Classifying Services to Gain

Strategic Marketing Insights

By Christopher H. Lovelock
 Objective
To generate greater sophistication within
the realm of service marketing by
segmenting services into clusters that
share certain relevant marketing
characteristics.
 Classification of Goods
• Hunt (1976)
– Emphasized the usefulness of classification schemes
in marketing
• Copeland (1923)
– Most famous and enduring attempt to classify goods
– Classification of convenience, shopping, and specialty
goods
– Helped managers to:
• Better understand consumer needs and behavior
• Provided insight into the management of retail distribution
systems
 Classification of Goods

• Classification schemes:
– Durable vs. non-durable goods
• Durability is relative to purchase frequency and,
therefore, is important for the development of
distribution and communications strategies
– Consumer goods vs. industrial goods
• Relates to types of goods purchased and
product evaluation (purchasing procedures and
usage behaviors)
 Previous Work – Classification
of Services
• Shostack (1977), Bateson (1979), Berry (1980)
– Argued that there are significant distinctions between
services and goods and have proposed several
generalizations for management practices
• Enis & Roering (1981)
– Believe that the differences that lie between goods and
services have no meaningful strategic implications
• Langeard et al. (1981)
– Stated the importance of recognizing that the service
sector, escpecially in the US, is becoming increasingly
competitive
Classification of Services Cont.
• Rathmell (1874) – Getting to know how one’s
business operates
– 1) Type of seller
– 2) Type of buyer
– 3) Buying motives
– 4) Buying practice
– 5) Degree of regulation
– This classification has no specific application to
services and, therefore, could also be used to
classify goods
 Classification of Services Cont.
• Judd (1964) - classification in accordance with
ownership
– 1) Rented goods services- right to own and use a
good for a defined time
– 2) Owned goods services- owned by customer
(repair or improvement of goods, custom creation)
– 3) Nongoods services- “experiential possessions” or
personal experiences
– 1 & 2 are specific in the services they encompass
– 3 is very broad and ignores select services- banking,
accounting, insurance, legal advice
 Classification of Services Cont.
• Shostack (1977), Sasser et al (1978) –
recognizing the composition of each product
“package”

Physical Intangible Package

Goods + Services =

– Identified the proportion of physical goods relative to the

amount of intangible services within
– Emphasizes that there are few pure goods / services
Classification of Services Cont.
• Hill (1977) – Emphasizes the nature of
service benefits and 5 variations in the
service delivery/consumption environment
– 1) Services affecting persons vs. those effecting
goods
– 2) Permanent vs. temporary effects of the service
– 3) Reversibility vs. non reversability of those
effects
– 4) Physical effects vs. mental effects
– 5) Individual vs. collective services
Classification of Services Cont.
• Thomas (1978) – Equipment based vs. People
based, helps to understand product attributes
– 1) Primarily equipment based:
• A) Automated- car wash
• B) Monitored by unskilled operators- movie theatre
• C) Operated by skilled personnel- airlines
– 2) Primarily people based:
• A) Unskilled labor- lawn care
• B) Skilled labor- repair work
• C) Professional staff- lawyers, dentists
– Operational rather than marketing oriented
Classification of Services Cont.

• Chase (1978) – Levels of customer contact

• Extent of customer contact required in service
– 1) High contact- health care, hotels, restaurants
– 2) Low contact- wholesaling, postal service
– Product variability is harder to control in high contact
services because customers exert more influences on
timing of demand and service features due to greater
involvement in the service process
 Classification of Services Cont.

• Kotler (1980) – Synthesizes previous

work, recognizes difference in purpose of
service organizations
– 1) People based vs. equipment based
– 2) Extent to which the client’s presence is
necessary
– 3) Meets personal need vs. business needs
– 4) Public vs. private , For-profit vs. nonprofit
 Classification of service
1 Based on the degree of customer involvement
a) People Processing
b) Possession Processing
c) Mental Stimulus Processing
d) Information Processing

2 Based on service Tangibility

a) Highly Tangible: car rental, vending machine,
telecommunications
b) Service linked to tangible goods: domestic appliance repair,
car service
c) Tangible goods linked to service: ticket tab, project report
d) Highly Intangible: psychotherapy, consultancy

3 Based on Knowledge and Expertise required

a) Professional service: medical services, legal services
b) Non-professional service: babysitting, casual labour
 Classification of service
4 Based on business orientation of service provider
a) Not-for-profit organization: charities, public sector leisure facilities
b) Commercial organization: banks, airlines, hotel and catering

5 Based on type of end user

a) Consumer service: hairdressing, leisure
b) Business to business service: ad agencies, consultancy
c) Industrial service: plant maintenance and repair, workwear &
hygiene
 Classification of Services Cont.
• Lovelock (1980) – Synthesizes previous
classifications and adds new schemes
– 1) Basic demand characteristics:
• Object served- personal vs. property
• Extent of demand / supply imbalances
• Discrete vs. continuous relationship between customers and
providers
– 2) Service content and benefits:
• Extent of physical goods content
• Extent of personal service content
• Single service vs. bundle service
• Timing and duration of benefits
– 3) Service delivery procedures:
• Multi-site vs. single-site delivery
• Allocation of capacity- reservations or first come first serve
• Independent vs. collective consumption
• Time defined vs. task defined transactions
• Extent to which customers must be present during service
delivery
– Defining objects served = most fundamental
classification scheme
– Suggests valuable marketing insights would come
from combining two or more classification schemes
in a matrix
 Methodology
• “Builds on past research by examining
characteristics of services that transcend
industry boundaries and are different in
degree or kind from the categorization
schemes traditionally applied to
manufacturing goods.”
• Five Classification Schemes were selected
and examined on two dimensions- reflecting
Lovelocks early conclusions
 Five Classification Schemes
Nature
of the service
act
Nature of
Mode of
demand and
delivery
supply
Services

Level of customization
Organization / Customer
& judgment for the
relations
service provider
 What is the nature of the
service act?

• Service= a “deed, act or performance”

(Berry 1980)
• Fundamental issues of services:
– At whom, or what, is the act direct?
– Is the act tangible or intangible
 Nature of
Service Act Who or what is the direct recipient of
the service?
What is the nature People Things
of the service act?
Tangible Actions Services directed at Services directed at
people’s bodies goods and other
-restaurants, physical
haircutting, beauty possessions
salons -freight transport,
laundry/dry cleaning
Intangible Actions Services directed at Services direct at
people’s mind intangible assets
-education, theatres -banking, legal
services
 Management Implications
• Nature of the service act:
– Answers questions such as:
• A) Does the customer need to be physically present?
– 1) Throughout the service delivery?
– 2) Only to initiate / terminate the service transaction?
– 3) Not at all
– Customer satisfaction will be influenced by interactions they have with personnel,
nature of facilities, characteristic of other customers, questions of location and schedule
convenience
• B) Does the customer need to be mentally present during service delivery? If so can it be
maintained across physical distance (mail or e-communications)?
• C) In what ways is the target of the service act “modified” by the receipt of the service? How
does the customer benefit from the “modifications?”  To develop a better understanding of
the nature of the service product and the core benefits it offers
• Managers of service organizations may be able to identify opportunities for
alternative, more convenient forms of service delivery- ex) Britain’s Open University’s
use of t.v. and radio broadcasts
 What type of relationship does the
service organization have with the
customer?
• Relationships
– Ongoing relationships- customers receive service on a continuing basis
• Possible “membership” relationship- ex) family doctor, phone plans
– No formal relationship
• Delivery
– Continuous basis- ex) public goods (police protection, broadcasts)
– Each transaction is recorded and charged separately
• Marketers tend to be less informed about their customers- “anonymous”
consumer
• Profitability & customer convenience are central to how a service will be priced
– 1) Single periodic charge / Flat rate- simple, usually for services offered on an
ongoing basis. Ex) insurance, public goods
– 2) Price per service administered- more complex, more fair for the less frequent
customers. Ex) pay phone
– 3) Base fee + incremental charges
 Organization / Customer
Relationships
Type of relationship between the
service organization and the customer
Nature of service “Membership” No formal
delivery relationship relationship
Continuous Ex) college Ex) police
delivery system enrollment, protection, radio
insurance, banking station, public
highway

Discrete Ex) transit pass, Ex) pay phone, car

Transactions long-distance phone rental, restaurant,
calls movie theater
• Organization / Customer Relations
– Membership relationships:
• Company knows who its current customers are, their
addresses, their preferences, their opinions on the service
provided,
• Valuable for segmentation purposes & targeted marketing
• May be offered discount rates in return for continuous
patronage
• Usually result in customer loyalty to a particular provider. Ex)
Rewards cards, Costco membership
• Helps ensure repeat business
• Task= build sales and revenues through membership but
avoid required membership and freezing out customers. Ex)
Best Buy w/ Reward Zone
• Allows for better decisions in regard to pricing
 How much room is there for customization
and judgment on the part of the service
provider?
• Customer is often involved in the production process – allows for tailoring of the service
to meet the needs of the individual customer
• Concerns:
– The extent to which the characteristics of the service allows them to be customized
– How much judgment customer contact personnel are able to exercise in defining
the nature of the service received by the individual customer
• Types of services:
– Wide choice of options
• Contact personnel is limited- mobile phone providers
• Contact personnel has freedom- locus of control shifts from user to supplier,
these people often give advice- professional such as doctors
– Standardization
• Contact personnel is limited- public transport
• Contact personnel has freedom- educators (different teachers teach the same
course different ways)
 Customization vs. Judgment
Extent to which service
characteristics are customized
Extent to which customer High Low
contact personnel
exercise judgment in
meeting individual
customer needs
High Ex) legal services, Ex) preventative
taxi service, health programs,
education education (large
(tutorials), surgery class)
Low Ex) hotel service, Ex) public
telephone service, transportation,
retail banking routine appliance
repair, movie
theaters
• Level of Customization & Judgment
– Most senior managers have come up through operations
and, therefore, may require executive education
programs to given them the necessary perspective on
marketing to make balanced decisions
– Customization is not necessarily important for success –
sometimes the image of customization is enough.
• Many people share the same experience.
• People share the same service facility but still have some custom
treatment. Ex) airlines use your name
– Customers like to know in advance what they are buying
• Professional services the professional diagnosis the nature of the
situation- can divide into two segments (diagnosis and
implementation) to easy customer worries
– Marketing focus on process of client-provider interactions. Ex)
statement of qualifications
• Levitt (1972,1976)

Industrialization > Customization

if
Speed + Consistency + Price Savings > benefits which yield from
the ability to customize

– The industrialization of a service in order to take advantage

of the economies of mass production may increase
consumer satisfaction if speed, consistency, and price
savings hold a higher value than service customization
What is the nature for the demand and
supply for the service?

• Finished services cannot be inventoried

• Demand exceeds supply on a particular
day = excess business may be lost
• Demand and supply imbalances are not
found in all services
Nature of Demand
& Supply Extent of demand fluctuations over time
Extent to Wide Narrow
which supply
is constrained
Peak demand Could use increases in Must decide whether to seek
can usually be demand outside of peak cont. growth in demand &
met without a periods capacity or maintain status
Ex) electricity, telephone, quo
major delay
natural gas Ex) banking, insurance, legal
services
Peak demand Must try to smooth demand A growing organization that
regularly to match capacity- must both may need temporary
exceeds stimulate and discourage demarketing until capacity
demand can be reach to meet current
capacity
Ex) theatres, hotels/motels, needs
restaurants Ex) services similar to those
in above field but with
insufficient capacity
• Nature of Demand and Supply
– Managing demand in services because
fluctuations can be sharp and there is no
buffer of inventory between supply and
demand
– Manage demand
• Hire seasonal or part time workers
• Renting extra facilities during peak periods
– Determining the appropriate strategy:
• 1) What is the typical cycle period for these demand fluctuations?
– Predictable- demand varies by hour of the day, day of week/month,
season of year
– Random- no apparent pattern to demand fluctuations
• 2) What are the underlying causes of these demand fluctuations?
– Customer habits or preferences- could marketing change these?
– Actions by third parties- employers set working hrs. hence marking efforts
might be directed at those employers
– Nonforcestable events- weather conditions, health symptoms
– Managers need to know who or what is the target of the service to
effectively choose these strategies.
– Smooth out ups and downs of demand:
• Decrease demand:
– Encourage customers to change their plans voluntarily- Offer discounts or
added product value during times of low demand
– Ration demand through reservations or a queuing system
• Increase demand:
– New business development efforts should be targeted at prospective
customers with a counter cyclical demand pattern. Ex) accounting firm
has lots of business at the end of the year may find new business for the
bulk of the year when it has relatively no business
 How is the service delivered?
• Nature of the interaction between the
customer and the service organization:
– Customer goes to service organization
– Service organization comes to customer
– Customer and service organization transact at
arms length
• Availability of service outlets:
– Single site
– Multiple site
Service Delivery Availability of service outlets
Nature of Single Site Multiple Site
interaction between
customer and
service organization
Customer goes to Ex) theatre, Ex) bus service, fast
service organization barbershop food chain
Service Ex) lawn care Ex) mail deliver, AAA
organization comes service, pest control emergency repairs
to customer service, taxi
Customer and Ex) credit card Ex) broadcast
service organization company, local t.v. network, telephone
transact at arms station company
length (mail or e-
communications)
• Mode of delivery
– Customer has to come to the service
• Convenience is lowest to the customer
– Service comes to customer- when target of the service is
immovable
• More expensive for the service organization
– Transactions at arms length
• Ex) 800 numbers
• Not all services may be conducted at arms length but certain portions of that
service may be
– Ex) make reservations by phone to go eat at a restaurant
– If it is possible, it is up to the manager to decide whether a third party will have the
right to participate in the arms length step – sometimes consumers see these
middle men as more objective and knowledgeable and trust their guidance more
than the service provider
– Increasing the number of outlets
• Increases convenience of access to customers but may raise issues of quality
control (consistency of the service)
 Conclusion
• Service sector is becoming increasingly
competitive partly due to the partial or complete
deregulation of several major service industries
• “As competition intensifies within the service
sector, the development of more effective
marketing efforts becomes essential for survival”
• The 5 matrixes will help managers:
– Identify how those factors shape marketing problems
and opportunities and, therefore, how they should
affect the nature of the marketing tasks
– Recognize similarities between their industry and
other industries to help them look beyond their
immediate competitors for new ideas as to how to
resolve marketing problems
 Limitations

• These matrixes can only provide a guideline for

service companies to become more aware of their
customers and the type of service they actually
provide
• It does not provide a simple clear outline as to how
to market a specific service effectively
• Every service in every market is different and unique,
even services within the same market differ
• The customer and market are always changing