly
1 - 215
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
1 - 216
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
Staffs product knowledge is a key aspect of service quality
Staff need to be able to explain product features and to position
products correctly
1 - 217
Factors Favoring Employee Empowerment
Firms 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
1 - 218
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
1 - 219
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
1 - 220
Motivate and Energize the Frontline

Use the full range of available rewards effectively,
including:
Job content
Feedback and recognition
Goal accomplishment
1 - 221
The Inverted Organizational Pyramid (Fig. 11.5)

Customer Base
Top
Mgmt
Frontline Staf
Middle
Mgmt
Legend:
Frontline
Staf
Middle Mgmt
& Top Mgmt
Support Frontline
Traditional
Organizational Pyramid
Inverted Pyramid with a

Customer & Frontline Focus
= Service encounters, or Moments of Truth.
1 - 222
The Wheel of Successful HR in Service Firms

(Fig. 11.6)
Leadership that:
1. Hire the
Right People
Focuses the entire organization

on supporting the frontline
Fosters a strong
service culture with
passion for service
and productivity
Drives values that
inspire, energize
and guide service
providers
3. Motivate &
Energize Your People
Utilize the full
range of rewards
Be the preferred
employer & compete
for talent market share
Service Excellence
& Productivity
Intensify the
selection
process
2. Enable Your People

Empower Frontline
Build high performance service
delivery teams
Extensive Training
1 - 223
Chapter 12
Managing Relationships
and Building Loyalty
1 - 224
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
1 - 225
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
Credit card
Year 2
Industrial laundry
Year 3
Year 4
Industrial distribution
Year 5
Auto servicing
Based on data from Reichheld and Sasser
1 - 226
What Makes Loyal Customers More Profitable?
Tend to spend more as relationship develops

customers 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
1 - 227
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
Year
Source: Reichheld and Sasser
1 - 228
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

1 - 229
Customer-Firm Relationship
Todays 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.
1 - 230
Types of Relationships with Customers (Table 12.1)
Type of Relationship--Firm and Customer

Nature of
Service Delivery
Continuous
Discrete transactions
Membership
Cable TV
Insurance
College enrollment
Subscriber phone
Theater subscription
Warranty repair
No formal relationship
Radio station
Police
Lighthouse
Pay phone
Movie theater
Public transport
1 - 231
Basic Segmentation Issues:

Building an Appropriate Customer Portfolio
Target customers whose needs match firms 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
1 - 232
Service-Relevant Segmentation Variables
Timing of service use (e.g., by hour, day, season)

Level of skill and experience as co-producer/selfserver
Preferred language in face-to-face contact

Access to electronic delivery systems (e.g., Internet)
Attitudes toward use of new service technologies
1 - 233
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
1 - 234
Portfolio of Professional Assignments (Fig. 12.4)

Major,
Major,State-of-the-art
State-of-the-artchallenges
challengesfor
forthe
thefirms
firms
principals
principalsthat
thatgive
givethe
thefirm
firmhigh
highvisibility
visibility
Demanding
Demandingclient
clientassignments
assignmentsoffering
offeringaa
learning
learningexperience
experiencefor
forthe
thefirms
firmsmost
most
experienced
experiencedassociates
associates
Pacesetters
Significant Projects
Routine
Routineclient
clientprojects
projectsshared
shared
among
amongprincipals
principalsand
andassociates
associates
Bread and Butter Projects
Analytical Work on Project Data
Entry-level
Entry-leveltasks
tasksfor
fornew
new
associates
associatesor
orfor
forresearch
research
assistants
assistants&&paraprofessionals
paraprofessionals
1 - 235
The Customer Pyramid (Fig. 12.5)

Good Relationship
Customers
Which segment sees high value in
our offer, spends more with us over
time, costs less to maintain, and
spreads positive word-of-mouth?
Platinum
Gold
Which segment costs us in time,

effort and money, yet does not
provide the return we want?
Which segment is difficult to do
business with?
Iron
Lead
Poor Relationship
Customers
1 - 236
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 firms 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
1 - 237
The Customer Satisfaction-Loyalty Relationship

(Fig. 12.6)
Apostle
Loyalty (Retention)
100
Zone of Affection
80
Near Apostle
60
40
Zone of Indifference
Zone of Defection
20
Terrorist 0
1
Very
dissatisfied
Neither
satisfied
Dissatisfied
Satisfied
nor dissatisfied
5
Very
Satisfied
Satisfaction
1 - 238
The Wheel of Loyalty (Fig. 12.7)

3. Reduce
Churn Drivers
Conduct churn diagnostic
Address key churn drivers
Enabled through:
Frontline staff
Account
managers
Membership
programs
CRM
Systems
Implement complaint
handling & service
recovery
Increase switching
costs
Build higher
level bonds
1. Build a
Foundation
for Loyalty
Segment the market
Be selective in acquisition
Customer
Loyalty
2. Create Loyalty
Bonds
Use effective tiering of

service.
Deliver quality
service.
Deepen the
relationship
Give loyalty
rewards
1 - 239
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
1 - 240
Drivers of Service Switching (Fig. 12.9)

Service
ServiceFailure
Failure/ /Recovery
Recovery
Value
ValueProposition
Proposition
Core Service Failure
Pricing
Service Mistakes
Billing Errors
Service Catastrophe
High Price
Price Increases
Unfair Pricing
Deceptive Pricing
Service Encounter Failures

Uncaring
Impolite
Unresponsive
Unknowledgeable
Inconvenience
Service Switching
Response to Service Failure

Negative Response
No Response
Reluctant Response
Location/Hours
Wait for Appointment
Wait for Service
Competition
Found Better Service
Others
Others
Involuntary Switching
Customer Moved
Provider Closed
Ethical Problems
Unsafe
Cheat
Hard Sell Conflict of Interest
1 - 241
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
1 - 242
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?
1 - 243
Chapter 13
Customer Feedback and

Service Recovery
1 - 244
American Customer Satisfaction Index:

Selected Industry Scores, 2002
Score
(Max = 100)
100
90
85
79
80
80
79
70
74
71
71
70
66
76
60
65
62
50
40
30
20
10
4.8% 3.3%
x)
g
(ta
S
tin
IR
as s)
dc ew
oa . n
Br atl
(n
od nts
fo
s t ur a
Fa sta
Re ls
ta
pi
s
Ho
ine
ink
rl
Ai
dr
Industry:
1.3% 0.0% 1.3% 2.8% 0.0% 0.0% 8.2% 2.9% -2.6%
al s
on r
r s u te
P e mp
co
s
tel
ks
Ho
an
.b
m
m
ce
Co
an
ur
ns
ei
Lif
s,
an
,v
rs
Ca .
c
i l,
et
ma
ss
p re
Ex cels
r
pa
s
ft
So
% Change 0 3.7%
2002 vs 2001
1 - 245
Key Questions for Managers to Ask about

Customer Complaining Behavior
Why do customers complain?

What proportion of unhappy customers complain?
Why dont unhappy customers complain?
Who is most likely to complain?
Where do customers complain?
1 - 246
Courses of Action Open to a Dissatisfied

Customer (Figure 13.1)
Complain
Complainto
tothe
the
service
firm
service firm
Take
Takesome
someform
form
of
public
action
of public action
Service
ServiceEncounter
Encounter
isisDissatisfactory
Dissatisfactory
Take
Takesome
someform
form
of
private
action
of private action
Take
Takeno
noaction
action
Complain
Complainto
toaa
third
thirdparty
party
Take
Takelegal
legalaction
action
to
seek
redress
to seek redress
Defect
Defect(switch
(switch
provider)
provider)
Negative
Negativeword-ofword-ofmouth
mouth
Any
Anyone
oneor
oraacombination
combinationof
of
these
responses
is
possible
these responses is possible
1 - 247
Dimensions of Perceived Fairness in Service

Recovery Process (Figure 13.2)
Complaint
ComplaintHandling
Handling&&Service
Service
Recovery
Process
Recovery Process
Justice Dimensions of the Service Recovery Process
Procedural
Procedural
Justice
Justice
Interactive
Interactive
Justice
Justice
Outcome
Outcome
Justice
Justice
Customer
CustomerSatisfaction
Satisfactionwith
withthe
the
Service
ServiceRecovery
Recovery
Source: Tax and Brown
1 - 248
Proportion of Unhappy Customers Who Buy

Again Depending on the Complaint Process
100
90
80
70
60
50
40
30
20
10
0
95%
82%
70%
46%
54%
37%
19%
9%
Customer did not
complain
Complaint was
not resolved
Problem cost > $100
Complaint
was resolved
Complaint was
resolved quickly
Problem cost $1 - 5
Source: TARP study
1 - 249
Impact of Effective Service Recovery

on Retention
No
Problem
84%
Problem,
but effectively
resolved
92%
Problem
Unresolved
46%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90% 100%
Customer Retention
Source: IBM-Rochester study
1 - 250
Components of an Effective Service Recovery

System (Figure 13.3)
1 - 251
Strategies to Reduce Customer Complaint

Barriers (Table 13.1)
Complaint Barriers for
Dissatisfied Customers
Strategies to Reduce These Barriers
Inconvenience
Difficult to find the right complaint
procedure.
Effort, e.g., writing a letter.
Make feedback easy and convenient by:

Printing Customer Service Hotline numbers,
e-mail and postal addresses on all
customer communications materials.
Doubtful Pay Off

Uncertain whether any action, and
what action will be taken by the
firm to address the issue the
customer is unhappy with.
Reassure customers that their feedback will be

taken seriously and will pay off by:
Having service recovery procedures in
place, and communicating this to
customers.
Featuring service improvements that
resulted from customer feedback.
Unpleasantness
Complaining customers fear that
they may be treated rudely,
may have to hassle, or
may feel embarrassed to complain.
Make providing feedback a positive

experience:
Thank customers for their feedback.
Train the frontline not to hassle and make
customers feel comfortable.
Allow for anonymous feedback.
1 - 252
How to Enable Effective Service Recovery
Be proactiveon 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
1 - 253
Guidelines for Effective

Problem Resolution (Management Memo 13.1)
Act fast
Admit mistakes but dont
Give benefit of doubt

Clarify steps to solve
Understand problem from
Keep customers informed
Dont argue
Acknowledge customers
Consider compensation
Persevere to regain
be defensive
customers viewpoint
feelings
problem
of progress
goodwill
1 - 254
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
1 - 255
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
1 - 256
The Hampton Inn 100% Satisfaction Guarantee

(Figure 13.4)
What are the benefits of such

a guarantee?
Are there any downsides?
1 - 257
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
1 - 258
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
1 - 259
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
Collection Tools
Service
Process
Satisfaction Satisfaction
Specific
Feedback
Actionable
Represen Potential
-tative, for Service
Reliable Recovery
First
Hand
Learning
Cost
Effective
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
1 - 260
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
1 - 261
Chapter 14
Improving Service Quality

and Productivity
1 - 262
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
1 - 263
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
ManufacturingBased:
Quality is conformance to the firms developed

specifications
Value-Based:
Quality is a trade-off between price and value
1 - 264
Dimensions of Service Quality
Tangibles
Reliability
Responsiveness
Assurance
competence,
courtesy
credibility
security
Empathy
access
communication
understanding of customer
1 - 265
Seven Service Quality Gaps (Fig. 14.1)

CUSTOMER
Customer needs
and expectations
1. Knowledge Gap
MANAGEMENT
Management definition
of these needs
2. Standards Gap
Translation into
design/delivery specs
3. Delivery Gap
Execution of
design/delivery specs
4. I.C.Gap
Advertising and
sales promises
5. Perceptions Gap
Customer interpretation
of communications
Customer perceptions
of product execution
7.
6. Interpretation Gap
Service Gap
Customer experience
relative to expectations
1 - 266
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:
delivery
Educate customers to see reality of service
Interpretation: Pretest communications to make sure

message is clear and unambiguous.
1 - 267
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.
1 - 268
Hard Measures of Service Quality
Control charts to monitor

a single variable
Service quality indexes

Root cause analysis
(fishbone charts)
Pareto analysis
1 - 269
Composition e of FedExs
Service Quality Index (SQI) (Table 14.4)
Failure Type
Weighting
X
Factor
Late Delivery Right Day

Late Delivery Wrong Day
Tracing request unanswered
Complaints reopened
Missing proofs of delivery
Invoice adjustments
Missed pickups
Lost packages
Damaged packages
Aircraft Delays (minutes)
Overcharged (packages missing label)
Abandoned calls
No of
Daily
=
Incidents
Points
1
5
1
5
1
1
10
10
10
5
5
1
Total Failure Points (SQI) =

XXX,XXX
1 - 270
Control Chart: Percent of Flights

Leaving within 15 Minutes of Schedule
(Fig. 14.2)
100%
90%
80%
70%
60%
J
Month
1 - 271
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.
1 - 272
Cause and Effect Chart for

Airline Departure Delays (Fig. 14.3)
Facilities,
Equipment
Arrive late
Oversized bags
Customers
Customers
Frontstage
Front-Stage
Personnel
Personnel
Procedure
Procedures
Delayed check-in
Gate agents
Aircraft late to
procedure
cannot process
gate
Mechanical fast enough
Acceptance of late
Failures
passengers
Late/unavailable
airline crew
Late pushback
Delayed
Departures
Late food
service
Other Causes
Weather
Air traffic
Late cabin
cleaners
Late baggage
Weight and balance

sheet late
Late fuel
Materials,
Materials,
Supplies
Supplies
Poor announcement of
departures
Backstage
Personnel
Information
1 - 273
Analysis of Causes of
Flight Departure Delays (Fig. 14.4)
15.3%
23.1%
15.4%
All stations, excluding

Chicago-Midway Hub
11.7%
23.1%
23.1%
33.3%
33.3%
53.3%
15%
Washington Natl.
Late passengers
Waiting for pushback
Waiting for fueling
19%
9.5%
8.7%
11.3%
Newark
4.9
%
Late weight and balance sheet

Late cabin cleaning / supplies
Other
1 - 274
Return on Quality (ROQ)
ROQ approach is based on four assumptions:

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

being related to productivity improvement programs
from
1 - 275
When Does Improving Service Reliability

Become Uneconomical? (Fig. 14.5)
Satisfy
SatisfyTarget
Target
Customers
CustomersThrough
Through
Service
Recovery
Service Recovery
Service Reliability
100%
Optimal
OptimalPoint
Pointof
of
Reliability:
Reliability:Cost
Costof
of
Failure
=
Service
Failure = Service
Recovery
Recovery
Satisfy
SatisfyTarget
Target
Customers
CustomersThrough
Through
Service
ServiceDelivery
Deliveryas
as
Planned
Planned
Investment
Small Cost,
Large Improvement
Large Cost,
Small Improvement
Assumption: Customers are equally (or even

more) satisfied with the service recovery provided
than with a service that is delivered as planned.
1 - 276
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.
1 - 277
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
1 - 278
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
1 - 279
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?
1 - 280
Operations-driven vs. Customer-driven Actions

to Improve Service Productivity
Operations-driven strategies Customer-driven strategies
Control costs, reduce waste
Set productive capacity to
match average demand
Automate labor tasks
Upgrade equipment and
systems
Train employees
Change timing of customer

demand
Involve customers more in
production
Ask customers to use third
parties
Leverage less-skilled
employees through expert
systems
1 - 281
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.
1 - 282
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
1 - 283
Six Sigma Methodology to Improve and

Redesign Customer Service Processes
Process Improvement Process Design/Redesign
Define
Measure
Analyze
Improve
Control
Identify the problem

Define requirements
Set goals
Validate problem/process
Refine problem/goal
Measure key steps/inputs
Develop causal hypothesis
Identify root causes
Validate hypothesis
Develop ideas to measure
root causes
Test solutions
Measure results
Establish measures to
maintain performance
Correct problems if needed
Identify specific or broad problems

Define goal/change vision
Clarify scope & customer requirements
Measure performance to requirements
Gather process efficiency data
Identify best practices
Assess process design
Refine requirements
Design new process
Implement new process, structures and
systems
Establish measures & reviews to

maintain performance
Correct problems if needed
1 - 284
Chapter 15
Organizing for Service

Leadership
1 - 285
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
1 - 286
The Service Profit Chain (Fig. 15.1)

Internal
External
Operating strategy and

service delivery system
Service
concept
Target Market
Loyalty
CUSTOMERS
EMPLOYEES
Satisfaction
Productivity
& Output
Quality
Service
Value
Revenue
Growth
Satisfaction
Loyalty
Profitability
Capability
Service
Quality
Workplace design
Job design
Selection and development
Rewards and recognition
Information and communication
Tools for serving customers
Quality and productivity

improvements yield
higher service quality
and lower costs
Lifetime value
Retention
Repeat business
Referral
1 - 287
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 chains success
1 - 288
Integrating Three Functional Imperatives

(recap from Chapter 1)
Marketing
Imperative
Human Resources
Imperative
Customers
Operations
Imperative
1 - 289
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
1 - 290
Reducing Intra-Organizational Tension
Transfers and cross training

Cross functional taskforces
New tasks and new people
Process management teams
Gain-sharing programs
1 - 291
The Search for Synergy:

A Top Management Perspective
What do we want?
What do our employees,

intermediaries, and
other partners want?
What do our
customers want?
What can we do?

1 - 292
From Losers to Leaders:

Moving Up the Service Performance Ladder
Service Leaders
Crme de la crme of their respective industries

Names synonymous with outstanding service, customer delight
Service Professionals
Clear positioning strategy
Sustained reputation for meeting customer expectations
Non-entities
Service
Traditional operations mindset

Rudimentary marketing, often emphasizing price discounts
Service Losers
Only survive because of lack of viable alternatives in marketplace
1 - 293
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 lowcost workers to quality of employees as strategic
advantage
1 - 294
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
1 - 295
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
1 - 296
Transformational Leadership May Require

Changing Corporate Culture
Corporate Culture:
Shared
Shared
Shared
Shared
Shared
perceptions regarding what is important

values about what is right and wrong
understanding about what works and what doesnt
beliefs about why these things are important
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
1 - 297

Services Marketing Christopher Lovelock

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Services Marketing Christopher Lovelock

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Chapter 1

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

How Important is the Service Sector in

In most countries, services add more economic value than

In developed economies, employment is dominated by

Jobs range from high-paid professionals and technicians

Service organizations can be any sizefrom huge global

Most activities by government agencies and nonprofit

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Services dominate the United States Economy:

Other Services 11%

Source: Bureau of Economic Analysis, November 2002

Services Marketing 5/E

Changing Structure of Employment

Time, per Capita Income

Services Marketing 5/E

Source: IMF, 1997

Some Service Industries Profiled by NAICS but

Diagnostic Imaging Centers

Hazardous Waste Collection

HMO Medical Centers

Services Marketing 5/E

Service elements within an organization that facilitate

Increasingly, these services are being outsourced

Services Marketing 5/E

Major Trends in Service Sector (Fig. 1.3)

Government Policies (e.g., regulations, trade

Manufacturers offer service

Advances in IT (e.g., speed, digitization, wireless,

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Some Impacts of Technological Change

Radically alter ways in which service firms do business:

Create relational databases about customer needs and

Leverage employee capabilities and enhance mobility

Services Marketing 5/E

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Defining the Essence of a Service

An act or performance offered by one party to another

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Distinguishing Characteristics of Services

Customers do not obtain ownership of services

Services Marketing 5/E

to facilities and systems

Services cannot be inventoried after production

Exception: some information-based output can be recorded

Services Marketing 5/E

Customers may be involved in production process

Intangible elements dominate value creation

communicating physical images or metaphors and tangible clues

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Value Added by Tangible vs Intangible Elements

Fast food restaurant

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Other people are often part of the service product

both marketing and operational criteria

Greater variability in operational inputs and outputs

both employees and customers