SERVICES MARKETING

PROF.R.MATHUR
 TEXT BOOKS
SERVICES MARKETING BY: Christopher
Lovelock
 INTRODUCTION
Services Are Deeds (perishable),
Processes And Performances that creates
value and benefits for the customer.
Facilities, equipment, labour can be held
in readiness to create the Services, the
elements represent the Productive
Capacity.
Services are all Economic Activities:
- Intangible output,
- Generally consumed at the time it is
produced
- Adds value to, say, Convenience,
Timeliness, Comfort, Health
Intangibles: Repair & Maintenance
 SERVICES’ DEFINITION
Services Provided by Hospitals, Hotels,
Banks, Insurance, to result in Customer
satisfaction.
Services by companies and also
manufacturers and Technology companies
e.g. IBM – IT services
Services Sector:
Transportation, Communication,
Electricity, Gas,
Trade, Finance, Insurance, Hospitality,
Health, Amusement, Recreation,
Educational, Legal, Management,
Household, Private, Government
Customer Services:
 Services Dominates Most of the
Economies

Agriculture, Forestry,
Mining, Construction 8%
Finance,
Insurance, Real
Manufacturing 14% Estate 20%

Government Wholesale and

(mostly Retail Trade
services) 16%
13%
Other Transport, Utilities,
Services 11% Communications
SERVICES
8%
Busines Health
s 6%

Service
Source: Bureau of Economic Analysis, November
5 20
s
Changing Structure of Employment
as Economic Development Evolves

Share of
Employment
Agriculture

Services

Industry

Time, per Capita Income Source: IMF, 1997

6
 % of GDP in INDIA

2005 61 20 19

2001 48 26 26

1995 40 28 32

1980 36 26 38

1970 31 24 45

0 20 40 60 80 100 120

Services Industry Agriculture

7
 TANGIBILITY
Services more Intangible than
Manufactured Products and Manufactured
Products more Tangible than Services.
Fast-food Industry is “Services” but has
tangible components as food and
Packaging.
Intangibles are produced by Service
sector as well as by Manufacturing sector
– Boeing provides Consulting and
Forecasting services Manufacturers often
have “associates” which provide allied
 VALUE ADDED BY TANGIBLE
VS.INTANGIBLE ELEMENTS IN GOODS AND
SERVICES
Tangible Elements
Coffee powder
Soft Drinks
CD player
New car
Tailored Clothing
Furniture Rental
Fast-Food Restaurant
Plumbing Repair
Health Club
Airline Flight
Retail Banking
Weather forecast

Intangible
Elements
 GOODS vs. SERVICES
MARKETING
The most basic difference is
Intangibility – Related Marketing
Implications – Services cannot be
Inventoried – Fluctuation in Demand.
Services cannot be: - Easily Patented
- Readily displayed or be easily
Communicated to customers – Quality?
- Assessed in Quality of Services
New Services concepts can be easily
copied by Competitors’
Decisions about Advertising content are
challenging, as is Pricing
Price Quality relationship complex
 SERVICES MARKETING
IMPORTANCE
Services sector is 80% of Employment
and 78% of GDP. Absolute and Fastest
rate of growth is in Services sector.
Export of Information, Knowledge,
Creativity, Technology are growing in
economies worldwide.
Lead in development of Service Industry
was taken by Banking & Health Care
services. These Service Industries
continue to evolve and become more
competitive.
The need for effective Services
Management and Marketing Strategies as
manufacturing and technology industries
also need to provide quality Services to
Differences Between Goods & Services

Intangible Heterogeneo
us

Simultaneous
Production Perishable
and
Consumption
12
Differences between Goods and Services

GOODS SERVICES RESULTING IMPLICATION

Tangible Intangible Services cannot be

inventoried
Cannot readily be
displayed or
communicated
Pricing is difficult

13
Differences between Goods and Services

GOODS SERVICES RESULTING IMPLICATION

Production Simultaneou Customers participate in
separate s and affect the transaction
from Customers affect each
consumptio other
n Employees affect service
outcome
Decentralization may be
essential
Mass production is
difficult

14
 Differences between Goods and Services

GOODS SERVICES RESULTING

IMPLICATION
Standardization Variability/ Service delivery &
Heterogeneous customer satisfaction
depend on employees
action
Service quality depends
upon many uncontrollable
factors
There is no sure
knowledge that the service
delivered matches what
15
was planned and promoted
 Differences between Goods and Services

GOODS SERVICES RESULTING

IMPLICATION
Non Perishable Perishable It is difficult to synchronize
supply and demand with
services
Services cannot be
returned or resold

16
 HETEROGENEITY IN
SERVICES
No two human Services Performances are
alike
Services delivery at different times and
by different employees differ
Different Customers’ demands of Services
in Content and quality differ
Services are heterogeneous across time,
organizations and people ensuring
consistent service quality is challenging
Quality depends upon factors that cannot
be fully controlled by Service suppliers –
consumer’s articulation of needs, level of
demand for the service
Organization may Sub-contract certain
 SERVICES PRODUCED &
CONSUMED
Products – Produced Sold
Consumed
Services – Sold Produced & Consumed
Restaurant Services Sold first, dining
experience Produced and Consumed.
Customer present while Service
Produced, can participate in the
production process
Mass production of services difficult.
Customer satisfaction dependent upon
happenings in “Real Time”
Centralization does not Produce
economies of Scale – operations need to
be relatively decentralized.
Customers may affect the outcome of
 SERVICES PERISHABLE
Services Are Perishable: Cannot be
Saved, Stored, Resold or returned.
Services cannot be inventoried
Demand forecasting, Planning and
Capacity utilization are challenging
decision areas
Strong recovery Strategies when things
go wrong to regain customer goodwill.
SERVICES OPERATIONS
Variability: Services can be evaluated for
quality before reaching the customers,
e.g. car repairs. Services consumed as
produced, final services must be
 SERVICES OPERATIONS
Difficult Evaluation: Goods can be
evaluated for Physical properties.
Services may emphasize Experience
properties, e.g. Taste, wear ability.
Credence properties – characteristics
difficult to evaluate even after
consumption, customers not
knowledgeable, e.g. Surgery, Technical
repairs, Professional Services.
Time factor: Services delivered in Real
Time. Customers may be willing to pay
faster service. Service Marketers should
appreciate customers time constraints
and priorities.
Distribution Channels: Advances in
 CATEGORISING SERVICE
PROCESSES
Marketing-relevant differences among
Services:
Traditional way of Grouping Services by
Industry
–Transportation, Hospitality, Banking.
Groupings
define Core products, customer needs and
satisfaction. However innovative managers
must
look outside their own industries for
effective
Strategies to adapt for their own
organization.
One categorization on nature of
 CATEGORIZING ….
…. Two categories get processedPeople
Customers are the Principal Inputs:
Objects
e.g., Passenger Transportation, Education.
In case of Objects as Inputs: automobile
repair, processing of financial data. In
some services, processes are tangible. In
others it could be Intangible, e.g.,
Education, Information.
Service Processes on Operational
perspective, can be categorized into four
broad Groups. These are based on:
tangible action to people’s physical bodies or
customers’ physical possessions (Products)
Intangible actions to people’s minds or their
 CATEGORIZING ….
…..These four categories are referred to as:
People Processing
Product Processing
Mental Stimulus processing
Information processing
Industries within each category share
important Process related characteristics.
Managers can create valued innovations
by studying other industries of the same
category.
PEOPLE PROCESSING
Services directed at themselves –
Transportation, Health, Lodging, Feeding.
Customers must physically enter the
 POSSESSION PROCESSING
Customers want Services for treatment of
Physical possession, e.g., House, Pets,
Computer: Customers not personally
involved. Customers drop the possession
at the Service Provider’s centre, explain
the problem, instruct for services and pick
up the serviced product. If the possession
cannot be moved, the service is provided
at the site.
MENTAL STIMULUS PROCESSING.
Services that interact with people’s minds
– News, education, Information,
Consultancy, Entertainment, Discourses.
Services aimed at Changing people’s
attitude and influence behaviour. Strong
ethical standards and careful monitoring,
 MENTAL STIMULUS….
Customers have to be mentally in
communication with information being
processed. Services like education and
entertainment are often created in one
place and transmitted to distant
customers. (Live concert directly to group
of customers?). Core content of all
services in this category is Information
based. Such Services can be recorded
and made available subsequently or
converted into a disc like a manufactured
product.
In People Processing, a customer can sleep
through a journey and still arrive at the
destination in time. In contrast a student
sleeping through a lecture will not be any
 INFORMATION PROCESSING
Information is the most Intangible form of
Service output. Information transformed
into Reports, Books, Letters, Discs are
tangible.
Financial and professional services as
Accounting, Law, Market Research,
Management Services, Medical diagnosis
are highly dependent on effective
collection and processing of Information.
Extent of customer involvement in Mental
Stimulus processing and information
Services are to learn about each other’s
Needs, Capabilities and Personalities.
Habits and tradition define the existing
service delivery system and service use
patterns. Increasing use of telephones, e-
 CLASSIFICATION OF SERVICES
PEOPLE PROCESSING PRODUCT PROCESSING

TANGIBLE PASSENGER TRANSPORTATION FREIGHT TRANSPORTATION

ACTIONS HEALTH CARE REPAIR & MAINTENANCE
LODGING RETAIL TRADE
SALONS WAREHOUSING/STORAGE
PHYSIO THRAPY LAUNDRY/DRY CLEANING
FITNESS CENTRES REFUELING
RESTAURANTS OFFICE CLEANING

INTANGIBLE MENTAL STIMULUS INFORMATION

ACTIONS PROCESSING PROCESSING
ADVERTISING/PR BANKING
ENTERTAINMENT DATA PROCESSING
MANAGEMENT CONSULTING DATA
TRANSMISSION
EDUCATION INSURANCE
INFORMATION SERVICES LEGAL SERVICES
MUSIC CONCERTS RESEARCH
RELIGIOUS SERVICES SOFTWARE CONSULTING
 The Services Marketing Triangle

Company
(Management)

Internal External
Marketing Marketing
“enabling the “setting the
promise” promise”

Employees Interactive Marketing Customers

“delivering the promise”
Source: Adapted from Mary Jo Bitner, Christian Gronroos, and Philip Kotler
28
 The Services Triangle &Technology

Company

Technology

Providers Customers

Source: Adapted from A. Parasuraman 29

 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 30
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,
31
food, toilets, etc.
 Implications of Service Processes:
(3) Evaluating Alternative Delivery
Channels
For possession-processing, mental-stimulus
processing, or information processing services,
alternatives include:
1. Customers come to the service factory
2. Customers come to a retail office
3. Service employees visit customer’s home or
workplace
4. Business is conducted at arm’s length
through
- physical channels (e.g., mail, courier
service)
- electronic channels (e.g., phone, fax,
32
email, Web site)
Capacity Implications of Service Processes:
(4) Balancing Demand and Capacity
When capacity to serve is limited
and
demand varies widely, problems
arise
Because service output can’t be
stored:

1. If demand is high and exceeds

supply, business may be lost
2. If demand is low, productive
capacity is wasted

Potential solutions:
33
Manage demand
 Implications of Service Processes:
(5) Applying Information Technology
All services can benefit from
IT,
but mental-stimulus
processing
and information-processing
services have the most to gain:
Remote delivery of
information-based services
“anywhere, anytime”
New service features through
websites, email, and internet
(e.g., information,
reservations) 34
Implications of Service Processes:
(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
35
 SERVICES MARKETING MIX
Strategic elements of marketing
manufactured goods are: Product, Price,
Place & Promotion. For Services
Performance, 3 elements added: Physical
Environment, Process & People. 7 P’s are
interrelated decision variables.
PRODUCT: Select features of Core Product
– a Product or Service plus other Service
elements in reference to customer
requirements and other competing
products. Service performance with
potential to create value for customers.
PLACE: Place, Time of Delivery and Methods,
Channels (Physical, Electronic) used.
Messaging, Internet Services delivers
Information in cyberspace. Physical delivery
 7 Ps ….
PROMOTION: Effective Communication
Strategy: Provide Information, Features
and Advantages, Persuading for action.
Services promotion more in nature of
Education – Benefits of service, Where
and When to obtain it, How to avail the
Services. Communication delivered
through Direct Sales or through Media.
Promotions influence Brand choice.
Incentives attract customers to buy.
PRICE: Price to pay for benefits of Services.
Service marketers must Minimize other
Expenses a customer might incur in
Purchasing and Using Services, e.g., travel to
service location, time, physical and mental
efforts, exposure to negative sensory
 7 Ps ….
PHYSICAL ENVIRONMENT: Provide Tangible
evidence of a firm’s Service quality. Customers
impressions get impacted by Building
appearance, landscaping, Interior furnishing,
Equipment, Printed material, Signs and other
Visuals.
PROCESS: Delivery of Product Elements require
Design and Implementation of Effective
Processes- A method and sequence of actions in
Service performance. Bad processes lead to
Slow, Bureaucratic, Ineffective Service delivery,
dissatisfied customers. Poor Processes make
front-line staff jobs difficult, results in low
 7 Ps ….
PEOPLE: Services Quality is often assessed
based on customer’s interactions with front
-line staff. Successful Service firms devote a
lot of effort to Recruit, Train and Motivate
these employees.
In the 7 Ps of Services Strategy, Marketing
must operate with other functions in
Services business. Three management
functions have Central and Interrelated
Roles: Marketing, Operations and Human
Resources.
Marketing expert T.Levitt has remarked,
“There are Industries whose Service
Components are greater or lesser than other
Industries. Every Industry is in Service”.
R.Rust suggests “Most goods businesses
 CONSUMER BEHAVIOR IN SERVICES
PURCHASE PROCESS FOR SERVICES
PREPURCHASE STAGE
NEED INFORMATION SEARCH EVALUATION OF
SERVICE
SUPPLIERS
SERVICE ENCOUNTER STAGE
INITIATE SERVICE FROM SUPPLIER SERVICE
DELIVERY
POSTPURCHASE STAGE
EVALUATION OF SERVICE PERFORMANCE FUTURE
REFERENCE
PRE-PURCHASE STAGE
Decision to buy and use a service. Needs and
expectations of customer will influence
alternatives considered. Purchase routine
and low risk, customers select Service
provider quickly. First time Service
requirement, of a high risk, customers spend
more time to select service provider.
 CONSUMER BEHAVIOR IN SERVICES
PERCEIVED RISKS
Functional – Will this service deliver desired
result.
Financial – Will I lose money
Temporal – Time Loss, Delays
Physical –Injury or Damage to Possession
Psychological – Fears ( flying), Emotions (feel
upset)
Social – Others’ thinking, Reaction
Sensory – Unwanted sensory feelings. (comfort,
smell)
SERVICE ENCOUNTER STAGE
Begins with starting the service process:
placing an order, submitting an
application. In high contact services,
customers involved in service process. In
low contact, impersonal interactions with
POST PURCHASE SERVICES EVALUATION
Search Attributes: Physical goods can be
evaluated before purchase. Style, colour,
texture, taste, machine output are
tangibles that can be tested before
purchase. Apparel, automobiles,
electronics, food are goods high in search
attributes.
Experience Attributes: To evaluate some
services, customers must experience
them: Can be evaluated only after
purchase -entertainment, restaurants fall
in the Experience Category. Information on
Websites, reviews, by friends etc. may not
help in evaluation.
Credence Attributes: Product
characteristics extremely difficult for
 SERVICE POSITIONING STRATEGY
How do businesses compete?
“On Service” …. “Value for money”, “Service
quality”, “People”,
“Convenience”
Speed, Quality, Extras to core service
Convenient Location, Time or Ease of use
Which product feature interests a
customer? Will help develop Competitive
Strategy. Else customers will not perceive
any real difference between competitive
alternatives and choose basis price.
Positioning Strategy is to create and
maintain distinctive differences that will
be noticed and valued by Potential Target
Customers for a long
 SERVICE POSITIONING ….
Service firms to provide a narrow product
mix for a particular market segment – a
group of buyers with common
characteristics, needs, purchasing behavior
or consumption pattern.
Concentrate resources on strategically
important elements of service operations. A
firm’s focus can be described in two
dimensions - Market focus and Service
focus. Market focus is extent to which a firm
serves few or many markets. Service focus is
extent to which a firm offers few or many
services.
These two dimensions describe four Basic
focus Strategies. A fully focused firm
provides limited range of services (maybe
one core product) to a narrow and specific
 SERVICE POSITIONING …..
  BREADTH OF SERVICE
OFFERING
    NARROW WIDE
UNFOCUSED
SERVICE (EVERYTHING
MANY
FOCUSED FOR
NUMBER EVERYONE)
OF FULLY
MARKETS FOCUSED(
SERVED MARKET
FEW SERVICE &
FOCUSED
MARKET
FOCUSED)

Service focused firms offer narrow range of

services to a fairly broad market. Many
Service providers fall into unfocused
category because they try to serve broad
markets and provide a wide range of
 SERVICE POSITIONING ….
SELECTION OF FOCUS
Fully focused strategy has Risks and
Opportunities.
Developing recognized expertise in a well
defined
niche may protect against potential
competition and
charge premium price.
Risk-Market small for volume business and
financial
viability is ? The demand may be displaced by
generic
competition or customers may be affected by
economic downturn.
Firms with narrow product line may serve
multiple
segments (service focused) to create portfolio
 SELECTION OF FOCUS ……
Offering broad product lines to narrow target
segment has potential of selling multiple
services to customers.
Firms must have operational capability. To
cross-sell additional services to btob, client
companies may have different purchase
groups.
MARKET SEGMENTATION
Firms offer services to segmented markets to
identify segments it can serve best. Need-
based segments have customers valuing
specific attributes.
Mass customization to serve specific market
segment by offering Standardized Core
product with tailor-made supplementary
service elements.
Creation of customer Database and Analytical
 CUSTOMER EXPECTATONS OF
SERVICES
HOW CUSTOMERS EXPECTATIONS FORMED
 Good service expectations varies from
business: expectations from a vet to treat
a pet or accountant for tax returns. Vary in
differentiated positioned service providers
– low cost airlines vs. full service. Purchase
dept. evaluate against internal standards.
Expectations change over time –
Customers seek participative role in health
care decisions.
CUSTOMER EXPECTATIONS COMPONENT
 Desired Service: Can and Should receive
 Zone of tolerance: Constant delivery
difficult. Extent of variation customers
willing to accept.
 Adequate Service: Minimum Service levels
 Predicted Service: Anticipate Levels of
Service between Desired and Adequate
 CUSTOMER EXPECTATONS ……
Situational factors: Service Expectations
affected
By temporary reasons for purchase –
Consumer’s
mood, the Weather, Time Constraints and
Urgency
Reasons for purchase: Use of a Hotel
Services –
Breaking journey, Spending week-end,
Using for
Corporate Training, Shift of residence,
Holding
Social programmes.
Consumer’s mood: Good mood means
higher
ZOT and level of adequate service lower.
Reverse
 MEASURING SERVICE QUALITY
Consumers evaluate 5 dimensions of
service quality:
Tangibles – physical facilities, (Soap,
Heating, Room safe malfunctioned and light
flashed and beeped at 3 AM)
Reliability – perform service promised
dependably and accurately (Service not in
line with Broch.),
Responsiveness – firm’s staff help
customers with prompt service (Hotel staff
ignored the presence, Room service
reminded to remove tray)
Assurance – Inspire trust and confidence
through knowledge competence and
courtesy and
 THE GAP MODEL
A MODEL OF SERVICE QUALIY
Service Quality means consistently
meeting or
exceeding Customer Expectations. The
Manager’s task is to balance Customer
Expectations with Perceptions of service
delivery and to close any gaps between
the
two. P- E will give Service Quality.
A Model Of Service Quality is given by
Gap
Model. The figure Identifies 5 Potential
Gaps.
The Horizontal dash line divides Service
Quality
Gaps that are SP related and Consumer
THE GAP MODEL
 THE GAP MODEL
The Knowledge Gap 1 :Difference
between
Customers’ Needs & Expectation and SP’s
Perceived Customer Expectation. A
contractor
wants to use the best grade electrical
wire.
Sub-contractor perceives contractor
wants to
keep costs down and uses low grade
wire. The
converse happening is also true. Extra
services
provided raise Expectations and also add
to the
cost.
Cause Of Gap Strategies to
 THE GAP MODEL
The Standards Gap 2: Difference between
firm’s
perceived Customer Expectation and its
translation to Service Quality
Specifications.
Reasons: 1.Resource Constraint ( Seasonal
Service demand), 2. Market Conditions, 3.
Indifference to Customers’ Needs
Cause Of Gap Strategies to
Reduce Gap
Resource Constraint Firm’s
Commitment
Market Conditions Develop Service
Quality Goals
Indifference Standardize tasks &
Address feasibility of
Customer
Expectation
 THE GAP MODEL
The Delivery Gap 3: Difference between
firm’s
Service Quality Specifications and
Delivery of
Specifications. This could be due: Service
Provider’s employees’ Performance
Cause Of Gap Strategies to
Reduce Gap
Employee unaware Enhance
Teamwork
of Specifications.
Skills to Perform Employee,
technology
Specifications job-fit
Unwilling to Perform Supervisory Control,
 THE GAP MODEL
Communication Gap 4 :The difference
between
the External communication about
service
(Advertising, Sales Promise) and Service
delivered.
To increase patronage, firms are tempted
to
make promises which may be difficult or
impossible to deliver.
Cause Of Gap Strategies to
Reduce Gap
Poor Communication Improve lateral
Communication
Over Promising Avoid propensity to
over promise
 THE GAP MODEL
The Perception Gap 5:
The difference between what Consumers
Receive and what they Expected. This is
the
sum of Gaps 1 to 4, both in direction and
magnitude.
Suppose a Consumer Survey gives scores
to
Gaps 1 to 4 on a scale of -3 to +3 as:
+1, -3, +1 and 0,
The score for Gap 5 would be +1 +(-
3)+1+0 =-1
This indicates the Service Performance
fell
Short of Customer Expectations. The SP
 BUILDING CUSTOMER
RELATIONSHIP
Relationship Marketing represents a
Paradigm shift in Marketing – away from
Acquisitions toward a retention/
relationship focus.
A Strategic orientation – focus on keeping
and improving current customers rather
than acquiring new customers.
The customers prefer an ongoing
relationship, not switch continually in
search for value. Targeting, acquiring and
retaining the right customers is at the
CORE of successful firms. The fact is it is
usually much cheaper to keep a current
customer than to attract new one. Firms
frequently focus on attracting customers
but do not pay attention to keeping them.
 BUILDING CUSTOMER ….
Customer Loyalty is described as:
Willingness to using Products/ Services on
a long term, Repeated purchase
preferably on exclusive basis,
Recommend firm’s Products/ Services to
friends and associates.
Customers changing Brands give
adequate signals by reducing purchase
and shifting to another Service provider.
Researches have found that the longer
customers stayed with a firm, the more
profitable they became. Four factors
which create incremental profits are: 1.
Profit derived from increased purchases.
2. Profits from Reduced Operating Costs.
3. Profits from referrals to other
 BUILDING CUSTOMER ….
Impact on profits also depend upon Product
Life
cycle of Services – more impact of referrals
in
early stages of PLC.
Customer Lifetime Value – Customers
potential to
generate ongoing Stream of profits and are
firm’s
important financial asset. Marketing
Services
programs should be seen as investments
rather
than just operating expenses.
The discounted value of each customer over
expected lifetime with the firm gives CLV.
 BUILDING CUSTOMER ….
Analyzing & Managing Customer Base:
Firms
should adopt a Strategic approach to
retaining,
upgrading and even terminating service to
unprofitable customers. Firms need not
make
efforts to treat all customers with the same
level
of intensity. Most firms have several layers
of
customers basis profitability and these
layers
have different needs and service
expectations.
Customer layers form 4 layers of a pyramid
 BUILDING CUSTOMER ….
Platinum: A small %age, Heavy user,
Contribute large profit, Less Price sensitive
and
expect large level of service
Gold: Larger customer base heavy users
with
individuals contribute less to profits. Slightly
sensitive to price, less committed to firm.
Iron: Provide bulk of customer base. Firm
builds
and maintains certain capacity level of
Infrastructure needed for servicing Gold and
Platinum customers. Gives the firm the
economies
of scale. Iron customers are marginally
 SERVICE RECOVERY
Service Recovery refers to the action taken by
an
organization response to a service failure.
Failure occurs for many reasons:
The service may be unavailable when
promised
Delivered late slow
The outcome may be incorrect or poorly
executed
Employees may be rude or uncaring
These failures bring about negative feelings and
responses for the customers. Result in
customers
Leaving and sharing negative experiences. May
even challenge the organization through
customers
rights organizations or legal channels
 SERVICE RECOVERY
Repeated Service Failures without an effective
Recovery Strategy in place can aggravate even
the
best employees.
The costs in Employee Morale and even lost
employee
can be huge
THE RECOVERY PARADOX
It is suggested that dissatisfied customers who
experience a high level of excellent service
recovery,
may ultimately be even more satisfied and more
likely
to repurchase than are those who were satisfied
I the
first place.
 SERVICE RECOVERY
Recovery Paradox is more complex than it may
seem
on the surface. It is expensive to fix mistakes.
Empirical Research suggests that only under
the very
highest levels of customers’ Service Recovery
ratings
will we observe increased satisfaction and
loyalty.
It is safe to say that “ Doing it right the first
time “ is
still the best and safest strategy.
However, when a failure does occur, then
every effort
at a superior Recovery should be made to
mitigate its
negative effects. In cases where the failure can
 CUSTOMER COMPLAINTS & ACTIONS
If customers initiate actions following service
failure,
the action can be of various types as shown in
the
Fig. From company’s point of view any
customer who
complains on the spot is the best case
scenario.
Company has the chance to respond
immediately.
If they don’t complain immediately, customers
may
choose to complain later to the provider by
phone or
in writing, or even write or call the corporate
offices
of the company. In all the above cases, the
 CUSTOMER COMPLAINTS & ACTIONS
(1) Passive:
This group of customers is least likely to
take any
Action. Less likely to spread negative Word
of
Mouth. They often doubt the effectiveness
of
complaining, thinking the consequences will
not
merit the time and effort spent.
(2) Vocal:
These customers actively complain to the
service
Provider, Less likely to spread negative word of
mouth, switch patronage, or go to a third party
with
 CUSTOMER COMPLAINTS & ACTIONS
Irate:
These customers more likely to engage in
negative
word of mouth to friends and relatives and
switch
providers. They are angry with the service
provider
although they do believe that complaining to
the
service provider can have social benefits. They
are
less likely to give the service provider a second
chance.
Activists:
These consumers have high propensity to
complain.
They will complain to the provider, they will tell
 CUSTOMER COMPLAINTS & ACTIONS
WHEN CUSTOMERS COMPLAIN, WHAT DO THEY
EXPECT?
Customers want justice and fairness in the
handling
of their complaints.
Customers are looking for: OUTCAME
FAIRNESS
PROCEDURAL
FAIRNESS
INTERACTIONAL FAIRNESS
Outcome Fairness: They expect equity in the
exchange- i.e. they want to feel that the
company
has “Paid” for its mistakes in a manner at least
equal
to what the customer has suffered. The
company’s
 CUSTOMER COMPLAINTS & ACTIONS
On the other hand, customers can be
comfortable if
they are overly compensated. E.g. Domino’s
Pizza
offered not to charge if the delivery was after
30
minutes of ordering. Many customers were not
comfortable asking for this level of
compensation,
especially if the driver was only few minutes
late.
Procedural Fairness: In addition to fair
compensation,
customers expect fairness in policies, rule and
timeliness of complaint redress. They want
easy
access to the complaint process. Fair
procedures are
 CUSTOMER COMPLAINTS & ACTIONS
Interactive Fairness: Customers expect to
be
treated politely, with care and honesty. This
form
of fairness can dominate the others if
customers
feel the company and its employees have
uncaring attitude and have done little to try
to
resolve the problem. Often rude and
uncaring
behavior of employees is due to lack of
training
and empowerment- a frustrated, frontline
employee who has no authority to
compensate
the customer may easily respond in an aloof
 Service Marketing System:
(1) High Contact Service-e.g., Hotel
Service Marketing System
Service Delivery SystemOther Contact Points
Advertising
Service Operations SystemOther
Customers Sales Calls
Interior & Exterior Market Research
Facilities Surveys
Billing / Statements
Technical Equipment The
Core Customer Miscellaneous Mail,
Phone Calls, Faxes, etc.
Service People Random Exposure to
Facilities / Vehicles
Chance Encounters
Backstage Front Stage Other with Service Personnel
(invisible) (visible) Customers
Word of Mouth
 Service Marketing System:
(2) Low Contact Service-e.g., Credit Card
Service Marketing System
Service Delivery System Other Contact Points
Service Operations
System
Advertising
Mail
Market Research
The Surveys
Technical Self Service
Core Equipment Customer Random Exposures
Facilities, Personnel
Phone,
WebFax,
site Word of Mouth
etc. Front Stage
Backstage (visible)
(invisible)
 SERVICE BLUEPRINTING
A service blueprint is a picture or map
that
accurately portrays the service system
so
that the different people involved in
providing it can understand and deal
with it
objectively regardless of their roles or
their
SERVICE MAPPING/BLUEPRINTING
A tool for simultaneously depicting
the service process, the points of
customer contact, and the
evidence of service from the
customer’s point of view.
Process

Service Points of Contact

Mappin
g Evidence
SERVICE BLUEPRINT COMPONENTS
CUSTOMER ACTIONS
line of interaction

“ONSTAGE” CONTACT EMPLOYEE ACTIONS

line of visibility

“BACKSTAGE” CONTACT EMPLOYEE ACTIONS

line of internal interaction

SUPPORT PROCESSES
SERVICE BLUEPRINT COMPONENTS
 SERVICE BLUEPRINTING: KEY
COMPONENTS
1. Define standards for front stage activities
2. Specify physical evidence
3. Identify principal customer actions
4. ------------line of interaction (customers and front
stage personnel)--------
5. Front stage actions by customer-contact personnel
6. ------------line of visibility (between front stage and
backstage)--------------
7. Backstage actions by customer contact personnel
8. Support processes involving other service personnel
9. Support processes involving IT
Where appropriate, show fail points
and risk of excessive waits
Simplified Example: Blueprinting a Hotel
Visit
(extract only)
Physical Hotel exterior, lobby, Elevator, corridor,
Evidence employees, key room, bellhop
Stage

Make Arrive, Check-in Go to

Customer reservation valet park at reception room
Line of Actions
Interaction
Employee Doorman Receptionist
Front

Actions greets, valet verifies, gives

Face-to-face takes car key to room

Phone
Contact Rep.
records,
confirms
Line of
Visibility
Valet Make up
Backstage

Parks Car Room

Enter Register
data guest data
 EXPRESS MAIL DELIVERY SERVICE
Truck Truck
Packaging Packaging
Forms Forms
EVIDENCE
CUSTOMER PHYSICAL

Hand-held Computer Hand-held Computer

Uniform Uniform
Customer
Custo Receive
Gives
mer Package
Package
Calls
Driver
(On Stage)

DELIV
CONTACT PERSON

Picks
ER
Up Pkg.
PACK
AGE
(Back Stage)

Customer
Service
Order
SUPPORT PROCESS

Airport Fly to Load

Dispatch Unload
Receives Sort Fly to On
Driver &
& Loads Center Destination Truck
Load on Sort
Airplane

Sort
Packages
 OVERNIGHT HOTEL STAY
Bill
EVIDENCE
PHYSICAL

Desk
Hotel Cart for Desk Elevators Cart for Room Menu Delivery Food Lobby
Exterior Bags Registration Hallways Bags Amenities Tray Hotel
Parking Papers Room Bath Food Exterior
Lobby Appearance Parking
Key
SUPPORT PROCESS(Back Stage) (On Stage) CUSTOMER

Arrive Give Bags Call Check out

Go to Receive Sleep Receive
at to Check in Room Eat and
Room Bags Shower Food
Hotel Bellperson Service Leave
CONTACT PERSON

Greet and
Process Deliver Deliver Process
Take
Registration Bags Food Check Out
Bags

Take
Take Bags Food
to Room Order

Registration Prepare Registration

System Food System
 BUILDING A SERVICE BLUEPRINT

Step 1 Step 2 Step 3 Step 4 Step 5 Step 6

Identify the Identify the Map the Map contact Link customer Add
process to customer or process from employee and contact evidence of
be blue- customer the actions, person service at
printed. segment. customer’s onstage and activities to each
point of view. back-stage. needed customer
support action step.
functions.
 SERVICE BLUEPRINTING STEPS

• Identify Process
• Isolate fail points
3. Establish a time frame
4. Analyze profitability 
APPLICATION OF SERVICE BLUEPRINTS
New Service Development
• concept development
• market testing
Supporting a “Zero Defects” Culture
• managing reliability
• identifying empowerment issues
Service Recovery Strategies
• identifying service problems
• conducting root cause analysis
• modifying processes
BLUEPRINTS CAN BE USED BY:
Service Human
Marketers Resources
– creating
realistic – empowering the
customer human element
expectations • job descriptions
• service system • selection criteria
design • appraisal
• promotion systems

System
Operations
Management Technology
– rendering the – providing
service as necessary tools:
promised • system
• managing fail specifications
points • personal
Degree of Interaction & Customization of Services

CUSTOMIZATION

Standardized Customized
Service Factory Service Shops
Airlines Hospitals
Capital Intensive Trucking Auto repair
Hotels Other repair
DEGREE Resorts & Recreations services
OF LABOR
INTENSITY Mass service Professional
Retailing/Warehousing Services
Schools Doctors
Labor Intensive Lawyers
Retail aspects of
Accountants
Commercial Banking
Architects

Source: Robert Johnston

Factors Necessary for Appropriate
Service Standards
Standardization can take 3 forms:
• Substitution of technology for personal
contact & human effort
3 Improvement in work methods
4 Combination of these two methods
Standardizing whether accomplished by
technology or by improvements in work
processes, Reduces GAP 2
Both technology & improved work
processes structure important elements of
service provision and also facilitate goal
setting
 CUSTOMER – DEFINED SERVICE
STANDARDS
Once marketers understand what
customers expect
Critical Challenge is using this knowledge to
set
service quality standards and goals for the
Organization.
Difficulty in Setting Standards to match or
exceed
customer Expectations is because it
requires that
the Marketing & Operations within a
company
work together.
( Also known as Functional Integration)
 Factors Necessary for Appropriate Service
Standards
The Translation of Customer Expectations-
Service Quality Standards:
– Degree to which tasks and behaviors
performed can be Standardized or made
Routine
Some managers feel that services cannot be
standardized
As standardizing the tasks is perceived as being
impersonal, inadequate and not in customers
best interest.
It is also inconsistent with employee
empowerment- they feel controlled
Services are too intangible to be standardized
(This leads to vague & loose standard setting
with little or no measurement or feedback.)
In reality many service tasks are routine –
specific rules and standards can be fairly
established and effectively executed.
 Factors Necessary for Appropriate
Service Standards
Employees welcome knowledge to perform
actions most efficiently :
It frees them to use their ingenuity in the
more personal & individual aspects of their
jobs.
Even in Highly Customized Services – Many
aspects of Service can be made Routine
Dentist & Physician–Examining Patients
weighing, taking routine measurements,
billing.
More time of the Dentist & Physician can be
spent on the expert services of diagnosis or
patient care
Customer – Not Company – Defined
Standards
Company Defined – Established to reach
internal company goals for productivity,
efficiency, cost, or technical quality.
To close GAP 2 standards must be based on
Customer Requirements and Expectations
rather than just on internal company goals
Instead company should set Customer-
Defined Standards- Operational standards
based on pivotal customer requirements
that are visible to & measured by
customers
 Customer-Defined Service Standards

• Hard Customer-Defined Standards

• Soft Customer-Defined Standards
• One-Time Fixes
• Building Blocks: The Service Encounter
Sequence
• Expressing Customer Requirements as
Specific Behaviors and Action
• Measurements of Behavior and Actions
 Process For Developing Customer-Defined
Standards
1. Identify Existing or Desired Service Encounter

2. Translate Customer expectations into Behaviors / Actions

3. Select Behaviors/Actions for Standards

Measured 4. Set Hard or Soft Standards

by audits Measured
by
or Hard 5. Develop Feedback Mechanisms Soft transaction
operating based
surveys
data 6. Establish measures against standards

7. Track Measures Against Standards

8. Provide Feedback about Performance to Employees

9. Periodically Update Target Levels and Measures

 APPROACHES TO SERVICE RESEARCH

Service-Quality Information System:

Too much Research information obscures
most
meaningful insights, may intimidate
intended
users.
Also, incomplete information injects
needless
guessing into decision making.
Nature of Services, firm’s Service Strategy
and
needs of information users determine
 Market Research
Qualitative Monetar Time Frequency
Type of Primary Research /Quantitati y
Research Objectives ve

Complain To identify/attend to Qualit Low Low Contin

t dissatisfied ative uous
customers
solicitatio
To identify common
n service failure points
Critical To identify “best Qualit Low M Periodi
incident practices” at ative oder c
transaction level ate
studies
To identify
customers
requirements as
input for qualitative
studies
To identify common
service failure points
To identify systemic
strengths and
weaknesses in
 Market Research contd …..
Type of Primary Research Qualitativ Monet Time Frequenc
e/Quantit ary y
Research Objectives ative
Requirement To identify customer Qualita M M Annua
s
requirements as tive oder oder l
research
input for qualitative ate ate
research
Relationshi To monitor and track Quanti Low Low Contin
p surveys service performance tative uous
and
SERVQUAL
To assess overall
surveys company
performance
compared with that
of competition
To determine the
links between
satisfaction and
behavioral intentions
To assess gaps
between customer
expectations and
 Market Research contd …..
Qualitati Monetar Time Frequency
Type of Primary Research ve/Quant y
Research Objectives itative

Trailer To obtain immediate Quanti Low Low Continuous

calls feedback on performance tative
of service transactions
To measure effectiveness
of changes in service
delivery
To assess service
performance of individuals
and teams
To use as input for
process improvements
To identify common
service
To createfailure points
dialogue with Qualit Moder M Annual
Service
expectatio important customers ative ate oder
n To identify what individual ate
meetings large customers expect
and and then to assure that it
is delivered
reviews
 Market Research contd …..
Type of Primary Research Qualit Monet Time Frequen
Research Objectives ative/ ary cy
Quanti
tative
Process To determine Qualit Mode M Periodi
checkpoint customer perceptions ative rate oder c
evaluation of long term ate
s
professional services
during service
provision
To identify service
problems and solve
them early in the
Market – To research customers Qualit Mode High Periodi
oriented service relationship
in natural settings ative rate c
ethnograp
hy
To study customers
from cultures other
than your home
country
 Market Research contd …..
Qualitati Monetar Time Frequency
Type of Primary Research ve/Quant y
Research Objectives itative

Mystery To measure individual Quant Low Low Quarterly

shopping employee performance itative
for evaluation ,
recognition and
rewards
To identify systemic
strengths and
weaknesses in
Customer customer-contact
To monitor changing Qualit Mode M Continuo
services
customer expectations ative rate oder us
panels
To provide a forum for ate
customers to suggest
and evaluate new
Lost service ideas
To identify reasons for Qualit Low Low Continuo
customer customer defection ative us
research
 Market Research contd …..
Type of Primary Research Qualita Mone T Frequenc
Research Objectives tive/Qu tary ime y
antitat
ive
Future To forecast future Qualita High H Periodic
expectat expectations of tive igh
ions
customers
research
To develop and test
new service ideas

Databas To identify the Quantit High H Continuo

e individual ative igh us
marketin
g
requirements of
research customers using
information
technology and
database
 Provider Gap 3

CUSTOMER

Service Delivery
COMPANY
Service
Performance
Gap
Customer-Driven
Service Designs and
Standards
Understanding the Components of
the Augmented Service Product
 Shostack’s Molecular Model of a Total
Market Entity - Passenger Airline Service

Distribution
Price

Vehicle
Service
frequency

Transport In-flight
service
Pre- and
post-flight Food
service and
drink
KEY
Tangible elements
Intangible elements
Marketing Positioning
(Weighted toward evidence) Source: Shostack
Core Products and Supplementary
Services
Most firms offer customers a package of
benefits:
– core product (a good or a service)
– supplementary services that add value
to the core
In mature industries, core products often
become commodities
Supplementary services help to
differentiate core products and create
competitive advantage by:
– facilitating use of the core service
– enhancing the value and appeal of the
core
 Core &Supplementary Elements
Define core product and determine
supplementary elements to augment this
core Product.
Core+Supplementary=Augmented Product
Determine the benefits which create the most
value for customers.
Differentiated the Service Package from the
competition in ways that are meaningful to
target customers.
Determine current levels of service on the
core product and of the supplementary
elements?
Determine the charges for higher service
levels on key attributes (e.g., faster
response, better physical amenities, easier
access, more staff, superior caliber,
personnel)? Or if the service levels can be cut
and charge less?
 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 R e c e p tio n

A B e d fo r th e
Ro o m N ig h t in a n Baggage
S e r v ic e E le g a n t P r iv a te S e r v ic e
R o o m w ith a
B a th r o o m
W a ke-up C o c k ta il
C a ll Bar

Te le p h o n e R e s ta u r a n t
E n te r ta in m e n t/
S p o r ts / E x e r c is e
 Documenting Delivery Sequence over Time
The Time Dimension in the Augmented Service
Product
Reservation
Parking Get car

Check in Check out

USE ROOM Phone

USE GUESTROOM OVERNIGHT

Porter

Pay TV Room service

Meal

Pre Time Frame of an Overnight Hotel Stay

Visit (real-time service use)
Employees’ Role in Service Delivery

Service Culture
The Critical Importance of Service
Employees
Boundary-Spanning Roles
Strategies for Delivering Service
Quality Through People
Customer-Oriented Service Delivery
 Service Leadership & Culture
Strong Service Culture developed and
continuously Reinforced by Management
Management Leadership required to
change Values, Goals and Aspirations of
Front Line staff to be in line with Service
Organisation
Organisation culture have core values as
Excellence, Innovation, Team work,
Respect, Integrity and Social Profit
Shared Perception of What is important
in an organization
Shared Values and Beliefs about Why
these things are important
 Service Leadership & Culture
Strong Service Culture focus on Front Line
Being Lifeline of Services business. Revenues
driven by what happens at Service
Encounter. The Service Triangle
Customer
Service Encounter

Front Line

Top Management, Employees

Support Front Line

Highlights importance of front line showing

the role of Top Management and employees
is to support Front Line to deliver excellence
 Service Culture

Corporate culture is defined as

The pattern of shared values and beliefs
that
give the members of an organization
meaning, and provide them with the
rules for
behavior in the organization.
111
 Empowerment
Benefits: Drawbacks:
– quicker responses to – potentially greater
customer needs dollar investment
– quicker responses to in selection and
dissatisfied customers training
– employees feel better – higher labor costs
about their jobs and – potentially slower
themselves or inconsistent
– employees tend to service delivery
interact with – may violate
warmth/enthusiasm customers’
– empowered perceptions of fair
employees are a great play
source of ideas – employees may
– great word-of-mouth “give away the
advertising from store” or make bad
customers decisions
 Traditional Organizational
Chart

Manager

Superviso Superviso
r r

Front- Front- Front- Front- Front- Front- Front- Front-

line line line line line line line line
Employ Employ Employ Employ Employ Employ Employ Employ
ee ee ee ee ee ee ee ee

Customers

113
Customer-Focused Organizational
Chart

Customers

Front- Front- Front- Front- Front- Front- Front- •Front-

line line line line line line line line
Employ Employ Employ Employ Employ Employ Employ Employee
ee ee ee ee ee ee ee

Superviso Superviso
r r

Manager
114
 EMPLOYEES’ ROLE IN SERVICE
DELIVERY
The Critical Importance of Service Employees
It is very important to focus on employees
because :
They are the service
They are the organization in the customer’s
eyes
They are the brands
They are the marketers
In many cases , the contact employee is the
service –
there is nothing else. E.g. in most personal and
professional services (like haircutting, physical
trainers, child care , cleaning /maintenance
etc.) the
contact employees provide s the entire service
single
handedly. The offering is the employee. Thus
 EMPLOYEES’ ROLE IN SERVICE
DELIVERY
Because contact employees represent the
organization and can directly influence
customer
satisfaction, they perform the role of
marketers. They
physically embody the product and are the
walking
billboards from the promotional point of view.
Whether acknowledged or not, actively selling
or not,
service employees perform marketing
functions. They
can perform these functions well, to the
organization’s advantage, or poorly to the
organization’s detriment.
EMPLOYEE SATISFACTION, CUSTOMER
SATISFACTION AND PROFITS
 The Services Marketing Triangle

Company
(Management)

Internal Marketing External Marketing

“Enabling the “Making the
promise” promise”

Employees Customers
Interactive Marketing
“Delivering the promise” 117
Source: Adapted from Mary Jo Bitner, Christian Gronroos, and
Services Marketing Triangle Applications
Exercise
Focus on a service organization. In the
context you are focusing on, who occupies
each of the three points of the triangle?

How is each type of marketing being carried

out currently?

Are the three sides of the triangle well

aligned?

Are there specific challenges or barriers in

any of the three areas?
118
Ways to Use the Services Marketing
Triangle
Overall Specific Service
Strategic Implementation
Assessment
– What is being
– How is the service promoted and by
organization doing whom?
on all three sides of
the triangle?
– How will it be
– Where are the delivered and by
weaknesses? whom?

– What are the – Are the supporting

strengths? systems in place to
deliver the promised
service? 119
 EMPLOYEE SATISFACTION, CUSTOMER
SATISFACTION AND PROFITS
Research has shown that both a climate for
service and a climate for employee well-
being are
highly correlated with overall customer
perceptions of service quality.
Service Quality Dimensions

Reliability
Responsiveness
Assurance
Empathy
Tangibles

121
 Service Employees

Who are they?

– “boundary spanners”
What are these jobs like?
– emotional labor
– many sources of potential conflict
•person/role
•organization/client
•interclient
– quality/productivity tradeoffs
Boundary Spanners Interact with
Both Internal and External
Constituents
External Environment

Internal Environment 123

Boundary-Spanning Workers Juggle
Many Issues
Person versus role

Organization versus client

Client versus client

124
 Person/Role Conflict

This conflict arises when what they

are
asked to do things that are quite
different
from their personalities.

125
 Organization/Client Conflict
Front line executives have two bosses:
The organization & the individual
customer
The conflict may arise when the
employee has
To make a difficult choice between the
customer, the rules & satisfaction for the
customer

126
 Interclient Conflict

Employee

Serving customers Serving many customers

in turn simultaneously

127
 Quality/Productivity Trade-Offs
Front-line service employees have to
both :

Effective & Efficient

They are expected to deliver satisfying

service
to customers and at the same time have
to be
cost effective & productive . 128
Pricing Of Services
Three Key Ways Service Prices
Are Different For Consumers

Customer knowledge of Service Prices

The Role of Non-monetary Costs
Price as an Indicator of Service Quality
Customer Knowledge of Service
Prices
Service heterogeneity limits
knowledge
Providers are unwilling to estimate
prices
Individual customer needs vary
Price information is overwhelming in
services
Prices are not visible
The Role of Nonmonetary Costs

Time Costs
Search Costs
Convenience Costs
Psychological Costs
 Price as an Indicator of Service
Quality
Customers depend on price as a cue to
quality
and because price sets expectations of
quality,
service prices must be determined
carefully.
Approaches to Pricing Services

Cost-based
Co

e d
m

as
pe

- b
t

nd
it
io

a
em
n-

D
b
as
e d
 Cost-Based Pricing

•Costs are difficult to trace.

•Labor is more difficult to price

than materials.

•Cost may not equal value.

 Competition-Based Pricing
•Small firms may charge too
little to be viable.

•Heterogeneity of services limits

comparability.

•Prices may not reflect customer

value.
 Demand-Based Pricing

•Monetary price must be adjusted

to reflect the value of nonmonetary
costs.

•Information on service costs is less

available to customers, hence price
may not be a central factor.
Four Customer Definitions of
Value

Value is everything
Value is low price.
I want in a service.

Value is the Value is all that

quality I get for I get for all
the price I pay. that I give.
What Makes Service Pricing Strategy
Different (and Difficult)?
No ownership of services --hard for firms to
calculate financial costs of creating an
intangible performance
Variability of inputs and outputs --how can
firms define a “unit of service” and
establish basis for pricing?
Many services hard for customers to
evaluate --what are they getting in return
for their money?
Importance of time factor --same service
may have more value to customers when
delivered faster
Delivery through physical or electronic
channels --may create differences in
perceived value
Objectives of Pricing Strategies

Revenue and profit objectives

– Seek profit
– Cover costs
Patronage and user base-
related objectives
– Build demand
– Build a user base
The Pricing Tripod

Pricing
Strategy

Competition
Costs Value to
customer
Three Main Approaches to Pricing
Cost-Based Pricing
– Set prices relative to financial
costs (problem: defining costs)
Competition-Based Pricing
– Monitor competitors’ pricing
strategy (especially if service
lacks differentiation)
– Who is the price leader? (one firm
sets the pace)
Value-Based
– Relate price to value perceived by
customer
Activity-Based Costing: Relating Activities
to the Resources They Consume
Managers need to see costs as an integral
part of a firm’s effort to create value for
customers
When looking at prices, customers care about
value to themselves, not what production
costs the firm
Traditional cost accounting emphasizes
expense categories, with arbitrary allocation
of overheads
ABC management systems examine activities
needed to create and deliver service (do they
add value?)
Must link resource expenses to:
– variety of products produced
Net Value = (Benefits – Outlays)

EffortTime
e
Perceive Perceived
d Outlays
Benefits
 Enhancing Gross Value
Pricing Strategies to Reduce Uncertainty
– service guarantees
– benefit-driven (pricing that aspect of
service that creates value)
– flat rate (quoting a fixed price in
advance)
Relationship Pricing
– non-price incentives
– discounts for volume purchases
– discounts for purchasing multiple
services
Low-cost Leadership
– Convince customers not to equate
price with quality
– Must keep economic costs low to
 Paying for Service:
The Customer’s Perspective
Customer “expenditures” on service
comprise both
financial and non-financial outlays
Financial costs:
– price of purchasing service
– expenses associated with search,
purchase activity, usage
Time expenditures
Physical effort (e.g., fatigue,
discomfort)
Psychological burdens (mental effort,
negative feelings)
Negative sensory burdens (unpleasant
sensations affecting any of the five
Determining the Total Costs of a Service
to the Consumer

Search Costs Price Operating Costs

Related Monetary
Costs Incidental
Expenses
Time Costs
Purchase and
Physical Costs
Use Costs
Psychological
Costs

Sensory Costs

Necessary
After Costs follow-up
Problem
solving
Trading off Monetary and Non- Monetary
Costs
Which clinic would you patronize if you
needed a chest x-ray (assuming all three
clinics offer good quality) ?
Clinic A Clinic B Clinic C
 Price $45  Price $85  Price $125
 Located 1 hour  Located 15 min  Located next to
away by car or away by car or your office or
transit transit college
 Next available  Next available  Next
appointment is in appointment is in appointment is
3 weeks 1 week in 1 day
 Hours: Monday –  Hours: Monday –  Hours: Mo –Sat,
Friday, 8am –
Friday, 9am – 8am – 10pm
10pm
5pm  Estimated wait at
 By appointment
 Estimated wait at - estimated wait
clinic is about 30
clinic is about 2 - 45 minutes at clinic is about
hours 0 to 15 minutes
Increasing Net Value by Reducing
Non-financial Costs of Service
Reduce time costs of service at each
stage

Minimize unwanted psychological

costs of service

Eliminate unwanted physical costs of

service

Decrease unpleasant sensory costs of

service
 Revenue Management: Maximizing
Revenue from Available Capacity at a
Given Time
Based on price customization - charging
different customers (value segments)
different prices for same product
Useful in dynamic markets where demand
can be divided into different price buckets
according to price sensitivity
Requires rate fences to prevent customers in
one value segment from purchasing more
cheaply than willing to pay
RM uses mathematical models to examine
historical data and real time information to
determine
– what prices to charge within each price
bucket
 The Strategic Levers of
Revenue (Yield) Management

Price
Fixed Variable
Duration

Quadrant 1: Quadrant 2:
Predictabl Movies Hotel Rooms
e Stadiums/Arenas Airline Seats
Function Space Rental Cars
Cruise Lines
Quadrant 3: Quadrant 4:
Unpredictab Restaurants Continuing Care
le Golf Courses Hospitals