services marketing ab

SERVICES MARKETING

PROF.R.MATHUR

TEXT BOOKSSERVICES MARKETING BY: Christopher Lovelock

INTRODUCTIONServices Are Deeds (perishable), Processes And Performances that creates value and benefits for the customer. Facilities, equipment, labour can be held in readiness to create the Services, the elements represent the Productive Capacity.Services are all Economic Activities:- Intangible output, - Generally consumed at the time it is produced- Adds value to, say, Convenience, Timeliness, Comfort, HealthIntangibles: Repair & Maintenance Services, Consulting services, Training, Software Programs – Problem Analysis and Solution.

SERVICES’ DEFINITIONServices Provided by Hospitals, Hotels, Banks, Insurance, to result in Customer satisfaction.Services by companies and also manufacturers and Technology companies e.g. IBM – IT services Services Sector:Transportation, Communication, Electricity, Gas,Trade, Finance, Insurance, Hospitality, Health, Amusement, Recreation, Educational, Legal, Management, Household, Private, Government Customer Services:Services provided to support Company’s Core Products.

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Services Dominates Most of the Services Dominates Most of the EconomiesEconomies

Source: Bureau of Economic Analysis, November 2002

Finance, Insurance, Real Estate 20%

Wholesale and Retail Trade 16%

Transport, Utilities, Communications 8%

Health 6%

Business Services 5%

Other Services 11%

Government(mostly services) 13%

Manufacturing 14%

Agriculture, Forestry,Mining, Construction 8%

SERVICES

6

Changing Structure of Employment as Economic Development Evolves

Time, per Capita Income

Share of Employment

Industry

Services

Agriculture

Source: IMF, 1997

7

% of GDP in INDIA

31

36

40

48

61

24

26

28

26

20

45

38

32

26

19

0 20 40 60 80 100 120

1970

1980

1995

2001

2005

Services Industry Agriculture

TANGIBILITY

Services more Intangible than Manufactured Products and Manufactured Products more Tangible than Services. Fast-food Industry is “Services” but has tangible components as food and Packaging.Intangibles are produced by Service sector as well as by Manufacturing sector – Boeing provides Consulting and Forecasting services Manufacturers often have “associates” which provide allied Services – HUL + Lintas

VALUE ADDED BY TANGIBLE VS.INTANGIBLE ELEMENTS IN GOODS AND

SERVICES

Tangible ElementsCoffee powderSoft DrinksCD playerNew carTailored Clothing

Furniture RentalFast-Food Restaurant

Plumbing RepairHealth Club

Airline FlightRetail BankingWeather

forecast

Intangible

Elements

GOODS vs. SERVICES MARKETING

The most basic difference is Intangibility – Related Marketing Implications – Services cannot be Inventoried – Fluctuation in Demand. Services cannot be: - Easily Patented- Readily displayed or be easily Communicated to customers – Quality?- Assessed in Quality of ServicesNew Services concepts can be easily copied by Competitors’Decisions about Advertising content are challenging, as is PricingPrice Quality relationship complexCost of unit of service difficult to determine

SERVICES MARKETING IMPORTANCE

Services sector is 80% of Employment and 78% of GDP. Absolute and Fastest rate of growth is in Services sector. Export of Information, Knowledge, Creativity, Technology are growing in economies worldwide. Lead in development of Service Industry was taken by Banking & Health Care services. These Service Industries continue to evolve and become more competitive. The need for effective Services Management and Marketing Strategies as manufacturing and technology industries also need to provide quality Services to compete worldwide.

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Differences Between Goods & ServicesDifferences Between Goods & Services

Intangible

PerishableSimultaneous

Productionand

Consumption

Heterogeneous

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Differences between Goods and Services

GOODS SERVICES RESULTING IMPLICATION

Tangible Intangible Services cannot be inventoried

Cannot readily be displayed or communicated

Pricing is difficult

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GOODS SERVICES RESULTING IMPLICATIONProduction separate from consumption

Simultaneous

Customers participate in and affect the transaction

Customers affect each other

Employees affect service outcome

Decentralization may be essential

Mass production is difficult

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Standardization Variability/ Heterogeneous

Service delivery & customer satisfaction depend on employees action

Service quality depends upon many uncontrollable factors

There is no sure knowledge that the service delivered matches what was planned and promoted

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Non Perishable Perishable It is difficult to synchronize supply and demand with services

Services cannot be returned or resold

HETEROGENEITY IN SERVICES

No two human Services Performances are alikeServices delivery at different times and by different employees differDifferent Customers’ demands of Services in Content and quality differServices are heterogeneous across time, organizations and people ensuring consistent service quality is challengingQuality depends upon factors that cannot be fully controlled by Service suppliers – consumer’s articulation of needs, level of demand for the serviceOrganization may Sub-contract certain service elements of its total offering

SERVICES PRODUCED & CONSUMED

Products – Produced Sold ConsumedServices – Sold Produced & Consumed Restaurant Services Sold first, dining experience Produced and Consumed. Customer present while Service Produced, can participate in the production processMass production of services difficult. Customer satisfaction dependent upon happenings in “Real Time”Centralization does not Produce economies of Scale – operations need to be relatively decentralized.Customers may affect the outcome of Services Production due simultaneous production and Consumption

SERVICES PERISHABLEServices Are Perishable: Cannot be Saved, Stored, Resold or returned.Services cannot be inventoriedDemand forecasting, Planning and Capacity utilization are challenging decision areasStrong recovery Strategies when things go wrong to regain customer goodwill.

SERVICES OPERATIONS

Variability: Services can be evaluated for quality before reaching the customers, e.g. car repairs. Services consumed as produced, final services must be performed in real-time conditions.

SERVICES OPERATIONSDifficult Evaluation: Goods can be evaluated for Physical properties. Services may emphasize Experience properties, e.g. Taste, wear ability.Credence properties – characteristics difficult to evaluate even after consumption, customers not knowledgeable, e.g. Surgery, Technical repairs, Professional Services.Time factor: Services delivered in Real Time. Customers may be willing to pay faster service. Service Marketers should appreciate customers time constraints and priorities. Distribution Channels: Advances in technology, electronic delivery of services is expanding fast. Banks offer customers choice of Distribution channels – visit the Bank or Home Banking

CATEGORISING SERVICE PROCESSESMarketing-relevant differences among Services:

Traditional way of Grouping Services by Industry–Transportation, Hospitality, Banking. Groupingsdefine Core products, customer needs and satisfaction. However innovative managers must look outside their own industries for effectiveStrategies to adapt for their own organization.

One categorization on nature of Processes by which services are created and delivered. Unlike goods, Services Marketing may involve customers in service production. A Process is a method or series of action involving multiple steps in a defined sequence – taking an input and transforming them into Output. .......

CATEGORIZING ….…. Two categories get processed PeopleCustomers are the Principal Inputs:Objectse.g., Passenger Transportation, Education.In case of Objects as Inputs: automobile

repair, processing of financial data. In some services, processes are tangible. In others it could be Intangible, e.g., Education, Information.

Service Processes on Operational perspective, can be categorized into four broad Groups. These are based on:

- tangible action to people’s physical bodies or customers’ physical possessions (Products)

- Intangible actions to people’s minds or their intangible assets ……

CATEGORIZING ….…..These four categories are referred to as:

People ProcessingProduct ProcessingMental Stimulus processingInformation processing

Industries within each category share important Process related characteristics. Managers can create valued innovations by studying other industries of the same category.

PEOPLE PROCESSING Services directed at themselves –

Transportation, Health, Lodging, Feeding. Customers must physically enter the service system by spending time and actively interact with Service Providers

POSSESSION PROCESSINGCustomers want Services for treatment of Physical possession, e.g., House, Pets, Computer: Customers not personally involved. Customers drop the possession at the Service Provider’s centre, explain the problem, instruct for services and pick up the serviced product. If the possession cannot be moved, the service is provided at the site.

MENTAL STIMULUS PROCESSING.Services that interact with people’s minds – News, education, Information, Consultancy, Entertainment, Discourses. Services aimed at Changing people’s attitude and influence behaviour. Strong ethical standards and careful monitoring, else manipulation possible ….

MENTAL STIMULUS….Customers have to be mentally in

communication with information being processed. Services like education and entertainment are often created in one place and transmitted to distant customers. (Live concert directly to group of customers?). Core content of all services in this category is Information based. Such Services can be recorded and made available subsequently or converted into a disc like a manufactured product.

In People Processing, a customer can sleep through a journey and still arrive at the destination in time. In contrast a student sleeping through a lecture will not be any wiser at the end of the lecture.

INFORMATION PROCESSINGInformation is the most Intangible form of Service output. Information transformed into Reports, Books, Letters, Discs are tangible.Financial and professional services as Accounting, Law, Market Research, Management Services, Medical diagnosis are highly dependent on effective collection and processing of Information.Extent of customer involvement in Mental Stimulus processing and information Services are to learn about each other’s Needs, Capabilities and Personalities. Habits and tradition define the existing service delivery system and service use patterns. Increasing use of telephones, e-mails and internet will shift these Services to arm’s-length.

PEOPLE PROCESSING PRODUCT PROCESSING

TANGIBLE PASSENGER TRANSPORTATION FREIGHT TRANSPORTATION

ACTIONS HEALTH CARE REPAIR & MAINTENANCELODGING RETAIL TRADESALONS WAREHOUSING/STORAGEPHYSIO THRAPY LAUNDRY/DRY CLEANINGFITNESS CENTRES REFUELINGRESTAURANTS OFFICE CLEANING

INTANGIBLE MENTAL STIMULUS INFORMATION ACTIONS PROCESSING

PROCESSINGADVERTISING/PR BANKINGENTERTAINMENT DATA PROCESSINGMANAGEMENT CONSULTING DATA

TRANSMISSIONEDUCATION INSURANCEINFORMATION SERVICES LEGAL SERVICESMUSIC CONCERTS RESEARCHRELIGIOUS SERVICES SOFTWARE CONSULTING

CLASSIFICATION OF SERVICES

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The Services Marketing Triangle

Internal Marketing

Interactive Marketing

External Marketing

Company(Management)

CustomersEmployees

“enabling thepromise”

“delivering the promise”

“setting thepromise”

Source: Adapted from Mary Jo Bitner, Christian Gronroos, and Philip Kotler

29Source: Adapted from A. Parasuraman

Company

CustomersProviders

Technology

The Services Triangle &Technology

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Implications of Service Processes (1) Seeking Efficiency May Lower

SatisfactionProcesses determine how services are created/ delivered— process change may affect customer SatisfactionImposing new processes on customers, especially replacing people by machines, may cause

dissatisfactionNew 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

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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.

Implications of Service Processes: (2) Designing the Service Factory

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Implications of Service Processes: (3) Evaluating Alternative Delivery

ChannelsFor possession-processing, mental-stimulus processing, or information processing services, alternatives include:

1. Customers come to the service factory2. Customers come to a retail office

3. Service employees visit customer’s home or workplace

4. Business is conducted at arm’s length through - physical channels (e.g., mail, courier service)

- electronic channels (e.g., phone, fax, email, Web site)

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Capacity Implications of Service Processes: (4) Balancing Demand and Capacity

When capacity to serve is limited and demand varies widely, problems arise Because service output can’t be

stored:

1. If demand is high and exceeds supply, business may be lost

2. If demand is low, productive capacity is wasted

Potential solutions:

- Manage demand - Manage capacity

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Implications of Service Processes: (5) Applying Information Technology

All services can benefit from IT,but mental-stimulus processingand information-processingservices have the most to gain:

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

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Implications of Service Processes:(6) Including People as Part of the

ProductInvolvement 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

SERVICES MARKETING MIXStrategic elements of marketing manufactured goods are: Product, Price, Place & Promotion. For Services Performance, 3 elements added: Physical Environment, Process & People. 7 P’s are interrelated decision variables.PRODUCT: Select features of Core Product – a Product or Service plus other Service elements in reference to customer requirements and other competing products. Service performance with potential to create value for customers.PLACE: Place, Time of Delivery and Methods, Channels (Physical, Electronic) used. Messaging, Internet Services delivers Information in cyberspace. Physical delivery directly to customers. Speed and convenience determine Strategy. …..

7 Ps ….PROMOTION: Effective Communication Strategy: Provide Information, Features and Advantages, Persuading for action. Services promotion more in nature of Education – Benefits of service, Where and When to obtain it, How to avail the Services. Communication delivered through Direct Sales or through Media. Promotions influence Brand choice. Incentives attract customers to buy.PRICE: Price to pay for benefits of Services. Service marketers must Minimize other Expenses a customer might incur in Purchasing and Using Services, e.g., travel to service location, time, physical and mental efforts, exposure to negative sensory experiences. ……

7 Ps ….PHYSICAL ENVIRONMENT: Provide Tangible evidence of a firm’s Service quality. Customers impressions get impacted by Building appearance, landscaping, Interior furnishing, Equipment, Printed material, Signs and other Visuals.PROCESS: Delivery of Product Elements require Design and Implementation of Effective Processes- A method and sequence of actions in Service performance. Bad processes lead to Slow, Bureaucratic, Ineffective Service delivery, dissatisfied customers. Poor Processes make front-line staff jobs difficult, results in low Productivity and more chances of service failures.

7 Ps ….PEOPLE: Services Quality is often assessed based on customer’s interactions with front -line staff. Successful Service firms devote a lot of effort to Recruit, Train and Motivate these employees.In the 7 Ps of Services Strategy, Marketing must operate with other functions in Services business. Three management functions have Central and Interrelated Roles: Marketing, Operations and Human Resources.Marketing expert T.Levitt has remarked, “There are Industries whose Service Components are greater or lesser than other Industries. Every Industry is in Service”. R.Rust suggests “Most goods businesses now view themselves primarily as Services”.

CONSUMER BEHAVIOR IN SERVICESPURCHASE PROCESS FOR SERVICESPREPURCHASE STAGE

NEED INFORMATION SEARCH EVALUATION OF SERVICE SUPPLIERS

SERVICE ENCOUNTER STAGE INITIATE SERVICE FROM SUPPLIER SERVICE DELIVERY

POSTPURCHASE STAGE EVALUATION OF SERVICE PERFORMANCE FUTURE

REFERENCE

PRE-PURCHASE STAGEDecision to buy and use a service. Needs and expectations of customer will influence alternatives considered. Purchase routine and low risk, customers select Service provider quickly. First time Service requirement, of a high risk, customers spend more time to select service provider.

CONSUMER BEHAVIOR IN SERVICESPERCEIVED RISKS1. Functional – Will this service deliver desired result.2. Financial – Will I lose money 3. Temporal – Time Loss, Delays4. Physical –Injury or Damage to Possession5. Psychological – Fears ( flying), Emotions (feel upset)6. Social – Others’ thinking, Reaction7. Sensory – Unwanted sensory feelings. (comfort,

smell)SERVICE ENCOUNTER STAGE Begins with starting the service process:

placing an order, submitting an application. In high contact services, customers involved in service process. In low contact, impersonal interactions with instruments, computers. Customers experience a variety of elements during service delivery providing clues to service quality.

POST PURCHASE SERVICES EVALUATIONSearch Attributes: Physical goods can be evaluated before purchase. Style, colour, texture, taste, machine output are tangibles that can be tested before purchase. Apparel, automobiles, electronics, food are goods high in search attributes.Experience Attributes: To evaluate some services, customers must experience them: Can be evaluated only after purchase -entertainment, restaurants fall in the Experience Category. Information on Websites, reviews, by friends etc. may not help in evaluation.Credence Attributes: Product characteristics extremely difficult for customers to evaluate even after purchase and consumption. Customer forced to trust that benefits have been delivered.

SERVICE POSITIONING STRATEGYHow do businesses compete?

“On Service” …. “Value for money”, “Service quality”, “People”, “Convenience”

Speed, Quality, Extras to core serviceConvenient Location, Time or Ease of use Which product feature interests a customer? Will help develop Competitive Strategy. Else customers will not perceive any real difference between competitive alternatives and choose basis price.Positioning Strategy is to create and maintain distinctive differences that will be noticed and valued by Potential Target Customers for a longterm relationship.

SERVICE POSITIONING ….Service firms to provide a narrow product mix for a particular market segment – a group of buyers with common characteristics, needs, purchasing behavior or consumption pattern. Concentrate resources on strategically important elements of service operations. A firm’s focus can be described in two dimensions - Market focus and Service focus. Market focus is extent to which a firm serves few or many markets. Service focus is extent to which a firm offers few or many services. These two dimensions describe four Basic focus Strategies. A fully focused firm provides limited range of services (maybe one core product) to a narrow and specific market segment. A Market focused firm concentrates on narrow market segment but wide range of Services.

SERVICE POSITIONING ….. BREADTH OF SERVICE

OFFERING

NARROW WIDE

NUMBER OF MARKETS SERVED

MANYSERVICEFOCUSED

UNFOCUSED (EVERYTHING

FOR EVERYONE)

FEW

FULLY FOCUSED(SERVICE & MARKET

FOCUSED)

MARKET FOCUSED

Service focused firms offer narrow range of services to a fairly broad market. Many Service providers fall into unfocused category because they try to serve broad markets and provide a wide range of Services.

SERVICE POSITIONING ….SELECTION OF FOCUSFully focused strategy has Risks and Opportunities. Developing recognized expertise in a well defined niche may protect against potential competition and charge premium price. Risk-Market small for volume business and financial viability is ? The demand may be displaced by

genericcompetition or customers may be affected by economic downturn. Firms with narrow product line may serve multiple segments (service focused) to create portfolio of customers. For new customers firm should develop expertise. Developing expertise to serve each segment will require greater investment in marketing communication – in btob Services.

…….

SELECTION OF FOCUS ……Offering broad product lines to narrow target segment has potential of selling multiple services to customers. Firms must have operational capability. To cross-sell additional services to btob, client companies may have different purchase groups.

MARKET SEGMENTATIONFirms offer services to segmented markets to identify segments it can serve best. Need-based segments have customers valuing specific attributes. Mass customization to serve specific market segment by offering Standardized Core product with tailor-made supplementary service elements. Creation of customer Database and Analytical software enables firms Micro segment Strategies target micro- groups with similar characteristics.

CUSTOMER EXPECTATONS OF SERVICES

HOW CUSTOMERS EXPECTATIONS FORMED Good service expectations varies from

business: expectations from a vet to treat a pet or accountant for tax returns. Vary in differentiated positioned service providers – low cost airlines vs. full service. Purchase dept. evaluate against internal standards. Expectations change over time – Customers seek participative role in health care decisions.

CUSTOMER EXPECTATIONS COMPONENT Desired Service: Can and Should receive Zone of tolerance: Constant delivery difficult.

Extent of variation customers willing to accept. Adequate Service: Minimum Service levels Predicted Service: Anticipate Levels of Service

between Desired and Adequate Customers anticipate receiving ……

CUSTOMER EXPECTATONS ……Situational factors: Service Expectations affected By temporary reasons for purchase – Consumer’s mood, the Weather, Time Constraints and Urgency Reasons for purchase: Use of a Hotel Services – Breaking journey, Spending week-end, Using for Corporate Training, Shift of residence, Holding Social programmes. Consumer’s mood: Good mood means higher ZOT and level of adequate service lower. Reverseis also true. Improve mood with music, décor, aromatics, friendly service personnel. The Weather: Bad weather for airlines, desired Level remains but predicted level reduce as also

ZOT.

MEASURING SERVICE QUALITYConsumers evaluate 5 dimensions of service quality:Tangibles – physical facilities, (Soap, Heating, Room safe malfunctioned and light flashed and beeped at 3 AM)Reliability – perform service promised dependably and accurately (Service not in line with Broch.), Responsiveness – firm’s staff help customers with prompt service (Hotel staff ignored the presence, Room service reminded to remove tray) Assurance – Inspire trust and confidence through knowledge competence and courtesy and Empathy – Caring, Individualized attention (canned apology letter in response to complaint)

THE GAP MODELA MODEL OF SERVICE QUALIY

Service Quality means consistently meeting or

exceeding Customer Expectations. The Manager’s task is to balance Customer Expectations with Perceptions of service delivery and to close any gaps between

the two. P- E will give Service Quality.A Model Of Service Quality is given by Gap Model. The figure Identifies 5 Potential

Gaps. The Horizontal dash line divides Service

QualityGaps that are SP related and Consumer Oriented.

THE GAP MODEL

THE GAP MODELThe Knowledge Gap 1 :Difference betweenCustomers’ Needs & Expectation and SP’sPerceived Customer Expectation. A contractorwants to use the best grade electrical wire. Sub-contractor perceives contractor wants to keep costs down and uses low grade wire. The converse happening is also true. Extra services provided raise Expectations and also add to thecost.Cause Of Gap Strategies to ReduceFailure of Service Customer Communication,Provider to identify Market Research, Consumer Expectation Encourage Upward

Communication,Reduce Hierarchy

THE GAP MODELThe Standards Gap 2: Difference between firm’sperceived Customer Expectation and its translation to Service Quality Specifications. Reasons: 1.Resource Constraint ( Seasonal Service demand), 2. Market Conditions, 3. Indifference to Customers’ Needs Cause Of Gap Strategies to Reduce

GapResource Constraint Firm’s Commitment Market Conditions Develop Service Quality

GoalsIndifference Standardize tasks &

Address feasibility of Customer Expectation

Emphasis on high commitment to level of Service Quality. Competitive parity is to provide Service Quality at least as good as competition –

“Competitive Parity”

THE GAP MODEL

The Delivery Gap 3: Difference between firm’s

Service Quality Specifications and Delivery of

Specifications. This could be due: Service Provider’s employees’ Performance

Cause Of Gap Strategies to Reduce Gap

Employee unaware Enhance Teamwork of Specifications. Skills to Perform Employee, technologySpecifications job-fitUnwilling to Perform Supervisory Control, Specifications Reduce Role Conflict/

Ambiguity Conflict

THE GAP MODEL

Communication Gap 4 :The difference between

the External communication about service (Advertising, Sales Promise) and Service delivered. To increase patronage, firms are tempted tomake promises which may be difficult or impossible to deliver. Cause Of Gap Strategies to Reduce

GapPoor Communication Improve lateral

CommunicationOver Promising Avoid propensity to

over promise Emphasis on High Transparency on Service Quality and Reduce or Prevent Surprises for Customers

THE GAP MODELThe Perception Gap 5: The difference between what Consumers Receive and what they Expected. This is thesum of Gaps 1 to 4, both in direction and magnitude.Suppose a Consumer Survey gives scores to Gaps 1 to 4 on a scale of -3 to +3 as: +1, -3, +1 and 0, The score for Gap 5 would be +1 +(-3)+1+0 =-1This indicates the Service Performance fell Short of Customer Expectations. The SP shouldanalyze Gap 2 Closely to Rectify the Differencein their Standards of Quality Specifications.

BUILDING CUSTOMER RELATIONSHIP

Relationship Marketing represents a Paradigm shift in Marketing – away from Acquisitions toward a retention/ relationship focus. A Strategic orientation – focus on keeping and improving current customers rather than acquiring new customers. The customers prefer an ongoing relationship, not switch continually in search for value. Targeting, acquiring and retaining the right customers is at the CORE of successful firms. The fact is it is usually much cheaper to keep a current customer than to attract new one. Firms frequently focus on attracting customers but do not pay attention to keeping them. Sales, Advertising, Promotions attracts business. Bucket Theory ….

BUILDING CUSTOMER ….Customer Loyalty is described as: Willingness to using Products/ Services on a long term, Repeated purchase preferably on exclusive basis, Recommend firm’s Products/ Services to friends and associates. Customers changing Brands give adequate signals by reducing purchase and shifting to another Service provider. Researches have found that the longer customers stayed with a firm, the more profitable they became. Four factors which create incremental profits are: 1. Profit derived from increased purchases. 2. Profits from Reduced Operating Costs. 3. Profits from referrals to other customers. 4. Profits from Price Premium.

BUILDING CUSTOMER ….Impact on profits also depend upon Product Life cycle of Services – more impact of referrals in early stages of PLC. Customer Lifetime Value – Customers potential togenerate ongoing Stream of profits and are firm’simportant financial asset. Marketing Servicesprograms should be seen as investments ratherthan just operating expenses. The discounted value of each customer over expected lifetime with the firm gives CLV. Customer Equity is the sum of discounted Lifetime Values of firm’s current customers. Enhancing Customer Equity should be the key driver of Marketing Strategy.

BUILDING CUSTOMER ….Analyzing & Managing Customer Base: Firms should adopt a Strategic approach to retaining, upgrading and even terminating service to unprofitable customers. Firms need not make efforts to treat all customers with the same level of intensity. Most firms have several layers of customers basis profitability and these layers have different needs and service expectations. Customer layers form 4 layers of a pyramid

based on profit contribution and personal profiles.

Platinum

Gold Iron

Lead

BUILDING CUSTOMER ….Platinum: A small %age, Heavy user, Contribute large profit, Less Price sensitive andexpect large level of serviceGold: Larger customer base heavy users with individuals contribute less to profits. Slightly sensitive to price, less committed to firm. Iron: Provide bulk of customer base. Firm builds and maintains certain capacity level of Infrastructure needed for servicing Gold and Platinum customers. Gives the firm the economies of scale. Iron customers are marginally profitable.Lead: Customers generate low revenue, require the same level of service as with iron customers.

SERVICE RECOVERYService Recovery refers to the action taken by an organization response to a service failure.Failure occurs for many reasons:

The service may be unavailable when promisedDelivered late slowThe outcome may be incorrect or poorly executedEmployees may be rude or uncaring

These failures bring about negative feelings and responses for the customers. Result in customersLeaving and sharing negative experiences. Mayeven challenge the organization through customersrights organizations or legal channelsResearch has shown resolving customer problemseffectively has a strong impact on Customer Satisfaction, Loyalty and Bottom line performance.

SERVICE RECOVERYRepeated Service Failures without an effective Recovery Strategy in place can aggravate even the best employees.The costs in Employee Morale and even lost employee can be huge THE RECOVERY PARADOXIt is suggested that dissatisfied customers who experience a high level of excellent service recovery, may ultimately be even more satisfied and more likely to repurchase than are those who were satisfied I the first place.The logical but not very rational conclusion is that companies should plan to disappoint customers so that they can recover and gain even greater loyaltyfrom them as a result. This idea is known as the RECOVERY PARADOX.

SERVICE RECOVERYRecovery Paradox is more complex than it may seem on the surface. It is expensive to fix mistakes.Empirical Research suggests that only under the veryhighest levels of customers’ Service Recovery ratings will we observe increased satisfaction and loyalty. It is safe to say that “ Doing it right the first time “ is still the best and safest strategy.However, when a failure does occur, then every effort at a superior Recovery should be made to mitigate its negative effects. In cases where the failure can be fully overcome, the failure is less critical, or the Recovery Effort is clearly superlative, it may be possible to observe evidence of the Recovery Paradox.

CUSTOMER COMPLAINTS & ACTIONS

If customers initiate actions following service failure,the action can be of various types as shown in the Fig. From company’s point of view any customer who complains on the spot is the best case scenario. Company has the chance to respond immediately. If they don’t complain immediately, customers may choose to complain later to the provider by phone or in writing, or even write or call the corporate offices of the company. In all the above cases, the company has a chance to recover. These Proactive types of complaining behavior is preferred as voice responses or Seeking Redress. TYPES OF COMPLAINANTSFour Types of customers response to failures have been identified: (1) Passive (2) Vocal (3) Irate (4)Activist


(1) Passive: This group of customers is least likely to take

any Action. Less likely to spread negative Word of Mouth. They often doubt the effectiveness of complaining, thinking the consequences will not merit the time and effort spent. (2) Vocal:These customers actively complain to the service Provider, Less likely to spread negative word of mouth, switch patronage, or go to a third party with their complaints. These customers viewed as the Service providers friend. Actively complain and give company a second chance. They believe

complaining has social benefits and therefore don’t hesitate to voice their opinion.


Irate: These customers more likely to engage in negative word of mouth to friends and relatives and switch providers. They are angry with the service provider although they do believe that complaining to the service provider can have social benefits. They are less likely to give the service provider a second chance.Activists:These consumers have high propensity to complain. They will complain to the provider, they will tell others, and they are more likely to complain to third parties. They feel that all types of complaining will have positive consequences.

CUSTOMER COMPLAINTS & ACTIONSWHEN CUSTOMERS COMPLAIN, WHAT DO THEY EXPECT?Customers want justice and fairness in the handling of their complaints.Customers are looking for: OUTCAME FAIRNESS

PROCEDURAL FAIRNESS INTERACTIONAL FAIRNESS

Outcome Fairness: They expect equity in the exchange- i.e. they want to feel that the company has “Paid” for its mistakes in a manner at least equal to what the customer has suffered. The company’s “ punishment should fit the crime”. They also appreciate it when a company gives them choices in terms of compensation. E.g. A hotel guest should be offered the choice of a refund or free upgrade to a better room in compensation for a room not being available on arrival.

CUSTOMER COMPLAINTS & ACTIONSOn the other hand, customers can be comfortable if they are overly compensated. E.g. Domino’s Pizza offered not to charge if the delivery was after 30 minutes of ordering. Many customers were not comfortable asking for this level of compensation, especially if the driver was only few minutes late.Procedural Fairness: In addition to fair

compensation, customers expect fairness in policies, rule and timeliness of complaint redress. They want easy access to the complaint process. Fair procedures are characterized by clarity, speed and absence of complexities. Unfair procedures are those that customers perceive as slow, prolonged and inconvenient. Customers also feel it is unfair if they have to prove their case- when the assumption seems to be they are wrong or lying until they can prove otherwise.

CUSTOMER COMPLAINTS & ACTIONSInteractive Fairness: Customers expect to be treated politely, with care and honesty. This form of fairness can dominate the others if customers feel the company and its employees have uncaring attitude and have done little to try to resolve the problem. Often rude and uncaring behavior of employees is due to lack of training and empowerment- a frustrated, frontline employee who has no authority to compensate the customer may easily respond in an aloof and uncaring manner, especially if the customer is angry and/or rude.SWITCHING VERSUS STAYING - SERVICE RECOVERYUltimately, customer’s reaction to a Service Recovery failure handling will influence future decisions to remain loyal to the service provider orto switch to another provider.

Service Marketing System: (1) High Contact Service-e.g., Hotel

TheCustomer

TechnicalCore

Interior & ExteriorFacilities

Equipment

Service People

OtherCustomers

OtherCustomers

Advertising

Sales CallsMarket Research Surveys

Billing / Statements

Miscellaneous Mail, Phone Calls, Faxes, etc.

Random Exposure toFacilities / Vehicles

Chance Encounters with Service Personnel

Word of Mouth

Service Operations System

Backstage(invisible)

Front Stage(visible)

Service Delivery SystemOther Contact Points

Service Marketing System

Service Marketing System: (2) Low Contact Service-e.g., Credit Card(2) Low Contact Service-e.g., Credit Card

TechnicalCore

Mail

Self ServiceEquipment

Phone, Fax, Web site

etc.

TheCustomer

Service Operations System

Service Delivery System Other Contact Points

Backstage(invisible)

Front Stage(visible)

Advertising

Market Research Surveys

Random ExposuresFacilities, Personnel

Word of Mouth

Service Marketing System

SERVICE BLUEPRINTING

A service blueprint is a picture or map that

accurately portrays the service system so

that the different people involved in

providing it can understand and deal with it

objectively regardless of their roles or their

individual point of view.

SERVICE MAPPING/BLUEPRINTINGA tool for simultaneously depicting the service process, the points of customer contact, and the evidence of service from the customer’s point of view.

ServiceMapping

Process

Points of Contact

Evidence

SERVICE BLUEPRINT COMPONENTS

CUSTOMER ACTIONSline of interaction

“ONSTAGE” CONTACT EMPLOYEE ACTIONS

line of visibility

“BACKSTAGE” CONTACT EMPLOYEE ACTIONS

line of internal interaction

SUPPORT PROCESSES

SERVICE BLUEPRINT COMPONENTS

SERVICE BLUEPRINTING: KEY COMPONENTS

1. Define standards for front stage activities

2. Specify physical evidence

3. Identify principal customer actions

4. ------------line of interaction (customers and front stage personnel)--------

5. Front stage actions by customer-contact personnel

6. ------------line of visibility (between front stage and backstage)--------------

7. Backstage actions by customer contact personnel

8. Support processes involving other service personnel

9. Support processes involving IT

Where appropriate, show fail points and risk of excessive waits

Simplified Example: Blueprinting a Hotel Visit

(extract only)

PhysicalEvidence

Customer Actions

Employee Actions Face-to-face

Fro

nt

Sta

ge

Phone Contact

Bac

ksta

ge

Makereservation

Rep. records, confirms

Arrive, valet park

Check-in at reception

Doorman greets, valet takes car

Enter data

Valet Parks Car

Make up Room

Register guest data

Receptionist verifies, gives key to room

Go to room

Hotel exterior, lobby,employees, key

Elevator, corridor,room, bellhop

Line of Interaction

Line of Visibility

Driver Picks Up Pkg.

DispatchDriver

AirportReceives& Loads

SortPackages

Load onAirplane

Fly toDestination

Unload&

Sort

LoadOn

Truck

EXPRESS MAIL DELIVERY SERVICESU

PP

OR

T P

RO

CE

SSC

ON

TA

CT

PE

RSO

N

(Bac

k St

age)

(On

Stag

e)

CU

STO

ME

RP

HY

SIC

AL

EV

IDE

NC

E

CustomerCalls

CustomerGives

Package

TruckPackagingFormsHand-held ComputerUniform

ReceivePackage

TruckPackagingFormsHand-held ComputerUniform

DELIVER

PACKAGE

CustomerServiceOrder

Fly toSort

Center

OVERNIGHT HOTEL STAYS

UP

PO

RT

PR

OC

ES

SC

ON

TA

CT

PE

RS

ON

(Bac

k S

tage

)(O

n S

tage

)C

US

TO

ME

R

HotelExteriorParking

Cart for Bags

DeskRegistrationPapersLobbyKey

ElevatorsHallwaysRoom

Cart for Bags

RoomAmenitiesBath

Menu DeliveryTrayFoodAppearance

Food

BillDeskLobbyHotelExteriorParking

Arriveat

Hotel

Give Bagsto

BellpersonCheck in Go to

RoomReceive

BagsSleep

Shower

CallRoom

Service

ReceiveFood

EatCheck out

andLeave

Greet andTakeBags

ProcessRegistration

DeliverBags

DeliverFood

ProcessCheck Out

Take Bagsto Room

TakeFood

Order

RegistrationSystem

PrepareFood

RegistrationSystem

PH

YS

ICA

LE

VID

EN

CE

Step 1

Identify the process to be blue-printed.

Step 1

Identify the process to be blue-printed.

Step 2

Identify the customer or customer segment.

Step 2

Identify the customer or customer segment.

Step 3

Map the process from the customer’s point of view.

Step 3

Map the process from the customer’s point of view.

Step 4

Map contact employee actions, onstage and back-stage.

Step 4

Map contact employee actions, onstage and back-stage.

Step 5

Link customerand contact person activities to needed support functions.

Step 5

Link customerand contact person activities to needed support functions.

Step 6

Add evidence of service at each customer action step.

Step 6

Add evidence of service at each customer action step.

BUILDING A SERVICE BLUEPRINT

SERVICE BLUEPRINTING STEPS

1.Identify Process 2.Isolate fail points3. Establish a time frame4. Analyze profitability

APPLICATION OF SERVICE BLUEPRINTS

New Service Development•concept development•market testing

Supporting a “Zero Defects” Culture•managing reliability• identifying empowerment issues

Service Recovery Strategies• identifying service problems• conducting root cause analysis• modifying processes

BLUEPRINTS CAN BE USED BY:Service Marketers– creating realistic

customer expectations

• service system design

• promotion

Operations Management– rendering the

service as promised

• managing fail points

• training systems• quality control

Human Resources– empowering the

human element• job descriptions• selection criteria• appraisal systems

System Technology– providing

necessary tools:• system

specifications• personal

preference databases

Degree of Interaction & Customization of Services

CUSTOMIZATION

DEGREEOF LABORINTENSITY

Standardized

Capital Intensive

Labor Intensive

Customized

Service Factory Service Shops

Professional Services

Mass service

Source: Robert Johnston

Airlines

Trucking

HotelsResorts & Recreations

Hospitals

Auto repair

Other repair

services

Retailing/Warehousing

Schools

Retail aspects of

Commercial Banking

Doctors

Lawyers

Accountants

Architects

Factors Necessary for Appropriate Service Standards

Standardization can take 3 forms:1. Substitution of technology for personal

contact & human effort 2 Improvement in work methods3 Combination of these two methodsStandardizing whether accomplished bytechnology or by improvements in work processes, Reduces GAP 2Both technology & improved work processes structure important elements of service provision and also facilitate goal setting

CUSTOMER – DEFINED SERVICE STANDARDS

Once marketers understand what customers expect

Critical Challenge is using this knowledge to set

service quality standards and goals for the Organization.Difficulty in Setting Standards to match or

exceed customer Expectations is because it requires

that the Marketing & Operations within a company work together.

( Also known as Functional Integration)


The Translation of Customer Expectations-Service Quality Standards: – Degree to which tasks and behaviors performed

can be Standardized or made RoutineSome managers feel that services cannot be standardized

As standardizing the tasks is perceived as being impersonal, inadequate and not in customers best interest.It is also inconsistent with employee empowerment- they feel controlledServices are too intangible to be standardized(This leads to vague & loose standard setting with little or no measurement or feedback.)In reality many service tasks are routine – specific rules and standards can be fairly established and effectively executed.


Employees welcome knowledge to perform actions most efficiently :It frees them to use their ingenuity in the more personal & individual aspects of theirjobs.Even in Highly Customized Services – Manyaspects of Service can be made RoutineDentist & Physician–Examining Patients weighing, taking routine measurements,billing. More time of the Dentist & Physician can bespent on the expert services of diagnosis orpatient care

Customer – Not Company – Defined Standards

Company Defined – Established to reachinternal company goals for productivity,efficiency, cost, or technical quality.To close GAP 2 standards must be based on Customer Requirements and Expectationsrather than just on internal company goalsInstead company should set Customer-Defined Standards- Operational standards based on pivotal customer requirementsthat are visible to & measured by customers

Customer-Defined Service Standards

1. Hard Customer-Defined Standards2. Soft Customer-Defined Standards3. One-Time Fixes4. Building Blocks: The Service Encounter

Sequence5. Expressing Customer Requirements as

Specific Behaviors and Action6. Measurements of Behavior and Actions

Process For Developing Customer-Defined Standards

1. Identify Existing or Desired Service EncounterIdentify Existing or Desired Service Encounter

2. Translate Customer expectations into Behaviors / Actions

3. Select Behaviors/Actions for Standards

4. Set Hard or Soft Standards

5. 5. Develop Feedback Mechanisms

6. Establish measures against standards

7. Track Measures Against Standards

8. Provide Feedback about Performance to Employees

9. Periodically Update Target Levels and Measures

SoftHard

Measuredby audits

or operating

data

Measured by

transaction based surveys

APPROACHES TO SERVICE RESEARCH

Service-Quality Information System: Too much Research information obscures most meaningful insights, may intimidate intended users. Also, incomplete information injects needless guessing into decision making. Nature of Services, firm’s Service Strategy and needs of information users determine Service- Quality research approaches to use.

Market ResearchMarket ResearchType of

ResearchPrimary Research

Objectives

Qualitative/

Quantitative

Monetary

Time Frequency

Complaint solicitation

To identify/attend to dissatisfied customersTo identify common service failure points

Qualitative

Low Low Continuous

Critical incident studies

To identify “best practices” at transaction levelTo identify customers requirements as input for qualitative studiesTo identify common service failure pointsTo identify systemic strengths and weaknesses in customer-contact services

Qualitative

Low Moderate

Periodic

Market Research contd …..Type of Research

Primary Research Objectives

Qualitative/Quantitative

Monetary

Time Frequency

Requirementsresearch

To identify customer requirements as input for qualitative research

Qualitative

Moderate

Moderate

Annual

Relationship surveys and SERVQUAL surveys

To monitor and track service performanceTo assess overall company performance compared with that of competitionTo determine the links between satisfaction and behavioral intentionsTo assess gaps between customer expectations and perceptions

Quantitative

Low Low Continuous

Market Research contd ….. …..Type of Research



Monetary

Time Frequency

Trailer calls

To obtain immediate feedback on performance of service transactionsTo measure effectiveness of changes in service deliveryTo assess service performance of individuals and teamsTo use as input for process improvementsTo identify common service failure points

Quantitative

Low Low Continuous

Service expectation meetings and reviews

To create dialogue with important customersTo identify what individual large customers expect and then to assure that it is delivered To close the loop with important customers

Qualitative

Moderate

Moderate

Annual




Monetary

Time Frequency

Process checkpoint evaluations

To determine customer perceptions of long term professional services during service provisionTo identify service problems and solve them early in the service relationship

Qualitative

Moderate

Moderate

Periodic

Market –oriented ethnography

To research customers in natural settingsTo study customers from cultures other than your home country

Qualitative

Moderate

High Periodic

Market Research contd …..Market Research contd …..Type of Research



Monetary

Time Frequency

Mystery shopping

To measure individual employee performance for evaluation , recognition and rewardsTo identify systemic strengths and weaknesses in customer-contact services

Quantitative

Low Low Quarterly

Customer panels

To monitor changing customer expectationsTo provide a forum for customers to suggest and evaluate new service ideas

Qualitative

Moderate

Moderate

Continuous

Lost customer research

To identify reasons for customer defection

Qualitative

Low Low Continuous




Monetary

Time

Frequency

Future expectationsresearch

To forecast future expectations of customersTo develop and test new service ideas

Qualitative

High High

Periodic

Database marketing research

To identify the individual requirements of customers using information technology and database information

Quantitative

High High

Continuous

CUSTOMERCUSTOMER

COMPANYCOMPANYService DeliveryService Delivery

Service Service Performance Performance

GapGap

Customer-Driven Service Designs and

Standards

Provider Gap 3

Understanding the Components of the Augmented Service Product

Employees’ Role in Service Delivery

Service CultureThe Critical Importance of Service EmployeesBoundary-Spanning RolesStrategies for Delivering Service Quality Through PeopleCustomer-Oriented Service Delivery

Service Leadership & CultureStrong Service Culture developed and continuously Reinforced by ManagementManagement Leadership required to change Values, Goals and Aspirations of Front Line staff to be in line with Service OrganisationOrganisation culture have core values as Excellence, Innovation, Team work, Respect, Integrity and Social Profit

1. Shared Perception of What is important in an organization

2. Shared Values and Beliefs about Why these things are important

Service Leadership & CultureStrong Service Culture focus on Front LineBeing Lifeline of Services business. Revenues driven by what happens at Service Encounter. The Service Triangle

Customer

Service Encounter

Front Line

Top Management, Employees Support Front Line

Highlights importance of front line showingthe role of Top Management and employeesis to support Front Line to deliver excellence

111

Service Culture

Corporate culture is defined asThe pattern of shared values and beliefs that

give the members of an organization meaning, and provide them with the rules for

behavior in the organization.

EmpowermentBenefits:– quicker responses to

customer needs – quicker responses to

dissatisfied customers– employees feel better

about their jobs and themselves

– employees tend to interact with warmth/enthusiasm

– empowered employees are a great source of ideas

– great word-of-mouth advertising from customers

Drawbacks:– potentially greater

dollar investment in selection and training

– higher labor costs– potentially slower

or inconsistent service delivery

– may violate customers’ perceptions of fair play

– employees may “give away the store” or make bad decisions

113

Traditional Organizational Chart

Manager

Supervisor

Front-Front-lineline

EmployEmployeeee

Customers


EmployEmployeeee


EmployEmployeeee


EmployEmployeeee

Supervisor


EmployEmployeeee


EmployEmployeeee


EmployEmployeeee


EmployEmployeeee

114

Customer-Focused Organizational Chart

Manager

Supervisor


EmployEmployeeee

Customers


EmployEmployeeee


EmployEmployeeee


EmployEmployeeee

Supervisor


EmployEmployeeee


EmployEmployeeee


EmployEmployeeee

•Front-Front-lineline

EmployeeEmployee

EMPLOYEES’ ROLE IN SERVICE DELIVERY

The Critical Importance of Service EmployeesIt is very important to focus on employees because :They are the serviceThey are the organization in the customer’s eyesThey are the brandsThey are the marketers

In many cases , the contact employee is the service –

there is nothing else. E.g. in most personal and professional services (like haircutting, physical trainers, child care , cleaning /maintenance etc.) the contact employees provide s the entire service

single handedly. The offering is the employee. Thus investing in the employee to improve the service parallels making a direct investment in the improvement of a manufactured product.

EMPLOYEES’ ROLE IN SERVICE DELIVERY

Because contact employees represent the organization and can directly influence customer satisfaction, they perform the role of marketers.

They physically embody the product and are the walking billboards from the promotional point of view.Whether acknowledged or not, actively selling or not, service employees perform marketing functions.

They can perform these functions well, to the organization’s advantage, or poorly to the organization’s detriment.

EMPLOYEE SATISFACTION, CUSTOMER SATISFACTION AND PROFITS

Concrete evidence - satisfied employees make for satisfied customers (satisfied customers can, in turn, reinforce employees’ sense of satisfaction in their jobs). Suggest - unless service employees happy in their jobs, customer satisfaction difficult to achieve.

117

The Services Marketing Triangle

Internal Marketing

Interactive Marketing

External Marketing

Company(Management)

CustomersEmployees

“Enabling the promise”

““Delivering the promise”

“Making the promise”

Source: Adapted from Mary Jo Bitner, Christian Gronroos, and Philip Kotler

118

Services Marketing Triangle Applications Exercise

Focus on a service organization. In the context you are focusing on, who occupies each of the three points of the triangle?

How is each type of marketing being carried out currently?

Are the three sides of the triangle well aligned?

Are there specific challenges or barriers in any of the three areas?

119

Ways to Use the Services Marketing Triangle

Overall Strategic Assessment– How is the service

organization doing on all three sides of the triangle?

– Where are the weaknesses?

– What are the strengths?

Specific Service Implementation

– What is being promoted and by whom?

– How will it be delivered and by whom?

– Are the supporting systems in place to deliver the promised service?

EMPLOYEE SATISFACTION, CUSTOMER SATISFACTION AND PROFITS

Research has shown that both a climate for service and a climate for employee well-

being are highly correlated with overall customer perceptions of service quality.

121

Service Quality Dimensions

ReliabilityResponsivenessAssuranceEmpathyTangibles

Service Employees

Who are they?–“boundary spanners”

What are these jobs like?–emotional labor–many sources of potential conflict

•person/role•organization/client•interclient

–quality/productivity tradeoffs

123

Boundary Spanners Interact with Both Internal and External

Constituents

Internal Environment

External Environment

124

Boundary-Spanning Workers Juggle Many Issues

Person versus role

Organization versus client

Client versus client

125

Person/Role Conflict

This conflict arises when what they are

asked to do things that are quite different

from their personalities.

126

Organization/Client Conflict

Front line executives have two bosses:The organization & the individual customer

The conflict may arise when the employee has

To make a difficult choice between the customer, the rules & satisfaction for the customer

127

Interclient Conflict

Serving many customerssimultaneously

Employee

Serving customers in turn

128

Quality/Productivity Trade-Offs

Front-line service employees have to both :

Effective & Efficient

They are expected to deliver satisfying service

to customers and at the same time have to be

cost effective & productive .

Pricing Of Services

Three Key Ways Service Prices Are Different For Consumers

Customer knowledge of Service PricesThe Role of Non-monetary CostsPrice as an Indicator of Service Quality

Customer Knowledge of Service Prices

Service heterogeneity limits knowledgeProviders are unwilling to estimate pricesIndividual customer needs varyPrice information is overwhelming in servicesPrices are not visible

The Role of Nonmonetary Costs

Time CostsSearch CostsConvenience CostsPsychological Costs

Price as an Indicator of Service Quality

Customers depend on price as a cue to quality

and because price sets expectations of quality,

service prices must be determined carefully.

Approaches to Pricing Services

Cost-based

Demand- b

ased

Competition-based

Cost-Based Pricing

•Costs are difficult to trace.

•Labor is more difficult to price than materials.

•Cost may not equal value.

Competition-Based Pricing

•Small firms may charge too little to be viable.

•Heterogeneity of services limits comparability.

•Prices may not reflect customer value.

Demand-Based Pricing

•Monetary price must be adjusted to reflect the value of nonmonetary costs.

•Information on service costs is less available to customers, hence price may not be a central factor.

Four Customer Definitions of Value

Value is low price. Value is everythingI want in a service.

Value is all thatI get for allthat I give.

Value is the quality I get for the price I pay.

What Makes Service Pricing Strategy Different (and Difficult)?

No ownership of services --hard for firms to calculate financial costs of creating an intangible performanceVariability 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 fasterDelivery through physical or electronic channels --may create differences in perceived value

Objectives of Pricing Strategies

Revenue and profit objectives–Seek profit–Cover costsPatronage and user base-related objectives–Build demand–Build a user base

The Pricing Tripod

Pricing Strategy

CostsCompetition

Value to customer

Three Main Approaches to PricingCost-Based Pricing–Set prices relative to financial costs (problem: defining costs)

Competition-Based Pricing–Monitor competitors’ pricing strategy (especially if service lacks differentiation)

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

Value-Based–Relate price to value perceived by customer

Activity-Based Costing: Relating Activities to the Resources They Consume

Managers need to see costs as an integral part of a firm’s effort to create value for customersWhen looking at prices, customers care about value to themselves, not what production costs the firmTraditional cost accounting emphasizes expense categories, with arbitrary allocation of overheadsABC 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

Perceived

Benefits

Timee

Effort

Net Value = (Benefits – Outlays)

Perceived Outlays

Enhancing Gross ValuePricing 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

Paying for Service:The Customer’s Perspective

Customer “expenditures” on service comprise both

financial and non-financial outlaysFinancial costs:–price of purchasing service–expenses associated with search, purchase activity, usage

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

Determining the Total Costs of a Service to the Consumer

Price

Related Monetary Costs

Time Costs

Physical Costs

Psychological Costs

Sensory Costs

Necessary follow-up

Problemsolving

Operating Costs

Incidental Expenses

Purchase andUse Costs

Search Costs

After Costs

Trading off Monetary and Non- Monetary Costs

Which clinic would you patronize if you needed a chest x-ray (assuming all three

clinics offer good quality) ?

Price $85 Located 15 min

away by car or transit

Next available appointment is in 1 week

Hours: Monday – Friday, 8am – 10pm

Estimated wait at clinic is about 30 - 45 minutes

Clinic BClinic B

Price $125 Located next to

your office or college

Next appointment is in 1 day

Hours: Mo –Sat, 8am – 10pm

By appointment - estimated wait at clinic is about 0 to 15 minutes

Clinic CClinic CClinic AClinic A

Price $45 Located 1 hour

away by car or transit

Next available appointment is in 3 weeks

Hours: Monday – Friday, 9am – 5pm

Estimated wait at clinic is about 2 hours

Increasing Net Value by Reducing Non-financial Costs of Service

Reduce time costs of service at each stage

Minimize unwanted psychological costs of service

Eliminate unwanted physical costs of service

Decrease unpleasant sensory costs of service

Revenue Management: Maximizing Revenue from Available Capacity at a

Given TimeBased 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

The Strategic Levers of Revenue (Yield) Management

Quadrant 4:Continuing CareHospitals

Quadrant 3:RestaurantsGolf Courses

Unpredictable

Quadrant 2:Hotel RoomsAirline SeatsRental Cars Cruise Lines

Quadrant 1:MoviesStadiums/ArenasFunction Space

Predictable

Du

rati

on

VariableFixed

Price

services marketing ab

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