Service Marketing

1.

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Chapter

INTRODUCTION TO SERVICES

This chapter's objectives are to 1. Explain what services are and identify important trends in services.

2. Explain the need for special services marketing concepts and practices and why the need has

developed and is accelerating.

3. Explore the profound impact of technology on service.

1. Outline the basic differences between goods and services and the resulting challenges and opportunities for service businesses.

1. Introduce the expanded marketing mix for services and the philosophy of customer focus, as powerful frameworks and themes that are fundamental to the rest of the text.

"Services are going to move in this decade to being the front edge of the industry." Louis V. Gerstner, 2001

This quote from IBM's former CEO, Louis V. Gerstner, illustrates the changes sweeping across industry today. Many businesses that were once viewed as manufacturing giants are shifting their focus to services. IBM has led the pack in its industry. Mr. Gerstner predicts that in the IT industry over the next decade services will lead the market instead of hardware and software to the extent that "hardware and software will be sold inside a services wrapper." Actions of current IBM CEO, Sam Palmisano, have reinforced this view. In his tenure, Mr. Palmisano has led IBM in the expansion of its outsourcing businesses and accentuated its focus on client solutions. He also led IBM in its purchase of PriceWaterhouseCoopers in 2002 to gain broader strategic services consulting expertise.

4. 5. Chapter 1 Introduction to Services 3

In a company brochure IBM states that it is the largest service business in the world. Through ts Global Services division, IBM offers product support services, professional consulting services, and network computing services around the globe. Many businesses have outsourced entire service functions to IBM, counting on the company to provide the services better than anyone else. Currently the services side of IBM brings in $43 billion, over half the company's total revenue. "he services strategy has been very successful for IBM to date and promises to be the engine of growth into the future (see the "New Wave of Services" graphic). Going forward, IBM's strategy to focus on total solutions and to be a truly valued, trusted, and indispensable partner for its key clients. This strategy means providing clients with total service solutions in such wide-ranging areas as human resources, marketing, product design, and customer relationship management.

No one in IBM would suggest that these positive results have been easily achieved. Switching +orn a manufacturing to a service and customer focus is indeed a challenge. It requires changes " management mind-set, changes in culture, changes in the ways people work and are rewarded, and new ways of implementing customer solutions. At IBM this change has evolved over decades.

is suggested that Lou Gerstner's legacy at IBM may well be the definitive switch that the company has made from hardware to services and the strategic focus on customers.

Many companies (such as Hewlett-Packard, Sun Microsystems, and Cisco) have viewed IBM's success and are attempting to make the same transition to services. It is not as easy as it looks. In '11oving into services, companies discover what service businesses such as hospitality, consulting, nealth care, financial services, and telecommunications have known for years: services marketing and management are different-not totally unique, but different. Selling and delivering a

$80

Source: Inside Sam's $100 Billion Growth Machine." by David Kirkpatrick, Fortune, June 14, 2004, p. 86. FORTUNE © 2004 TIme Inc. All Rights Reserved.

NEW WAVE OF SERVICES On the fly and against all odds, IBM has transformed itself into a services powerhouse.

$100 billion IBM revenue

$60

$40

$20

1990 1992 1994 1996 1998 2000 2002 ·03

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computer is not the same as selling and delivering a service that solves a customer's problem.' As the opening vignette suggests, services are not limited to service industries, services can be very profitable, and services are challenging to manage and market. Services represent a huge and growing percentage of the world economy; yet particularly in the United States, customer perceptions of service are not good.' In fact, the University of Michigan's American Customer Satisfaction Index has shown consistently lower scores for services when compared to other products.' Given the economic growth in services, their profit and competitive advantage potential, and the overall decline in customer satisfaction with services, it seems that the potential and opportunities for companies who can excel in services marketing, management, and delivery have never been greater.

This text will give you a lens with which to approach the marketing and management of services. What you learn can be applied in a company like IBM with a traditional manufacturing history or in pure service businesses. You will learn tools, strategies, and approaches for developing and delivering profitable services that can provide competitive advantage to firms. At the base of services marketing and management you will find a strong customer focus that extends across all functions of the firmthus the subtitle of this book, "integrating customer focus across the firm."

WHAT ARE SERVICES?

Put in the most simple terms, services are deeds, processes, and performances. Our opening vignette illustrates what is meant by this definition. The services offered by IBM are not tangible things that can be touched, seen, and felt, but rather are intangible deeds and performances. To be concrete, IBM offers repair and maintenance service for its equipment, consulting services for IT and e-cornmerce applications, training services, Web design and hosting, and other services. These services may include a final, tangible report, a website, or in the case of training, tangible instructional materials. But for the most part, the entire service is represented to the client through problem analysis activities, meetings with the client, follow-up calls, and reporting-a series of deeds, processes, and performances. Similarly, the core offerings of hospitals, hotels, banks, and utilities comprise primarily deeds and actions performed for customers.

Although we will rely on the simple, broad definition of services, you should be aware that over time services and the service sector of the economy have been defined in subtly different ways. The variety of definitions can often explain the confusion or disagreements people have when discussing services and when describing industries that comprise the service sector of the economy. Compatible with our simple, broad definition is one that defines services to include "all economic activities whose output is not a physical product or construction, is generally consumed at the time it is produced, and provides added value in forms (such as convenience, amusement, timeliness, comfort, or health) that are essentially intangible concerns of its first purchaser."4 The breadth of industries making up the service sector of the Indian economy is illustrated in Figure 1.1.

Services Industries, Services as Products, Customer Service, and Derived Service As we begin our discussion of services marketing and management, it is important to draw distinctions between service industries and companies, services as products, customer service, and derived service. Sometimes when people think of service, they think only of customer service, but service can be divided into four distinct categories. The tools and strategies you will learn in this text can be applied to any of these categories.

7. 8. 9. rld

Chapter 1 Introduction to Services 5

1.1 Contributions of Service Industries to India's Gross Domestic Product, 2007

Community, social & personal services 14%

Agriculture, forestry & fishing 18%

Finance, insurance, real estate &

business services 14%

Mining & quarrying 2%

Manufacturing 16%

T rade,hotels, transp ort & communication

27% Electricity, gas &

water supply

Construction 2% 7%

from PIB, Government of India, Press ote dated May 31, 2007. [http.. rnospi.nic.in/pressnote I

Contribution to India's GDP by Sector (2006-2007) Agriculture Sector [including mining] : 20.46 %

trial Sector [manufacturing, electricity, gas, water supply and construction] : 24.60 % Services Sector: 54.94 %

10. 11. 12. 13. 14.

hapter 1 Introduction to Services 7 -/

Chapter 1 Introduction to Services 21 TABLE 1.1 Eight Central Paradoxes of Technological Products

Control/chaos

Paradox Description

Freedom/enslavement

ew/obsolete

Competence/incompetence

Efficiency/inefficiency

Fulfills/creates needs

Assirnllatlon/isolatlon

Engaging/disengaging

Technology can facilitate regulation or order, and technology can lead to upheaval or disorder. Technology can facilitate independence or fewer restrictions, and technology can lead to dependence or more restrictions. New technologies provide the user with the most recently developed benefits of scientific knowledge, and new technologies are already or soon to be outmoded as they reach the marketplace. Technology can facilitate feelings of intelligence or efficacy, and technology can lead to feelings of ignorance or ineptitude. Technology can facilitate less effort or time spent in certain activities, and technology can lead to more effort or time in certain activities. Technology can facilitate the fulfillment of needs or desires, and technology can lead to the development or awareness of needs or desires previously unrealized. Technology can facilitate human togetherness, and technology can lead to human separation. Technology can facilitate involvement, flow, or activity, and technology can lead to disconnection, disruption, or passivity .

. D. G. Mick and S. Fournier, "Paradoxes of Technology: Consumer Cognizance, Emotions, and Coping Strategies," Journal of Consumer Research 25 ber 1998), pp. 123-47. Copyright © 1998 University of Chicago Press. Reprinted by permission.

'ith technology infusion comes a loss of human contact, which many people believe is detrimental ly from a quality oflife and human relationships perspective. Parents may lament that their children d hours in front of computer screens, interacting with games, seeking information, and relating to

~ friends only through instant messaging without any face-to-face human contact. And workers in ganizations become more and more reliant on communicating through technology---even unicating via e-mail with the person in the next office! inally, the payback in technology investments is often uncertain. It may take a long time for an e tment to result in productivity or customer satisfaction gains. Sometimes it never happens. For pIe, McKinsey & Company reports that a firm projected a $40 million savings from moving its ..mg and service calls to the Web. Instead it suffered a $16 billion loss as a result of lower usage by omers than projected, unanticipated follow-up calls and e-mails to the call center from those who used the Web application initially, and loss of revenue from lack of cross-selling opportunities.'?

HARACTERISTICS OF SERVICES COMPARED TO GOODS

ere is general agreement that differences between goods and services exist and that the distinctive racteristics discussed in this section result in challenges (as well as advantages) for managers of 'ices.'! It is also important to realize that each of these characteristics could be arranged on a rinuurn similar to the tangibility spectrum show in Figure 1.1. That is, services tend to be more erogeneous, more intangible, more difficult to evaluate than goods, but the differences between

and services are not black and white by any means.v Table 1.2 summarizes the differences between goods and services and the implications of these racteristics, Many of the strategies, tools, and frameworks in this text were developed to address

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22 Part 1 Foundations for Services Marketing

TABLE 1.2 Goods versus Services

Goods Tangible

Resulting Implications Services cannot be inventoried. Services cannot be easily patented. Services cannot be readily displayed or

Services Intangible

communicated.

Standardized Pricing is difficult. Service delivery and customer satisfaction depend on employee and customer actions. Service quality depends on many uncontrollable factors. There is no sure kr.owledge that the service delivered matches what was planned and promoted. Customers participate in and affect the transaction. Customers affect each other. Employees affect the service outcome. Decentralization may be essential. Mass production is difficult. It is difficult to synchronize supply and demand with services. Services cannot be returned or resold.

Heterogeneous

Production separate from consumption

Simultaneous production and consumption

Nonperishable Perishable

Source: A. Parasuraman, VA. Zeithaml, and L. L. Berry, "A Conceptual Model of Service Quality and It's Implications for Future Research." Journal of Marketing 49 (Fall 1985) pp. 41-50. Reprinted by permission of the American Marketing Association.

these characteristics, which, until the 1980s, had been largely ignored by marketers. Recently it has been suggested that these distinctive characteristics should not be viewed as unique to services but that they are also relevant to goods, that "all products are services," and that "economic exchange is fundamentally about service provision."33 Although this view is rather abstract, it does suggest that all types of organizations may be able to gain valuable insights from services marketing frameworks, tools, and strategies.

Intangibility The most basic distinguishing characteristic of services is intangibility. Because services are performances or actions rather than objects, they cannot be seen, felt, tasted, or touched in the same manner that you can sense tangible goods. For example, health care services are actions (such as surgery, diagnosis, examination, and treatment) performed by providers and directed toward patients and their families. These services cannot actually be seen or touched'by the patient, although the patient may be able to see and touch certain tangible components of the service (like the equipment or hospital room). In fact, many services such as health care are difficult for the consumer to grasp even mentally. Even after a diagnosis or surgery has been completed the patient may not fully comprehend the service performed, although tangible evidence of the service (e.g., incision, bandaging, pain) may be quite apparent.

Resulting Marketing Implications Intangibility presents several marketing challenges. Services cannot be inventoried, and therefore fluctuations in demand are often difficult to manage. For example, there is tremendous demand for resort accommodations in Phoenix in February, but little demand in

16. 17. 18. 19. 20.


et resort owners have the same number of rooms to sell year-round. Services cannot be easily d. and new service concepts can therefore easily be copied by competitors. Services cannot be _ displayed or easily communicated to customers, so quality may be difficult for consumers to Decisions about what to include in advertising and other promotional materials are challenging, ricing. The actual costs of a "unit of service" are hard to determine, and the price-quality ~ __ cnship is complex.

Heterogeneity Services are performances, frequently produced by humans, no two services will be precisely -:be employees delivering the service frequently are the service in the customer's eyes, and people er in their performance from day to day or even hour to hour. Heterogeneity also results because u tomers are precisely alike; each will have unique demands or experience the service in a ·ay. Thus the heterogeneity connected with services is largely the result of human interaction n and among employees and customers) and all of the vagaries that accompany it. For example, ountant may provide a different service experience to two different customers on the same day --........i"ng on their individual needs and personalities and on whether the accountant is interviewing en he or she is fresh in the morning or tired at the end of a long day of meetings.

Resulting Marketing Implications Because services are heterogeneous across time, organizations, and ~ ensuring consistent service quality is challenging. Quality actually depends on many factors ot be fully

controlled by the service supplier, such as the ability of the consumer to articulate er needs, the ability and willingness of personnel to satisfy those needs, the presence (or of other customers, and the level of demand

for the service. Because of these complicating the service manager cannot always know-for sure that the service is being delivered in a manner -==~tent with what was originally planned and promoted. Sometimes

services may be provided by a further increasing the potential heterogeneity of the offering.

Simultaneous Production and Consumption Whereas most goods are produced first, then sold and consumed, most services are sold first and then --~''''d and consumed simultaneously. For example, an automobile can be manufactured in Detroit,

to San Francisco, sold two months later, and consumed over a period of years. But restaurant - annot be provided until they have been sold, and the dining experience is essentially produced sumed at the same

time. Frequently this situation also means that the customer is present while Ice is being produced and thus views and may even take part in the production process. ~_ •••. neity also means that customers will

frequently interact with each other during the service ~ on process and thus may affect each others' experiences. For example, strangers seated next to er in an airplane may well affect the nature of the service

experience for each other. That ---'='Ters understand this fact is clearly apparent in the way business travelers will often go to great

- to be sure they are not seated next to families with small children. Another outcome of =~;taneous production and consumption is that service producers find themselves playing a role as the

product itself and as an essential ingredient in the service experience for the consumer.

Resulting Marketing Implications Because services often are produced and consumed at the same mass production is difficult. The quality of service and customer satisfaction will be highly ent on

what happens in "real time," including actions of employees and the interactions between

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24 Part 1 Foundations (or Services Marketing

employees and customers. Clearly the real-time nature of services also results in advantages in terms of opportunities to customize offerings for individual consumers. Simultaneous production and consumption also means that it is not usually possible to gain significant economies of scale through centralization. Often, operations need to be relatively decentralized so that the service can be delivered directly to the consumer in convenient locations, although the growth of technology-delivered services is changing this requirement for many services. Also because of simultaneous production and consumption, the customer is involved in and observes the production process and thus may affect (positively or negatively) the outcome of the service transaction.

Perishability Perishability refers to the fact that services cannot be saved, stored, resold, or returned. A seat on an airplane or in a restaurant, an hour of a lawyer's time, or telephone line capacity not used cannot be reclaimed and used or resold at a later time. Perishability is in contrast to goods that can be stored in inventory or resold another day, or even returned if the consumer is unhappy. Wouldn't it be nice if a bad haircut could be returned or resold to another consumer? Perishability makes this action an unlikely possibility for most services.

Resulting Marketing Implications A primary issue that marketers face in relation to service perishability is the inability to inventory. Demand forecasting and creative planning for capacity utilization are therefore important and challenging decision areas. The fact that services cannot typically be returned or resold also implies a need for strong recovery strategies when things do go wrong. For example, although a bad haircut cannot be returned, the hairdresser can and should have strategies for recovering the customer's goodwill if and when such a problem occurs.

Challenges and Questions for Service Marketers Because of the basic characteristics of services, marketers of services face some very real and distinctive challenges. Answers to questions such as the ones listed here still elude managers of services:

How can service quality be defined and improved when the product is intangible and nonstandardized? How can new services be designed and tested effectively when the service is essentially an intangible process? How can the firm be certain it is communicating a consistent and relevant image when so many elements of the marketing mix communicate to customers and some of these elements are the service providers themselves? How does the firm accommodate fluctuating demand when capacity is fixed and the service itself is perishable? How can the firm best motivate and select service employees who, because the service is delivered in real time, become a critical part of the product itself? How should prices be set when it is difficult to determine actual costs of production and price may be inextricably intertwined with perceptions of quality? How should the firm be organized so that good strategic and tactical decisions are made when a decision in any of the functional areas of marketing, operations, and human resources may have significant impact on the other two areas?

22. 23. 24. 25. Chapter 1 Introduction to Services 25

, can the balance between standardization and personalization be determined to maximize h the efficiency of the organization and the satisfaction of its customers?

can the organization protect new service concepts from competitors when service processes ot be readily patented? does the firm communicate quality and value to consumers when the offering is intangible annot be readily tried or displayed?

can the organization ensure the delivery of consistent quality service when both the

=:mization's employees and the customers themselves can affect the service outcome?

CES MARKETING MIX

eding questions are some of the many raised by managers and marketers of services that will _-";:;;,,,ed throughout the text through a variety of tools and strategies, Sometimes these tools are ons of traditional marketing tools, as with the services marketing mix presented here. Other eyare radically new, as in the case of service blueprinting presented in Chapter 9.

. ional Marketing Mix

the most basic concepts in marketing is the marketing mix, defined as the elements an -~,·.,tion controls that can be used to satisfy or communicate with customers. The traditional ==::i::'iing mix is composed of the four Ps: product, price, place (distribution), and promotion. 34 These ~-- •.• .. ;> appear as core decision variables in any marketing text or marketing plan. The notion of a mix

.hat all the variables are interrelated and depend on each other to some extent. Further, the ===--~'tmg mix philosophy implies an optimal mix of the four factors for a given market segment at a

mt in time. _ strategy decision areas for each of the four Ps are captured in the first four columns in Table 1.3.

management of product, place, promotion, and price will clearly also be essential to the ~;:es.:.£-i.rl marketing of services. However, the strategies for the four Ps require some modifications

plied to services. For example, traditionally promotion is thought of as involving decisions ales, advertising, sales promotions, and publicity. In services these factors are also important,

_ ause services are produced and consumed simultaneously, service delivery people (such as . ket takers, nurses, and phone personnel) are involved in real-time promotion of the service their jobs are typically defined in terms of the operational function they perform.

~p.anded Mix for Services

ervices are usually produced and consumed simultaneously, customers are often present in the tory, interact directly with the firm's personnel, and are actually part of the service production Also, because services are intangible, customers will often be looking for any tangible cue to

m understand the nature of the service experience. For example, in the hotel industry the design or of the hotel as well as the appearance and attitudes of its employees will influence customer -:::::=-:e;::i!Jons and experiences.

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26 Part 1 Foundations for Services Marketing

Price Flexibility Price level Terms Differentiation Discounts Allowances

Place Channel type Expcsure Intermediaries Outlet locations Transportation Storage Managing channels

Physical Evidence Facility design Equipment Signage Employee dress Other tangibles

Reports Business cards Statements Guarantees

Promotion Promotion blend Salespeople

Selection Training Incentives

Advertising Media types Types of ads

Sales promotion Publicity Internet/Web strategy

Process Flow of activities Standardized Customized Number of steps Simple Complex Customer involvement

TABLE 1.3

Expanded Marketing Mix for Services

Product Physical good features Quality level Accessor ies Packaging Warranties Product lines Branding

People Employees Recruiting Training Motivation Rewards Teamwork Customers

Education Training

Acknowledgment of the importance of these additional variables has led services marketers to adopt the concept of an expanded marketing mix for services shown in the three remaining columns in Table 1.3.35 In addition to the traditional four Ps, the services marketing mix includes people, physical evidence, and process.

People All human actors who playa part in service delivery and thus influence the buyer's perceptions: namely, the firm's personnel, the customer, and other customers in the service environment.

All the human actors participating in the delivery of a service provide cues to the customer regarding the nature of the service itself. How these people are dressed, their personal appearance, and their attitudes and behaviors all influence the customer's perceptions of the service. The service provider or contact person can be very important. In fact, for some services, such as consulting, counseling, teaching, and other professional relationship-based services, the provider is the service. In other cases the contact person may play what appears to be a relatively small part in service delivery-for instance, a telephone installer, an airline baggage handler, or an equipment delivery dispatcher. Yet research suggests that even these providers may be the focal point of service encounters that can prove critical for the organization.

In many service situations, customers themselves can also influence service delivery, thus affecting service quality and their own satisfaction. For example, a client of a consulting company can influence

27. 28. 29.


uality of service received by providing needed and timely information and by implementing mmendations provided by the consultant. Similarly, health care patients greatly affect the quality of e

they receive when they either comply or don't comply with health regimens prescribed by the er. tomers not only influence their own service outcomes, but they can influence other customers as .n a

theater, at a ball game, or in a classroom, customers can influence the quality of service ed by others--either enhancing or detracting from other customers' experiences.

ical evidence The environment in which the service is delivered and where the firm and customer ct, and any tangible components that facilitate performance or communication of the service.

physical evidence of service includes all the tangible representations of the service such as es, letterhead, business cards, report formats, signage, and equipment. In some cases it includes

. ical facility where the service is offered-the "servicescape"-for example, the retail bank facility. In other cases, such as telecommunication services, the physical facility may be :=;;f'!'\;ant. In this case other

tangibles such as billing statements and appearance of the repair truck may rtant indicators of quality. Especially when consumers have little on which to judge the actual _ of

service they will rely on these cues, just as they rely on the cues provided by the people and Ice process. Physical evidence cues provide excellent opportunities for the firm to send ent and strong messages regarding the organization's purpose, the intended market segments, and e of the service.

The actual procedures, mechanisms, and flow of activities by which the service is delivered-the delivery and operating systems.

tual delivery steps that the customer experiences, or the operational flow of the service, also omers evidence

on which to judge the service. Some services are very complex, requiring the =:::::::::::er to follow a complicated and extensive series of actions to complete the process. Highly =:::z.::cratized services

frequently follow this pattern, and the logic of the steps involved often escapes orner. Another distinguishing characteristic of the process that can provide evidence to the

_====::ter is whether the service follows a production-line/standardized approach or whether the process powered/customized one. None of these characteristics of the service is inherently better or another. Rather,

the point is that these process characteristics are another form of evidence • - e consumer to judge service. For example, two successful airline companies, Southwest and -=;:;:;;xn-e Airlines, follow extremely

different process models. Southwest is a no-frills (no food, no eats), low-priced airline that offers frequent, relatively short domestic flights. All the evidence

.~~"' .••.. " is consistent with its vision and market position, as illustrated in Exhibit 1.2. Singapore ~ _____ on the other hand, focuses on the business traveler and is concerned with meeting individual- eeds. Thus, its process is highly customized to the individual, and employees are empowered nonstandard

service when needed. Both airlines have been very successful. ee new marketing mix elements (people, physical evidence, and process) are included in the -

~·"""'.5:> mix as separate elements because they are within the control of the firm and because any or may influence the customer's initial decision to purchase a service as well as the customer's - tisfaction and repurchase decisions. The traditional elements as well as the new marketing ents will be explored in depth in future chapters.

THE SERVICE ENCOUNTER STAGE

Your experience of purchasing and consuming a service typically takes the form series of encounters. A service encounter is a period of time during which you, as a c tomer, interact directly with a service provider.l'i Although some of these encoun are very brief and consist of just a few steps-consider what is involved in a taxi or a phone call-others may extend over a longer time frame and involve multip actions of varying degrees of complexity. A leisurely restaurant meal might str over a couple of hours; a visit to a theme park might last all day. If you use a sen-that requires advance reservation, that first step might have been taken days or ev weeks before arriving at the service facility.

Service Encounters as "Moments of Truth" Richard Normann borrowed the metaphor "moment of truth" from bullfighting ; show the importance of contact points with customers:

[W]e could say that the perceived quality is realized at the moment of truth, when the service provider and the service customer confront one another in the arena. At that moment they are very much on their own .... It is the skill, the motivation, and the tools employed by the firm's representative and the expectations and behavior of the client which together will create the service delivery process.P

In bullfighting, what is at stake is the life of either the bull or the matador (or possibly both). The moment of truth is the instant at which the matador deftly slays th bull with his sword-hardly a comfortable analogy for a service organization inten; on building long-term relationships with its customers! Normann's point, of course is that it's the life of the relationship that is at stake. Contrary to bullfighting, the goa. of relationship marketing-which we explore in depth in Chapter 12-is to prevent one unfortunate (misiencounter from destroying what is already, or has the potentia: to become, a mutually valued, long-term relationship.

Jan Carlzon, the former chief executive of Scandinavian Airlines System (SAS used the "moment of truth" metaphor as a reference point for transforming SA from an operations-driven business into a customer-driven airline. Carlzon made the following comments about his airline:

Last year, each of our 10 million customers came into contact with approximately five SAS employees, and this contact lasted an average of 15 seconds each time. Thus, SAS is "created" 50 million times a year, 15 seconds at a time. These 50 million "moments of truth" are the moments that ultimately determine whether SAS will succeed or fail as a company. They are the moments when we must prove to our customers that SAS is their best alternative.l"

Each service business faces similar challenges in defining and managing the moments of truth that its customers will encounter in that particular industry.

Service Encounters Range from High-Cont.act to Low-Contact Each of the four categories of services described at the beginning of the chapter involves different levels of contact with the service operation. In Figure 2.6, we group services into three levels of customer contact, representing the extent of interaction with service personnel, physical service elements, or both. You'll notice that traditional retail banking, person-to-person telephone banking, and Internet banking are each located in very different parts of that chart. While recognizing that level of customer contact covers a spectrum, it's useful to examine the differences between organizations at the high and low ends, respectively.

48 Part I Understanding Service Markets, Products, and Customers

30. 31. 32.

re 2.6 of Customer -

,-,-.....c<-t with Service - izations

High-Contact Services Using a high-contact service entails interactions throughout service delivery between customers and the organization. The customer's exposure to the service provider takes on a physical and tangible nature. When customers visit the facility where service is delivered, they enter a service "factory" -something that rarely happens in a manufacturing environment. Viewed from this perspective, a budget hotel is a lodging factory, a hospital is a health treatment factory, an airliner is a flying transportation factory, and a restaurant is a food service factory. Because each of these industries focuses on "processing" people rather than inanimate objects, the marketing challenge is to make the experience an appealing one for customers in terms of both the physical environment and their interactions with service personnel During the course of service- delivery, customers are usually exposed to many physical clues about the organization-the exterior and interior of its buildings, equipment and furnishings, appearance and behavior of service personnel, and even other customers.

Low-Contact Services At the opposite end of the spectrum, low-contact services involve little, if any, physical contact between customers and service providers. Instead, contact takes place at arm's length through the medium of electronic or physical distribution channels-a fast-growing trend in today's convenience-oriented society. Many high-contact and medium-contact services are being transformed into low-contact services as customers undertake more self-service; conduct their insurance and banking transactions by mail, telephone, and the Internet; or research and purchase a host of information-based services by visiting web sites rather than bricks-and-mortar facilities. As highlighted in Figure 2.6, some service industries offer customers a choice of delivery systems featuring different levels of contact.

Emphasizes encounters

with service personnel High

• Nursing Home • Haircut

• Four-Star Hotel

• Good Restaurant • Management Consulting • Airline Travel

• Retail Banking .: • Motel /

• Fast Food

• Telephone Banking

• Car Repair • Dry Cleaning

• Insurance • Movie Theater

• Subway

• Cable TV

• Internet Banking •

Mail-Based Repairs Emphasizes

encounters with equipment • Internet-Based Services

Low

Chapter 2 Customer Behavior in Service Encounters 49

33. 34. 4. Why should service firms create separate brand names for their dif-

ferent products? 5. What are the main approaches to designing new services?

ANNING AND CREATING SERVICES

e 3.1 s Molecular

- Passenger = ervice ~ •.. ynn Shostack,

--------- Free from _ Iarketing,"

Aarketing,44 -- .~-~: 73-80, pub • eAmerican --':";;0:;:;-

Association. d with permis-

What do we mean by a service "product"? When customers purchase a manufactured good such as a camera, a commodity such as diesel fuel, or an agricultural product such as a bag of potatoes, they take title to physical objects. Service performances, however, are experienced rather than owned. Even when there are physical elements to which the customer does take title-such as a cooked meal (which is promptly consumed), a surgically implanted pacemaker, or a replacement part for a car-a significant portion of the price paid by customers is for the value added by the service elements, including expert labor and the use of specialized equipment. A service product comprises all the elements of the service performance, both tangible and intangible, that create value for customers.

Augmenting the Core Product Services are usually defined with reference to a particular industry-for instance, health care or transportation-based on the core set of benefits and solutions delivered to customers. However, delivery of this core product is typically accompanied by a varie of other service-related activities that we refer to collectively as su lementar services which facilitate use of the core product and add value and differentiation to the customer's overall experience. Core' products ten to become commodities as an industry matures and competition increases, so the search for competitive advantage often emphasizes performance on supplementary services.

The core-and-supplementary combination represents the service concept (sometimes referred to in a manufacturing context as the augmented product). Lynn Shostack developed a molecular model (Figure 3.1) that uses a chemIcal analogy to help

, , ' , ' , Service \ " Frequency " , ' ,

Marketing Positioning (weighted toward evidence)

Key .Tangible Elements ',~'Intangible Elements

Chapter 3 Developing Service Concepts: Core and Supplementary Elements 67

35. marketers visualize and manage what she termed a "total market entity,"! Her m can be applied to either goods or services. At the center is the core benefit, addressrr _ the basic customer need, which is linked to a series of other service characteristics. argues that, as in chemical formulations, a change in one element may completely ale the nature of the entity. Surrounding the molecules are a series of bands representi- _

rice, distribution, and market positioning (communication messages). The molecular model can help you to identify the tangible and intangible e.ments

involved in service delivery. For an airline, for example, the intangible e _ ments include transportation itself; service frequency; and preflight, in-flig. ' and postflight service. However, the aircraft and the food and drinks that azserved are all tangible. The greater the roportio. ·ntaJl.gible elements; t-.

more necessary it is to rovide tan ible clues about-the t< n ualit

the service. Pierre Eiglier and Eric Langeard proposed a model in which the core service

surrounded by an array of supplementary services that are specific to that partie, lar product.f their approach, like Shostack's, emphasizes the interdependence the various components. They distinguish between those elements needed to fa itate use of the core service (such as the reception desk at a hotel) and those t enhance the appeal of the core service (such as a fitness center and business s vices at a hotel).

Both models offer useful insights. Shostack wants us to determine which ser elements are tangible and which are intangible in order to help formulate produ policy and communication programs. Eiglier and Langeard ask us to think abo two issues: first, whether supplementary services are needed to facilitate use of core service or simply to add extra appeal; and second, whether customers sho be charged separately for each service element or whether all elements should bundled under a single price tag. Further insight is provided by Christian Gram _ who clarifies the different roles ascribed to supplementary services by describir them as either facilitating services (or goods), which facilitate use of the core pr uct, and supporting services (or goods), which increase the value of the servi and/or help to differentiate it.3 (For greater clarity, we will refer to the latter enhancing services.)

Designing a Service Concept How should you go about designing a service concept? Experienced service mar keters recognize the need to take a holistic view of the entire performance that th want customers to experience, highlighting the specific dimensions on which th firm plans to compete. The value proposition must address and integrate three corr ponents: core product, supplementary services, and delivery processes.

Core Product The core product is the central component that" supplies the principal, problerr solving benefits customers seek. Thus, transport solves the need to move a person a physical object from one location to another; management consulting should yie expert advice on what actions a client should take; and repair services restore a darr aged or malfunctioning machine to good working order.

Supplementary Services Supplementary services augment the core product, both facilitating its use an enhancing its value and appeal. The extent and level of supplementary services oft playa role in differentiating and positioning the core product against competing vices. Adding 'more supplementary elements or increasing the level of performan should be done in ways that enhance the perceived value of the core product ' prospective customers and enable the service provider to charge a higher price.

68 Part II Building the Service Model

36.

Delivery Processes The third component concerns the processes used to deliver both the core product and each of the supplementary services. The design of the service offering must address the following issues:

How the different service components are delivered to the customer The nature of the customer's role in those processes How long delivery lasts The prescribed level and style of service to be offered.

Each of the four categories of processes introduced in Chapter 2-people processing,

possessing processing, mental stimulus processing, and information processing-has different implications for operational procedures, the degree of customer contact with service personnel and facilities, and requirements for supplementary services. As you might anticipate, people processing services typically involve more supplementary elements than the other categories, because customers must come to the service factory and spend time there during service delivery.

The integration of the core product, supplementary services, and delivery processes is captured in Figure 3.2, which illustrates the components of the service offering for an overnight stay at a luxury hotel-which not only offers more services than a motel, but also a delivers higher level of performance on those tangible and intangible elements that are common to both types of accommodation.

The core product-overnight rental of a bedroom-is dimensioned by service level, scheduling (how long the room may be used before another payment becomes due), the nature of the process (in this instance, people processing), and the role of

Reservation

Check-in I Check-out

Room Service

Supplementary

Services Pay TV -,

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" " -, "

Me3J.

/ / /

7 /

/ /

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Delivery Processes for Supplementary Services


37. 38.

THE FLOWER OF SERVICE

Figure 3.6 The Flower of Service: Core Product Surrounded by a Cluster of Supplementary Services

Supplementary services play one of two roles. Facilitating supplementary services either required for service delivery or aid in the use of the core product. Enhan: supplementary services add extra value for customers. There are potentially doze different supplementary services, but almost all of them can be classified into a the following eight clusters. We've listed them according to whether they are cat rized as facilitating or enhancing.

Facilitating Services Enhancing Services

Information • Consultation Order taking • Hospitality Billing • Safekeeping Payment • Exceptions

In Figure 3.6, these eight clusters are displayed as petals surrounding the ce of a flower-which we call the flower of seroice.' We've shown them clockwise in sequence in which they are often likely to be encountered by customers (altho this sequence may vary-for instance, payment may have to be made before sen is delivered rather than afterwards). In a well-designed and well-managed sen organization, the petals and core are fresh and well formed. A badly designed poorly executed service is a like a flower with missing, wilted, or discolored pe Even if the core is perfect, the overall impression of the flower is unattractive. Thir about your own experiences as a customer (or when purchasing on behalf of an a nization). When you were dissatisfied with a particular purchase, was it the core th was at fault, or was it a problem with one or more of the petals?

Not every core product is surrounded by supplementary elements from all ei~ clusters. As we'll see, the nature of the product helps to determine which supp mentary services must be offered and which might usefully be added to enhan value and make the organization easy to do business with. In general, people pr cessing services tend to be accompanied by more supplementary services than do

Information

Billing

Safekeeping


Order Taking

Directions to service site Schedules/ service hours Prices Instructions on using core product/supplementary services Reminders Warnings Conditions of sale / service Notification of changes Documentation Confirmation of reservations Summaries of account activity Receipts and tickets

Table 3.1 Examples of Information Elements

other three categories; similarly, high-contact services usually have more than low-contact services.

A company's market positioning strategy helps to determine which supplementary services should be included (see Chapter 7). A strategy of adding benefits to increase customers' perceptions of quality will probably require more supplementary services (and also a higher level of performance on all such elements) than a strategy of competing on low prices. Firms that offer different grades of servicesuch as first class, business class, and economy class in an airline context-often differentiate them by adding extra supplementary services for each upgrade in service.

Information To obtain full value from any good or service, customers need relevant information (Table 3.1). New customers and prospects are especially information-hungry. Customer's needs may include directions to the site where the product is sold (or details of how to order it), service hours, prices, and instructions for use. Further information, sometimes required by law, might include conditions of sale and use, warnings, reminders, and notification of changes. Customers also appreciate advice on how to get the most value from a service and how to avoid problems (Figure 3.7). Finally, customers may want documentation of what has already taken place, such as confir-mation of reservations, receipts and tickets, or monthly summaries of account activity.

Companies should make sure the information they provide is both timely and accurate, because inaccurate information can annoy or inconvenience customers. Traditional ways of providing information include using front-line employees (who are not always as well informed as customers might like), printed notices, brochures, and instruction books. Other information media include videotapes or softwaredriven tutorials, touch-screen video displays, and menu-driven recorded telephone messages. The most significant recent innovation has been corporate use of web sites. Examples of useful applications range from train and airline schedules to hotel details, assistance in locating specific retail outlets such as restaurants and stores, and information on the services of professional firms. Many business logistics companies offer shippers the opportunity to track the movements of their packageseach of which is assigned a unique identification number.

Order Taking Once customers are ready to buy, a key supplementary element comes into play-accepting applications, orders, and reservations (Table 3.2). The process of order taking should be polite, fast, and accurate, so that customers do not waste time and endure unnecessary mental or physical effort. Technology can be used to make order taking easier and faster for both customers and suppliers. The key lies in minimizing the time and effort required of both parties, while also ensuring completeness and accuracy.


39. 40. Figure 3.7 Credit Card Companies Join Forces to Educate Consumers

Guan:i your trash from theft by shredding documents and receipts. Thieves can build an

altemate identity using the mail you throw 3war.

Don't leave credit cards in gtove cO/Tl)3rtments. (Glove COf1ll3l1ments

acCOUnt for thousivlds of credit card thefts.)

AJways check your monthly statements. (Cn","naIs will sometimes make a small purchase fin;t, to see If it goes undetected. before making a big one.)

No<;/Y tho post offoce immedi3tely if you chanp yOUf'" address. Man going to your Did address can end up In the wrong hands.

crt •.

Courtesy of Your Credit Card Companies.


Banks, insurance companies, and utilities require prospective customers to _ through an application process designed to gather relevant information and screen out those who do not meet basic enrollment criteria (such as a bad cre record or serious health problems). Universities also require prospective students apply for admission. Reservations (including appointments and check-in) repres a special type of order taking that entitles customers to a specified unit of servicefor example, an airline seat, a restaurant table, a hotel room, time with a qualifi professional, or admission to a facility such as a theater or sports arena with desiz-nated seating. Accuracy in scheduling is vital-reserving seats for the wrong day likely to be unpopular with customers.

Ticketless systems, based on telephone or web-site reservations, provide eno _ mous cost savings for airlines, because there are no travel agent commissions ~ pay-customers book directly-and administrative effort is drastically reduc A paper ticket at an airline may be handled 15 times, whereas an electronic tick

I 2

3 4

e 3.2 es of Order=

Elements Applications Membership in clubs or programs Subscription services (e.g., utilities) Prerequisite-based services (e.g., financial credit, college enrollment)

Order Entry On-site order fullillrnent Mail/ telephone order placement email/web site order placement

Reservations and Check-in Seats/tables/rooms Vehicles or equipment rental Professional appointments

requires just one step. Customers receive a confirmation number when they make the reservation and need only show identification at the airport to claim their seats and receive a boarding pass.

Billing Billing is common to almost all services (unless the service is provided free of charge). Inaccurate, illegible, or incomplete bills risk disappointing customers who may, up to that point, have been quite satisfied with their experience. Such failures add insult to injury if the customer is already dissatisfied. Billing should also be timely, because it stimulates faster payment. Procedures range from verbal statements to a machine-displayed price, and from handwritten invoices to elaborate monthly statements of account activity and fees (Table 3.3). Perhaps the simplest approach is self-billing, by which the customer tallies up the amount of an order and authorizes a card payment or writes a check. In such instances, billing and payment are combined into a single act, although the seller may still need to check for accuracy.

Customers usually expect bills to be clear and informative, and itemized in ways that make it clear how the total was computed. Unexplained, arcane symbols that have all the meaning of hieroglyphics on an Egyptian monument (and are decipher-able only by the high priests of accounting and data processing) do not create a favorable impression of the supplier. Nor does fuzzy printing or illegible handwriting. Laser printers, with their ability to switch fonts and typefaces, to box and to highlight, can produce statements that are not only more legible but also organize information in more useful ways. Marketing research can help here, by asking customers what information they want and how they would like it to be organized.

Busy customers hate to be kept waiting for a bill to be prepared in a hotel, or restaurant. Many hotels have now created express check-out options, taking cus-tomers' credit card details in advance and documenting charges later by mail. However, accuracy is essential. Customers use the express check-outs to save time; they certainly don't want to waste time later seeking corrections and refunds.

Table 3.3 Examples of Billing Elements

Periodic statements of account activity Invoices for individual transactions Verbal statements of amount due Machine display of amount due Self-billing (computed by customer)


41.


Table 3.4 Examples of Payment Elements

Self-Service Insert card, cash, or token in machine Electronic funds transfer Mail a check Enter credit card number online

Direct to Payee or Intermediary Cash handling and change giving Check handling Credit/charge/debit card handling Coupon redemption Tokens, vouchers, etc.

Automatic Deduction from Financial Deposits (e.g., bank charges) Control and Verificati Automated systems (e.g., machine-readable tickets that operate entry gates) Human systems (e.g., toll collectors, ticket inspectors)

Many hotels push bills under guestroom doors on the morning of departure sh ing charges to date; others offer customers the option of previewing their bills bef checkout on the TV monitor in their room.

Payment In most cases, a bill requires the customer to take action on payment (and such ac may be very slow in coming!). One exception is bank statements, which d charges that have already been deducted from the customer's account. Increasinz customers expect ease and convenience of payment, including credit, when make purchases in their own countries and while traveling abroad.

A variety of options exist for customers to make payment. (Table 3.4). Self-ser-payment systems, for instance, require insertion of coins, banknotes, tokens, or car in machines. Equipment breakdowns will destroy the whole purpose of such a tern, so good maintenance and rapid-response troubleshooting are essential. payment still takes place through hand-to-hand transfers of cash and checks, credit and debit cards are growing in importance as more and more establishm accept them. Other alternatives include vouchers, coupons, or prepaid tick Firms benefit from prompt payment, because that reduces the amount of accou:: receivable.

To ensure that people actually pay what is due, some service businesses ha instituted control systems, such as ticket checks before entering a movie theater or board a train. However, inspectors and security officers must be trained to com politeness with firmness in performing their jobs, so that honest customers do feel harassed.

Consultation Now we move to enhancing supplementary services, led by consultation. In con to information, which suggests a simple response to customers' questions (or prin; information that anticipates their needs), consultation involves a dialog to probe a -tomer requirements and then develop a tailored solution. Table 3.5 provides e ples of several supplementary services in the consultation category. At its simp consultation consists of immediate advice from a knowledgeable service perso response to the request, "What do you suggest?" (For example, you might ask person who cuts your hair for advice on hairstyles and hair products.) Effective sultation requires an understanding of each customer's current situation, bef suggesting a suitable course of action. Good customer records can be a great hel this respect, particularly if relevant data can be retrieved easily from a remote termin

Table 3.5 Examples of Consultation Elements

Customized advice l- Personal counseling Tutoring/training in product use Management or technical consulting

Counseling represents a more subtle approach to consultation because it involves helping customers better understand their situations so that they can come up with their "own" solutions and action programs. This approach can be a particularly valuable supplement to services such as health treatment, in which part of the challenge is to get customers to take a long-term view of their personal situation and to adopt more healthful behaviors, often involving significant lifestyle changes. For example, diet centers use counseling to help customers change behaviors so that weight loss can be sustained after the initial diet is completed.

More formalized efforts to provide management and technical consulting for corporate customers include the "solution selling" associated with expensive industrial equipment and services. The sales engineer researches the customer's situation and then offers objective advice about what particular package of equipment and systems will yield the best results for the customer. Some consulting services are offered free of charge, in the hope of making a sale. In other instances, however, the service is "unbundled" and customers are expected to pay for it. Advice can also be offered through tutorials, group training programs, and public demonstrations.

Hospitality Hospitality-related services should, ideally, reflect pleasure at meeting new customers and greeting old ones when they return. Well-managed businesses try, at least in small ways, to ensure that their employees treat customers as guests. Courtesy and consideration for customers' needs apply to both face-to-face encounters and telephone interactions (Table 3.6). Hospitality finds its fullest expression in face-to-face encounters. In some cases, it starts (and ends) with an offer of transport to and from the service site, as with courtesy shuttle buses. If customers must wait outdoors before the service can be delivered, then a thoughtful service provider will offer weather protection; if customers wait indoors, then a waiting area with seating and even entertainment (TV, newspapers or magazines) to pass the time may be provided. Recruiting employees who are naturally warm, welcoming, and considerate for customer-contact jobs helps to create a hospitable atmosphere.

The quality of the hospitality services offered by a firm plays an important role in determining your satisfaction (or dissatisfaction) with the core product. This is especially true for people processing services, because you cannot easily leave the service

Table 3.6 Examples of Hospitality Elements

Greeting Food and beverages Toilets and washrooms Waiting facilities and amenities Lounges, waiting areas, seating Weather protection Magazines, entertainment, newspapers Transport Security


42.

facility until delivery of the core service is completed. Strategies for improving tomer satisfaction often center on looking for ways to add or improve supplentary services. For instance, a hospital may seek to enhance its appeal by provi the level of room service, including meals, that might be expected in a good h Some airlines seek to differentiate themselves from their competitors with b meals and more attentive cabin crew; Singapore Airlines is well recognized on counts."

Although preflight and in-flight hospitality is important, an airline JOUIT' doesn't really end until passengers reach their final destination. Air travelers come to expect departure lounges, but British Airways (BA) came up with novel idea of an arrivals lounge for its terminals at London's Heathrow Gatwick airports, to serve passengers arriving early in the morning after 10 overnight flights from the Americas, Asia, Africa, and Australia. It offers holders first and business class tickets or a BA Executive Club gold card (awarded to airline's most frequent flyers) the opportunity to use a special lounge where can take a shower, change, use a spa, have breakfast, and make phone calls a: check their email before continuing to their final destination feeling a lot fres It's a nice competitive advantage, which BA actively promotes. Other airlines ha felt obliged to copy this innovation.

Safekeeping When customers are visiting a service site, they often want assistance with their sonal possessions. In fact, unless certain safekeeping services are provided (such safe and convenient parking for their cars), some customers may not come at On-site safekeeping services includes baggage transport, handling, and stora •. safekeeping of valuables; and even child care and pet care (Table 3.7) Responsi

. businesses pay close attention to safety and security issues for customers who visiting the firm's premises. Many banks mail brochures with its bank statem containing information about using its ATM machines safely, educating its custom about how to protect both their ATM cards and themselves from theft and perso injury. And the bank makes sure that its machines are in brightly lit, highly visi locations.

Table 3.7 Examples of Safekeeping Elements

Caring for Possessions Customers Bring with Them Child care Pet care Parking facilities for vehicles Valet parking Baggage handling Storage space Safe deposit boxes Security personnel

Caring for Goods Purchased (or Rented) by Customers Packaging Pickup Transportation and delivery Installation Inspection and diagnosis Cleaning Refueling Preventive maintenance Repairs and renovation Upgrade

I

- II Building the Service Model

Additional safekeeping services may involve physical products that customers buy or rent. They may include packaging, pickup and delivery, assembly, installation, cleaning, and inspection. These services may be offered free or for an additional fee.

Exceptions Exceptions involve supplementary services that fall outside the routine of normal ser-vice delivery (Table 3.8). Astute businesses anticipate exceptions and develop contin-gency plans and guidelines in advance. That way, employees will not appear helpless and surprised when customers ask for special assistance. Well-defined procedures make it easier for employees to respond promptly and effectively. There are several types of exceptions:

1. Special requests. A customer may request service that requires a departure from normal operating procedures. Advance requests often relate to personal needs, including care of children, dietary requirements, medical needs, religious obser-vance, and personal disabilities. Such requests are particularly common in the travel and hospitality industries.

2. Problem solving. Sometimes, normal service delivery (or product performance) fails to run smoothly as a result of an accident, delay, equipment failure, or a cus-tomer having difficulty using a product.

3. Handling of complaints/suggestions/compliments. This activity requires welldefined procedures. It should be easy for customers to express dissatisfaction, offer suggestions for improvement, or pass on compliments; and service providers should be able to make an appropriate response quickly.

4. Restitution. Many customers expect to be compensated for serious performance failures. Compensation may take the form of repairs under warranty, legal settle-ments, refunds, an offer of free service, or another form of payment-in-kind.

Managers need to keep an eye on the level of exception requests. Too many requests may indicate that standard procedures need revamping. For instance, if a restaurant frequently receives requests for special vegetarian meals because there are none on the menu, it may be time to revise the menu to include at least one such

Special Requests in Advance of Service Delivery Children's needs Dietary requirements Medical or disability needs Religious observances Deviations from standard operating procedures

Handling Special Communications Complaints Compliments Suggestions

Problem Solving Warranties and guarantees against product malfunction Resolving difficulties that arise from using the product Resolving difficulties caused by accidents, service failures, and problems with staff or other

customers Assisting customers who have suffered an accident or medical emergency

Restitution Refunds Compensation in kind for unsatisfactory goods and services Free repair of defective goods
