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Chapter 1

Introduction to
Services Marketing

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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How Important is the Service Sector in


Our Economy?

In most countries, services add more economic value than


agriculture, raw materials and manufacturing combined

In developed economies, employment is dominated by


service jobs and most new job growth comes from
services

Jobs range from high-paid professionals and technicians


to minimum-wage positions

Service organizations can be any sizefrom huge global


corporations to local small businesses

Most activities by government agencies and nonprofit


organizations involve services

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Services dominate the United States Economy:


GDP by Industry, 2001 (Fig. 1.1)

Agriculture, Forestry,
Mining, Construction 8%

Finance, Insurance,
Real Estate
20%

Manufacturing 14%

Government
(mostly services)
13%

Wholesale and
Retail Trade
16%

Other Services 11%


SERVICES

Business Health
Services
6%
5%

Transport, Utilities,
Communications
8%

Source: Bureau of Economic Analysis, November 2002


Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Changing Structure of Employment


as Economic Development Evolves (Fig. 1.2)
Share of
Employment

Agriculture
Services

Industry

Time, per Capita Income


Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Source: IMF, 1997

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Some Service Industries Profiled by NAICS but


Not Identified by SIC Codes

Casino Hotels
Continuing Care Retirement
Communities

Diagnostic Imaging Centers


Diet and Weight Reducing
Centers

Environmental Consulting
Gold Courses and Country
Clubs

Hazardous Waste Collection


Slide 2004 by Christopher Lovelock and Jochen Wirtz

HMO Medical Centers


Industrial Design Services
Investment Banking and
Securities Dealing

Management Consulting
Services

Satellite Telecommunications
Telemarketing Bureaus
Temporary Help Services

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Internal Services

Service elements within an organization that facilitate


creation of--or add value to--its final output

Includes:
accounting and payroll administration
recruitment and training
legal services
transportation
catering and food services
cleaning and landscaping

Increasingly, these services are being outsourced


Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Major Trends in Service Sector (Fig. 1.3)

Government Policies (e.g., regulations, trade


agreements)
Social Changes (e.g., affluence, lack of time, desire for
experiences)
Business Trends

Manufacturers offer service


Growth of chains and franchising
Pressures to improve productivity and quality
More strategic alliances
Marketing emphasis by nonprofits
Innovative hiring practices

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


Internet)
Internationalization (travel, transnational companies)

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Some Impacts of Technological Change

Radically alter ways in which service firms do business:


with customers (new services, more convenience)
behind the scenes (reengineering, new value chains)

Create relational databases about customer needs and


behavior, mine databanks for insights

Leverage employee capabilities and enhance mobility


Centralize customer servicefaster and more responsive
Develop national/global delivery systems
Create new, Internet-based business models
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Marketing Relevant
Differences Between
Goods and Services

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Defining the Essence of a Service

An act or performance offered by one party to another


An economic activity that does not result in ownership
A process that creates benefits by facilitating a desired
change in:

customers themselves
physical possessions
intangible assets

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Distinguishing Characteristics of Services


(Table 1.1)

Customers do not obtain ownership of services


Service products are ephemeral and cannot be inventoried
Intangible elements dominate value creation
Greater involvement of customers in production process
Other people may form part of product experience
Greater variability in operational inputs and outputs
Many services are difficult for customers to evaluate
Time factor is more important--speed may be key
Delivery systems include electronic and physical channels
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Marketing Implications - 1

No ownership
Customers obtain temporary rentals, hiring of personnel, or access

to facilities and systems


Pricing often based on time
Customer choice criteria may differ for renting vs. purchase--may
include convenience, quality of personnel
Cant own people (no slavery!) but can hire expertise and labor

Services cannot be inventoried after production


Service performances are ephemeraltransitory, perishable

Exception: some information-based output can be recorded


in electronic/printed form and re-used many times
Balancing demand and supply may be vital marketing strategy
Key to profits: target right segments at right times at right price
Need to determine whether benefits are perishable or durable
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Marketing Implications - 2

Customers may be involved in production process


Customer involvement includes self-service and cooperation with

service personnel
Think of customers in these settings as partial employees
Customer behavior and competence can help or hinder productivity,
so marketers need to educate/train customers
Changing the delivery process may affect role played by customers
Design service facilities, equipment, and systems with customers in
mind: user-friendly, convenient locations/schedules

Intangible elements dominate value creation


Understand value added by labor and expertise of personnel
Effective HR management is critical to achieve service quality
Make highly intangible services more concrete by creating and

communicating physical images or metaphors and tangible clues

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Value Added by Tangible vs Intangible Elements


in Goods and Services (Fig. 1.4)
Hi

Salt

Tangible Elements

Soft drinks
CD Player
Golf clubs
New car
Tailored clothing
Furniture rental

Lo

Fast food restaurant


Plumbing repair
Office cleaning
Health club
Airline flight
Retail banking
Insurance
Weather forecast
Intangible Elements

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Hi
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Marketing Implications - 3

Other people are often part of the service product


Achieve competitive edge through perceived quality of employees
Ensure job specs and standards for frontline service personnel reflect

both marketing and operational criteria


Recognize that appearance and behavior of other customers can
influence service experience positively or negatively
Avoid inappropriate mix of customer segments at same time
Manage customer behavior (the customer is not always right!)

Greater variability in operational inputs and outputs


Must work hard to control quality and achieve consistency
Seek to improve productivity through standardization, and by training

both employees and customers


Need to have effective service recovery policies in place because it is
more difficult to shield customers from service failures
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Marketing Implications - 4

Often difficult for customers to evaluate services


Educate customers to help them make good choices, avoid risk
Tell customers what to expect, what to look for
Create trusted brand with reputation for considerate, ethical behavior
Encourage positive word-of-mouth from satisfied customers

Time factor assumes great importance


Offer convenience of extended service hours up to 24/7
Understand customers time constraints and priorities
Minimize waiting time
Look for ways to compete on speed

Distribution channels take different forms


Tangible activities must be delivered through physical channels
Use electronic channels to deliver intangible, information-based

elements instantly and expand geographic reach

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Important Differences
Exist among Services

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Four Categories of Services


Employing Different Underlying Processes (Fig. 1.5)

What is the
Nature of the
Service Act?
TANGIBLE
ACTS

INTANGIBLE
ACTS

Who or What is the Direct Recipient of the Service?


DIRECTED AT
PEOPLE

DIRECTED AT
POSSESSIONS

People Processing

Possession Processing

e.g., airlines, hospitals,


haircutting, restaurants
hotels, fitness centers

e.g., freight, repair,


cleaning, landscaping,
retailing, recycling

Information
Processing

Mental Stimulus
Processing

(directed at intangible
e.g., broadcasting, consulting, e.g., accounting,
assets) banking,

education, psychotherapy

Slide 2004 by Christopher Lovelock and Jochen Wirtz

insurance, legal, research

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Implications of Service Processes


(1) Seeking Efficiency May Lower Satisfaction
Processes determine how services are created/delivered
process change may affect customer satisfaction

Imposing new processes on customers, especially

replacing people by machines, may cause dissatisfaction

New processes that improve efficiency by cutting costs


may hurt service quality

Best new processes deliver benefits desired by customers


Faster
Simpler
More conveniently

Customers may need to be educated about new


procedures and how to use them

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Implications of Service Processes:


(2) Designing the Service Factory
People-processing services
require customers to visit the
service factory, so:

Think of facility as a stage for service


performance

Design process around customer


Choose convenient location
Create pleasing appearance, avoid
unwanted noises, smells

Consider customer needs--info,


parking, food, toilets, etc.

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Implications of Service Processes:


(4) Balancing Demand and Capacity
When capacity to serve is
limited and demand varies
widely, problems arise because
service output cant be stored:
1. If demand is high and exceeds
supply, business may be lost
2. If demand is low, productive
capacity is wasted
Potential solutions:
- Manage demand
- Manage capacity

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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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

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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The Services
Marketing Mix

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Elements of The Services Marketing Mix:


7Ps vs. the Traditional 4Ps

Rethinking the original 4Ps


Product elements
Place and time
Promotion and education
Price and other user outlays
Adding Three New Elements
Physical environment
Process
People
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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The 7Ps:
(1) Product Elements
All Aspects of Service Performance that Create Value

Core product featuresboth tangible and intangible


elements

Bundle of supplementary service elements


Performance levels relative to competition
Benefits delivered to customers (customers dont buy a
hotel room, they buy a good nights sleep)

Guarantees
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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The 7Ps:
(2) Place and Time
Delivery Decisions: Where, When, and How

Geographic locations served


Service schedules
Physical channels
Electronic channels
Customer control and convenience
Channel partners/intermediaries
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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The 7Ps:
(3) Promotion and Education
Informing, Educating, Persuading, and Reminding Customers

Marketing communication tools


media elements (print, broadcast, outdoor, retail, Internet, etc.)
personal selling, customer service
sales promotion
publicity/PR

Imagery and recognition


branding
corporate design

Content
information, advice
persuasive messages
customer education/training
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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The 7Ps:
(4) Price and Other User Outlays
Marketers Must Recognize that Customer Outlays Involve
More than the Price Paid to Seller
Traditional Pricing Tasks

Selling price, discounts, premiums


Margins for intermediaries (if any)
Credit terms
Identify and Minimize Other Costs Incurred by Users

Additional monetary costs associated with service usage (e.g., travel to


service location, parking, phone, babysitting,etc.)

Time expenditures, especially waiting


Unwanted mental and physical effort
Negative sensory experiences
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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The 7Ps:
(5) Physical Environment
Designing the Servicescape and providing tangible
evidence of service performances

Create and maintaining physical appearances


buildings/landscaping
interior design/furnishings
vehicles/equipment
staff grooming/clothing
sounds and smells
other tangibles

Select tangible metaphors for use in marketing


communications

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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7Ps:
(6) Process
Method and Sequence in Service Creation and Delivery

Design of activity flows


Number and sequence of actions for customers
Providers of value chain components
Nature of customer involvement
Role of contact personnel
Role of technology, degree of automation
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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The 7Ps:
(7) People
Managing the Human Side of the Enterprise

The right customer-contact employees performing tasks well


job design
recruiting/selection
training
motivation
evaluation/rewards
empowerment/teamwork

The right

customers for the firms mission

fit well with product/processes/corporate goals


appreciate benefits and value offered
possess (or can be educated to have) needed skills (co-production)
firm is able to manage customer behavior
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Managing the 7Ps Requires Collaboration between


Marketing, Operations, and HR Functions (Fig. 1.7)

Operations
Management

Marketing
Management
Customers

Human Resources
Management
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Chapter 2

Consumer Behavior in
Service Encounters

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Where Does the Customer Fit in a


Service Organization? (Fig. 2.1)

Consumers rarely involved in manufacture of goods but


often participate in service creation and delivery

Challenge for service marketers is to understand how


customers interact with service operations

Flowcharting clarifies how customer involvement in service


encounters varies with type of process - see Fig. 2-1:

People processing (e.g., motel stay): customer is physically involved

throughout entire process


Possession processing (e.g., DVD repair): involvement may be limited to
drop off of physical item/description of problem and subsequent pick up
Mental stimulus processing (e.g., weather forecast): involvement is
mental, not physical; here customer simply receives output and acts on it
Information processing (e.g., health insurance): involvement is mental specify information upfront and later receive documentation of coverage
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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High-Contact and Low-Contact Services


High Contact Services

Customers visit service facility and remain throughout


service delivery

Active contact between customers and service personnel


Includes most people-processing services
Low Contact Services

Little or no physical contact with service personnel


Contact usually at arms length through electronic or
physical distribution channels

New technologies (e.g. Web) help reduce contact levels


Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Levels of Customer Contact with Service


Organizations (Fig. 2.2)
Emphasizes encounters
with service personnel

High
Nursing Home

HairCut
4-Star Hotel

Management Consulting

Good Restaurant

Telephone Banking

Airline Travel (Econ.)

Retail Banking

Car Repair

Motel

Insurance

Dry Cleaning
Fast Food

Movie Theater
Cable TV

Subway
Internet Banking

Emphasizes encounters
with equipment
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Mail Based Repairs


Internet-based
Services

Services Marketing 5/E

Low
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Managing Service Encounters--1

Service encounter: A period of time during which customers


interact directly with a service

Moments of truth: Defining points in service delivery where


customers interact with employees or equipment

Critical incidents: specific encounters that result in

especially satisfying/dissatisfying outcomes for either


customers or service employees

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Managing Service Encounters--2

Service success often rests on performance of junior


contact personnel

Must train, coach, role model desired behavior


Thoughtless or badly behaved customers can cause

problems for service personnel (and other customers)

Must educate customers, clarify what is expected, manage


behavior

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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The Purchase Process for Services


(Adapted from Fig. 2-3)

Prepurchase Stage
Awareness of need
Information search
Evaluation of alternative service suppliers
Service Encounter Stage
Request service from chosen supplier
Service delivery
Postpurchase Stage
Evaluation of service performance
Future intentions

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Perceived Risks in
Purchasing and Using Services (Table 2.1)

Functional unsatisfactory performance outcomes

Financial monetary loss, unexpected extra costs

Temporal wasted time, delays lead to problems

Physical personal injury, damage to possessions

Psychological fears and negative emotions

Social how others may think and react

Sensory unwanted impacts to any of five senses

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Factors that Influence


Customer Expectations of Services
Personal Needs
Desired Service
Beliefs about
What Is Possible

(Fig. 2.4)

Explicit & Implicit


Service Promises
Word-of-Mouth
Past Experience

ZONE
OF
TOLERANCE

Perceived Service
Alterations
Adequate Service

Predicted Service

Situational Factors

Source: Adapted from Zeithaml, Parasuraman & Berry


Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Components of Customer Expectations

Desired Service Level: wished-for level of service quality


that customer believes can and should be delivered

Adequate Service Level: minimum acceptable level of


service

Predicted Service Level: service level that customer


believes firm will actually deliver

Zone of Tolerance: range within which customers are


willing to accept variations in service delivery

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Intangible Attributes, Variability, and Quality


Control Problems Make Services Hard to Evaluate

Search attributes Tangible characteristics that allow


customers to evaluate a product before purchase

Experience attributes Characteristics that can be


experienced when actually using the service

Credence attributes Characteristics that are difficult to


evaluate confidently even after consumption

Goods tend to be higher in search attributes, services tend


to be higher in experience and credence attributes

Credence attributes force customers to trust that desired


benefits have been delivered

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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How Product Attributes Affect


Ease of Evaluation) (Fig. 2.5)

High in search
attributes

Complex surgery

Legal services

Education

Computer repair

Most Services

Entertainment

Haircut

Lawn fertilizer

Restaurant meals

Foods

Motor vehicle

Chair

Easy
to evaluate

Clothing

Most Goods

Difficult
to evaluate

High in experience High in credence


attributes
attributes
Source: Adapted from Zeithaml

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Customer Satisfaction is Central to the


Marketing Concept

Satisfaction defined as attitude-like judgment following a


service purchase or series of service interactions

Customers have expectations prior to consumption, observe


service performance, compare it to expectations

Satisfaction judgments are based on this comparison


Positive disconfirmation if better than expected
Confirmation if same as expected
Negative disconfirmation if worse than expected

Satisfaction reflects perceived service quality, price/quality


tradeoffs, personal and situational factors

Research shows links between customer satisfaction and a


firms financial performance

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Customer Delight:
Going Beyond Satisfaction

Research shows that delight is a function of 3 components


Unexpectedly high levels of performance
Arousal (e.g., surprise, excitement)
Positive affect (e.g., pleasure, joy, or happiness)

Is it possible for customers to be delighted by very


mundane services?

Progressive Insurance has found ways to positively surprise


customers with customer-friendly innovations and
extraordinary customer service

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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A Service Business is a System Comprising


Three Overlapping Subsystems
Service Operations (front stage and backstage)

Where inputs are processed and service elements created.


Includes facilities, equipment, and personnel
Service Delivery (front stage)
Where final assembly of service elements takes place
and service is delivered to customers
Includes customer interactions with operations and other
customers
Service Marketing (front stage)

Includes service delivery (as above) and all other contacts


between service firm and customers

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Service Marketing System:


(1) High Contact Service--e.g., Hotel (Fig. 2.7)
Service Marketing System
Service Delivery System
Service Operations System

Other
Customers

Interior & Exterior


Facilities

Technical
Core

Equipment

The
Customer

Service People

Backstage
(invisible)

Front Stage
(visible)

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Other
Customers

Services Marketing 5/E

Other Contact Points


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

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Service Marketing System:


(2) Low Contact Service--e.g., Credit Card (Fig. 2.8)
Service Marketing System
Service Delivery System
Service Operations System

Other Contact Points

Advertising
Mail
Technical
Core

Self Service
Equipment

The
Customer

Phone, Fax,
Web site etc.
Backstage
(invisible)

Market Research
Surveys
Random Exposures
Facilities, Personnel

Word of Mouth

Front Stage
(visible)

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Service as Theater

All the worlds a stage and all


the men and women merely
players. They have their exits
and their entrances and each
man in his time plays many
parts
William Shakespeare
As You Like It

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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The Dramaturgy of Service Delivery

Service dramas unfold on a stage--settings may change as


performance unfolds

Many service dramas are tightly scripted, others improvised


Front-stage personnel are like members of a cast
Like actors, employees have roles, may wear special
costumes, speak required lines, behave in specific ways

Support comes from a backstage production team


Customers are the audiencedepending on type of
performance, may be passive or active

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Role and Script Theories

Role:

A set of behavior patterns learned through experience


and communication

Role congruence: In service encounters, employees and


customers must act out defined roles for good outcomes

Script: A sequence of behavior to be followed by employees


and customers during service delivery

Some scripts (e.g. teeth cleaning) are routinized, others flexible


Technology change may require a revised script
Managers should reexamine existing scripts to find ways to improve

delivery, increase productivity, enhance experiences

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Chapter 3

Positioning Services in
Competitive Markets

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Search for Competitive Advantage in Services


Requires Differentiation and Focus

Intensifying competition in service sector threatens firms


with no distinctive competence and undifferentiated
offerings

Slowing market growth in mature service industries means


that only way for a firm to grow is to take share from
competitors

Rather than attempting to compete in an entire market, firm


must focus efforts on those customers it can serve best
Must decide how many service offerings with what
distinctive (and desired) characteristics

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Standing Apart from the Competition

A business must set itself apart from its competition.


To be successful it must identify and promote itself
as the best provider of attributes that are
important to target customers

GEORGE S. DAY

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Basic Focus Strategies for Services

(Fig. 3.1)

BREADTH OF SERVICE OFFERINGS

Narrow
Service
Focused

Many
NUMBER
OF MARKETS
SERVED

Few

Fully Focused
(Service and
market focused)

Wide
Unfocused
(Everything
for everyone)

Market
Focused

Source: Robert Johnston


Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Four Principles of Positioning Strategy

1. Must establish position for firm or product in minds of


customers
2. Position should be distinctive, providing one simple,
consistent message
3. Position must set firm/product apart from competitors
4. Firm cannot be all things to all people--must focus
Jack Trout

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Uses of Positioning in
Marketing Management (Table 3.1)

Understand relationships between products and markets


compare to competition on specific attributes
evaluate products ability to meet consumer needs/expectations
predict demand at specific prices/performance levels

Identify market opportunities


introduce new products
redesign existing products
eliminate non-performing products

Make marketing mix decisions, respond to competition


distribution/service delivery
pricing
communication
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Possible Dimensions for Developing Positioning


Strategies

Product attributes
Price/quality relationships
Reference to competitors (usually shortcomings)
Usage occasions
User characteristics
Product class
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Developing a
Market Positioning Strategy (Fig. 3.3)
MARKET
ANALYSIS

- Size
- Composition
- Location
- Trends

Define, Analyze
Market Segments
Select
Target Segments
To Serve

INTERNAL
ANALYSIS

- Resources
- Reputation
- Constraints
- Values

Articulate
Desired Position
in Market

Marketing
Action
Plan

Select Benefits
to Emphasize
to Customers

COMPETITIVE
ANALYSIS

- Strengths
- Weaknesses
- Current
Positioning

Analyze
Possibilities for
Differentiation
Source: Adapted from Michael R. Pearce

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Positioning of Hotels in Belleville:


Price vs. Service Level (Fig. 3.4)
Expensive

Grand
Regency

High
Service

PALACE
Shangri-La
Sheraton

Atlantic

Moderate
Service

Italia

Less Expensive
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Castle
Alexander IV
Airport Plaza

1 - 63

Positioning of Hotels in Belleville:


Location vs. Physical Luxury (Fig. 3.5)
High Luxury

Regency

Grand

Shangri-La
Sheraton
PALACE
Financial
District

Shopping District
and Convention Centre

Inner
Suburbs

Italia

Castle

Alexander IV
Atlantic
Airport Plaza
Moderate Luxury

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 64

Positioning after New Hotel Construction:


Price vs. Service Level (Fig. 3.6)
Expensive
Mandarin
New Grand Heritage
Marriott
Continental
Action?
Regency
High
Service

PALACE
Shangri-La
No action?

Moderate
Service

Atlantic
Sheraton
Italia

Less
Expensive
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Castle
Alexander IV
Airport Plaza

1 - 65

Positioning after New Hotel Construction:


Location vs. Physical Luxury (Fig. 3.7)
High Luxury

Mandarin

New Grand

Heritage
Regency
Marriott
Sheraton Shangri-La

Continental
Action?
PALACE
Financial
District

No action? Shopping District


and Convention Centre
Castle

Inner
Suburbs

Alexander IV
Atlantic

Italia

Airport Plaza

Moderate Luxury

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 66

Positioning Maps Help Managers to


Visualize Strategy

Positioning maps display relative performance of competing


firms on key attributes

Research provides inputs to development of positioning maps


Challenge is to ensure that
attributes employed in maps are important to target segments
performance of individual firms on each attribute accurately

reflects perceptions of customers in target segments

Predictions can be made of how positions may change in the


light of new developments in the future

Simple graphic representations are often easier for managers to


grasp than tables of data or paragraphs of prose

Charts and maps can facilitate a visual awakening to threats


and opportunities and suggest alternative strategic directions

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 67

Chapter 4

Creating the
Service Product

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 68

Key Steps in Service Planning:


Matching Opportunities to Resources

Must relate marketing opportunities to firms resources


(physical, financial, technological, human)

Identify, evaluate firms marketing assets

Customer portfolio/lifetime value (customer equity)


Market knowledge
Marketing implementation skill
Product line
Competitive positioning strategies
Brand reputation (brand equity)

Identify, evaluate firms operating assets

Physical facilities, equipment


Technology and systems (especially IT)
Human resources (numbers, skills, productivity)
Leverage through alliances and partnerships
Potential for customer self service
Cost structure

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 69

Service Design Involves Matching Marketing


Concept with Operations Concept (Fig. 4.1)
Corporate Objectives
and Resources
Marketing Assets

Operating Assets

(Customer Base, Mkt. Knowledge,


Implementation Skills, Brand Reput.)

(Facilities/Equipment, IT Systems,
People, Op. Skills, Cost Structure)

Service Marketing Concept

Service Operations Concept

Benefits to customer from core/


supplementary elements, style,
service level, accessibility

Nature of processes
Geographic scope of ops
Scheduling
Facilities design/layout
HR (numbers, skills)
Leverage (partners, self-service)
Task allocation: front/backstage
staff; customers as co-producers

User costs/outlays incurred


Price/other monetary costs
Time
Mental and physical effort
Neg. sensory experiences

Service Delivery
Process

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 70

Understanding the
Components of the
Augmented Service Product

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 71

Shostacks Molecular Model of a Total Market


Entity - Passenger Airline Service (Fig. 4-2)
Distribution
Price

Vehicle

Service
frequency

Transport
Pre- and
post-flight
service

In-flight
service

Food
and
drink

KEY

Tangible elements
Intangible elements

Marketing Positioning
(Weighted toward evidence)

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Source: Shostack
1 - 72

Core Products and Supplementary Services

Most firms offer customers a package of benefits:

core product (a good or a service)


supplementary services that add value to the core

In mature industries, core products often become


commodities

Supplementary services help to differentiate core products


and create competitive advantage by:

facilitating use of the core service


enhancing the value and appeal of the core

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 73

Core and Supplementary Product Design:


What Do We Offer and How Do We Create and Deliver It?

Supplementary
services offered
and how created
and delivered

Delivery Concept
For Core Product
Scheduling

Process

Core
Service
Level

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Customer
Role

Services Marketing 5/E

1 - 74

What Should Be the Core and Supplementary


Elements of Our Service Product?

How is our core product defined and what supplementary


elements currently augment this core?

What product benefits create the most value for customers?


Is our service package differentiated from the competition in
ways that are meaningful to target customers?

What are current levels of service on the core product and


each of the supplementary elements?

Can we charge more for higher service levels on key

attributes (e.g., faster response, better physical amenities,


easier access, more staff, superior caliber personnel)?

Alternatively, should we cut service levels and charge less?


Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 75

Core and Supplementary Services in a Luxury Hotel


(Offering Guests Much More than a Cheap Motel!)

R e s e r v a tio n
C a s h ie r

V a le t
P a r k in g

B u s in e s s
C e n te r

Ro o m
S e r v ic e

R e c e p tio n
A B e d fo r th e
N ig h t in a n
E le g a n t P r iv a te
R o o m w ith a
B a th r o o m

W a ke-up
C a ll
Te le p h o n e

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Baggage
S e r v ic e

C o c k ta il
Bar
E n te r ta in m e n t/
S p o r ts / E x e r c is e

R e s ta u r a n t

Services Marketing 5/E

1 - 76

What Happens, When, and in What Sequence?


The Time Dimension in the Augmented Service Product

Reservation
Parking

Get car
Check in
USE ROOM

Check out
Phone
USE GUESTROOM OVERNIGHT

Porter
Meal

Pre
Visit

Pay TV

Room service

Time Frame of an Overnight Hotel Stay


(real-time service use)

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 77

The Flower of Service:


Categorizing Supplementary Services (Fig. 4-5)

Information
Payment
Billing

Consultation
Core

Exceptions
KEY:

Facilitating elements
Enhancing elements
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Order-Taking

Hospitality
Safekeeping

Services Marketing 5/E

1 - 78

Facilitating Services - Information


(Table 4.1)

Core

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Customers often require


information about how to
obtain and use a product or
service. They may also
need reminders and
documentation

Services Marketing 5/E

1 - 79

Facilitating Services - Order-Taking


(Table 4.2)

Core

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Many goods and services


must be ordered or reserved
in advance. Customers need
to know what is available and
may want to secure
commitment to delivery

Services Marketing 5/E

1 - 80

Facilitating Services - Billing


(Table 4.3)

Core

Slide 2004 by Christopher Lovelock and Jochen Wirtz

How much do I owe you?


Customers deserve clear,
accurate and intelligible
bills and statements

Services Marketing 5/E

1 - 81

Facilitating Services - Payment


(Table 4.4)

Core

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Customers may pay faster


and more cheerfully if you
make transactions simple
and convenient for them

Services Marketing 5/E

1 - 82

Enhancing Services - Consultation


(Table 4.5)

Core

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Value can be added to


goods and services by
offering advice and
consultation tailored to
each customers
needs and situation

Services Marketing 5/E

1 - 83

Enhancing Services - Hospitality


(Table 4.6)

Core

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Customers who invest time


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

Services Marketing 5/E

1 - 84

Enhancing Services - Safekeeping


(Table 4.7)

Core

Customers prefer not to


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

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 85

Enhancing Services - Exceptions


(Table 4.8)

Core

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Customers appreciate some


flexibility in a business
when they make special
requests. They expect it
when not everything goes
according to plan

Services Marketing 5/E

1 - 86

Branding
Service Products

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 87

Service Branding:
Clarifying Distinctive Service Offerings

Marriott Hotel Brands

British Airways Brands

Marriott Hotels
Marriott Resorts

Intercontinental
First
Club World
World Traveller
World Traveller

Courtyard by Marriott
Fairfield Inns
Residence Inns
SpringHill Suites
TownePlace Suites
Marriott Vacation Clubs

International

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Plus

European
Club Europe
Euro-Traveller
UK Domestic
Shuttle

Services Marketing 5/E

1 - 88

Branding a High-Tech, B2B Product Line:


A Family of Brands at Sun Microsystems

Corporate umbrella brand


Sun Microsystems

Product line brand (system support services)


Sun Spectrum Support

Sub-brands (4 levels of support service programs)

Platinum
Gold
Silver
Bronze

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 89

Sun Spectrum Support:


Sub-branding Highlights Four Service Levels
Sub-branding clarifies service levels offered at different fees
Platinum: Mission Critical

On-site service 24/7, two-hour response;


telephone support 24/7, onsite parts replacement;
additional services available
Gold: Business Critical

Onsite service Mon-Fri 8am-8pm , four-hour response;


telephone support 24/7; onsite parts replacement
Silver: Basic Support

Onsite service Mon-Fri 8am-5pm, four-hour response;


telephone support Mon-Fri 8am-8pm; onsite parts replacement
Bronze: Self Support

Phone support Mon-Fri 8am-5pm; parts replacement by courier


Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 90

New Service
Development

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 91

New Service Development:


A Hierarchy of New Service Categories

Major service innovations--new core products for previously


undefined markets

Major process innovations--using new processes to


deliver existing products and offer extra benefits

Product line extensions--additions to current product lines


Process line extensions--alternative delivery procedures
Supplementary service innovations--adding new or
improved facilitating or enhancing elements

Style changes--visible changes in service design or scripts


Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 92

New Service Development:


Physical Goods as Source of Service Ideas

Customers can rent goodsuse and return for a fee


instead of purchasing them

Customers can hire personnel to operate their own or


rented equipment

Any new durable product may create need for after-sales


services (possession processing)

Shipping
Installation
Problem-solving and consulting advice
Cleaning
Maintenance
Repair
Upgrading
Disposal
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 93

Creating Services as Substitutes for


Owning and/or Using Goods (Fig. 4-7)

Own a Physical Good

Perform the
Work Oneself
Hire Someone
to Do the Work

Rent the Use


of a Physical Good

Drive own car

Rent car and drive it

Type on own word processor

Rent word processor and type

Hire chauffeur to drive car

Hire a taxi or limousine

Hire typist to use word processor

Send work to secretarial service

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 94

Service Development through Delivery Options:


Alternative Meal Service Formats (Fig. 4-8)

Fast-Food
Restaurant
(Eat In)
Drive-In
Restaurant
(Take Out)

See sign

Park and
enter

Order meal,
and pay

Pick up
meal

Find table
and eat

Drive away,
eat later

See sign

Stop car at
order point

Order via
microphone

Get meal at
pickup, pay

Home
Delivery

Telephone
Restaurant

Order food,
give address

Driver rings
doorbell

Pay driver,
take food

Eat

Home
Catering

Arrange to
meet caterer

Plan meal,
pay deposit

Food and
staff arrive

Meal is
prepared
and served

Eat

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Clear table
and leave

Staff cleans
up; pay

1 - 95

Elements of a Hotel Offering:


Trading off Room Price vs. Features/Services

External building design


and features

Room features
Food-related services
Lounge facilities
Services (e.g., reception)
Leisure facilities
Securitypeople/systems
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 96

Success Factors in New Service Development

Market synergy
Good fit between new product and firms image/resources
Advantage vs. competition in meeting customers needs
Strong support from firm during/after launch
Firm understands customer purchase decision behavior

Organizational factors
Strong interfunctional cooperation and coordination
Internal marketing to educate staff on new product and its

competition
Employees understand importance of new services to firm

Market research factors


Scientific studies conducted early in development process
Product concept well defined before undertaking field studies

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 97

Chapter 5

Designing the
Communications Mix
for Services

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 98

Advertising Implications for


Overcoming Intangibility (Fig. 5-1)
Problem

Advertising Strategy

Generality
- objective claims
- subjective claims

Document physical system capacity


Cite past performance statistics
Present actual service delivery incident

Nonsearchability

Present customer testimonials


Cite independently audited performance

Abstractness

Display typical customers benefiting

Impalpability

Documentary of step-by-step process,


Case history of what firm did for customer
Narration of customers subjective experience

Source: Mittal and Baker

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 99

Other Communications Challenges


in Services Marketing

Facilitate customer involvement in production


prepare customers for service experience and demonstrate roles
teach customers about new technologies, new features

Help customers to evaluate service offerings


provide tangible or statistical clues to service performance
highlight quality of equipment and facilities
emphasize employee qualifications, experience, professionalism

Simulate or dampen demand to match capacity


provide information about timing of peak, off-peak periods
offer promotions to stimulate off-peak demand

Promote contribution of service personnel


help customers understand service encounter
highlight expertise and commitment of backstage personnel
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 100

Setting Clear Objectives: Checklist for


Marketing Communications Planning (5 Ws)

Who is our target audience?


What do we need to communicate and achieve?
How should we communicate this?
Where should we communicate this?
When do communications need to take place?

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 101

Common Educational and Promotional


Objectives in Service Settings (Table 5-2)

Create memorable images of specific companies and


their brands

Build awareness/interest for unfamiliar service/brand


Build preference by communicating brand strengths and
benefits

Compare service with competitors offerings and counter


their claims

Reposition service relative to competition


Stimulate demand in off-peak and discourage during peak
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 102

Educational and Promotional Objectives (cont.)

Encourage trial by offering promotional incentives


Reduce uncertainty/perceived risk by providing useful info
and advice

Provide reassurance (e.g., promote service guarantees)


Familiarize customers with service processes before use
Teach customers how to use a service to best advantage
Recognize and reward valued customers and employees
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 103

Marketing Communications Mix for Services


(Fig. 10.4)

Personal
Communications

Advertising

Sales Promotion

Publicity &
Public Relations

Instructional
Materials

Sampling

Press
releases/kits

Web sites

Coupons

Press
conferences

Manuals

Corporate
Design

Selling

Broadcast

Customer
service

Print

Training

Internet

Sign-up
rebates

Special
events

Brochures

Vehicles

Telemarketing

Outdoor

Gifts

Sponsorship

Videoaudiocassettes

Equipment

Direct mail

Prize
promotions

Trade Shows,
Exhibitions

Software
CD-ROM

Stationery

Media-initiated
coverage

Voice mail

Uniforms

Word-of-mouth
Word
mouth
(otherof
customers)

Signage
Interior decor

Key: * Denotes communications originating from outside the organization

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 104

Originating Sources of Messages Received by a


Target Audience (Fig. 5-5)
Messages originating
within the organization
Front-line staff
n
uctio
d
o
r
P
nels
n
a
h
C

M a rk
Chan eting
nels

Service outlets
Advertising
Sales promotions
Direct marketing
Personal selling
Public relations

A
U
D
I
E
N
C
E

Word of mouth

Messages originating
outside the organization
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Media editorial

Services Marketing 5/E

1 - 105

What is Brand Equity and Why Does It Matter?


(From Berry, Cultivating Brand Equity)
Definition: A set of assets and liabilities linked to a brands
name and symbol that adds to (or subtracts from) the
perceived value of the product
Insights

Brand equity can be positive or negative


Positive brand equity creates marketing advantage for
firm plus value for customer

Perceived value generates preference and loyalty


Management of brand equity involves investment to
create and enhance assets, remove liabilities

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 106

A Service Branding Model:


How Communications + Experience Create Brand Equity

Marketer-controlled communications

Firms Presented Brand


(Sales, Advertising, PR)

Awareness of
Firms Brand

Uncontrolled brand communications

Firms
Brand Equity

What Media, Intermediaries,


Word-of-Mouth Say re: Firm

Customers Experience
with Firm

Meaning Attached
To Firms Brand
Source: Adapted from L. L. Berry ( Fig. 1)

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 107

Marketing Communication and the Internet (1)

International in Scope
Accessible from almost anywhere in the world
Simplest form of international market entry

Internet Applications
Promote consumer awareness and interest
Provide information and consultation
Facilitate 2-way communications through e-mail and chat rooms
Stimulate product trial
Enable customers to place orders
Measure effectiveness of specific advertising/promotional

campaigns

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 108

Marketing Communications and the Internet (2)

Web Site design considerations


Memorable address that is actively promoted
Relevant, up-to-date content (text, graphics, photos)
Contain information that target users will perceive as

useful/interesting
Easy navigation
Fast download

Internet advertising
Banners and buttons on portals and other websites seek to draw

online traffic to own site


Limits to effectivenessexposure (eyeballs) may not lead to
increases in awareness/preference/sales
Hence, advertising contracts may tie fees to marketing relevant
behavior (e.g., giving personal info or making purchase)
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 109

Chapter 6

Pricing and Revenue


Management

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 110

What Makes Service Pricing Strategy Different


(and Difficult)?

No ownership of services--hard for firms to calculate


financial costs of creating an intangible performance

Variability of inputs and outputs--how can firms define a


unit of service and establish basis for pricing?

Many services hard for customers to evaluate--what


are they getting in return for their money?

Importance of time factor--same service may have more


value to customers when delivered faster

Delivery through physical or electronic channels--may


create differences in perceived value

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 111

Objectives of Pricing Strategies

Revenue and profit objectives


Seek profit
Cover costs

Patronage and user base-related objectives


Build demand
Build a user base

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 112

The Pricing Tripod (Fig. 6.1)

Pricing Strategy

Costs
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Competition
Value to customer
Services Marketing 5/E

1 - 113

Three Main Approaches to Pricing

Cost-Based Pricing
Set prices relative to financial costs

(problem: defining costs)

Competition-Based Pricing
Monitor competitors pricing strategy

(especially if service lacks differentiation)


Who is the price leader? (one firm sets the pace)

Value-Based
Relate price to value perceived by customer

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 114

Activity-Based Costing: Relating Activities to


the Resources They Consume

Managers need to see costs as an integral part of a firms


effort to create value for customers

When looking at prices, customers care about value to


themselves, not what production costs the firm

Traditional cost accounting emphasizes expense categories,


with arbitrary allocation of overheads

ABC management systems examine activities needed to


create and deliver service (do they add value?)

Must link resource expenses to:

variety of products produced


complexity of products
demands made by individual customers

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 115

Net Value = (Benefits Outlays)


(Fig. 6.3)

EffortTime

Perceived
Outlays

Perceived
Benefits

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 116

Enhancing Gross Value

Pricing Strategies to Reduce Uncertainty


service guarantees
benefit-driven (pricing that aspect of service that creates value)
flat rate (quoting a fixed price in advance)

Relationship Pricing
non-price incentives
discounts for volume purchases
discounts for purchasing multiple services

Low-cost Leadership
Convince customers not to equate price with quality
Must keep economic costs low to ensure profitability at low price

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 117

Paying for Service:


The Customers Perspective
Customer expenditures on service comprise both
financial and non-financial outlays

Financial costs:
price of purchasing service
expenses associated with search, purchase activity, usage

Time expenditures
Physical effort (e.g., fatigue, discomfort)
Psychological burdens (mental effort, negative feelings)
Negative sensory burdens (unpleasant sensations affecting any
of the five senses)

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 118

Determining the Total Costs of a Service


to the Consumer (Fig. 6.4)
Price

Search Costs

Related Monetary
Costs
Time Costs
Purchase and
Use Costs

Operating Costs
Incidental
Expenses

Physical Costs
Psychological
Costs
Sensory Costs

After Costs

Necessary
follow-up
Problem
solving

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 119

Trading off Monetary and Non- Monetary Costs


(Fig. 6.5)

Which clinic would you patronize if you needed a chest


x-ray (assuming all three clinics offer good quality) ?
Clinic
ClinicAA

Clinic
ClinicBB

Price
Price$45
$45

Located
Located11hour
houraway
away
by
bycar
caror
ortransit
transit

Next
Nextavailable
available
appointment
appointmentis
isin
in33
weeks
weeks

Hours:
Hours:Monday
Monday
Friday,
Friday,9am
9am5pm
5pm

Estimated
Estimatedwait
waitat
at
clinic
clinicisisabout
about22
hours
hours

Price
Price$85
$85

Located
Located15
15min
min
away
awayby
bycar
caror
or
transit
transit

Next
Nextavailable
available
appointment
appointmentis
isin
in11
week
week

Hours:
Hours:Monday
Monday
Friday,
Friday,8am
8am10pm
10pm

Estimated
Estimatedwait
waitat
at
clinic
clinicisisabout
about30
30-45
45minutes
minutes

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Clinic
ClinicCC

Price
Price$125
$125

Located
Locatednext
nextto
to
your
youroffice
officeor
or
college
college

Next
Nextappointment
appointment
is
isin
in11day
day

Hours:
Hours:Mo
MoSat,
Sat,
8am
8am10pm
10pm

By
Byappointment
appointment-estimated
estimatedwait
waitat
at
clinic
clinicis
isabout
about00to
to
15
15minutes
minutes
1 - 120

Increasing Net Value by Reducing


Non-financial Costs of Service

Reduce time costs of service at each stage


Minimize unwanted psychological costs of service
Eliminate unwanted physical costs of service
Decrease unpleasant sensory costs of service

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 121

Revenue Management: Maximizing Revenue


from Available Capacity at a Given Time

Based on price customization - charging different customers


(value segments) different prices for same product

Useful in dynamic markets where demand can be divided


into different price buckets according to price sensitivity

Requires rate fences to prevent customers in one value

segment from purchasing more cheaply than willing to pay

RM uses mathematical models to examine historical data


and real time information to determine

what prices to charge within each price bucket


how many service units) to allocate to each bucket

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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The Strategic Levers of


Revenue (Yield) Management
Price

Duration

Fixed

Predictable

Variable

Quadrant 1:

Quadrant 2:

Movies

Hotel Rooms

Stadiums/Arenas

Airline Seats

Function Space

Rental Cars
Cruise Lines

Unpredictable

Quadrant 3:

Quadrant 4:

Restaurants

Continuing Care

Golf Courses

Hospitals

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Dealing with Common Customer Conflicts


Arising from Revenue Management
Customer conflict can arise from:
Perceived Unfairness & Perceived

Financial Risk Associated with


Multi-Tier Pricing and Selective
Inventory Availability

Marketing tools to reduce


customer conflicts:
Fenced Pricing
Bundling
Categorising
High Published Price

Unfulfilled Inventory Commitment

Well designed Customer Recovery

Unfulfilled Demand of Regular

Preferred Availability Policies

Customers
Unfulfilled Price Expectation of
Group Customers
Change in the Nature of the
Service

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Programme for Oversale

Offer Lower Displacement Cost

Alternatives
Physical Segregation & Perceptible
Extra Service
Set Optimal Capacity Utilisation Level

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Price Elasticity (Fig. 6.6)

Price per
unit of
service

Di
De

Di

De

Quantity of Units Demanded


De : Demand is price elastic. Small changes in price lead to big changes in demand.
Di : Demand for service is price inelastic. Big changes have little impact on demand.

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Key Categories of Rate Fences (Table 6.2)


Rate Fences

Examples

Physical (Product-related) Fences


Basic Product

Amenities
Service Level

Class of travel (Business/Economy class)


Size and furnishing of a hotel room
Seat location in a theatre
Free breakfast at a hotel, airport pick up etc.
Free golf cart at a golf course
Priority wait listing
Increase in baggage allowances
Dedicated service hotlines
Dedicated account management team

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Key Categories of Rate Fences (Table 6.2 contd)

Non Physical Fences


Transaction Characteristics
Time of booking or
reservation
Location of booking or
reservation
Flexibility of ticket
usage

Requirements for advance purchase


Must pay full fare two weeks before departure
Passengers booking air tickets for an
identical route in different countries are
charged different prices

Fees/penalties for canceling or changing a


reservation (up to loss of entire ticket price)
Non refundable reservation fees

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Key Categories of Rate Fences (Table 6.2 contd)

Non Physical Fences (contd)


Consumption Characteristics
Time or duration of
use

Early bird special in restaurant before 6pm


Must stay over on Sat for airline, hotel
Must stay at least five days

Location of
consumption

Price depends on departure location, esp in


international travel
Prices vary by location (between cities, city
centre versus edges of city)

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Key Categories of Rate Fences (Table 6.2 contd)

Non Physical Fences (contd)


Buyer Characteristics
Frequency or volume
of consumption

Member of certain loyalty-tier with the firm get

Group membership

Child, student, senior citizen discounts


Affiliation with certain groups (e.g. Alumni)

Size of customer
group

Group discounts based on size of group

priority pricing, discounts or loyalty benefits

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Relating Price Buckets and Fences to the


Demand Curve (Fig. 6.7)
Price per
Seat
First Class
Full Fare Economy (No Restrictions)
One-Week Advance Purchase
One-Week Advance Purchase, Saturday Night Stayover
3-Week Advance Purchase, Saturday Night Stayover
3-Week Adv. Prchs, Sat. Night Stay., $100 for Changes
3-Wk Adv. Prchs, Sat. Night Stay, No changes/refunds
Late Sales through Consolidators/
Internet, no refunds

Capacity
of 1st-class
Cabin

Capacity
of Aircraft

No. of Seats Demanded

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Ethical Concerns in Pricing

Customers are vulnerable when service is hard to evaluate


or they dont observe work

Many services have complex pricing schedules


hard to understand
difficult to calculate full costs in advance of service

Unfairness and misrepresentation in price promotions


misleading advertising
hidden charges

Too many rules and regulations

customers feel constrained, exploited


customers unfairly penalized when plans change

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Pricing Issues:
Putting Strategy into Practice (Table 6.3)
How much to charge?
What basis for pricing?
Who should collect payment?
Where should payment be
made?
When should payment be
made?
How should payment be
made?
How to communicate prices?

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Consumption follows the Timing of Payments

Frequency of
Health Club Visits

Annual Payment Plan

Quarterly Payment Plan

Frequency of
Health Club Visits

(Research Insight 6.1)

Semiannual Payment Plan

Monthly Payment Plan

Time Line

Time Line

Source: John Gourville and Dilip Soman, Pricing and the Psychology of Consumption,
Harvard Business Review, September 2002, 90-96.

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Chapter 7(5)

Distributing Services

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Applying the Flow Model of Distribution to


Services
Distribution embraced three interrelated elements

Information and promotion flow


Negotiation flow
Product flow

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Information and Physical Processes of the


Augmented Service Product (Fig. 7.1)
Information
Processes
Payme
nt

Information
Consultation

Billing

Core

OrderTaking

Exceptio
Hospitality
ns
Safekeeping

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Physical
Processe
s

1 - 136

Using Websites for Service Delivery


Information
Read brochure/FAQ; get schedules/
directions; check prices

Consultation

Payment

Conduct e-mail dialog


Use expert systems

Pay by bank card


Direct debit

Billing
Receive bill
Make auction bid
Check account status

Core

Exceptions
Make special requests
Resolve problems

Order-Taking
Make/confirm reservations
Submit applications
Order goods, check status

Hospitality
Record preferences

Safekeeping

Track package movements


Check repair status

CORE: Use Web to deliver information-based core services


Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Options for Service Delivery


There are 3 types of interactions between customers and
service firms

Customer goes to the service provider (or intermediary)


Service provider goes to the customer
Interaction at arms length (via the Internet, telephone, fax,
mail, etc.)

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Method of Service Delivery (Table 7.1)


Availability of Service Outlets
Nature of Interaction Single Site
between Customer
and Service
Organization
Customer goes to service
organization
Service organization goes
to customer
Customer and service
organization transact at
arms length

Theater
Barbershop
House painting
Mobile car wash
Credit card company
Local TV station

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Multiple Sites

Bus service
Fast-food chain
Mail delivery
Auto club road service
Broadcast network
Telephone company

1 - 139

Place vs. Cyberspace


Place - customers and

Required for people processing


services
Offers live experiences, social
interaction, e.g., food services
More emphasis on eye-catching
servicescape, entertainment

Cyberspace - customers

Ideal for info-based services


Saves time
Facilitates information gathering
May use express logistics service
to deliver physical core
products

suppliers meet in a physical


environment

and suppliers do business


electronically in virtual
environment created by
phone/internet linkages

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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24/7 - Factors Encouraging


Extended Operating Hours (Mgt Memo 7.1)

Economic pressure from


consumers

Changes in legislation
Economic incentives to

improve asset utilization

Availability of employees
to work nights, weekends

Automated self-service
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Technology Revolutionizes Service Delivery:


Some Examples

Smart mobile telephones to link users to Internet


Voice recognition software
Automated kiosks for self-service (e.g. bank ATMs)
Web sites
provide information
take orders and accept payment
deliver information-based services

Smart cards that can act as electronic wallets

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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E-Commerce:
Factors that Attract Customers to Virtual Stores

Convenience (24-hour availability, save time, effort)


Ease of obtaining information on-line and searching for
desired items

Better prices than in bricks-and-mortar stores


Broad selection

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Splitting Responsibilities for Delivering


Supplementary Services (Fig. 7.2)

As created by
originating firm

Core

As enhanced
by distributor

Slide 2004 by Christopher Lovelock and Jochen Wirtz

As experienced
by customer

Services Marketing 5/E

Core

1 - 144

Franchising
Franchising is a fast growth strategy, when

Resources are limited


Long-term commitment of store managers is crucial
Local knowledge is important
Fast growth is necessary to pre-empt competition

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Service Process and Market Entry

People Processing Services

Export the service concept


Import customers
Transport customers to new locations

Possession Processing Services

Most require an ongoing local presence, whether it is the

customers dropping off items or personnel visiting customer sites

Information Based Services

Export the service to a local service factory


Import customers
Export the information via telecommunications and transform it

locally
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Barriers to International Trade in Services

Operating successfully in international markets remains

difficult for certain services despite efforts of the WTO and


control relaxations

Barriers include

Refusal by immigration offices to issue work permits


Heavy taxes on foreign firms
Domestic preference policies
Legal restrictions
Lack of broadly-agreed accounting standards
Cultural differences (esp. for entertainment industry)

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Forces for Internationalization

Market drivers
Competition drivers
Technology drivers
Cost drivers
Government drivers
Impact will vary by service
type (people, possessions,
information)

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Modes of Internationalization

Export information-based services


transmit via electronic channels
store in physical media, ship as merchandise

Use third parties to market/deliver service concept


licensing agents
brokers
franchising
alliance partners
minority joint ventures

Control service enterprise abroad


direct investment in new business
buyout of existing business
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Impact of Globalization Drivers on Different


Service Categories (Table 7.2)

Globalization
Drivers

People
Processing

Possession
Processing

Information
Based

Competition

Simultaneity of
production and
consumption limits
leverage of foreign
competitive advantage,
but management
systems can be
globalized

Technology drives
globalization of
competitors with
technical edge.

Highly vulnerable to
global dominance by
competitors with
monopoly or
competitive
advantage in
information.

Market

People differ
economically and
culturally, so needs for
service and ability to
pay may vary.

Level of economic
developments
impacts demand for
services to
individually owned
goods

Demand for many


services is derived to
a significant degree
from economic and
educational levels.

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Impact of Globalization Drivers on Different


Service Categories (Table 7.2, contd)
Globalization People
Drivers
Processing

Possession
Processing

Information
Based

Technology

Use of IT for delivery of


supplementary services
may be a function of
ownership and familiarity
with technology.

Need for technologybased service delivery


systems depends on
possessions requiring
service and the cost
trade-offs in labor
substitution

Ability to deliver
core services
through remote
terminals may be a
function of
investment in
computerization etc.

Cost

Variable labor rates may


impact on pricing in
labor-sensitive services.

Variable labor rates


may favor low-cost
locations.

Major cost elements


can be centralized &
minor cost elements
localized.

Government

Social policies (e.g.,


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

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Policies may impact


demand and supply
and distort pricing

1 - 151

Chapter 8

Designing and Managing


Service Processes

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Developing a Blueprint Some Basic Advice

Identify key activities in creating and


delivering the service

Distinguish between front stage (what

customers experience) and back stage

Chart activities in sequence


Show how interactions between customers

and employees are supported by backstage


activities and systems

Establish service standards for each step


Identify potential fail points
Focus initially on big picture (later, can drill
down for more detail in specific areas)

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Service Blueprinting: Key Components


1. Define standards for frontstage activities
2. Specify physical evidence
3. Identify principal customer actions
4. ------------line of interaction (customers and front stage personnel)-------5. Front stage actions by customer-contact personnel
6. ------------line of visibility (between front stage and backstage)-------------7. Backstage actions by customer contact personnel
8. Support processes involving other service personnel
9. Support processes involving IT
Where appropriate, show fail points and risk of excessive waits

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Simplified Example: Blueprinting a Hotel Visit


(extract only)

Hotel exterior, lobby,


employees, key

Stage

Physical
Evidence

Front

Line of
Interaction

Make
Customer reservation
Actions
Employee
Actions
Face-to-face
Phone
Contact

Backstage

Line of
Visibility

Arrive,
valet park

Check-in
at reception

Doorman
greets, valet
takes car

Receptionist
verifies, gives
key to room

Elevator, corridor,
room, bellhop
Go to
room

Rep.
records,
confirms
Make up
Room

Valet
Parks Car
Enter
data

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Register
guest data
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Improving Reliability of Processes


by Failure Proofing

Analysis of reasons for failure often reveals opportunities


for failure proofing to reduce/eliminate risk of errors

Errors include:
treatment errorshuman failures during contact with customers
tangible errorsfailures in physical elements of service

Fail-safe procedures include measures to prevent omission


of tasks or performance of tasks
incorrectly
in wrong order
too slowly
not needed or specified

Need fail-safe methods for both employees and customers


Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Process Redesign: Principal Approaches


(Table 8-1)

Eliminating non-value-adding steps


Shifting to self-service
Delivering direct service
Bundling services
Redesigning physical aspects of service processes

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Customers as Co-Producers:
Levels of Participation in Service Production

Low Employees and systems do all the work


Medium Customer inputs required to assist provider
Provide needed information, instructions
Make personal effort
May share physical possessions

High Customer works actively with provider to


co-produce the service

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Self Service Technologies (SSTs)

Self-service is ultimate form of customer involvement in


service production

Customers undertake specific activities using facilities or systems

provided by service supplier

Customers time and effort replace those of employees

Concept is not newself-serve supermarkets date from


1930s, ATMs and self-serve gas pumps from 1970s

Today, customers face wide array of SSTs to deliver

information-based services, both core and supplementary

Many companies seek to divert customers from employee


contact to Internet-based self-service

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Service Firms as Teachers:


Well-trained Customers Perform Better

Firms must teach customers roles


as co-producers of service

Customers need to know how to


achieve best results

Education can be provided through:

Brochures
Advertising
Posted instructions
Machine-based instructions
Websites, including FAQs
Service providers
Fellow customers

Employees must be well-trained to


help advise, assist customers

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Managing Customers as Partial Employees


to Increase Productivity and Quality
1. Analyze customers present roles in the business and
compare to managements ideal
2. Determine if customers know how to perform and have
necessary skills
3. Motivate customers by ensuring that will be rewarded for
performing well
4. Regularly appraise customers performance; if
unsatisfactory, consider changing roles or termination

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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The Problem of Customer Misbehavior


Identifying and Managing Jaycustomers
What is a jaycustomer?
A customer who behaves in a thoughtless or abusive
fashion, causing problems for the firm itself, employees,
other customers

Why do jaycustomers matter?

Can disrupt processes


Affect service quality
May spoil experience of other customers

What should a firm do about them?

Try to avoid attracting potential jaycustomers


Institute preventive measures
Control abusive behavior quickly
Take legal action against abusers
BUT firm must act in ways that dont alienate other
customers

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Six Types of Jaycustomer

Thief seeks to avoid paying for service


Rule breaker ignores rules of social behavior and/or procedures for
safe, efficient use of service

Belligerent angrily abuses service personnel (and sometimes other


customers) physically and/or emotionally

Family Feuders fight with other customers in their party


Vandal deliberately damages physical facilities, furnishings, and
equipment

Deadbeat fails to pay bills on time


Can you think of others?
How should firms deal with each of these problems?

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Chapter 9

Balancing Demand
and Capacity

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Relating Demand to Capacity:


Four Key Concepts

Excess demand: too much demand relative to capacity at a


given time

Excess capacity: too much capacity relative to demand at a


given time

Maximum capacity: upper limit to a firms ability to meet


demand at a given time

Optimum capacity: point beyond which service quality


declines as more customers are serviced

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Variations in Demand Relative to Capacity


(Fig. 9-1)

VOLUME DEMANDED
Demand exceeds capacity
(business is lost)

CAPACITY UTILIZED

Demand exceeds
optimum capacity
(quality declines)

Maximum Available
Capacity
Optimum Capacity
(Demand and Supply
Well Balanced

Excess capacity
(wasted resources)

Low Utilization
(May Send Bad Signals)

TIME CYCLE 1
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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TIME CYCLE 2
1 - 166

Defining Productive Capacity


in Services

Physical facilities to contain customers


Physical facilities to store or process goods
Physical equipment to process people, possessions, or
information

Labor used for physical or mental work


Public/private infrastructuree.g., highways, airports,
electricity

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Alternative Capacity Management Strategies

Level capacity (fixed level at all times)


Stretch and shrink
offer inferior extra capacity at peaks (e.g. bus/metro standees)
vary seated space per customer (e.g. elbow room, leg room)
extend/cut hours of service

Chase demand (adjust capacity to match demand)


schedule downtime in low demand periods
use part-time employees
rent or share extra facilities and equipment
cross-train employees

Flexible Capacity (vary mix by segment)


Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Predictable Demand Patterns and


Their Underlying Causes (Table 9-1)

Predictable Cycles
of Demand Levels
day
week
month
year
other

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Underlying Causes of
Cyclical Variations
employment
billing or tax

payments/refunds
pay days
school hours/holidays
seasonal climate changes
public/religious holidays
natural cycles
(e.g. coastal tides)
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Causes of Seemingly Random Changes in


Demand Levels

Weather
Health problems
Accidents, Fires, Crime
Natural disasters
Question: which of these
events can be predicted?

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Alternative Demand Management Strategies


(Table 9-2)

Take no action

let customers sort it out

Reduce demand

higher prices
communication promoting alternative times

Increase demand

lower prices
communication, including promotional incentives
vary product features to increase desirability
more convenient delivery times and places

Inventory demand by reservation system


Inventory demand by formalized queueing
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Hotel Room Demand Curves by Segment


and by Season (Fig. 9-2)
Price per
Room Night

Bl

Bh

Bh = business travelers in high season

Th

Bl = business travelers in low season


Tl

Th = tourist in high season


Tl = tourist in low season

Bl

Bh

Th
Tl

Quantity of Rooms Demanded at Each Price


by Travelers in Each Segment in Each Season
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Note: hypothetical example


1 - 172

Avoiding Burdensome Waits for Customers

Add extra capacity so that demand can be met at most


times (problem: may add too many costs)

Rethink design of queuing system to give priority to certain


customers or transactions

Redesign processes to shorten transaction time


Manage customer behavior and perceptions of wait
Install a reservations system
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Alternative Queuing Configurations (Fig. 9-4)


Single line, single server, single stage
Single line, single servers at sequential stages
Parallel lines to multiple servers
Designated lines to designated servers
Single line to multiple servers (snake)
Take a number (single or multiple servers)

25

30
31

26
32

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

29

28

27

21
20
24
23

1 - 174

Tailoring Queuing Systems to Market Segments:


Criteria for Allocation to Designated Lines

Urgency of job
emergencies vs. non-emergencies

Duration of service transaction


number of items to transact
complexity of task

Payment of premium price


First class vs. economy

Importance of customer
frequent users/loyal customers vs. others

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Ten Propositions on the Psychology of Waiting


Lines (Table 9-3)
1. Unoccupied time feels longer
2. Preprocess/postprocess waiting feel longer than inprocess
3. Anxiety makes waiting seem longer
4. Uncertain waiting is longer than known, finite waiting
5. Unexplained waiting seems longer
6. Unfair waiting is longer than equitable waiting
7. People will wait longer for more valuable services
8. Waiting alone feels longer than in groups
9. Physically uncomfortable waiting feels longer
10. Waiting seems longer to new or occasional users
Sources: Maister; Davis & Heineke; Jones & Peppiatt
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Benefits of Effective Reservations Systems

Controls and smoothes demand


Pre-sells service
Informs and educates customers in advance of arrival
Customers avoid waiting in line for service (if service times
are honored)

Data capture helps organizations prepare financial


projections

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Characteristics of Well-designed
Reservations Systems

Fast and user friendly for customers and staff


Can answer customer questions
Offers options for self service (e.g. Web)
Accommodates preferences (e.g., room with view)
Deflects demand from unavailable first choices to
alternative times and locations

Includes strategies for no-shows and overbooking


requiring deposits to discourage no-shows
canceling unpaid bookings after designated time
compensating victims of over-booking

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Setting Capacity Allocation Sales Targets for a


Hotel by Segment and Time Period (Fig. 9-5)
Capacity (% rooms)

Week 7

Week 36

(Low Season)

100%
Out of commission for renovation

(High Season)
Executive service guests

Executive service
guests
Transient guests
50%

Weekend
package
Transient guests

W/E
package

Groups and conventions


Groups (no conventions)
Airline contracts
Nights:M

Tu

Th

Airline contracts
F

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Sn

Time

Services Marketing 5/E

Tu

Th

Sn
1 - 179

Information Needed for Demand and


Capacity Management Strategies

Historical data on demand level and composition, noting


responses to marketing variables

Demand forecasts by segment under specified conditions


Fixed and variable cost data, profitability of incremental
sales

Site-by-site demand variations


Customer attitudes towards queuing
Customer evaluations of quality at different levels of
capacity utilization

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Chapter 10

Planning the
Service Environment

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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The Purpose of Service Environments


The service environment influences buyer behaviour in 3 ways

Message-creating Medium: symbolic cues to communicate the


distinctive nature and quality of the service experience.

Attention-creating Medium: to make the servicescape stand out


from other competing establishments, and to attract customers
from target segments.

Effect-creating Medium: colors, textures, sounds, scents and


spatial design to enhance the desired service experience,
and/or to heighten an appetite for certain goods, services or
experiences

Helps the firm to create a distinctive image & positioning that


is unique.
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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Comparison of Hotel Lobbies


(Figure 10.1)

The servicescape is part of the value proposition!

Orbit Hotel and Hostel, Los Angeles


Four Seasons Hotel, New York
Slide 2004 by Christopher Lovelock and Jochen Wirtz

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The Mehrabian-Russell Stimulus-Response


Model (Figure 10.2)

Environmental
Stimuli &
Cognitive
Processes

Dimensions of
Affect:

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Pleasure and
Arousal

Services Marketing 5/E

Response
Behaviors:
Approach/
Avoidance &
Cognitive
Processes

1 - 184

The Mehrabian-Russell Stimulus-Response


Model

Simple and fundamental model of how people respond to


environments

Peoples conscious and unconscious perceptions and

interpretation of the environment influence how they feel in


that environment

Feelings, rather than perceptions or thoughts drive behavior


Typical outcome variable is approach or avoidance of an
environment, but other possible outcomes can be added to
the model as well

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 185

The Russell Model of Affect

Arousing
Distressing

Exciting

Unpleasant

Pleasant

Relaxing

Boring

Sleepy
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 186

The Russell Model of Affect

Emotional responses to environments can be described


along two main dimensions, pleasure and arousal.

Pleasure is subjective depending on how much the


individual likes or dislikes the environment

Arousal quality of an environment is dependent on its


information load, i.e., its degree of

Novelty (unexpected, surprising, new, familiar) and

Complexity (number of elements, extent of motion or change)

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 187

Drivers of Affect

Affect can be caused by perceptions and cognitive


processes of any degree of complexity.

Simple Cognitive Processes, Perception of Stimuli


tangible cues (of service quality)
consumer satisfaction

Complex Cognitive Processes


affective charged schemata processing
attribution processes

The more complex a cognitive process becomes, the more


powerful its potential impact on affect.However, most service
encounters are routine. Simple processes can determine affect.
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 188

Behavioral Consequence of Affect

Basically, pleasant environments result in approach,

and

unpleasant environments result in avoidance

Arousal acts as an amplifier of the basic effect of pleasure


on behavior

If the environment is pleasant, increasing arousal can lead

to excitement and stronger positive consumer response. If


the environment is unpleasant, increasing arousal level will
move consumers into the Distressing region

Feelings during the service encounter is also an important


driver of customer loyalty

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 189

An Integrated Framework Bitners


ServiceScape Model (Figure 10.4)
Environmental
Dimensions

Ambient
Conditions
Space/
Function
Signs,
Symbols &
Artefacts

Moderators
Holistic
Environment

Internal Responses
Cognitive
Emotional
Psychological

Employee
Response
Moderator

Employee
Responses

Perceived
ServiceScape

Customer
Response
Moderator

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Customer
Responses
Cognitive
Emotional
Psychological
Services Marketing 5/E

Behaviour

Approach
or
Avoid
Social Interaction
Between
Customers &
Employees

Approach
or
Avoid

1 - 190

An Integrated Framework Bitners


ServiceScape Model(cont)

Identifies the main dimensions in a service environment


and views them holistically

Customer and employee responses classified under,

cognitive, emotional and psychological which would in turn


lead to overt behavior towards the environment

Key to effective design is how well each individual


dimension fits together with everything else

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 191

Dimensions of the Service Environment


Service environments are complex and have many design
elements. The main dimensions in the servicescape model
includes:

Ambient Conditions
Music (e.g, fast tempo and high volume increase arousal

levels)
Scent (strong impact on mood, affect and evaluative

responses, purchase intention and in-store behavior)


Color (e.g, warm colors associated with elated mood states

and arousal but also increase anxiety, cool colors reduce


arousal but can elicit peacefulness and calm)
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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Dimensions of the Service Environment (cont)

Spatial Layout and Functionality


Layout refers to size and shape of furnishings and the ways it

is arranged
Functionality is the ability of those items to facilitate
performance

Signs, Symbols and Artifact


Explicit or implicit signals to communicate the firms image,

help consumers find their way and to convey the rules of


behavior

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 193

Impact of Music on Restaurant Diners


(Table 10-2)
Restaurant
Patron
Behavior

Fast-beat
Slow-beat
Difference between
Music
Music
Slow and Fast-beat
Environment Environment Environments
Absolute
Difference

%
Difference

Consumer time
spent at table

45min

56min

+11min

+24%

Spending on
food

$55.12

$55.81

+$0.69

+1%

Spending on
beverages

$21.62

$30.47

+$8.85

+41%

Total spending

$76.74

$86.28

+$9.54

+12%

Estimated
gross margin

$48.62

$55.82

+$7.20

+15%

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 194

The Effects of Scents on the Perceptions of


Store Environments (Table 10-3)
Evaluation

Unscented
Scented
Environment Environment
Mean Ratings Mean Ratings

Difference

Store Evaluation
Negative/positive

4.65

5.24

+0.59

Outdated/modern

3.76

4.72

+0.96

Unattractive/attracti
ve

4.12

4.98

+0.86

Drab/colorful

3.63

4.72

+1.09

Boring/Stimulating

3.75

4.40

+0.65

Store Environment

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 195

The Effects of Scents on the Perceptions of


Store Environments (Table 10-3)
Evaluation

Unscented
Environment
Mean Ratings

Scented
Environment
Mean Ratings

Difference

Outdated/up- to-date
style

4.71

5.43

+0.72

Inadequate/adequate

3.80

4.65

+0.85

Low/high quality

4.81

5.48

+0.67

Low/high price

5.20

4.93

-0.27

Merchandise

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 196

Aromatherapy: The Effects of Fragrance on


People (Table 10-4)
Fragrance

Aromath Aromather
erapy
apy Class

Tradition Potential Psychological


al Use
Impact on People

Orange

Citrus

Soothing Calming and relaxing


agent,
effect esp. for nervous
astringen people
t

Lavender

Herbaceo Calming,
us
balancing,
soothing

Muscle
relaxant,
soothing
agent

Jasmine

Floral

Uplifting,
balancing

Emollient Helps makes people feel


soothing refreshed, joyful,
agent
comfortable

Energizing,
stimulating

Skin
cleanser

Peppermint Minty

Calming

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Relaxing and calming,


helps create a homey and
comfortable feel

Increase attention level


and boosts energy
1 - 197

Common Associations and Human Responses


to Colors (Table 10-5)
Color

Degree of Nature Common Association and


Warmth
Symbol Human Responses to Color

Red

Warm

Earth

High energy and passion; can


excite, stimulate, and increase
arousal and blood pressures

Orange

Warmest

Sunset

Emotions, expressions, and


warmth

Green

Cool

Grass
and
Trees

Nurturing, healing and


unconditional love

Blue

Coolest

Sky and Relaxation, serenity and loyalty


Ocean

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 198

Selection of Environmental Design Elements

There is a multitude of research on the perception and

impact of environmental stimuli on behaviour, including:


People density, crowding
Lighting
Sound/noise
Scents and odours
Queues

No standard formula to designing the perfect combination of


these elements.

Design from the customers perspective


Design with a holistic view!
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 199

Tools to Guide in Servicescape Design

Keen Observation of Customers Behavior and Responses


to the service environment by management, supervisors,
branch managers, and frontline staff

Feedback and Ideas from Frontline Staff and Customers


using a broad array of research tools ranging from
suggestion boxes to focus groups and surveys.

Field Experiments can be used to manipulate specific

dimensions in an environment and the effects observed.

Blueprinting or Service Mapping - extended to include the


physical evidence in the environment.

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 200

Chapter 11

Managing People
for Service Advantage

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 201

Frontline Service Personnel: Source of


Customer Loyalty and Competitive Advantage

Frontline is an important source of differentiation and


competitive advantage. It is:
a core part of the product
the service firm
the brand

Frontline also drives customer loyalty, with employees


playing key role in anticipating customer needs,
customizing service delivery and building personalized
relationships

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 202

Boundary Spanning Roles

Boundary spanners link the inside of the organization to the


outside world

Multiplicity of roles often results in service staff having to


pursue both operational and marketing goals

Consider management expectations of restaurant servers:


deliver a highly satisfying dining experience to their customers
be fast and efficient at executing operational task of serving

customers
do selling and cross selling, e.g. We have some nice desserts to
follow your main course

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 203

Role Stress in the Frontline


3 main causes of role stress:
Person vs. Role: Conflicts between what jobs require and

employees own personality and beliefs


Organization vs. Customer: Dilemma whether to follow

company rules or to satisfy customer demands


Customer vs. Customer: Conflicts between customers that

demand service staff intervention

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 204

Emotional Labor

The act of expressing socially desired emotions during

service transactions (Hochschild, The Managed Heart)

Three approaches used by employees


surface acting
deep acting
spontaneous response

Performing emotional labor in response to societys or


managements display rules can be stressful

Good HR practice emphasizes selective recruitment,


training, counseling, strategies to alleviate stress

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 205

The Cycles of Failure, Mediocrity and Success


Too many managers make short-sighted assumptions about
financial implications of:
Low pay
Low investment (recruitment, training)
High turnover human resource strategies

Often costs of short-sighted policies are ignored:


Costs of constant recruiting, hiring & training
Lower productivity & lower sales of new workers
Costs of disruptions to a service while a job remains unfilled
Loss of departing persons knowledge of business and customers
Cost of dissatisfied customers

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 206

Cycle of Failure (Fig. 11.1)


Customer
turnover

Low profit
margins

High employee turnover;


poor service quality

Use of technology Emphasis on


to control quality rules rather
than service
Payment of
low wages

No continuity in
relationship for
Employee dissatisfaction;
customer
poor service attitude

Employees cant
respond to customer
problems

Slide 2004 by Christopher Lovelock and Jochen Wirtz

yc
le

Minimization of
pl
Em
selection effort
Minimization
of training
C

Customer
dissatisfaction

Employees
become bored

Narrow design of
jobs to accommodate
low skill level

oy
ee
C
yc
le

Failure to develop
customer loyalty

Repeat emphasis on
attracting new customers

er
m
o
st
Cu

Services Marketing 5/E

Source: Schlesinger and Heskett

1 - 207

Routinized

Openness of Service Sabotage Behaviors


Covert

Overt

Customary-Private Service
Sabotage
e.g. Waiters serving smaller
servings, bad beer or sour wine

Intermittent

Normality of Service Sabotage Behaviors

Service Sabotage (Fig. 11-A)

Customer-Public Service
Sabotage
e.g. Talking to guests like
young kids and putting them
down

Sporadic-Private Service
Sabotage

Sporadic-Public Service
Sabotage

e.g. Chef occasionally


purposefully slowing down
orders

e.g. Waiters spilling soup onto


laps, gravy onto sleeves, or hot
plates into someones hands

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 208

Cycle of Mediocrity (Fig. 11.2)


Customers trade
horror stories

Other suppliers (if any)


seen as equally poor

Employee
dissatisfaction
(but cant easily quit)

No incentive for
cooperative relationship
to obtain better service

Employees spend
working life
in environment
of mediocrity
Emphasis
on rules
Narrow design vs.
pleasing
of jobs
customers

Complaints met by
indifference or
hostility

Cy
cle

Training emphasizes
Success =
learning rules
not making
mistakes
Service not focused
on customers needs
Jobs are boring and
le
c
repetitive; employees
y
unresponsive
e C Good wages/benefits
e
high job
oy
Empl
security
Resentment at inflexibility and
Promotion
lack of employee initiative;
and pay
complaints to employees
increases based Initiative is
on longevity, discouraged er
m
lack of mistakes
sto
Cu
Customer dissatisfaction

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 209

Cycle of Success (Fig. 11.3)


Low
customer
turnover

Customer
loyalty

Repeat emphasis on
customer loyalty and
retention

Higher
profit
margins

Lowered turnover,
high service quality

Train, empower frontline


personnel to control quality
ee
Cy
cle

Continuity in
relationship with
customer Employee satisfaction,
positive service attitude

Broadened
job designs

Above average
loy
wages
p
Em
Intensified
selection effort
er
m
o
st
Cu

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Cy
cle

High customer
satisfaction

Extensive
training

Source: Heskett and Schlesinger

1 - 210

How to Manage People for Service Advantage?


Staff performance is a function of both ability and motivation.
How can we get able service employees who are motivated
to productively deliver service excellence?

1. Hire the right people


2. Enable your people
3. Motivate and energize your people

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 211

Hire the Right People

The
Theold
oldsaying
sayingPeople
Peopleare
areyour
yourmost
most
important
importantasset
assetis
iswrong.
wrong.
The
TheRIGHT
RIGHTpeople
peopleare
areyour
yourmost
most
most
mostimportant
important asset.
asset.
Jim Collins
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 212

Recruitment

The right people are a firms most important asset: take a


focused, marketing-like approach to recruitment

Clarify what must be hired versus what can be taught


Clarify nature of the working environment, corporate values
and style, in addition to job specs

Ensure candidates have/can obtain needed qualifications


Evaluate candidates fit with firms culture and values
Fit personalities, styles, energies to the appropriate jobs
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 213

Select And Hire the Right People:


(1) Be the Preferred Employer
Create a large pool: Compete for Talent Market Share

What determines a firms applicant pool?


Positive
Quality
The

image in the community as place to work

of its services

firms perceived status

There is no perfect employee


Different

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


personalities

Hire

candidates that fit firms core values and culture

Focus

on recruiting naturally warm personalities

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 214

Select and Hire the Right People:


(2) How to Identify the Best Candidates

Observe Behavior
Hire

based on observed behavior, not words you hear

Best

predictor of future behavior is past behavior

Consider

group hiring sessions where candidates given group tasks

Personality Testing
Willingness

to treat co-workers and customers with courtesy,


consideration and tact

Perceptiveness
Ability

regarding customer needs

to communicate accurately and pleasantly

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 215

Select and Hire the Right People:


(3) How to Identify the Best Candidates

Employ Multiple, Structured Interviews

Use structured interviews built around job requirements

Use more than one interviewer to reduce similar to me effects

Give Applicants a Realistic Preview of the Job

Chance to have hands-on with the job

Assess how the candidates respond to job realities

Allow candidates to self select themselves out of the job

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 216

Train Service Employees

The Organizational Culture, Purpose and Strategy


Promote core values, get emotional commitment to strategy
Get managers to teach why, what and how of job.

Interpersonal and Technical Skills


Both are necessary but neither is sufficient for optimal job

performance

Product/Service Knowledge
Staffs product knowledge is a key aspect of service quality
Staff need to be able to explain product features and to position

products correctly

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 217

Factors Favoring Employee Empowerment

Firms strategy is based on competitive differentiation and on


personalized, customized service

Emphasis on long-term relationships vs. one-time transactions


Use of complex and non-routine technologies
Environment is unpredictable, contains surprises
Managers are comfortable letting employees work independently
for benefit of firm and customers

Employees seek to deepen skills, like working with others, and


are good at group processes

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 218

Control vs. Involvement Model of Management


Control concentrates 4 key features at top of organization;
Involvement pushes them down:

Information about operating results and measures of


competitive performance

Rewards based on organizational performance (e.g. profit


sharing, stock ownership)

Knowledge/skills enabling employees to understand and


contribute to organizational performance

Power to influence work procedures and organizational


direction (e.g. quality circles, self-managing teams)
Source: Bowen and Lawler

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 219

Levels of Employee Involvement

Suggestion involvement

Employee recommendation

Job involvement

Jobs redesigned
Employees retrained
Supervisors facilitate

High involvement

Information is shared
Employees skilled in teamwork,
problem solving etc.
Participate in decisions
Profit sharing and stock ownership

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 220

Motivate and Energize the Frontline


Use the full range of available rewards effectively,
including:

Job content

Feedback and recognition

Goal accomplishment

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 221

The Inverted Organizational Pyramid (Fig. 11.5)


Customer Base
Top
Mgmt

Frontline Staf

Middle
Mgmt

Legend:

Frontline
Staf

Middle Mgmt
& Top Mgmt
Support Frontline

Traditional
Organizational Pyramid

Inverted Pyramid with a


Customer & Frontline Focus

= Service encounters, or Moments of Truth.

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 222

The Wheel of Successful HR in Service Firms


(Fig. 11.6)

Leadership that:
1. Hire the
Right People

Focuses the entire organization


on supporting the frontline
Fosters a strong
service culture with
passion for service
and productivity
Drives values that
inspire, energize
and guide service
providers

3. Motivate &
Energize Your People
Utilize the full
range of rewards

Be the preferred
employer & compete
for talent market share

Service Excellence
& Productivity

Intensify the
selection
process

2. Enable Your People


Empower Frontline
Build high performance service
delivery teams
Extensive Training

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 223

Chapter 12

Managing Relationships
and Building Loyalty

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 224

Four Stages of Brand Loyalty in a Consumer

Cognitive loyalty perception from brand attribute

information that one brand is preferable to its alternatives

Affective loyalty developing a liking for the brand based


on cumulatively satisfying usage occasions

Conative loyalty commitment to rebuying the same brand


Action loyalty exhibiting consistent repurchase behavior

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 225

Loyalty is Important to Profitability :


Index of Customer Profits over Time (Fig. 12.1)
(Year 1=100)
350
300
250
200
150
100
50
0

Year 1
Credit card

Year 2
Industrial laundry

Year 3

Year 4

Industrial distribution

Year 5
Auto servicing

Based on data from Reichheld and Sasser

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 226

What Makes Loyal Customers More Profitable?

Tend to spend more as relationship develops


customers balances may grow
may consolidate purchases to one supplier

Cost less to serve


less need for information and assistance
make fewer mistakes

Recommend new customers to firm (act as unpaid sales


people)

Trust leads to willingness to pay regular prices vs. shopping


for discounts

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 227

Analyzing Why Customers Are More Profitable


over Time (Fig. 12.2)
Profit from price
premium
Profit from references
Profit from reduced
op. costs
Profit from increased
usage
Base Profit

Year
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Source: Reichheld and Sasser

Services Marketing 5/E

1 - 228

Measuring Customer Equity:


Calculating Life Time Value of Each Customer

Value at Acquisition
revenues (application fee + initial purchase)
Less costs (marketing +credit check + account set up)

Annual Value (project for each year of relationship)


revenues (annual fee + sales + service fees + value of referrals)
Less costs (account management + cost of sales + write-offs)

Net Present Value


Determine anticipated customer relationship lifetime
Select appropriate discount figure
Sum anticipated annual values (future profits) at chosen discount

rate

Customer Equity is total sum of NPVs of all current customers


Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 229

Customer-Firm Relationship
Todays marketers seek to develop long-term relationships
with customers. Relationship marketing includes:

Database Marketing: Involves the use of technology by

delivering differentiated service levels to consumers and


subsequently tracking the relationship.

Interaction Marketing: Usually in B2B context where people and


the social process also add mutually beneficial value.

Network Marketing: Common in B2B context where companies


commit resources to develop positions in a network of
relationships with the stakeholders and relevant agencies.

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 230

Types of Relationships with Customers (Table 12.1)

Type of Relationship--Firm and Customer


Nature of
Service Delivery
Continuous

Discrete transactions

Membership
Cable TV
Insurance
College enrollment
Subscriber phone
Theater subscription
Warranty repair

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

No formal relationship
Radio station
Police
Lighthouse
Pay phone
Movie theater
Public transport

1 - 231

Basic Segmentation Issues:


Building an Appropriate Customer Portfolio

Target customers whose needs match firms capabilities


Focus on value of prospective customers within each
segment, not just numbers

Avoid targeting customers who might abuse:


our employees, facilities
other customers

Create a mix of segments to reduce risks of volatility during


swings of economic cycles

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 232

Service-Relevant Segmentation Variables

Timing of service use (e.g., by hour, day, season)


Level of skill and experience as co-producer/selfserver

Preferred language in face-to-face contact


Access to electronic delivery systems (e.g., Internet)
Attitudes toward use of new service technologies

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 233

Identifying and Selecting Target Segments


(Mgt Memo 12.2)

User characteristics

demographics
psychographics
geographic location
benefits sought

User behavior

Slide 2004 by Christopher Lovelock and Jochen Wirtz

when, where, how services used


quantity/value of purchases
frequency of use
profitability of relationship
sensitivity to marketing variables

Services Marketing 5/E

1 - 234

Portfolio of Professional Assignments (Fig. 12.4)


Major,
Major,State-of-the-art
State-of-the-artchallenges
challengesfor
forthe
thefirms
firms
principals
principalsthat
thatgive
givethe
thefirm
firmhigh
highvisibility
visibility
Demanding
Demandingclient
clientassignments
assignmentsoffering
offeringaa
learning
learningexperience
experiencefor
forthe
thefirms
firmsmost
most
experienced
experiencedassociates
associates

Pacesetters

Significant Projects

Routine
Routineclient
clientprojects
projectsshared
shared
among
amongprincipals
principalsand
andassociates
associates

Bread and Butter Projects

Analytical Work on Project Data

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Entry-level
Entry-leveltasks
tasksfor
fornew
new
associates
associatesor
orfor
forresearch
research
assistants
assistants&&paraprofessionals
paraprofessionals

1 - 235

The Customer Pyramid (Fig. 12.5)


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

Platinum
Gold

Which segment costs us in time,


effort and money, yet does not
provide the return we want?
Which segment is difficult to do
business with?

Iron
Lead
Poor Relationship
Customers
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 236

How Customers See Relational Benefits in


Service Industries (Research Insights 12.1)

Confidence benefits
less risk of something going wrong, less anxiety
ability to trust provider
know what to expect
get firms best service level

Social benefits
mutual recognition, known by name
friendship, enjoyment of social aspects

Special treatment benefits


better prices, discounts, special deals unavailable to others
extra services
higher priority with waits, faster service

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 237

The Customer Satisfaction-Loyalty Relationship


(Fig. 12.6)

Apostle

Loyalty (Retention)

100

Zone of Affection

80

Near Apostle

60
40

Zone of Indifference
Zone of Defection

20

Terrorist 0

1
Very
dissatisfied

Neither
satisfied
Dissatisfied
Satisfied
nor dissatisfied

5
Very
Satisfied

Satisfaction
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 238

The Wheel of Loyalty (Fig. 12.7)


3. Reduce
Churn Drivers
Conduct churn diagnostic
Address key churn drivers
Enabled through:
Frontline staff
Account
managers
Membership
programs
CRM
Systems

Implement complaint
handling & service
recovery
Increase switching
costs

Build higher
level bonds

1. Build a
Foundation
for Loyalty
Segment the market
Be selective in acquisition

Customer
Loyalty

2. Create Loyalty
Bonds

Use effective tiering of


service.
Deliver quality
service.

Deepen the
relationship

Give loyalty
rewards
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 239

Rewarding Value of Use, Not Just Frequency at


British Airways (Best Practice in Action 12.2)
Dedicated reservations
Reservations assurance
Priority waitlist and standby
Advance notification of delays

exceeding 4 hours

Upgraded check-in
Preferred boarding
Special services assistance
Bonus air miles
Upgrade for two
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 240

Drivers of Service Switching (Fig. 12.9)


Service
ServiceFailure
Failure/ /Recovery
Recovery

Value
ValueProposition
Proposition

Core Service Failure

Pricing

Service Mistakes
Billing Errors
Service Catastrophe

High Price
Price Increases
Unfair Pricing
Deceptive Pricing

Service Encounter Failures


Uncaring
Impolite
Unresponsive
Unknowledgeable

Inconvenience

Service Switching

Response to Service Failure


Negative Response
No Response
Reluctant Response

Location/Hours
Wait for Appointment
Wait for Service

Competition
Found Better Service

Others
Others
Involuntary Switching
Customer Moved
Provider Closed
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Ethical Problems
Unsafe
Cheat
Hard Sell Conflict of Interest

Services Marketing 5/E

1 - 241

Common CRM Applications (Mgt Memo 12.2)

Signifies the whole process by which relationships with


customers are built and maintained.

CRM as an enabler, offering a unified customer interface


and allow firms to better understand and segment the
customers etc. Applications include:
Data collection
Data analysis
Sales force automation
Marketing automation
Call center automation

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 242

Customer Relationship Strategies with CRM


Systems: Key Questions

How should our value proposition change to increase customer


loyalty?

How much customization or one-to-one marketing and service


delivery is appropriate and profitable?

What is the incremental profit potential of increasing share of


wallet with current customers? How much does this vary by
customer tier and/or segment?

How much time and resource can we allocate to CRM right now?
If we believe in CRM, why have we not taken steps in that
direction before? What can we do today to develop customer
relationship without spending on technology?

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 243

Chapter 13

Customer Feedback and


Service Recovery

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 244

American Customer Satisfaction Index:


Selected Industry Scores, 2002
Score
(Max = 100)

100
90

85

79

80

80

79

70

74

71

71

70

66

76

60

65

62

50
40
30
20
10
4.8% 3.3%

x)
g
(ta
S
tin
IR
as s)
dc ew
oa . n
Br atl
(n
od nts
fo
s t ur a
Fa sta
Re ls
ta
pi

s
Ho

Services Marketing 5/E

ine

ink

Slide 2004 by Christopher Lovelock and Jochen Wirtz

rl
Ai

dr

Industry:

1.3% 0.0% 1.3% 2.8% 0.0% 0.0% 8.2% 2.9% -2.6%

al s
on r
r s u te
P e mp
co
s
tel
ks
Ho
an
.b
m
m
ce
Co
an
ur
ns
ei
Lif
s,
an
,v
rs
Ca .
c
i l,
et
ma
ss
p re
Ex cels
r
pa
s

ft
So

% Change 0 3.7%
2002 vs 2001

1 - 245

Key Questions for Managers to Ask about


Customer Complaining Behavior

Why do customers complain?


What proportion of unhappy customers complain?
Why dont unhappy customers complain?
Who is most likely to complain?
Where do customers complain?

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 246

Courses of Action Open to a Dissatisfied


Customer (Figure 13.1)
Complain
Complainto
tothe
the
service
firm
service firm
Take
Takesome
someform
form
of
public
action
of public action
Service
ServiceEncounter
Encounter
isisDissatisfactory
Dissatisfactory

Take
Takesome
someform
form
of
private
action
of private action
Take
Takeno
noaction
action

Complain
Complainto
toaa
third
thirdparty
party
Take
Takelegal
legalaction
action
to
seek
redress
to seek redress
Defect
Defect(switch
(switch
provider)
provider)
Negative
Negativeword-ofword-ofmouth
mouth

Any
Anyone
oneor
oraacombination
combinationof
of
these
responses
is
possible
these responses is possible
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 247

Dimensions of Perceived Fairness in Service


Recovery Process (Figure 13.2)
Complaint
ComplaintHandling
Handling&&Service
Service
Recovery
Process
Recovery Process
Justice Dimensions of the Service Recovery Process
Procedural
Procedural
Justice
Justice

Interactive
Interactive
Justice
Justice

Outcome
Outcome
Justice
Justice

Customer
CustomerSatisfaction
Satisfactionwith
withthe
the
Service
ServiceRecovery
Recovery
Source: Tax and Brown
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 248

Proportion of Unhappy Customers Who Buy


Again Depending on the Complaint Process
100
90
80
70
60
50
40
30
20
10
0

95%
82%
70%
46%

54%

37%
19%
9%
Customer did not
complain

Complaint was
not resolved

Problem cost > $100

Complaint
was resolved

Complaint was
resolved quickly

Problem cost $1 - 5
Source: TARP study

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 249

Impact of Effective Service Recovery


on Retention
No
Problem

84%

Problem,
but effectively
resolved

92%

Problem
Unresolved

46%
0%

10%

20%

30%

40%

50%

60%

70%

80%

90% 100%

Customer Retention
Source: IBM-Rochester study
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 250

Components of an Effective Service Recovery


System (Figure 13.3)

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 251

Strategies to Reduce Customer Complaint


Barriers (Table 13.1)
Complaint Barriers for
Dissatisfied Customers

Strategies to Reduce These Barriers

Inconvenience
Difficult to find the right complaint
procedure.
Effort, e.g., writing a letter.

Make feedback easy and convenient by:


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

Doubtful Pay Off


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

Reassure customers that their feedback will be


taken seriously and will pay off by:
Having service recovery procedures in
place, and communicating this to
customers.
Featuring service improvements that
resulted from customer feedback.

Unpleasantness
Complaining customers fear that
they may be treated rudely,
may have to hassle, or
may feel embarrassed to complain.

Make providing feedback a positive


experience:
Thank customers for their feedback.
Train the frontline not to hassle and make
customers feel comfortable.
Allow for anonymous feedback.

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 252

How to Enable Effective Service Recovery

Be proactiveon the spot, before customers


complain

Plan recovery procedures


Teach recovery skills to relevant personnel
Empower personnel to use judgment and skills to
develop recovery solutions

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 253

Guidelines for Effective


Problem Resolution (Management Memo 13.1)

Act fast
Admit mistakes but dont

Give benefit of doubt


Clarify steps to solve

Understand problem from

Keep customers informed

Dont argue
Acknowledge customers

Consider compensation
Persevere to regain

be defensive

customers viewpoint

feelings

Slide 2004 by Christopher Lovelock and Jochen Wirtz

problem

of progress

goodwill

Services Marketing 5/E

1 - 254

Service Guarantees Help Promote and Achieve


Service Loyalty

Force firms to focus on


what customers want

Set clear standards


Highlights cost of service
failures

Require systems to get &

act on, customer feedback

Reduce risks of purchase


and build loyalty

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 255

Types of Service Guarantees

Single attribute-specific guarantee one key service


attribute is covered

Multiattribute-specific guarantee a few important service


attributes are covered

Full-satisfaction guarantee all service aspects covered


with no exceptions

Combined guarantee like the full-satisfaction, adding


explicit minimum performance standards on important
attributes

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 256

The Hampton Inn 100% Satisfaction Guarantee


(Figure 13.4)

What are the benefits of such


a guarantee?

Are there any downsides?

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 257

Key Objectives of Effective Customer Feedback


Systems

Assessment and benchmarking of service quality


and performance

Customer-driven learning and improvements


Creating a customer-oriented service culture
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 258

Building a Customer Feedback System

Total market surveys


Post-transaction surveys
Ongoing customer surveys
Customer advisory panels
Employee surveys/panels
Focus groups
Mystery shopping
Complaint analysis
Capture of service
operating data

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 259

Strengths and Weakness of Key Customer Feedback


Collection Tools (Table 13.3)
Selection of a cocktail of effective customer feedback
collection tools.
Multi-level Measurement

Collection Tools

Service
Process
Satisfaction Satisfaction

Specific
Feedback

Actionable

Represen Potential
-tative, for Service
Reliable Recovery

First
Hand
Learning

Cost
Effective

Total Market Survey (inclu.


competitors)
Annual Survey on overall
satisfaction
Transactional Survey
(process specific)
Service Feedback Cards
(process specific)
Mystery Shopping
(service testers)
Unsolicited Feedback Recd
(Online feedback system)
Focus Group Discussions
Service Reviews
Meets Requirements:

Fully

Moderate

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Little/Not at all

Services Marketing 5/E

1 - 260

Entry Points for Unsolicited Feedback

Employees serving customers face-to-face or by phone


Intermediaries acting for original supplier
Managers contacted by customers at head/regional office
Complaint cards mailed or placed in special box
Complaints passed to company by third-party recipients
consumer advocates
trade organizations
legislative agencies
other customers

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 261

Chapter 14

Improving Service Quality


and Productivity

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 262

Importance of Productivity and Quality for


Service Marketers
Productivity

Helps to keep costs down


lower prices to develop market, compete better
increase margins to permit larger marketing budgets
raise profits to invest in service innovation

May impact service experience (must avoid negatives)


May require customer involvement, cooperation
Quality

Gain competitive advantage, maintain loyalty


Increase value (may permit higher margins)
Improve profits
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 263

Perspectives on Service Quality


Transcendental: Quality = excellence. Recognized only through
experience

Product-Based: Quality is precise and measurable


User-Based:

Quality lies in the eyes of the beholder

ManufacturingBased:

Quality is conformance to the firms developed


specifications

Value-Based:

Quality is a trade-off between price and value

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 264

Dimensions of Service Quality

Tangibles
Reliability
Responsiveness
Assurance

competence,
courtesy
credibility
security

Empathy
access
communication
understanding of customer

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 265

Seven Service Quality Gaps (Fig. 14.1)


CUSTOMER

Customer needs
and expectations

1. Knowledge Gap

MANAGEMENT

Management definition
of these needs

2. Standards Gap
Translation into
design/delivery specs

3. Delivery Gap
Execution of
design/delivery specs

4. I.C.Gap

Advertising and
sales promises

5. Perceptions Gap

Customer interpretation
of communications

Customer perceptions
of product execution

7.

6. Interpretation Gap

Service Gap
Customer experience
relative to expectations

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 266

Prescriptions for Closing Service Quality Gaps


(Table 14.3)

Knowledge: Learn what customers expect--conduct


research, dialogue, feedback

Standards: Specify SQ standards that reflect expectations


Delivery: Ensure service performance matches specs-consider roles of employees, equipment, customers

Internal communications: Ensure performance levels match


marketing promises

Perceptions:
delivery

Educate customers to see reality of service

Interpretation: Pretest communications to make sure


message is clear and unambiguous.

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 267

Hard and Soft Measures of Service Quality

Hard measures refer to standards and measures that can


be counted, timed or measured through audits
typically operational processes or outcomes
e.g. how many trains arrived late?

Soft measures refer to standards and measures that cannot


easily be observed and must be collected by talking to
customers, employees or others
e.g. SERVQUAL, surveys, and customer advisory panels.

Control charts are useful for displaying performance over


time against specific quality standards.

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 268

Hard Measures of Service Quality

Control charts to monitor


a single variable

Service quality indexes


Root cause analysis
(fishbone charts)

Pareto analysis

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 269

Composition e of FedExs
Service Quality Index (SQI) (Table 14.4)
Failure Type

Weighting
X
Factor

Late Delivery Right Day


Late Delivery Wrong Day
Tracing request unanswered
Complaints reopened
Missing proofs of delivery
Invoice adjustments
Missed pickups
Lost packages
Damaged packages
Aircraft Delays (minutes)
Overcharged (packages missing label)
Abandoned calls

No of
Daily
=
Incidents
Points

1
5
1
5
1
1
10
10
10
5
5
1

Total Failure Points (SQI) =


Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

XXX,XXX
1 - 270

Control Chart: Percent of Flights


Leaving within 15 Minutes of Schedule

(Fig. 14.2)

100%
90%
80%
70%
60%
J

Month
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 271

Tools to Address Service Quality Problems

Fishbone diagrams: A cause-and-effect diagram to identify


potential causes of problems.

Pareto charts: Separating the trivial from the important.

Often, a majority of problems is caused by a minority of


causes i.e. the 80/20 rule.

Blueprinting: A visualization of service delivery. It allows


one to identify fail points in both the frontstage and
backstage.

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 272

Cause and Effect Chart for


Airline Departure Delays (Fig. 14.3)
Facilities,
Equipment
Arrive late
Oversized bags

Customers
Customers

Frontstage
Front-Stage
Personnel
Personnel

Procedure
Procedures

Delayed check-in
Gate agents
Aircraft late to
procedure
cannot process
gate
Mechanical fast enough
Acceptance of late
Failures
passengers
Late/unavailable
airline crew
Late pushback

Delayed
Departures
Late food
service

Other Causes
Weather
Air traffic

Late cabin
cleaners

Late baggage

Weight and balance


sheet late

Late fuel
Materials,
Materials,
Supplies
Supplies

Poor announcement of
departures

Backstage
Personnel

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Information

Services Marketing 5/E

1 - 273

Analysis of Causes of
Flight Departure Delays (Fig. 14.4)

15.3%

23.1%

15.4%

All stations, excluding


Chicago-Midway Hub
11.7%

23.1%

23.1%

33.3%

33.3%
53.3%

15%

Washington Natl.

Late passengers
Waiting for pushback
Waiting for fueling
Slide 2004 by Christopher Lovelock and Jochen Wirtz

19%
9.5%

8.7%
11.3%

Newark

4.9
%

Late weight and balance sheet


Late cabin cleaning / supplies
Other

Services Marketing 5/E

1 - 274

Return on Quality (ROQ)

ROQ approach is based on four assumptions:


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

Implication: Quality improvement efforts may benefit


being related to productivity improvement programs

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

from

1 - 275

When Does Improving Service Reliability


Become Uneconomical? (Fig. 14.5)
Satisfy
SatisfyTarget
Target
Customers
CustomersThrough
Through
Service
Recovery
Service Recovery

Service Reliability

100%

Optimal
OptimalPoint
Pointof
of
Reliability:
Reliability:Cost
Costof
of
Failure
=
Service
Failure = Service
Recovery
Recovery

Satisfy
SatisfyTarget
Target
Customers
CustomersThrough
Through
Service
ServiceDelivery
Deliveryas
as
Planned
Planned

Investment
Small Cost,
Large Improvement

Large Cost,
Small Improvement

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Assumption: Customers are equally (or even


more) satisfied with the service recovery provided
than with a service that is delivered as planned.

1 - 276

Productivity in a Service Context

Productivity measures amount of output produced relative


to the amount of inputs.

Improvement in productivity means an improvement in


the ratio of outputs to inputs.

Intangible nature of many service elements makes it hard

to measure the productivity of service firms, especially for


information based services.

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 277

Efficiency, Effectiveness, and Productivity

Efficiency: comparison to a standard--usually time-based


(e.g., how long employee takes to perform specific task)
Problem: focus on inputs rather than outcomes
May ignore variations in quality or value of service

Effectiveness: degree to which firm is meeting its goals


Cannot divorce productivity from quality/customer satisfaction

Productivity: financial valuation of outputs to inputs


Consistent delivery of outcomes desired by customers should

command higher prices

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 278

Measuring Service Productivity

Traditional measures of service output tend to ignore


variations in quality or value of service

That is, they focus on outputs rather than outcomes, and stress

efficiency but not effectiveness.

Firms that are more effective in consistently delivering

outcomes desired by customers can command higher


prices. Furthermore, loyal customers are more profitable.

Measures with customers as denominator include:


profitability by customer
capital employed per customer
shareholder equity per customer

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 279

Questions to Ask When Developing Strategies


to Improve Service Productivity

How to transform inputs into outputs efficiently?


Will improving productivity hurt quality?
Will improving quality hurt productivity?
Are employees or technology the key to productivity?
Can customers contribute to higher productivity?

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 280

Operations-driven vs. Customer-driven Actions


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

Change timing of customer


demand
Involve customers more in
production
Ask customers to use third
parties

Leverage less-skilled
employees through expert
systems
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 281

Backstage and Frontstage Productivity Changes:


Implications for Customers

Backstage improvements can ripple to the front stage and


affect customers

e.g., new printing peripherals may affect appearance of bank

statements.

Front-stage productivity enhancements are especially


visible in high contact services.

Some may just require passive acceptance by customers


Others require customers to change their scripts and behavior.

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 282

Overcoming Customers Reluctance to Accept


Changes in Environment and Behavior

Develop customer trust


Understand customers habits and expectations
Pretest new procedures and equipment
Publicize the benefits
Teach customers to use innovations and promote trial
Monitor performance, continue to seek improvements
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 283

Six Sigma Methodology to Improve and


Redesign Customer Service Processes
Process Improvement Process Design/Redesign
Define
Measure
Analyze
Improve

Control

Identify the problem


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

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Identify specific or broad problems


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

Establish measures & reviews to


maintain performance
Correct problems if needed

Services Marketing 5/E

1 - 284

Chapter 15

Organizing for Service


Leadership

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 285

Customer-Led versus Market-Oriented


Philosophies of Management

Firms may lose market leader position if listen too closely to


current customers

Service leadership requires curiosity, risk taking


Customer-led businesses focus on understanding expressed
desires of customers in currently served markets

Market-oriented businesses commit to understand current/

latent customer desires plus competitors plans, capabilities


Scan market more broadly, have longer-term focus
Work closely with lead users (windows to future vs. anchors to

past)
Combine traditional research with experimentation, observation

Conclusion: Pursue customer satisfaction, but set limits on


being led by customers, especially during rapid change

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 286

The Service Profit Chain (Fig. 15.1)


Internal

External

Operating strategy and


service delivery system

Service
concept

Target Market

Loyalty

CUSTOMERS

EMPLOYEES
Satisfaction
Productivity
& Output
Quality

Service
Value

Revenue
Growth
Satisfaction

Loyalty

Profitability

Capability
Service
Quality

Workplace design
Job design
Selection and development
Rewards and recognition
Information and communication
Tools for serving customers

Quality and productivity


improvements yield
higher service quality
and lower costs

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Lifetime value
Retention
Repeat business
Referral

1 - 287

Causal Links in the Service Profit Chain

(Table 15.1)

Customer loyalty drives profitability and growth


Customer satisfaction drives customer loyalty
Value drives customer satisfaction
Employee productivity and retention drive value
Employee loyalty drives productivity
Employee satisfaction drives loyalty and productivity
Internal quality drives employee satisfaction
Top management leadership underlies chains success
Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 288

Integrating Three Functional Imperatives


(recap from Chapter 1)

Marketing
Imperative

Human Resources
Imperative

Customers

Operations
Imperative

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 289

Defining Three Functional Imperatives

Marketing Imperative
Target right customers and build relationships
Offer solutions that meet their needs
Define quality package with competitive advantage

Operations Imperative
Create, deliver specified service to target customers
Adhere to consistent quality standards
Achieve high productivity to ensure acceptable costs

Human Resource Imperative


Recruit and retain the best employees for each job
Train and motivate them to work well together
Achieve both productivity and customer satisfaction

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 290

Reducing Intra-Organizational Tension

Transfers and cross training


Cross functional taskforces
New tasks and new people
Process management teams
Gain-sharing programs

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 291

The Search for Synergy:


A Top Management Perspective
What do we want?

What do our employees,


intermediaries, and
other partners want?

What do our
customers want?

What can we do?


Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 292

From Losers to Leaders:


Moving Up the Service Performance Ladder

Service Leaders

Crme de la crme of their respective industries


Names synonymous with outstanding service, customer delight

Service Professionals
Clear positioning strategy

Sustained reputation for meeting customer expectations

Non-entities
Service

Traditional operations mindset


Rudimentary marketing, often emphasizing price discounts

Service Losers

Only survive because of lack of viable alternatives in marketplace

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 293

Achieving Service Leadership by Focusing on


Role of Each Functional Area

Marketing: move from tactical to innovative and


strategic

Operations: move from reactive/cost oriented to


focused, innovative, well coordinated with
marketing and HR

Human Resources: move from tight control of lowcost workers to quality of employees as strategic
advantage

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

1 - 294

Leadership for Change Management Involves


Eight Stages

Create sense of urgency to develop impetus for change


Put together strong team to direct process
Create appropriate vision of where organization must go
Communicate new vision broadly
Empower employees to act on vision
Produce sufficient short term results to create credibility
Build momentum to tackle tougher problems
Anchor new behaviors in the organizational culture
Source: John Kotter
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Leadership Qualities Needed in Service


Organizations

Vision, charisma, persistence, high expectations,


expertise, empathy, persuasiveness, integrity

Ability to visualize quality of service as foundation for


competing

Believe in people who work for the firm, make good


communications a priority

Possess a natural enthusiasm for the business, teach it to


others, pass on nuances, secrets, crafts of operating

Cultivate leadership qualities of others in organization


Use values to navigate firms through difficult times
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Transformational Leadership May Require


Changing Corporate Culture

Corporate Culture:
Shared
Shared
Shared
Shared
Shared

perceptions regarding what is important


values about what is right and wrong
understanding about what works and what doesnt
beliefs about why these things are important
styles of working and relating to others

Climate for Service--Tangible working environment atop


underlying culture. Influential factors include:

Shared perceptions concerning practices, procedures and types of

behaviors that get rewarded


Clarity about mission and values, level of commitment to common
purpose
Flexibility: freedom to innovate, sense of responsibility, standards
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