Instructor Solution Manual For Services Marketing Concepts, Strategies, & Cases, 5th Edition K. Doug

Instructor Solution Manual For Services Marketing Concepts, Strategies, & Cases, 5th Edition K. Douglas Hoffman John E.G. Bateson Chapter 1-15

CHAPTER 1: AN INTRODUCTION TO SERVICES  PowerPoint Slide: #1 "It‘s just the little touches after the average man would quit that makes the master‘s fame."

Orison Swett Marden, Founder, Success magazine

Chapter Objectives: This chapter provides an introduction to the field of services marketing. The chapter discusses the basic differences between goods and services and the factors necessary for the creation of the service experience. In addition, the chapter establishes the importance of the service sector in the world economy and the need for services marketing education.

Learning Objectives:

 PowerPoint Slide: #2

After reading this chapter, you should be able to 1. Understand the basic difference between goods and services. 

In general, goods are defined as objects, devices, or things, whereas services are defined as deeds, efforts, or performances (The term product refers to both goods and services and is used in such a manner throughout the remainder of this text).

2. Develop an appreciation for how service can be used as a competitive advantage for both intangible and tangible products. 

The scale of market entities displays a continuum of products based on their tangibility where goods are tangible dominant and services are intangible dominant. The core benefit of a tangible dominant product typically involves a physical possession that contains service elements to a less degree. In contrast, intangible dominant products do not involve the physical possession of a product and can only be experienced.

3. Appreciate the factors that create the customer's service experience and why it is important to manage the overall experience. © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.



The Servuction model is constructed of two parts: that which is visible to the consumer and that which is not. The visible part of the Servuction model consists of three parts: the inanimate environment, the contact personnel/service providers, and other customers. The invisible component of the model consists of the invisible organization and systems.

4. Comprehend the driving forces behind the importance of the study of services marketing. 

There are a number of reasons why the study of services marketing is important: (1) consumers evaluate services differently than goods, and service marketers must effectively manage the experiential aspects of the service product; (2) services can be effectively used as a differential advantage for tangible dominant products; (3) the growth of the global service economy in terms of contributions to gross domestic product (GDP) has increased dramatically; (4) the growth of the global service workforce has also increased accordingly; (5) the emergence of technologically based e-services has transformed many service industries; and (6) knowledge is needed in the area of developing sustainable services marketing business practices.  PowerPoint Slide: #3

Opening Vignette: “The Burj al Arab Hotel 

The world‘s only 7-star hotel offers guests a remarkable service experience: o Magnificent views o Large rooms o Rain showers and Jacuzzis standard o Fleet of chauffeur-driven Rolls-Royces o Finest in personal service



The concepts provided in this text are the keys for delivering a truly remarkable service experience.

Lecture Outline: I.

Introduction A.

Traditional goods producers are turning to the service aspects of their operation to establish a differential advantage in the marketplace

B.

New ―global services era‖ characterized by: 1.

 PowerPoint Slide: #4

Economies and labor force dominated by the service sector

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2.

3.

4.

5.

6.

II.

More customer involvement in strategic business decisions Products that are increasingly market-focused The development of technologies that assist in the provision of services Employees with more discretionary freedom The emergence of new service industries and the ―service imperative‖ -Reflects the view that the intangible aspects of products are becoming the key features that differentiate the product in the marketplace.  PowerPoint Slide: 5

What Is a Service?

A.

The distinction between goods and services is not perfectly clear.

Examples include General Electric and IBM, generally thought of as major goods producers, who now generate more than half of their revenues from services.

B.

1.

Goods - is described as objects, devices, or things.

2.

Services - is described as deeds, efforts, or performances.

3.

Product – refers to both goods and services.

Scale of Market Entities 1.

 PowerPoint Slides: #6, 7

Helps illustrate how products fall along a continuum that ranges from tangible dominant to intangible dominant. (See Figure 1.1) -Tangible dominant: products that possess physical properties that can be felt, tasted, and seen prior to the consumer’s purchase decision.

-Intangible dominant: products that lack the physical properties that can be sensed by consumers prior to the purchase decision

2.

Defining service businesses too narrowly, firms can develop classic cases of marketing myopia.

-is the practice of too narrowly defining one’s business by overlooking the service aspects of one’s products.  PowerPoint Slide: #8

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C.

The Economic Value of Transforming Goods into Services 1.

The economic value of products, like the coffee bean, progresses from commodities to goods to services to experiences. (See Figure 1.2)  PowerPoint Slide: #9

D.

III.

Molecular Model 1.

A conceptual model of the relationship between tangible and intangible components of a firm’s operations. (See Figure 1.3)

2.

Understanding the importance and components of the service experience is critical.

Creating the Service Experience A.

B.

 PowerPoint Slide: #10

Benefit concept -the encapsulation of the benefits of a product in the consumer’s mind 1.

Services deliver a bundle of benefits through the experience that is created for the consumer.

2.

For example, most consumers of an orange will never see the orange grove, will most likely never interact with the grove workers who harvest the fruit nor with the management staff that directs the workers; and they will also generally not consume the orange in the company of other consumers at the grocery store.

 PowerPoint Slides: #11–16 Servuction Model -a model used to illustrate the factors that influence the service experience, including those that are visible to the consumer and those that are not. (See Figure 1.4) Consists of four factors that directly influence consumers‘ service experience: (visible) servicescape, contact personnel/service providers, other customers, and (invisible) organizations and systems 1.

Servicescape -the physical evidence used to design service environments.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

2.

a.

Plainly visible to consumers.

b.

Consists of ambient conditions, inanimate objects, and other physical evidence.

Contact Personnel/Service Providers -Contact Personnel - employees other than the primary service provider who briefly interact with the customer.

-Service Providers - the primary providers of a core service, such as a waiter or waitress, dentist, physician, or college instructor.

3.

4.

IV.

a.

Plainly visible to consumers.

b.

Interaction between consumers and contact personnel/service providers are commonplace.

Other Customers a.

Plainly visible to consumers.

b.

Many customers may be served simultaneously. The influence of other customers can be active or passive.

Invisible Organization and Systems -reflects the rules, regulations, and processes upon which the organization is based. a.

Invisible to consumers.

b.

Have a very profound effect on the consumer‘s service experience.

Why Study Services?

A.

 PowerPoint Slide: #17

Growth of the global service economy 1.

Caused by a highly competitive international marketplace

2.

Higher disposable incomes have led to a proliferation of personal services a.

Particularly in the entertainment sector  PowerPoint Slide: #18

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b.

Breakdown of U.S. Service Supersectors and their respective contributions to GDP (see Figure 1.5)  PowerPoint Slide: #19

c.

End result has been phenomenal growth in service industries, shown clearly in Worldwide GDP (see Figure 1.6)  PowerPoint Slide: #20

B.

C.

Growth of the global service labor force 1.

(See Figure 1.7) The growth and shifting of employment from agriculture to manufacturing to services

2.

U.S. Bureau of Labor Statistics expected service occupations to account for more than 96% of all new job growth for the period 2002–2012.

3.

The bulk of new jobs created in America over the last 30 years have been white-collar jobs, in higher-level professional, technical, administrative, and sales positions.

4.

Read Global Services in Action – Ski Dubai

 PowerPoint Slide: #21 Emergence of e-services?

- an electronic service available via the Net that completes tasks, solve problems, or conducts transactions 1.

Phenomenal developments in technology – particularly the Internet  PowerPoint Slide: #22 a.

In 2014, over 3 billion people representing 42.3% of the world‘s population had access to the Internet. (See Figure 1.8)

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2.

Growth of e-services a.

b.

D.

1.

Technologically based services that help customers help themselves.

2.

Including local bank‘s online account services, ATMs, UPS package tracking service, Schwab‘s stock trading services, Travelocity‘s online purchasing options, a grocery store‘s self-check-out

Read E-Service In Action – Restaurants Ride the Social Media Wave  PowerPoint Slide: #23

Developing sustainable service marketing business practices -the ability to meet current needs without hindering the ability to meet the needs of future generations in terms of economic, environmental, and social challenges 1.

V.

Including self-service technologies

Why would a service provider want to embrace sustainable practices? a.

When the social good can overlap with business opportunity

b.

The overlap is known as the ―sweet spot‖

2.

There are four areas in which a company can achieve a source of competitive advantage: eco-efficiency, environmental cost leadership, beyond compliance leadership, and eco-branding.

3.

Read Sustainability & Service in Action – The Origins and Growth of ―Green‖

Summary Ultimately, service marketing is about managing the compromising relationships that must exist among marketing, operations, and human resources.

Services permeate every aspect of our lives; consequently, the need for services marketing knowledge is greater today than ever before.

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REVIEW QUESTIONS: 1. Define the following terms: goods, services, products.

In general, goods are defined as objects, devices, or things, whereas, services are defined as deeds, efforts, or performances. The term product refers to both goods and services.

2. What can be learned from the service imperative?

Today‘s business environment is experiencing the emergence of new service industries and the ―service imperative,‖ where the intangible aspects of the product are becoming more and more the key features that differentiate product in the marketplace. There are countless examples of firms using the service imperative to drive their businesses forward to profit and growth.

3. Why is it difficult to distinguish between many goods and services? Use the scale of market entities and the molecular model concept to explain your answer.

The distinction between goods and services is not always perfectly clear. In reality, most services contain some tangible components, while most goods also contain intangible components. It is difficult to say whether a pure service or a pure good even exist. The scale of market entities helps us understand whether the product under consideration is tangible dominant or intangible dominant.

4. Utilizing the servuction model, describe your classroom experience.

Answers will vary, but at the core should be a description of the visible servicescape, contact personnel/service providers, other customers, and invisible organization and systems.

5. How would your servuction model, discussed in question 4, change as you describe the experience at a local restaurant?

Answers will vary, but at the core should be a description of the visible servicescape, contact personnel/service providers, other customers, and invisible organization and systems.

6. How does the organization and systems dimension of the servuction model differ from the other three dimensions? What is the purpose of the organization and systems dimension?

The organization and systems dimension is invisible to the customer. Of course, the visible components that comprise the servuction model cannot exist in isolation, and indeed, they have to be supported by invisible components that tie together the organization and its systems. Invisible organization and systems reflects the rules, © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

regulations, and processes upon which the organization is based.

7. As you consider the table that provides Worldwide GDP information, a mix of countries comprise the top 10 service economies. These countries sometimes differ greatly, yet still generate large service economies. Please explain.

Countries that industrialized their economies first eventually come under attack by other countries that are newly making the transition from an agricultural to an industrial economy. These ―newcomer‖ countries offer lower product costs that attract industry. Consequently, as industrial sectors flow from one country to the next, the countries they abandon begin to more heavily rely on the growth of their service sectors as the mainstay of their economies. All developed economies now have large service sectors; and Japan, France, and Great Britain have service economies at least as developed as that of the United States. Leading the pack are Hong Kong and the Bahamas.

8. Discuss the keys to delivering effective self-service technologies.

Self-service technologies are purposely created to automate routine interactions between customers and providers with the goal of providing convenience and efficiency to both parties. A self-service must provide the customer a benefit (e.g., convenience, an opportunity to customize, cost savings, time savings, etc.). An SST that is implemented purely to decrease the operating cost of the firm will most likely not be well-received.

9. Describe online services that help humanize the online experience.

E-services play a critical role in the transformation of the customer‘s online experience that progresses over time from a functional experience to a more personalized experience. E-service humanizes the Net by providing various customer service activities while simultaneously reducing the online firm‘s operating costs.

10. Discuss the four approaches to using sustainability as an effective business positioning strategy.

The four areas include: eco-efficiency, environmental cost leadership, beyond compliance leadership, and eco-branding. Eco-efficiency focuses on the concept of the ―double dividend.‖ Companies that attempt to reduce wastes and inefficiencies within the system see positive results both financially and environmentally.

Environmental cost leadership involves developing a radical innovation that will allow the company to be more environmentally friendly while maintaining cost competitiveness. Beyond compliance leadership involves companies wanting to increase their sustainability efforts, but also wanting these efforts to be acknowledged by the public. These companies often spend money on environmental certifications, such as LEEDS building certifications. The first-movers in an industry in this case have the greatest advantage. Those who take the first initiative are seen as innovative, while the rest of the companies within the industry are forced to follow © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

suit. Eco-branding strategies focus on the use of marketing differentiation based on the environmental attributes (e.g., organic, vegan, or fair-trade status) of products.

There are three basic prerequisites that often exist for firms to successfully execute this approach: consumers must be willing to pay for the costs of ecological differentiation; reliable information about the product’s environmental performance must be readily available to the consumer; and the differentiation must be difficult to imitate by competitors.

CHAPTER 2: THE SERVICE ECONOMY: SUPERSECTORS AND ETHICAL CONSIDERATIONS  PowerPoint Slide: #1 "If you don‘t have integrity, you have nothing. You can‘t buy it. You can have all the money in the world, but if you are not a moral and ethical person, you really have nothing."

Henry Kravis

Chapter Objectives: This chapter provides an overview of the service economy by introducing the nine service supersectors. Although on the surface many of these supersectors seem quite diverse, service classification schemes are discussed that assist in our understanding of the commonalities among service industries. Trends and concerns pertaining to the growth of service industries are presented that further our understanding of the service economy. Finally, this chapter introduces the very important topic of ethical issues in services marketing. Service marketers as well as service customers often face unique ethical issues that merit discussion.

Learning Objectives:

 PowerPoint Slide: #2

After reading this chapter, you should be able to © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 2 The Service Economy: Supersectors and Ethical Considerations

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1. Describe the nine supersectors that comprise the service economy. 

An in-depth look into the service economy provides an overview of the service economy supersectors including: (1) education and health services, (2) financial activities, (3) government, (4) information, (5) leisure and hospitality, (6) professional and business services, (7) transportation and utilities, (8) wholesale and retail trade, and (9) other services.

2. Identify the trends and concerns pertaining to the growth of the service economy. 

Several key forces continue to influence the growth of the service sector. These tends include the emergence of technologically based e-services, socio-cultural forces derived from an aging population, and the competitive force of ―outservicing,‖ which involves the offshoring, outsourcing, and industrialization of many services.

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Chapter 2 The Service Economy: Supersectors and Ethical Considerations

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3. Understand the reasons consumers are particularly vulnerable to ethical misconduct within the service sector. 

Reasons contributing to consumer vulnerability include: (1) services possess few search attributes; (2) services are often technical and specialized, thereby, difficult to understand; (3) a time lapse sometimes exist between service performance and consumer evaluation; (4) many services are sold without warranties or guarantees; (5) many services are provided by unsupervised boundary-spanning personnel; (6) services are nonstandardized; consequently, some variability is accepted; (7) reward structures based solely on sales tend to reward and fail to punish ethical misconduct; and (8) due to the consumers‘ involvement in the production process, consumers often accept part of the blame for less than perfect performance.

4. Appreciate the types of ethical issues that often arise in the business sector. 

The most typical issues that managers and/or employees will face while conducting business include: conflict of interest, organizational relationship, honesty, fairness, and communication.

5. Discuss the consequences of ethical misconduct. 

Employees forced to deal with ethical issues on a continuous basis frequently suffer from job-related tension, frustration, anxiety, ineffective performance (i.e., reduced sales and reduced profits), turnover intentions and lower job satisfaction.

In addition to the personal effects of ethical misconduct, the organization as a whole suffers. Ethical improprieties have also been linked to customer dissatisfaction (loss of sales), unfavorable word-of-mouth publicity for the organization, and a negative public image for the entire industry.

6. Explain strategies that attempt to facilitate positive ethical behaviors. 

Strategies suggested to control the ethical behavior of personnel include employee socialization, standards of conduct, corrective control, leadership training, service/product knowledge, monitoring of employee performance, and the building of long-term customer relationships.  PowerPoint Slide: #3

Opening Vignette: Getaway2Give 

Getaway2Give (G2G) is the world‘s only philanthropic vacation club. Its destinations include elite resorts and privately owned homes in coveted beach, ski, city and international destinations, such as Anguilla, Aspen, New York City, and Tuscany. Its designated charities receive half of new membership fees and a percentage of all rental fees.

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Chapter 2 The Service Economy: Supersectors and Ethical Considerations

 

13

Another way G2G differentiates itself is by facilitating ―voluntourism,‖ or special activities that allow members to give their talents and time to deserving charities while on vacation.

G2G appeals to affluent Americans who feel grateful for their fortunate lifestyle and want to give something back.

Lecture Outline: I.

II.

Introduction A.

The first half of the chapter focuses on the nine service supersectors that collectively comprise the service economy. For students seeking a career in services marketing, the information on projected supersector growth, salary implications, and educational requirements should be particularly helpful.

B.

Next, the chapter introduces and discusses concepts related to social responsibility and services marketing ethics. Because of the unique opportunities that exist for ethical misconduct in service organizations, students of services marketing courses in particular should be made aware of the issues surrounding ethical decision making.

What Is the Service Economy?

E.

 PowerPoint Slide: #4

It is generally accepted that the service economy includes the ―soft parts‖ of the economy consisting of nine industry supersectors – education and health services, financial activities, government, information, leisure and hospitality, professional and business services, transportation and utilities, wholesale and retail trade, and other services.

1. Figure 2.1 The U.S. Service Economy (Employment Growth Projections 2006–2016)  PowerPoint Slide: #5

F.

2. Figure 2.2 Past, Present, and Future: U.S. Service Supersector Employment  PowerPoint Slide: #6 Education and Health Services 1. The educational services subsector includes schools, colleges, universities and training centers.  The second largest employment industry.

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Chapter 2 The Service Economy: Supersectors and Ethical Considerations

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 Accounting for 13.3 million jobs.

2. The health care and social assistance subsector is comprised of:  Health services such as hospitals, nursing care facilities, physician‘s offices and home health care services.

1. The largest employment industry in the private sector.

2. Accounting for 14 million jobs.

3. Seven of the top 20 fastest growing occupations are in health care.  Social assistance such as individual and family services, vocational rehabilitations services, and community food and housing, and emergency and other relief services.

G.

Financial Activities

 PowerPoint Slide: #7

1. Banking and Insurance subsector is comprised of:  Commercial banking, savings institutions, credit unions.  Banking employment expected to increase by 4% (2006– 2016).  Insurance subsector provides clients protection against financial loss for a variety of incidents.

2. Securities, commodities, and other investments  Manage the issuance, purchase, and sale of financial instruments.  Staggering 46% employment increase expected because of the growing need for investments and securities to fuel the global marketplace, as well as the increase in need for financial advice.

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 PowerPoint Slide: #8 H.

The Government 1. Consist of three subsectors:  Not-for-profit sector (advocacy, grantmaking, and civic organizations)  Federal government  State and local governments 2. Employed approximately 1.2 million personnel in 2006; projected increase by 13% (2006–2016) in the not-for-profit sector.

3. Federal government is largest single employer with 1.8 million civilian employees.  PowerPoint Slide: #9

I.

Information 1. Consist of establishments that produce and distribute information and cultural products, provide the means to distribute or transmit these products, and/or process data.

2. Major players include publishing industries, the motion picture and sound recording industries, the broadcasting industries, the telecommunication industries, Internet service providers and web search portals, data procession industries, and information services industries.  Represents 2.6% of all employment and 1.9% of all establishments.  Software publishers are currently the fastest growing industry within the Information supersector, with a projected growth rate of 32% (2006–2016).

3. Read E-Services in Action – Top Ten Social Media Retailers

J.

Leisure and Hospitality

 PowerPoint Slide: #10

1. Arts, entertainment, and recreation

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Chapter 2 The Service Economy: Supersectors and Ethical Considerations

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 Establishments that produce, promote, or participate in live performances, events, or exhibits intended for public viewing.  Establishments that preserve and exhibit objects and sites of historical, cultural, or educational interest.  Establishments that provide amusement, hobby, and leisure time interests.  More than 40% of the workforce has no formal education beyond high school.

2. Food services and drinking places  Establishments providing a meal, snack, or beverage for immediate consumption.  More than 20% of employees are between the ages of 16 and 19.  Two out of 5 employees work part time.  Employment projected to grow by 11%; jobs are plentiful due to high turnover.

3. Hotels and other accommodations  Similar statistics to food service and drinking places.  Account for 2/3 of leisure and hospitality employment.  Employment projected to grow by 14%.

K.

Professional and Business Services

 PowerPoint Slide: #11

1. Consulting  One of the highest-paying industries.  Projected growth rate is 78% (2006–2016).

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2. Professional, scientific, and technical services  Will change the face of how we do business and how we live our lives.  Job opportunities are best for scientists and engineers who have obtained doctoral degrees.  PowerPoint Slide: #12 L.

Transportation and Warehousing and Utilities 1. Air transportation a.

Most jobs are in ground operations.

b.

Pilots with seniority are the highest paid workers in country.

c.

Expected employment growth is 7%.

2. Truck transportation and warehousing  Variety of activities that link between manufacturer and consumer.  Truck drivers and driver/sales workers occupy 45% of all jobs in this subsector.  Job opportunities are best for truck drivers and diesel mechanics; projected employment growth of 15%.

3. Utilities  Electricity, natural gas, steam, water, and sewage removal.

M.

 Nearly half of current utility workers will retire within the next 10 years.  PowerPoint Slide: #13 Wholesale and Retail Trade 1. Wholesale trade  Wholesale merchandise (generally without transformation) and services related to the sale of merchandise.

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 Wholesale firms tend to be small with fewer than 20 employees, of which 7 out of 10 work in office and administrative support, sales, or transportation and material moving occupations.

2. Retail trade  Retail merchandise and services related to the sale of merchandise. Includes automobile dealers.  Growth projected at 11%.

3. Clothing, accessory, and general merchandise stores  Most retail trade jobs (84%) consist of sales and administrative support positions.  Growth projected at a modest 7%.

4. Grocery stores  Modest expected growth, at 1%, but many opportunities due to industry size and employee turnover.  Many jobs are part-time, with half the jobs comprised of cashiers and stock clerks.

N.

Other Services

 PowerPoint Slide: #14

1. A ―catch-all‖ for all of the services that do not neatly fit into the preceding eight supersector categories.

2. A myriad of establishments that are engaged in a variety of activities including equipment and machinery repair, promoting or administering religious activities, grantmaking, advocacy, dry cleaning and laundry service, personal care, death care, pet care, photofinishing, temporary parking services, and dating services.

3. Represents 3.3% of all employment and 12.6% of all establishments.

4. Projected employment growth of 1.3%.  PowerPoint Slide: #15

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Chapter 2 The Service Economy: Supersectors and Ethical Considerations

O.

19

Service Sector Growth Concerns 1. Materialismo snobbery a. Reflects the belief that only manufacturing can create real wealth. b. With less manufacturing, there will be less for people to service and so more people available to do less work.

2. Dichotomization of wealth –Some fear that as the economy shifts further away from manufacturing to service jobs, there will be further dichotomization of wealth—the rich will get richer and the poor will get poorer.

3. Low wages associated with service employment –―Most service enterprises consist of a well-paid brain trust and poorly paid support staff; $500/hr lawyers and $10/hr secretaries.‖  PowerPoint Slide: #16

III.

Ethical Considerations for Services Marketers A.

Topics specific to the service sector 1. Consumer vulnerability in services marketing 2. Issues that create ethical conflict 3. Factors influencing ethical decision making 4. The effects of ethical misconduct 5. Strategies for controlling ethical behavior

B.

To encourage ethical vigilance – paying close attention to whether one’s activities are ―right‖ or ―wrong,‖ and if ethically ―wrong‖ asking why you are behaving in that manner.  PowerPoint Slide: #17

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Chapter 2 The Service Economy: Supersectors and Ethical Considerations

IV.

IV.

20

What Are Ethics?

-Commonly defined as: A.

A branch of philosophy dealing with what is good and bad and with moral duty and obligation.

B.

The principles of moral conduct governing an individual group.

Business ethics –comprises moral principles and standards that guide behavior in the world of business.

1.

Businesses must make a profit in order to survive.

2.

Business profits should not be obtained by any means necessary.

3. A trade-off must exist between the firm‘s desire for profits and what is good for individuals and society.

4.

Read Sustainability and Services in Action feature.  PowerPoint Slide: #18

V.

The Opportunity for Ethical Misconduct in Services Marketing A. Intangibility complicates the consumer's ability to objectively evaluate the quality of service provided.

B.

Heterogeneity reflects the difficulty in standardization and quality control.

C. Inseparability reflects the human element involved in the service delivery process.  PowerPoint Slide: #19 D. Consumer vulnerability within the service sector can be attributed to several sources.

1. Services are characterized by few search attributes; consequently, consumers have little prepurchase information available to help them make an informed, intelligent decision.

2. Many services are technical and specialized; consequently, the opportunity exists to easily mislead customers.

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Chapter 2 The Service Economy: Supersectors and Ethical Considerations

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3. Some services have a significant time lapse between performance and evaluation; hence, service providers may not be accountable for their actions in the short run.

4.

Services are often sold without warranties and guaranties.

5. Services are often provided by boundary-spanning personnel who work without direct supervision.

–Boundary-spanning personnel: personnel who provide their services outside the firm’s physical facilities.

6. Due to heterogeneity, variability in service performance is some-what accepted. Unethical service providers may attempt to broaden the window of acceptable performance.

7. Outcome-based reward systems often dictate the behavior of employees, and it does not take employees long to figure out the shortest route to the most money.

8.

Customers are active participants in the production process. a. The consumer's involvement enables a service provider to try coercive influence strategies. b. Conflict avoidance is one of the major reasons customers do not complain to a service provider.  PowerPoint Slide: #20

VI.

Issues that Create Ethical Conflict (See Figure 2.10 Ethical Issues Encountered by Businesses) A.

Conflict of interest –the situation in which a service provider feels torn between the organization, the customer, and/or the service provider’s own personal interest.

B.

Organizational relationships –working relationships formed between service providers and various role partners such as customers, suppliers, peers, subordinates, supervisors, and others.

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Chapter 2 The Service Economy: Supersectors and Ethical Considerations

C.

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Honesty –is a partner of truthfulness, integrity, and trustworthiness.

D.

Fairness –is an outcome of just treatment, equity, and impartiality.

E.

Communication –ranges from mass advertising to warranty information to interpersonal communication between the service provider and the customer.  PowerPoint Slide: #21

VII.

The Effects of Ethical Misconduct A.

Effects on employees –job-related tension, frustration, anxiety, ineffective performance, turnover intentions, and low job satisfaction.

B.

Effects on organization and industry –customer dissatisfaction, unfavorable word-of-mouth publicity, and a negative image for the entire industry.  PowerPoint Slide: #22

VIII.

Controlling Ethical Decision Making A.

Employee socialization –the process through which an individual adapts and comes to appreciate the values, norms, and required behavior patterns of an organization.

B.

Develop standards of conduct –code of ethics: formal standards of conduct that assist in defining proper organizational behavior.

C.

Corrective control –the use of rewards and punishments to enforce a firm's code of ethics.

D.

Leadership training –subordinates look to their leaders to set an example.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 2 The Service Economy: Supersectors and Ethical Considerations

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Service/product knowledge –Provide employees the knowledge of what the service can and cannot accomplish.

IX.

F.

Monitoring employee performance

G.

Stress long-term customer relationships

Summary It is generally accepted that the service economy includes the ―soft parts‖ of the economy consisting of nine industry supersectors—education and health services, financial activities, government, information, leisure and hospitality, professional and business services, transportation and utilities, wholesale and retail trade, and other services. The nine service supersectors illustrate the diversity of activities within the service economy.

Service consumers are particularly vulnerable to ethical misconduct for a variety of reasons. The most common ethical issues involve conflict of interest, confidentiality in organizational relationships, honesty, fairness, and the integrity of the firm‘s communications efforts.

The behavior of service providers engaged in ethical decision making reflects the moral philosophies in which they believe. Organizations have utilized a number of strategies that attempt to control the ethical behavior of employees.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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REVIEW QUESTIONS: 1. Rank and discuss the projected growth rates of the nine service supersectors. What do you believe is driving the growth of the three most highly ranked supersectors?

Based on projected growth rates for the period 2006–2016, the nine service supersectors rank in the following order: (1) education and health services, (2) professional and business services, (3) information, (4) financial activities, (5) leisure and hospitality, (6) wholesale and retail trade, (7) transportation and utilities, (8) government, and (9) other services Answers may vary. The highest projected growth is expected in education and health services. Education will see growth because one in four Americans is currently enrolled in an educational institution. Health services is currently the largest industry in the private sector and will likely see growth due to an aging population that is living longer. The second-highest projected growth is expected in professional and business services. Consulting is the fastest growing of the professional and business services and one of the highest paid. As science, technology, and computer systems become more advanced and complex, demand for consulting and other services in these areas will continue to grow. Finally, the third-highest projected growth is in information. Software publishing is currently the fastest-growing industry in the economy.

2. Explain how a service supersector can have minimal projected growth yet still have many job opportunities available.

Overall employment numbers can remain stagnant or have modest growth while high employee turnover can still result in many job openings. For example, nearly half of the current utility workers are expected to retire within the next 10 years, resulting in many more job opportunities than is represented by the 6% employment growth forecasted.

3. Go to http://www.bls.gov/iag/leisurehosp.htm and click on the Hotel and Other Accommodations Career Guide link found at the bottom of the scrolled page. Discuss working conditions, current and projected employment, occupations, and earnings as they related to the hotel industry.  



Answers will vary. The site has ample information about the hotel industry.

Work in hotels and other accommodations can be hectic, particularly for those providing check-in and checkout services. Hotel desk clerks must quickly, accurately, and cordially process large numbers of sometimes impatient and irate guests.

Service occupations, by far the largest occupational group, account for 66 percent of the industry‘s employment.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 2 The Service Economy: Supersectors and Ethical Considerations

 

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Hotels employ many young workers and others in part-time and seasonal jobs.

Average earnings are lower than in most other industries.

4. Compare changing from an agricultural economy to an industrial economy with moving from an industrial economy to a service economy.

In 1850, 65% of the population was connected to farming. During this period, many voiced concern over workers leaving the farms to work in factories. Today, 1% of the U.S. labor force is involved in farming operations and provides an abundance of food.

Similarly, with advances in technology and new management practices, the need no longer exists to have as many people in manufacturing as we had in the mid-1900s.

5. Discuss the difference between ethics and social responsibility.

On one hand, social responsibility could promote the stance that the firm's survival provides employees‘ salaries with which employees feed their families and educate their children, thereby leading to the betterment of society. On the other hand, business profits that are necessary for the firm‘s survival should not be obtained by any means necessary. A trade-off must exist between the firm's desire for profits and what is good for individuals and society.

6. How does the public feel about the ethical behaviors of businesspeople?

According to a Business Week/Harris poll and other surveys: (1) 46% believed that the ethical standards of businesspeople were only average; (2) 90% believed that white-collar crime was somewhat or very common; (3) 76% relate the decline in moral standards in the United States directly to the lack of business ethics; (4) 66% of employees believe that businesspeople will occasionally act unethically; and (5) 15% believe that ethical misconduct occurs often in the business sector.

7. What type of company has more difficulties controlling the ethical behavior of its employees—a centralized firm or a decentralized firm? Please explain.

Because of the physical distance from the main office inherent with decentralization, branch managers and their service providers may have more opportunity to act in a manner inconsistent with organizational standard operating procedures without repercussions from upper management.

8. Explain how reward systems affect ethical behavior.

The reward system of an organization often dictates the behavior of its employees, and it does not take employees long to figure out the shortest route to the most money. Reward systems may encourage the unethical conduct of its employees. For example, straight commissions and quotas reinforce activities that are directly linked to making the sale while discouraging nonselling customer support activities. © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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9. Discuss the relationship between a code of ethics and corrective control.

For the service firm‘s code of ethics to be effective, the conditions set forth in it must be enforced. Enforcement of the code of ethics may be accomplished through corrective control, or the use of rewards and punishments.

10. Describe the relevance of a “search attribute” as it applies to service marketing ethics.

Search attributes can be determined prior to purchase and include such attributes as touch, smell, visual cues, and taste. Services possess few search attributes and therefore are difficult to evaluate before the purchase decision has been made.

Consumers of services often must base their purchase decisions on information provided by the service provider. This leaves consumers vulnerable to the ethical misconduct of a provider who might misrepresent the service. Service firms need to constantly train all employees concerning the details of what each service product can and cannot provide as well as provide and emphasize its business code of ethics.

For example, the insurance industry now requires continuing education for its sales agents.

CHAPTER 3: FUNDAMENTAL DIFFERENCES BETWEEN GOODS AND SERVICES  PowerPoint Slide: #1

"It is wrong to imply that services are just like goods ‗except‘ for intangibility. By such logic, apples are just like oranges, except for their ‗appleness.‘‖ G. Lynn Shostack

Chapter Objectives: This chapter discusses the basic differences between goods and services, the marketing challenges that arise due to these differences, and possible solutions to the challenges created by these differences.

Learning Objectives:

 PowerPoint Slide: #2

After reading this chapter, you should be able to 1. Discuss the four unique service characteristics that distinguish goods from © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 3 Fundamental Differences Between Goods and Services

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services. 

Simply stated, intangibility means that services have no substance and therefore cannot be touched or evaluated like goods. Inseparability refers to the interaction and physical presence of the service provider and the consumer throughout the service experience. The heterogeneity of services pertains to the variability that is inherent in the service delivery process. Perishability refers to the service provider‘s inability to store or inventory services. Services that are not used at their appointed time cease to exist.

2. Understand the marketing challenges associated with intangibility and their possible solutions. 

Since services are intangible, the marketing challenges that arise include: (1) it is difficult to easily display or communicate the properties of services to consumers; (2) prices are difficult to set; (3) services are not patentable, thus making it easy for competitors to copy; and (4) services cannot be stored for future use.

Solutions suggested to minimize the challenges associated with intangibility include: (1) utilizing tangible clues to influence customer perceptions of service delivery; (2) developing promotional plans that emphasize personal sources of information as opposed to nonpersonal; and (3) developing the organization‘s image to reduce customer levels of perceived risk.

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3. Describe the marketing challenges created by inseparability and their possible solutions. 

The marketing challenges associated with inseparability are directly related to: (1) the service provider's face-to-face interactions with the customer; (2) the customer's involvement in the service delivery process; (3) the impact of "other customers" that are sharing the service experience with each other; and (4) the difficulty involved in the centralized mass production of services. Suggested solutions to minimize the impact of inseparability include: (1) the careful selection and thorough training of public contact personnel; (2) a variety of strategies which may be used to manage customers to enhance their service experience; and (3) the use of multi-site locations to increase the convenience of the service firm to the customer and to overcome the difficulties associated with centralized mass production.

4. Explain the marketing challenges associated with heterogeneity and their possible solutions. 

The primary marketing challenge associated with heterogeneity is that standardization and quality control are difficult for the service firm to provide on a regular basis. The chapter suggests that standardization may be achieved via automation—replacing human labor with machines. In contrast, many service firms are taking advantage of the variability that is inherent in service delivery by offering customized services. The tradeoffs associated with customer preferences with standardization and customization include price, speed of delivery, and consistency of performance.

5. Identify the marketing challenges created by perishability and their possible solutions. 

Due to the characteristic of perishability, it is not possible to inventory services.

Due to the lack of an inventory, the only time that demand truly matches supply in the service sector is by accident. To minimize the impacts of perishability, strategies are utilized to increase supply and/or alter demand. Strategies that increase the supply of service include utilizing part-time employees, sharing capacity with other service providers, making preparations in advance with regards to future expansion, utilizing third parties, and increasing the amount of customer participation during the service process. Strategies to alter demand include developing creative pricing strategies, utilizing reservation systems, developing complimentary services, and developing nonpeak demand.

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6. Consider the impact of intangibility, inseparability, heterogeneity, and perishability on marketing’s relationship to other functions within the service organization. 

Marketing plays a very different role in service-oriented organizations than it does in pure goods organizations. The concept of operations being responsible for producing the product and marketing being responsible for selling it cannot work in a service firm. The invisible and visible parts of the organization, the contact personnel and the physical environment, the organization and its customers, and the customers themselves are all bound together by a complex series of relationships. Consequently, the marketing department must maintain a much closer relationship with the rest of the service organization than is customary in many goods businesses.

 PowerPoint Slide: #3 Opening Vignette: Qatar Airways—The Best Airline in the World 

   

Qatar is consistently recognized as one of the world‘s top airlines. It meets or exceeds at least 800 quality standards in service and product delivery. The star ratings received can only be achieved through competitive performance evaluations conducted by Skytrax‘s professional auditors.

First-class seats feature 6.5 feet of legroom, down duvets, and flat-folding beds with built-in entertainment systems and massage functions. .

Business class passengers can recline 173 degrees in seats with massage functions and sip complimentary wine and champagne.

New aircraft have seats in a 1-2-1 configuration to give aisle access to all passengers.

Its Doha terminal features expedited check-in, duty-free shops, conference rooms, a nursery, children‘s play area, spa services, restaurants, and more.

Lecture Outline: I.

Introduction A.

In the past, marketing educators felt that the marketing of services was not significantly different from the marketing of goods.

B.

However, specific differences are primarily attributed to four unique characteristics – intangibility, inseparability, heterogeneity, and perishability.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 3 Fundamental Differences Between Goods and Services

C.

II.

30

Service-dominant logic: philosophical viewpoint that the primary role of marketers is to deliver service. Consequently, goods are simply a means of rendering a service to the customer.  PowerPoint Slide: #4

Intangibility: The Mother of All Unique Differences –a distinguishing characteristic of services that makes them unable to be seen, felt, tasted, or touched in the same manner as physical goods.

P.

Intangibility is the primary source from which the other three characteristics emerge.

1. For example, with a good [described as an object, device, or thing] such as a pair of shoes, you can – – – –

Pick up the shoes Feel the quality of materials View specific style and color Sample the fit

2. Versus a service [described as a deed, effort, or performance] such as that provided by a movie ticket – Entitles the consumer to an experience – Is subjectively evaluated – Provides the physical ownership of only a ticket stub

Q.

 PowerPoint Slides: #56 Marketing Challenges Created by Intangibility (See Figure 3.1) 1. Lack of service inventories 2. Lack of patent protection 3. Difficulty in displaying or communicating services 4. Difficulty in pricing services

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 PowerPoint Slide: #7 R.

Possible Solutions to Challenges Caused by Intangibility (See Figure 3.1) 1. Use tangible clues.

–the physical characteristics that surround a service to assist consumers in making service evaluations, such as the quality of furnishings, the appearance of personnel, or the quality of paper stock used for an insurance policy.

2. Use personal sources of information to help spread the word about service alternatives.

–personal sources such as friends, family, and other opinion leaders that consumers use to gather information about a service. a.

Mass media advertising with customer testimonials that simulate word-of-mouth advertising can also be very effective.

b.

See E-Services in Action – Engaging Content Draws Guests.

3. Create strong organizational images to reduce the amount of perceived risk associated with service purchases. a.

Organizational image: the perception an organization presents to the public, and if well-known and respected, lowers the perceived risk of potential customers making service provider choices.

b.

See Sustainability and Services In Action – Chipotle Mexican Grill: Food with Integrity?

4. Utilize an activity-based costing approach.

–Costing method that breaks down the organization into a set of activities, and activities into tasks, which convert materials, labor, and technology into outputs.

III.

 PowerPoint Slide: #8 Inseparability: The Interconnection of Service Participants –a distinguishing characteristic of services that reflects the interconnection among the service provider, the customer involved in receiving the service, and other customers sharing the service experience.

–critical incident: the interaction between customer and service provider.  PowerPoint Slide: #9 C.

Marketing challenges created by inseparability

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1. The service provider is physically connected to the service. a. The service provider becomes a tangible clue, evaluated based on the use of language, clothing, personal hygiene, and interpersonal communication skills. b. Face-to-face interaction with customers makes employee satisfaction critical.

2. Customers are involved in the production process. a. Customer involvement may vary.

 PowerPoint Slide: #10

1. Customer must be physically present throughout process, i.e., dental service or haircut.

2. Customer need only be present to start and stop the service, i.e., dry cleaning and auto repair.

3. Customer need only be mentally or remotely present, i.e., participation in an online college course. b. Customer has direct impact on the: 1. type of service desired.

2. cycle of demand, i.e., customers go to restaurants primarily during breakfast, lunch, and dinner hours.

3. length of the delivery service, i.e., some customers ask more questions and/or need more attention. c. The service factory must be built with the customer‘s presence in mind.  PowerPoint Slide: #11 3. Other customers are involved in the production process. a. Several customers often share a common service experience. b. This ―shared experience‖ can be negative or positive. c. Primary challenge concerns effectively managing different market segments with different needs within a single service environment. © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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4. The mass production of services presents special challenges. a. Individual service provider can produce only a limited supply. b. Customers interested in a particular provider‘s services would have to travel to the provider‘s location. c. See Global Services In Action – Medical Tourism on the Rise.  PowerPoint Slide: #12 D.

Possible Solutions to Challenges Created by Inseparability 1. Strategic selection and training of public contact personnel. a. Select employees with superior communication and interpersonal skills. b. Train employees in ―soft‖ management skills such as reliability, responsiveness, empathy, assurance, and managing the tangibles that surround the service.

2. Effectively manage consumers. a. Consumer management –a strategy service personnel can implement that minimizes the impact of inseparability. b. Examples: 1. Separating smokers from nonsmokers 2. Sending a patient insurance forms and information about office procedures in advance 3. Establishing a reservation system to smooth demand 3. Develop multisite locations.

–a way service firms that mass produce combat inseparability, involving multiple locations to limit the distance the consumers have to travel and staffing each location differently to serve a local market. a. Limit travel distance for the consumer. b. Act as ―factories in the field.‖ -another name for multisite locations.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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c. Examples: H&R Block accounting services, Hyatt Legal Services, and Marriott Hotels.  PowerPoint Slide: #13 IV.

Heterogeneity: The Variability of Service Delivery (See Figure 3.3) –a distinguishing characteristic of services that reflects the variation in consistency from one service transaction to the next.

A.

Marketing challenges created by heterogeneity 5.

 PowerPoint #14

Slide:

Standardization and quality control are difficult to achieve. a. Each employee has a different personality and skill level and interacts with customers differently. b. The same employee may act differently from one day to the next as a result of mood changes and other factors.

B.

Possible solutions to heterogeneity challenges

 PowerPoint Slide: #15

1. Pursue a customization strategy. a. Customization: taking advantage of the variation inherent in each service encounter by developing services that meet each customer’s exact specifications. b. Downside of providing customized services: 

Customers may not be willing to pay the higher prices.



The speed of service delivery may be an issue.



Customers may not be willing to face the uncertainty associated with customized services.

2. Pursue a standardization strategy. a. Standardization: to produce a consistent service product from one transaction to the next. b. Intensively train employees to help reduce extreme variations in performance. © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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c. Replace human labor with machines.  PowerPoint Slide: #16 V.

Perishability: Balancing Supply and Demand (See Figure 3.4) –A distinguishing characteristic of services in that they cannot be saved, their unused capacity cannot be reserved, and they cannot be inventoried.  PowerPoint Slide: #17 A.

Marketing challenges caused by perishability 1. Matching supply and demand is a major challenge. a. Demand exceeds supply of service available. b. Demand exceeds the optimal supply of service available. c. Demand is below optimal supply. d. Demand and supply are at optimal levels.

B.

Possible solutions to challenges created by perishability  PowerPoint Slide: #18 1. Demand strategies a. Utilize creative pricing. i. Creative pricing: pricing strategies often used by service firms to help smooth demand fluctuations, such as offering ―matinee‖ prices or ―early bird specials‖ to shift demand from peak to nonpeak periods. ii. Used to target specific groups such as senior citizens, children and their parents (families), and college students. iii. Price incentives to use the company‘s web site b. Implement a reservation system. i. Reservation system: a strategy to help smooth demand fluctuations in which consumers ultimately request a

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portion of the firm’s services for a particular time slot. ii. Typical service firms that use reservation systems include restaurants, doctors of all varieties, golf courses (tee times), and day spas. iii. Advantages of a reservation system: 1. Reduces the customer‘s risk of not receiving the service.

2. Minimizes the time spent waiting in line for the service to be available.

3. Allows service firms to prepare in advance for a known quantity of demand. iv. Disadvantages of a reservation system: 1. Someone must maintain the system, which adds additional cost to the operation.

2. Customers do not always show up on time or sometimes fail to show up at all.

3. It offers to the customer an implied guarantee that the service will be available at a specified time, thereby increasing the customer‘s expectations. c. Shift demand to complimentary services.

–Complimentary services: services provided for consumers to minimize their perceived waiting time, such as driving ranges at golf courses, the bar/lounge at a restaurant, arcades at movie theaters, or reading materials of doctors’ offices. d. Develop nonpeak demand periods. i. nonpeak demand development: a strategy in which service providers use their downtime to prepare in advance for peak periods or to market to different target markets that follow different demand patterns than the firm’s traditional market segment.

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ii. Can reduce the effects of perishability.

1. Employees can be cross-trained during nonpeak demand periods to perform a variety of other duties to assist fellow personnel during peak demand periods.

2. Can be developed to generate additional revenues by marketing to a different market segment that has a different demand pattern than the firm‘s traditional segment.

2. Supply Strategies

 PowerPoint Slides: #19-20

a. Utilize part-time employees. i. Advantages: 1. Lower labor costs 2. Flexible labor force that can be employed when needed and released during nonpeak periods ii. Disadvantage: 1. Causes consumers to associate the firm with lower job skills and lack of motivation and organizational commitment. b. Share capacity. i. Capacity sharing: a strategy to increase the supply of service by forming a type of co-op among service providers. ii. Permits co-op members to expand their supply of service as a whole. c. Prepare in advance for expansion. i. Expansion preparation: planning for future expansion in advance and taking a long-term orientation to physical facilities and growth.

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ii. Build current facilities with future expansion needs in mind. iii. Saves time and money in reacting to demand pressures. d. Utilize third parties. i. Third parties: a supply strategy in which a service firm utilizes an outside party to service customers and thereby save on costs, personnel, etc. ii. Example: Travel agency assisting airline customers. iii. Disadvantage: May expose customers to competitive offerings. e. Increase customer participation. i. Customer participation: a supply strategy that increases the supply of service by having the customer perform part of the service. ii. Examples: Salad bar, self-serve fountain drinks, ATM, self-service gas pump VII.

Summary The major differences between the marketing of goods and the marketing of services are most commonly attributed to four distinguishing characteristics: intangibility, inseparability, heterogeneity, and perishability. This chapter has discussed the marketing challenges presented by these four characteristics and described possible solutions that minimize their impacts on services firms.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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REVIEW QUESTIONS: 1. Briefly describe how the unique service characteristics of intangibility, inseparability, heterogeneity, and perishability apply to your educational experience in your services marketing class.

Intangibility means that services lack physical substance and therefore cannot be touched or evaluated like goods. The services marketing class is an educational experience. Inseparability reflects the interconnection between service providers and their customers. The professors of services marketing classes engage in face-to-face interaction with their students, who are directly involved in the educational experience. Heterogeneity pertains to the variability inherent in the service delivery process. The services marketing class has variability from semester to semester, student to student, and professor to professor. Perishability refers to the service provider‘s inability to store or inventory services. Services (like services marketing class) that are not used at their appointed time cease to exist (missing class).

2. Discuss why the pricing of services is particularly difficult in comparison with the pricing of goods.

Typically, products' prices are based on cost-plus pricing. This means that the producing firm figures the cost of producing the product and adds a markup to that figure. The challenge involved in pricing services is that there is no cost of goods sold. The primary cost of producing a service is labor.

3. What strategies have the insurance industry utilized in its attempt to minimize the effects of intangibility? Of the companies that have actively attempted to minimize the effects, have some companies done a better job than others? Please explain.

Tangible clues are the physical evidence that surrounds the service. In the absence of a physical product to evaluate, consumers look for tangible clues to base evaluations. Insurance firms have attempted to minimize the effects of intangibility by using tangible clues in their advertising such as Prudential's "piece of the rock." Other uses of tangible clues include the appearance of personnel, the office decor, and the quality of paper used to produce insurance policies and company brochures. Yes, some companies have done a better job than others. Answers will vary.

4. Discuss the pros and cons of having the customer involved in the production process.

The customer's involvement in the service production process can be an operation's nightmare. Customers influence the type of demand, the cycle of demand, and the duration of the service production process. However, on the positive side, since © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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service customers are part of the process they can often produce some of the service themselves, thereby, increasing the amount of service that can be provided by a single provider. Due to consumer involvement, service factories must be built with the consumer's presence in mind.

Another consideration is the level of customer involvement necessary. Do customers need to be physically present throughout the experience, or just to start and stop the process, or do they just need to be mentally present? The level of involvement will impact the design of facilities as well as location decisions.

5. Discuss the reasons why the centralized mass production of services is challenging.

The problems pertaining to mass production are twofold. First, because the service provider is directly linked to the service being produced, an individual service provider can produce only a limited supply. Hence, meeting the demand of the mass market with a single provider becomes a major challenge.

The second problem directly relates to the consumer's involvement in the production process. How can a service firm market to a geographically widespread target market from a single location? The use of multi-site locations is one solution.

6. What is meant by the term other customers, and why is their influence so much greater for services than for goods?

The term is used to describe customers other than the consumer in focus that are present during or share a service experience. . This ―shared experience‖ can be negative or positive. The primary challenge concerns effectively managing different market segments with different needs within a single service environment.

7. Why are standardization and quality control difficult to maintain throughout the service delivery process?

Each service organization may have several people providing the same basic service.

As individuals, each employee has his or her own unique personality and set of skills and will likely interact with customers differently than other employees. Even with the same provider, variations in the delivery process are likely to occur from one service encounter to another as result of mood changes and other factors.

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8. Which is better for consumers: (1) a customized service or (2) a standardized service? Please explain.

The answer depends on the needs of the consumers. Customization may provide services that meet the exact needs of the consumer; however, the price for the service is likely to be higher, the delivery process will be slower, and there is uncertainty associated with the final outcome. On the other hand, standardization may not meet an individual's specific needs but is likely to be cheaper, delivered faster, and the uncertainty associated with the final outcome will be minimized.

9. What are the limitations associated with a service firm’s inability to maintain inventories?

The primary difficulty associated with the inability to maintain service inventories is balancing supply and demand. In addition, the lack of inventories limits the firm's ability to separate production and consumption by time and space. Statistical sampling techniques that ensure quality control of goods inventories are of little use in service settings. Finally, because of no inventories, marketing and operations must work much closer together than in traditional manufacturing settings.

10. A number of supply and demand strategies were presented as possible solutions to offset the challenges created by the perishability of services. (1) Discuss the major objectives of demand strategies in comparison to supply strategies. (2) To which group of strategies does “increasing consumer participation” belong? (3) How does “increasing consumer participation” solve potential problems caused by the perishability of services?

(1) The major objective of demand strategies is to smooth out periods of demand.

The major objective of supply strategies is to increase supply. Demand strategies include using creative pricing, implementing a reservation system, shifting to complimentary services, and utilizing nonpeak demand. Supply strategies include using part-time employees, sharing capacity with other providers, preparing for expansion in advance, utilizing third parties, and increasing customer participation.

(2) ―Increasing consumer participation‖ belongs to the supply strategy group.

(3) Increasing customer participation increases supply during peak periods of demand and frees employees to provide other services. The willingness of customers to provide their own service is generally a function of convenience, price, and customization. While increasing customer participation solves potential problems caused by perishability, this strategy may also create unhappy customers who are forced to fend for themselves. In many instances, the more the customer becomes a major player in the production of the service, the less control the service firm can maintain over the quality of the service provided.

CHAPTER 4: SERVICES CONSUMER BEHAVIOR

 PowerPoint Slide: #1

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Chapter 4

Services Consumer Behavior

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―There is only one boss—the customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.‖ Sam Walton, founder of Wal-Mart

Chapter Objectives: This chapter discusses consumer decision process issues as they relate to the purchase of services.

Learning Objectives:

 PowerPoint Slide: #2

After reading this chapter, you should be able to 1. Appreciate the value of models that attempt to explain how consumers process information. 

Understanding consumers and improving their experience is particularly important for services, which in many instances still tend to be operationsdominated rather than customer-oriented. Every time consumers make a marketing decision, they are basing their decision on some model of how the consumer will behave. These models are implicit and seldom shared with others, representing, in effect, the marketing manager‘s own experience.

2. Discuss the six steps that comprise the consumer decision process model. 

The consumer decision process model consists of three main stages: the prepurchase stage, the consumption stage, and the postpurchase stage. The prepurchase stage describes the events which occur prior to the consumer's acquisition of the service and includes stimulus reception, problem awareness, information search, and evaluation of alternatives. The outcome of the prepurchase stage is a choice that takes place during the consumption stage.

The consumption stage includes the activities of buying, using, and disposal of the product. Finally, the postpurchase stage refers to the process by which the consumer evaluates his or her level of satisfaction with the purchase.

3. Understand the special considerations of service purchases as they pertain to the prepurchase, consumption, and postpurchase stages of the consumer decision process model. 

As compared to goods, consumers of services during the prepurchase stage of the decision process: (1) perceive higher levels of risk to be associated with the purchase; (2) tend to be more brand loyal; (3) rely more on personal sources of information; (4) tend to have fewer alternatives to consider; and (5) often include

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self-provision as a viable alternative. In addition, the use of multi-attribute models, have several managerial shortcomings when used to compare alternative services. 

No service can be produced or used with either the consumer or the service firm absent. Due to the extended delivery process, many believe that the consumer‘s postchoice evaluation occurs during and after, rather than just after, the use of services. From a marketer‘s point of view, this provides the opportunity to directly influence that evaluation. Due to the client-company interface, the service provider is able to catch problems and change evaluations in a way that the manufacturer of a packaged good never could.



The postpurchase evaluation of services is a complex process. As indicated in the above question, the evaluation process begins soon after the customer makes the choice of the service firm he or she will be using and continues throughout the consumption and postconsumption stages. The evaluation is influenced by the unavoidable interaction of a substantial number of social, psychological, and situational variables. Service satisfaction relies not only on the technical quality of the service and the four elements of the Servuction system— contact personnel, inanimate environment, other customers, and internal organization systems—but also on the synchronization of these elements in the service production/consumption process.

4. Describe three theories that attempt to explain the consumer’s postpurchase evaluation with regard to customer satisfaction. 

Models which assist in our understanding of the consumer's postpurchase evaluation process include the expectancy disconfirmation model, the perceivedcontrol perspective and the script perspective. In short, the expectancy disconfirmation model defines satisfaction as meeting or exceeding customer expectations. The perceived-control perspective proposes that during the service experience, the higher the level of control over the situation perceived by consumers, the stronger will be their satisfaction with the service. The script perspective proposes that in a service encounter customers perform roles, and their satisfaction is a function of "script congruence"―whether or not the actual behaviors by customers and staff are consistent with the expected roles.  PowerPoint Slide: #3

Opening Vignette: Planet Fitness: The Gym for the Rest of Us  

The gym actively supports a ―Judgement Free Zone‖ and a ―No Lunks‖ policy.

It does not employ salespeople and offers few extra amenities that drive up

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costs.

Membership prices typically range from $10 to $15 a month.

It offers a clean, stylish facility with popular brand-name cardio and strength equipment Planet Fitness has successfully promoted itself as the gym for the common person.

Lecture Outline: I.

Introduction A.

The purpose of this chapter is to discuss the consumer decision process as it relates to the purchase of services.

B.

Due to the unique characteristics of services, differences exist between the way consumers make decisions regarding services versus goods.

C.

This chapter is divided into two sections: 1.

A broad overview of the consumer decision-making process 2.

Specific considerations about the consumer decision-making process as it relates to services  PowerPoint Slide: #4

II.

The Consumer Decision Process: An Overview –The three-step process consumers use to make purchase decisions includes the prepurchase stage, the consumption stage, and the postpurchase evaluation stage. (Figure 4.1) S.

The Prepurchase Stage –prepurchase stage refers to all consumer activities occurring before the acquisition of the service.  PowerPoint Slide: #5 1. The Stimulus –the thought, action, or motivation that incites a person to consider a purchase.

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1. Commercial cues are the result of promotional efforts.

–Commercial cue: an event or motivation that provides a stimulus to the consumer and is a promotional effort on the part of the company.

2. Social cues are obtained from the individual‘s peer group or from significant others.

–Social cue: an event or motivation that provides a stimulus to the consumer, obtained from the individual’s peer group or from significant others.

3. Physical cues are such things as thirst, hunger, or various other biological cues.

–Physical cue: a motivation such as biological cues that provides a stimulus to the consumer.  PowerPoint Slide: #6 2. Problem Awareness –the second phase of the prepurchase stage, in which the consumer determines whether a need exists for the product.

1. The need may be based on a shortage –the need for a product or service due to the consumer’s not having that particular product or service.

2. The need may be based on an unfulfilled desire –the need for a product or service due to a consumer’s dissatisfaction with a current product or service.  PowerPoint Slide: #7 3. Information Search –the phase in the prepurchase stage in which the consumer collects information on possible alternatives.

1. Awareness set: the set of alternatives of which a consumer is aware.

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2. Evoked set: the limited set of ―brands‖ that comes to the consumer’s mind which thinking about a particular product category from which the purchase choice will be made.

3. Consideration set: the remaining alternatives after those brands considered unfit are eliminated right away from the evoked set.

4. Internal search: a passive approach to gathering information in which the consumer’s own memory is the main source of information about a product.

5. External search: a proactive approach to gathering information in which the consumer collects new information from sources outside the consumer’s own experience.  PowerPoint Slide: #8 4. Evaluation of Alternatives –the phase of the prepurchase stage in which the consumer places a value or ―rank‖ on each alternative.

1. Nonsystematic evaluation: choosing among alternatives by using a set of formalized steps to arrive at a decision.

2. Systematic evaluation: choosing among alternatives by using a set of formalized steps to arrive at a decision.  PowerPoint Slide: #9 i.

A multi-attribute model (Figure 4.1 MultiAttribute Choice Model for Evaluating Alternative Universities) 1. across the top of the table are two types of variables: a. the consideration set of alternatives to be evaluated. b. importance weight with which the consumer ranks the various attributes that comprise the vertical axis of the table.

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2. Linear compensatory approach: a systematic model that proposes that the consumer creates a global score for each brand by multiplying the rating of the brand on each attribute by the importance attached to the attribute and adding the scores together.

3. Lexicographic approach: a systematic model that process that the consumer make a decision by examining each attribute, starting with the most important, to rule out alternatives.  PowerPoint Slide: #10 T.

The Consumption Stage –the stage of the consumer decision process in which the consumer purchases and uses the product or service.

1. The consumer may make a store choice—deciding to purchase from a particular outlet—or a nonstore choice—deciding to purchase from a catalog, the Internet, or a variety of mail-order possibilities.

2. The activities of buying, using, and disposing are grouped together and labeled the consumption process.  PowerPoint Slide: #11

U.

Postpurchase Evaluation –the stage of the consumer decision-making process during which the consumer determines whether the correct purchase decision was made.

1. Marketers often attempt to minimize the consumer‘s cognitive dissonance.

–Cognitive dissonance: doubt in the consumer’s mind regarding the correctness of the purchase decision.

2. Marketers reassure the customer that the correct decision has been made by: 1. offering after-sale contact.

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2. providing a reassuring letter in the packaging of the product.

3. providing warranties and guarantees.

4. reinforcing the consumer‘s decision through the firm‘s advertising.  PowerPoint Slide: #12 III.

Special Considerations Pertaining to Services E.

Prepurchase Stage Considerations: Perceived Risk 1. The perceived risk associated with the purchase of services is higher compared to goods purchases.

2. Perceived risk consists of two dimensions: a. Consequence: the degree of importance and/or danger of the outcome of any consumer decision. b. Uncertainty: the subjective possibility of the occurrence of these outcomes.  PowerPoint Slide: #13 3. Five types of perceived risk exist: a. Financial risk: the possibility of a monetary loss if the purchase goes wrong or fails to operate correctly. b. Performance risk: the possibility that the item or service purchased will not perform the task for which it was purchased c. Physical risk: the possibility that if something does go wrong, injury could be inflicted on the purchaser d. Social risk: the possibility of a loss in personal social status associated with a particular purchase. e. Psychological risk: the possibility that a purchase will affect an individual’s self-esteem.  PowerPoint Slide: #14

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4. Risk and Standardization a. The amount of perceived risk increases as the difficulty in producing a standardized product increases. b. Relates to the concept of heterogeneity.

5. Co-Producer Risk a. The involvement of the consumer in the production process also increases the amount of perceived risk. b. Relates to the concept of inseparability.

6. Risk and Information a. Less prepurchase information is available about services, hence, perceived risk increases. b. Products possess three different types of attributes: 1. Search attributes: product attributes that can be determined prior to purchase.

2. Experience attributes: product attributes that can be evaluated only during and after the production process.

3. Credence attributes: product attributes that cannot be evaluated confidently even immediately after receipt of the good or service. c. Services have few search attributes. d. Services are primarily characterized by experience and credence attributes.

7. Risk and Brand Loyalty

 PowerPoint Slide: #15

a. Brand loyalty is based on the degree to which the consumer has obtained satisfaction in the past. b. Brand loyalty reduces perceived risk.

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1. For example, satisfied clients of Citigroup may see little reason to switch their loyalty to another financial service provider. c. Possibly attributable to having fewer alternatives available. d. Brand loyalty avoids switching costs.

–costs that can accrue when changing from one service provider to another.

1. Search costs—the time costs associated with seeking out new alternatives.

2. Transaction costs—the monetary costs associated with first-time visits, such as new x-rays when changing dentists.

3. Learning costs—costs such as time and money that are associated with learning new systems, such as new versions of software packages.

4. Loyal customer discounts—discounts that are given for maintaining the same service over time, such as accident-free auto insurance rates. Such discounts are sacrificed when switching from one supplier to the next.

5. Customer habit—costs associated with changing established behavior patterns.

6. Emotional costs—emotional turmoil that one may experience when severing a long-term relationship with a provider.

7. Cognitive costs—costs in terms of the time it takes simply thinking about making a change in service providers.  PowerPoint Slide: #16 F.

Prepurchase Stage Considerations: The Importance of Personal Sources of Information 1. Word-of-mouth references 2. Information from opinion leaders –an individual who is looked to for advice.

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3. Mass media is less effective with services, due to intangibility.

4. Nonpersonal sources of information may not be available because: a. of professional restrictions. b. of negative attitudes regarding the use of advertising. c. small firms may lack the resources or marketing expertise.  PowerPoint Slide: #17 G.

Prepurchase Stage Considerations: Fewer Alternatives to Consider 1. Each service provider only offers one brand. a. For example, Geico sells only Geico Insurance.

2. The evoked set tends to be small – pertains to the number of establishments providing the same service.

3. Lack of prepurchase information to inform consumers.

H.

Prepurchase Stage Considerations: Self-Service as a Viable Alternative 1. For example, lawn care, fence installation, housekeeping, painting, and a number of other services.  PowerPoint Slide: #18

I.

Consumption Stage Considerations 1. The consumption sequence for services differs from that of goods. a. Goods: Produce–Acquire–Use–Dispose. b. Services: Production, acquisition, and use are entangled; disposal is irrelevant.

2. Interactions between the customer and the company‘s facilities and personnel are inevitable.

3. Evaluation for the service occurs during and after consumption. a. From a marketer‘s point of view, this opens up the prospect of

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being able to directly influence the evaluation.  PowerPoint Slide: #19 J.

Postpurchase Considerations 1. The postpurchase evaluation of services is a complex process.

2. A number of proposed models attempt to describe the process by which consumers evaluate their purchase decisions.  PowerPoint Slide: #20 a. The Expectancy Disconfirmation Theory –the theory proposing that consumers evaluate services by comparing expectations with perceptions.

1. The simplest and most powerful model.

2. Customer satisfaction = Perceptions > Expectations 3. Ultimately, customer satisfaction is achieved through the effective management of customer perceptions and expectations. a. For example, Motel Six downplays its service offering by lowering customer expectations prior to purchase.  PowerPoint Slide: #21 b. The Perceived-Control Perspective –a model in which consumers evaluate services by the amount of control they have over the perceived situation.

1. The basic premise is the higher the level of control over the situation perceived by consumers, the higher their satisfaction with the service.

2. Consumers exchange cash and control for benefits.

3. Behavioral control and cognitive control are important.

However, it‘s the perception of control, not the reality, that is important.  PowerPoint Slide: #22 c. The Script Perspective—All the World‘s a Stage and All the People Players

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1. In a service encounter, customers follow scripts, and their satisfaction is a function of script congruence.

–Script congruence: occurs when the actual scripts performed by customers and staff are consistent with the expected scripts.

2. The key managerial implications of script theory are: i.

to design scripts for the service encounter that are acceptable and capable of fulfilling the needs of both the customers and the service providers.

ii.

to communicate these scripts to both customers and employees so that both have realistic expectations and perceptions of their roles.

3. See Global Services in Action: Tipping Etiquette Around the World IV.

Summary The consumer decision process model consists of three main stages: the prepurchase stage, the consumption stage, and the postpurchase stage.

Although the consumer decision process model applies to both goods and services, unique considerations arise with respect to services in each of the three stages.

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REVIEW QUESTIONS: 1. In general terms, discuss the purpose of consumer behavior models like the consumer decision process model depicted in Figure 4.1.

Whether marketing managers like it or not, every time they make marketing decisions, they are basing their decisions on some model of how the consumer will behave. Quite often these models are implicit and seldom shared with others. To market services effectively, marketing managers need to understand the thought processes used by consumers. Although we can never truly know the thought process used by individuals when making a buying choice, models help us to structure our thinking and to guide our marketing research regarding consumer behavior.

2. Why do consumers of services perceive higher levels of risk associated with their purchases compared to goods purchases?

In comparison to goods consumers, consumers of services tend to perceive a higher level of risk for a number of reasons. First, services are associated with varying degrees of uncertainty and consequence. Since services are nonstandardized, uncertainty of the final outcome increases consumer risk. In many instances, consumers become a coproducer of the service and are directly involved in the service production process. In a case such as surgery, the consequences associated with a poor choice can be devastating. Another reason levels of perceived risk are higher is due to the lack of prepurchase information available regarding many services.

3. Discuss the different types of risk.

Five types of risk have been identified: 1. Financial risk—the possibility of monetary loss if the purchase goes wrong or fails to operate correctly.

2. Performance risk—the possibility that the item or service purchased will not perform the task for which it was purchased.

3. Physical risk—the possibility that if something does go wrong, injury could be inflicted on the purchaser.

4. Social risk—the possibility of a loss in personal social status associated with a particular purchase.

5. Psychological risk—the possibility that a purchase will affect an individual's self-esteem.

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4. Define and discuss the following terms: search attributes, experience attributes, and credence attributes. Which type(s) of attributes most accurately apply to services? Explain.

1. Search attributes—attributes that can be determined prior to purchase.

2. Experience attributes—attributes that can be evaluated only during and after the production process.

3. Credence attributes—attributes that cannot be evaluated confidently even immediately after receipt of the good or service.

Due to intangibility, services possess few search attributes and are primarily characterized by experience and credence attributes.

5. Regarding multi-attribute models, what is the difference between the linear compensatory approach and the lexicographic approach?

The linear compensatory approach is a systematic approach that proposes that the consumer creates a global score for each brand by multiplying the rating of the brand on each attribute by the importance attached to the attribute and adding the scores together. While the lexicographic approach is also a systematic approach, it uses shortcuts to get to a decision. It proposes that the consumer makes a decision by examining each attribute, starting with the most important, to rule out alternatives.

6. Who is typically more brand loyal—a consumer of goods or a consumer of services? Please explain.

Consumers are more brand loyal of services for the following reasons: (1) repeat purchases from the same provider reduces the amount of perceived risk associated with the purchase; (2) brand loyalty may also be higher due to the limited number of alternative choices available; and (3) consumers of services may be more brand loyal in the attempt to avoid switching costs.

7. Discuss the reasons why personal sources of information tend to be more important for consumers of services.

Service consumers often use personal sources of information to reduce the amount of perceived risk. In some instances, personal sources may be the only information available where service providers are small and lack the resources or marketing expertise needed for mass marketing strategies. In other cases, personal sources are simply more informative than nonpersonal sources.

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8. Discuss the managerial implications of the production, acquisition, use, and disposal sequence during the consumption stage. How does this sequence differ for goods and services? What are the managerial implications associated with this difference?

The consumption stage is more complex for services in comparison with that of goods because the production, acquisition, and use of services become entangled in a single process and the disposal stage become irrelevant. Moreover, due to the extended service delivery process, many believe that the consumer‘s postchoice evaluation occurs both during and after, rather than only after, the use of services. From a marketer‘s point of view, this provides the opportunity to directly influence the consumer‘s evaluation during the service delivery process.

9. What is a script and how does it relate to the manner in which customer satisfaction evaluations are formed?

Scripts are understood rules, mostly determined by social and cultural variables, that define how participants in a service encounter are to act. These rules shape the participants‘ expectations. The rules must be acknowledged and obeyed by all participants if satisfactory outcomes are to be generated. Consequently, the principal idea proposed by script theory is that in a service encounter, customers follow scripts, and their satisfaction is a function of script congruence—whether the actual scripts performed by customers and staff are consistent with the expected scripts.

10. Explain the relevance of the perceived-control perspective with specific reference to behavioral control and cognitive control as each relates to the postconsumption stage.

The perceived control perspective is a postpurchase stage model in which consumers evaluate services by the amount of control they have over the service encounter. The basic premise of this perspective is that during the service experience, the higher the level of control over the situation perceived by consumers, the higher their satisfaction with the service will be. The concept of control consists of two types of control— behavioral and cognitive. Behavioral control, the ability to control what is actually going on, is only part of the idea. Research shows that cognitive control is also important.

Thus, when consumers perceive that they are in control, or at least that what is happening to them is predictable, the effect can be the same as that achieved by behavioral control. In other words, it is the perception of control, not the reality, that is most important.

CHAPTER 5: THE SERVICE DELIVERY PROCESS  PowerPoint Slide: #1 "When one has finished building one‘s house, one suddenly realizes that in the process one has learned something that one really needed to know in the worst way – before one began." © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Friedrich Nietzsche

Chapter Objectives: This main objective in this chapter is to familiarize you with operations concepts and explain the importance of balancing operations and marketing functions in service operations.

Learning Objectives:

 PowerPoint Slide: #2

After reading this chapter, you should be able to 1. Compare and contrast the four stages of operational competitiveness. 

Strategically, the service firm can choose to sue its operations as the key component of its competitive strategy or view its operations as a necessary evil.

The manner in which ―operational competitiveness‖ is embraced by various service firms can be described by four stages: (1) Available for service; (2) Journeyman; (3) Distinctive competencies achieved; and (4) World-class service delivery.

2. Appreciate the relationship between operations and marketing as it pertains to developing service delivery systems. 

In a very broad sense, one way of viewing the task of marketing and operations is to think of it as the marrying of consumers' needs with the technology and manufacturing capabilities of the firm. Such a marriage will obviously involve compromises since the consumers' needs can seldom be met completely and economically. Similarly, operational efficiency has to be balanced against the effectiveness of the system from the consumer's point of view. In sum, operations personnel must recognize the importance of their marketing counterparts and vice versa.

3. Describe the types of operational models that facilitate operational efficiency. 

The servuction system itself is an operations nightmare, since it is impossible to use inventories and impossible to decouple production from the customer.

Instead of receiving demand at a constant rate, the system is linked directly to a market that frequently varies from day to day, hour to hour, and even minute to minute. This creates massive problems in capacity planning and utilization.

4. Consider the challenges associated with applying operational efficiency models to service organizations and recommend strategies that overcome some of these difficulties. © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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J. D. Thompson has proposed that to operate efficiently, the firm must be able to operate "as if the market will absorb the single kind of product at a continuous rate and as if the inputs flowed continuously at a steady rate and with specified quality." At the center of his argument was the idea that uncertainty creates inefficiency. In the ideal situation, the technical core is able to operate without uncertainty on both the input and output side.

5. Explain the art of service blueprinting as it relates to the design of service delivery operations. 

Service blueprints identify the directions in which processes flow, the time it takes to move from one process to the next, the costs involved with each process step, the amount of inventory build-up at each step, and the bottlenecks in the system.

6. Discuss the role of complexity and divergence as they relate to new service product development. 

New product development within service firms can be implemented through the introduction of complexity and divergence. They perform equivalent task from an operations viewpoint, they can be very different from a marketing viewpoint.

 PowerPoint Slide: #3 Opening Vignette: Chipotle Mexican Grill: Fast and Fresh Is the New Black      

Chipotle sells only fresh foods and prepares everything by hand.

Speed is critical.

Chipotle‘s delivery system is much like an assembly line.

Employees manage throughput by preparing food and setting up the line before customers arrive.

An expeditor and manager back up the line employees.

The formula‘s success is demonstrated by Chipotle‘s growth to more than 1,600 stores that reap over $4 billion in sales per year.

Lecture Outline: I.

Introduction A.

Managers of service firms must understand the interactive nature of services and the involvement of the consumer in the production process.

B.

This chapter highlights the trade-offs between the search for operational efficiency and the need to create marketing effectiveness.

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II.

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This chapter focuses on the positive things marketing can achieve to help improve the efficiency of service operations.  PowerPoint Slide: #4

Stages of Operational Competitiveness A.

Philosophical viewpoint where operations move from ―necessary evil‖ to the key source of competitive advantage.

B.

Four Stages of Operational Competitiveness  PowerPoint Slide: #5

V. Stage 1: Available for Service

1. Operations are viewed as a necessary evil.

2. Operations are ―reactive.‖ 3. The primary mission is to avoid mistakes.

4. Technological investment, training, and personnel costs are minimized.

5. Management designs skill out of the work.

W. Stage 2: Journeyman

 PowerPoint Slide: #6

1. Prompted by the arrival of competition.

2. Operations become outward-looking.

3. Investment in technology is linked to long-term costs savings.

4. Employees are given procedures to follow.

5. Management focuses on ensuring that standardized procedures are followed.  PowerPoint Slide: #7 X. Stage 3: Distinctive Competencies Achieved 1. The firm has mastered the core service. © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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2. Understands complexity of making changes.

3. View of technology changes from ―cost savings‖ to ―enhancing the customers‘ experience.‖ 4. Philosophical change of balancing efficiency with effectiveness.

5. Front-line workers may select from alternative procedures.  PowerPoint Slide: #8 Y. Stage 4: World-Class Service Delivery 1. Company‘s name is synonymous with service excellence.

2. Operations become adaptive and innovative.  Technology provides a means to accomplish tasks that the competition cannot easily duplicate.

3. See Global Services in Action – DHL GlobalMail: International Post Made Easy.  PowerPoint Slide: #9 4. Figure 5.1 provides a quick glimpse into the major trade-offs between efficiency and effectiveness when developing operations for low-customer-contact versus high-customercontact services.  PowerPoint Slide: #10 III.

Marketing and Operations: Balance Is Critical K.

The marriage of customer needs with the manufacturing and technological capabilities of the firm.

L.

The marriage involves compromise since the customers‘ needs can seldom be met completely and economically.  PowerPoint Slide: #11

M.

Figure 5.2 shows sources of cooperation/conflict between marketing and operations.

N.

Success in service marketing demands a much greater understanding of

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the constraints and opportunities posed by operations.

1. Marketing and operations are in a tug-of-war that should be resolved by compromise.

2. There is no single solution that fits every situation. Often, operational efficiency and marketing effectiveness pull in opposite directions.

O.

Marketing demand may mean less operational efficiency.

P.

As the amount of customer contact increases, the efficiency of the firm is likely to decrease.

Q.

Customers ultimately determine the: 1. type of demand.

2. cycle of demand.

3. length of the service experience.

IV.

In a Perfect World, Service Firms Would Be Efficient A.

 PowerPoint Slide: #12 Thompson‘s Perfect-World Model –J. D. Thompson’s model of organizations proposing that operations’ ―perfect‖ efficiency is possible only if inputs, outputs, and quality happen at a constant rate and remain known and certain.

6.

Started with an organizational perspective, introducing the idea of a technical core.

–Technical core: the place within the organization where its primary operations are conducted.

7.

To operate efficiently, a firm must be able to operate ―as if the market will absorb the single kind of product at a continuous rate and as if the inputs flowed continuously at a steady rate and with specified quality.‖

8.

Decisions within the technical core can be programmed and individual discretion can be replaced by rules.

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9.

The removal of discretion means that jobs can be "de-skilled" and a lower quality of labor can be used; rules can be programmed into machines and replace labor.

10.

A system without uncertainty is easy to control and manage.

The Focused Factory Concept

 PowerPoint Slide: #13

1.

Broadens Thompson‘s perfect-world model by proposing that focus generates effectiveness as well as efficiency.

2.

Accepts the notion that the "ideal world" is virtually impossible to create.

3.

Concentrates on performing one particular task in one particular part of the plant.

4.

Promotes experience and effectiveness through repetition and concentration on one task.

5.

The focused factory can meet the demands of the market better whether the demand is low cost through efficiency, high quality, or any other criterion.  PowerPoint Slide: #14

C.

The Plant-Within-a-Plant (PWP) Concept –the strategy of breaking up large, unfocused plants into smaller units buffered from one another so that each can be focused separately.

1. Organizations buffer environmental influences by surrounding their technical core with input and output components.

–Buffering: surrounding the technical core with input and output components to buffer environmental influences.

2. The alternatives to buffering are smoothing, anticipating, and rationing.

–Smoothing: managing the environment to reduce fluctuations in supply and/or demand.

–Anticipating: mitigating the worst effects of supply and demand fluctuations by planning for them.

–Rationing: direct allocations of inputs and outputs when the demands

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 PowerPoint Slide: #15

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placed on a system by the environment exceed the system’s ability to handle them.

V.

Applying the Efficiency Models to Service Firms A. The servuction system (Chapter 1) is an operation‘s nightmare since it is impossible to use inventories and decouple production from the customer.

1. system is directly linked to the market 2. demand varies day to day, hour to hour, minute to minute 3. massive problems in capacity planning and utilization  PowerPoint Slides: #16-17 B. Operations Solutions for Service Firms a. (1) Isolating the Technical Core 1. This approach proposes the clear separation of the servuction system, which is characterized by a high degree of customer contact, from the technical core.

–Decoupling: disassociating the technical core from the servuction system.

2. Different management philosophies should be adopted for each unit of operation. a. The technical core should be subjected to production-lining approaches. b. High contact areas should sacrifice efficiency in the interest of the consumer. b. (2) Production-Lining the Whole System –Production-line approach: the application of hard and soft technologies to a service operation in order to produce a standardized service product.

1. Involves the application of hard and soft technologies to both © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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the front and back of the service operation. a. Hard technologies: hardware that facilitates the production of a standardized product. b. Soft technologies: rules, regulations, and procedures that facilitate the production of a standardized product.

2. This kind of approach is relatively rare; however, fast-food firms provide a classic example of where customization is minimal, volume is large, and customer participation in the process is high. c.

(3) Creating Flexible Capacity 1. See E-Service In Action – Verizon Enterprise Solutions Group: Teaming Up with Healthcare.

2. One method used to minimize the effects of variable demand is to create flexible capacity (supply).

3. Many strategies to increase supply were discussed in Chapter 3.

4. The operational gains that are achieved by implementing these strategies should be viewed in light of the tradeoffs in marketing effectiveness associated with many of these strategies.

d. (4) Increasing Customer Participation 1. To replace the work done by the employees of the firm with work done by the customer.

2. This approach primarily focuses on reducing the costs associated with providing the service to the customer.

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e. (5) Moving the Time of Demand to Fit Capacity 1. Smoothing demand is a useful strategy from an operations point of view.

2. This strategy fails to recognize the change in customer behavior needed to make the strategy effective.

VI.

The Art of Blueprinting –the flowcharting of a service operation.

 PowerPoint Slides: #18– 19

A. Blueprinting identifies the: a. Directions in which processes flow. b. Time it takes to move from one process to the next. c. Costs involved with each process step. d. Amount of inventory buildup at each step. e. Bottlenecks in the system.

B. Blueprints provide a means of communication between operations and marketing and can highlight potential problems on paper before they occur in real time.

C. An example of a simple blueprint [Figure 5.3]

 PowerPoint Slide: #20

1. Identify direction in which processes flow.

2. Identify the time it takes to move from one process to the next. a. Process time: calculated by dividing the activity time by the number of locations at which the activity is performed. b. Activity time: the time required to perform one activity at one station. c. Station: a location at which an activity is performed within a service blueprint.

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3. Identify the costs involved with each process step. a. Service cost per meal: the labor costs associated with providing a meal on a pre-meal basis (total labor costs/maximum output per hour). b. Maximum output per hour: the number of people that can be processed at each station in one hour.

4. Identify the amount of inventory buildup at each step.

5. Identify the bottlenecks in the system. a. Bottlenecks: points in the system at which consumers wait the longest periods of time.

D. The Service Operations Manager‘s Perspective 1. The first thing the blueprint does is provide a check on the logical flow of the whole process.

2. Blueprints identify any potential bottlenecks in the system.  PowerPoint Slides: #21–22 3. Improvements to Figure 5.3 that eliminate bottlenecks and increase capacity are illustrated in Figures 5.4 and 5.5.

E. The Service Marketing Manager‘s Perspective 1. The marketing manager has some of the same problems as the operations manager.

2. The marketing manager should recognize the benefits of changing the system to process customers more effectively.

3. The blueprinting approach allows the marketing and operations personnel to analyze in detail the process that they are jointly trying to create and manage.

F. Using Service Blueprints to Identify the Servuction Process 1. Figure 5.6 shows a much more detailed blueprint.

2. In assessing the quality of service received, according to the servuction model, the customer refers to the points of contact when © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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developing perceptions regarding the value of service quality received.

3. Figure 5.6 also highlights the potential fail points (F), which have three characteristics: –Fail points: points in the system at which the potential for malfunction is high and at which a failure would be visible to the customer and regarded as significant. a. The potential for operations malfunction is high. b. The result of the malfunction is visible to consumers. c. A system malfunction is regarded by consumers as particularly significant.

G. A Marketing or an Operations Blueprint?

1. The blueprints discussed so far have an internal focus—although they identify clearly the tangible points of contact with the client, they start from the organization and look outward.

2. An alternative way to develop a blueprint from a marketing perspective would be to start from consumer scripts.

H. Constructing the Service Blueprint 1. Elicit scripts from both employees and consumers that break down the service process into a sequence of events followed by both parties.

2. Too often, management makes the mistake of developing a one-sided blueprint.

–an unbalanced blueprint based on management’s perception of how the sequence of events should occur.

3. Service employees also have scripts that dictate their own behavior during interactions with the customer. a. Convergent scripts: employee/consumer scripts that are mutually agreeable and enhance the probability of customer satisfaction. b. Divergent scripts: employee/consumer scripts that ―mismatch‖ and point to areas in which consumer expectations are not being met. © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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4. Two-sided blueprint: blueprint that takes into account both employee and customer perceptions of how the sequence of events actually occurs.

5. Employees and consumers are asked to pay special attention to those contact activities that elicit strong positive or negative reactions during the service encounter.

6. Script norms: proposed scripts developed by grouping together events commonly mentioned by both employees and customers and then ordering those events in their sequence of occurrence.  PowerPoint Slides: #23-26 I. Blueprinting and New-Product Development: The Roles of Complexity and Divergence 1. Complexity: a measure of the number and intricacy of the steps and sequences that constitute a process.

2. Divergence: a measure of the degrees of freedom service personnel are allowed when providing a service.

3. Figure 5.7 presents a traditional florist. Figure 5.8 provides the blueprint for a second florist that has attempted to standardize its final product.

4. Companies may wish to pursue a volume-oriented positioning strategy –a positioning strategy that reduces divergence to create product uniformity and reduce costs.

5. Companies may wish to pursue a niche positioning strategy.

–a positioning strategy that increases divergence in an operation to tailor the service experience to each customer.

6. Companies may wish to pursue a specialization positioning strategy.

–a positioning strategy that reduces complexity by unbundling the different services offered.

–Unbundling: divesting an operation of different services and concentrating on providing only one or a few services in order to pursue a specialization positioning strategy.

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7. Companies may wish to pursue a mass market or penetration strategy –a positioning strategy that increases complexity by adding more services and/or enhancing current services to capture more of a market.

VII.

Summary The primary objective of this chapter was to highlight the idea that for a service firm to be successful, its marketing and operations departments must work together. In a broad sense, one could view the functions of marketing and operations as the marriage of consumers‘ needs with the technology and manufacturing capabilities of the firm.

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REVIEW QUESTIONS: 1. Why is developing an effective process strategy particularly important for service firms?

Given the consumer‘s involvement within the service encounter, the consumer‘s evaluation of the encounter is often based as much on the process as the final outcome.

Without a successful service delivery process, the service firm will meet its final demise as customers become frustrated over the level of poor service delivered.

2. Discuss the role of technology as a service firm transitions itself through the four stages of operational competitiveness.

Stage 1: Available for Service - Technological investment, training, and personnel costs are minimized.

Stage 2: Journeyman - Investment in technology is linked to long-term costs savings.

Stage 3: Distinctive Competencies Achieved - View of technology changes from ―cost savings‖ to ―enhancing the customers‘ experience.‖ Stage 4: World-Class Service Delivery - Technology provides a means to accomplish tasks that the competition cannot easily duplicate.

3. Explain how the inability to inventory services on the input and output sides of the technical core affects the operational efficiency of most service firms.

In many instances, the service encounter is an operations nightmare since it is impossible to use inventories. Instead of receiving demand at a constant rate, services are often linked directly to the market that frequently varies from day to day, hour to hour, and even minute to minute. If service inventories were possible, they would provide a source of supply during peak demand periods.

4. Compare Thompson's perfect-world model to the focused factory and plantwithin-a-plant concepts.

Peak operational efficiency occurs when inputs, outputs, and quality happen at a constant rate and remain known and certain. Obviously, such an ideal world is virtually impossible to create. The focused factory concept focuses on a particular job; once this focus is achieved, the factory does a better job because repetition and concentration in one area allows the work force and managers to become effective and experienced in the task required for success. The focused factory broadens the perfect-world model in that it argues that focus generates effectiveness as well as efficiency. The plant-withina-plant concept extends the focused factory concept by breaking up large, unfocused plants into smaller units buffered from one another so that each can be focused separately.

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5. What is buffering? How do the strategies of anticipating, smoothing, and rationing relate to buffering?

Organizations buffer environmental influences by surrounding their technical core with input and output components. Smoothing involves managing the environment to reduce fluctuations in supply and/or demand. Anticipating attempts to minimize the worst effects of fluctuations by planning for them. Rationing involves resorting to triage when the demands placed on the system by environmental influences exceeds the system's ability to handle them. Successful firms preplan smoothing, anticipating, and rationing strategies so that they can be more efficiently implemented in times of need.

6. Discuss some specific examples of how the customer's involvement in the service encounter influences the operational efficiency of the average service firm.

A number of specific examples can be cited. In general, customers can affect the type of service desired, the timing and cycle of demand, and the duration of the service experience. Service providers striving for peak efficiency would like to control each of these influences.

7. What does it mean to isolate the technical core of a business?

A typical example would be a dry cleaner. The technical core is the part of the operation where the cleaning processes occur and where customer contact is low. Due to the limited amount of customer contact in this part of the operation, efficiencies may be achieved that may be unattainable in high customer contact areas.

8. Provide examples of hard and soft technologies and explain their relevance to this chapter.

Examples of hard technologies include hardware that facilitates the production of a standardized product. In contrast, soft technologies are the rules, regulations, and procedures that attempt to accomplish the same goal. The primary purpose of hard and soft technologies is to increase the efficiency of the operation. For instance, McDonald's employees follow strict guidelines in food preparation that produces a standardized product. Some of the standardization is achieved through hard technologies such as deep fryers and a variety of other cooking-related machinery. Soft technologies are also utilized. Specific instructions regarding how to properly ―dress‖ menu items ensures a standardized product.

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9. Discuss the steps for developing a meaningful blueprint.

The first step in the process is to elicit scripts from both employees and consumers that break down the service process into a sequence of events followed by both parties. The second step is to identify potential fail points in the process. Fail points can be identified by asking employees and customers to pinpoint steps in the process that are particularly important in assessing dis/satisfaction. The third step involves specifying the time frame of service execution. Once the standard execution times of the events that make up the service encounter have been specified, the manager can analyze the profitability of the system, given the costs of inputs needed for the system to operate.

10. What are the trade-offs associated with increasing/decreasing divergence and increasing/decreasing complexity.

Increasing divergence creates flexibility in tailoring the experience to each customer, but it does so at the increased expense to the consumer. Moreover, the service operation becomes more difficult to manage, control, and distribute. Reducing divergence increases productivity, lowers production costs, and facilitates the distribution of a standardized service. However, the downside of reduced divergence is the lack of customization that can be provided to individual customers.

In comparison, the advantages associated with reduced complexity include improved control over the final product and improved distribution. However, risks are involved if full-service competitors are able to appeal to consumers wishing to purchase from a provider that offers a number of choices. Just the opposite is true for firms wishing to increase complexity. Increasing complexity translates into the addition of more services to the firm's offering as well as the enhancement of current ones.  PowerPoint Slide: #1 CHAPTER 6: THE PRICING OF SERVICES

"The bitterness of poor quality is remembered long after the sweetness of low price has faded from memory.‖ Aldo Gucci

Chapter Objectives: The purpose of this chapter is to discuss pricing as a strategic decision in overall service strategy. More specifically, the major objectives of this chapter are to familiarize you with the special considerations pertaining to service pricing decisions and to introduce emerging pricing practices within the service sector.

Learning Objectives:

 PowerPoint Slide: #2

After reading this chapter, you should be able to © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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1. Discuss the concept of perceived value as it pertains to comparing total customer cost to total customer value. 

Customer perceptions of value represent a trade-off between the perceived benefits obtained from purchasing the product and the perceived sacrifice in terms of cost to be paid. Total customer costs extend beyond monetary costs and include time, energy, and psychic costs. Similarly, total customer value extends beyond product value and includes service, personnel, and image value.

2. Understand the special considerations of service pricing as they relate to cost, demand, customer, competitor, profit, product, and legal considerations. 

The ultimate pricing challenge faced by most firms is determining a price that sells the services while at the same time offering a profitable return. When pricing retail services, many of the same factors that are considered for pricing goods should be examined. The literature suggests that retail price determination should be based on cost, demand, customer, competitive, profit, product, and legal considerations. While the considerations are the same for goods and services, the content of the considerations differ. Figure 6.1 highlights these key differences.

3. Discuss the pros and cons of using cost-based pricing in service pricing decisions. 

Service firms encounter a number of unique cost considerations that need to be addressed when formulating service pricing strategy: (1) service pricing is often not finalized until after provision; (2) services have no costs of goods sold; (3) often characterized by a high fixed cost to variable cost ratio; and (4) mass production of services leads to limited economies of scale. Pricing experts would agree that their role in setting the final price is often overemphasized. Service firms that overemphasize the role of cost in setting final prices are limited by their internal focus, and tend to underprice their services in the market. Firms that rely solely on costs to set prices fail to look externally at the market and extract the full value that customers place on the services offered.

4. Discuss the circumstances under which price segmentation is most effective. 

Criteria for effective price segmentation include: (1) different groups of consumers must have different responses to price; (2) the different segments must be identifiable, and a mechanism must exist to price them differently; (3) individuals in one segment who have paid a low price should not have the opportunity to pass their savings on to other segments; (4) the segment should be large enough to be profitable; (5) the cost of running the segmentation strategy should not exceed the incremental revenues obtained; and (6) the customers should not be confused by the use of different prices.

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5. Explain satisfaction-based, relationship, and efficiency approaches to pricing and provide examples of service firms that are using each of these pricing practices. 

The primary goal of satisfaction-based pricing is to reduce the amount of perceived risk associated with the purchase and appeal to target markets that value certainty. Satisfaction-based pricing can be achieved through guarantees, benefit-driven pricing, and flat-rate pricing. Relationship Pricing enhances and expands the firm's relationship with its targeted consumers through long-term contracts and price bundling strategies. Efficiency pricing appeals to economically-minded consumers by delivering the best and most cost-effective service for the price. Many companies have turned to adaptive pricing strategies during tough times, offering discounts without conceding margins on a permanent basis.  PowerPoint Slide: #3

Opening Vignette: Pay What You Can Restaurants      

The ―Pay What You Can‖ movement began at Salt Lake City‘s One World Café more than 12 years ago.

Denver is now home to three such restaurants.

There are no set prices on the menu. Customers can pay for their meals with cash or labor, or nothing at all.

The business model is simple: feed all customers regardless of their ability to pay and ask those who can afford it to contribute a little more.

These restaurants bring together people from all walks of life, unlike soup kitchens where all diners are poor.

Entrepreneurs around the country are considering opening these restaurants.

Lecture Outline: I.

Introduction

 PowerPoint Slide: #4

A.

Of the traditional marketing mix variables that are utilized to influence customer purchase decisions, the development of effective pricing strategies perhaps remains the most elusive.

B.

Today, price remains one of the least researched and mastered areas of marketing. This chapter focuses on how the pricing approaches apply and on how, to a greater or lesser extent, service pricing policies differ from those of goods.  PowerPoint Slide: #5 ®

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What Does It Mean to Provide Value?

Z.

Buyers‘ perceptions of value represent a trade-off between the perceived benefits of the service to be purchased and the perceived sacrifice in terms of the costs to be paid. (Figure 6.1)

AA.

Total costs to be paid include:

C.

1.

The monetary cost: the actual dollar price paid by the consumer for a product.

2.

Time costs: the time the customer has to spend to acquire the service.

3.

Energy costs: the physical energy spent by the customer to acquire the service.

4.

Psychic costs: the mental energy spent by the customer to acquire the service.

Total customer value includes: 1.

Product value: the worth assigned to the product by the customer.

2.

Service value: the worth assigned to the service by the customer.

3.

Personnel value: the worth assigned to the service-providing personnel by the customer.

4.

Image value: the worth assigned to the image of the service or service provider by the customer.

D.

If the total customer cost is an indicator of sacrifice relative to value, then price will have a negative or repelling effect and may reduce demand. If the signal sent by the price is an indicator of benefit or value, then the price will be an attractor and may increase demand.

E.

Consumers have both lower and upper price thresholds.

F.

Consumers exchange their money, time, and effort for the bundle of benefits the service provides.

1.

The reservation price captures the value consumers place on these benefits.

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2.

If the consumer can purchase the service for less than the reservation price, a consumer surplus will exist.

3.

See Services Ethics in Action – Springsteen, Pearl Jam, and Others Upset Over Ticketmaster Pricing Policies.

Special Considerations of Service Pricing

 PowerPoint Slide: #6

R.

The literature suggests that strategic pricing decisions should be based on cost, demand, customer, competitive, profit, product, and legal considerations. Figure 6.2 provides a summary of the key considerations.

S.

Cost Considerations

 PowerPoint Slide: #7

1. Consumers may not know the actual price they will pay for a service until after the service is completed.

2. Cost-based pricing is more difficult for services. a. Cost of goods sold is either small or nonexistent. b. Labor needs are challenging to forecast accurately in many service settings.

3. Many services are typically characterized by a high fixed- to variablecost ratio. a. Fixed cost: costs that are planned and accrued during the operating period regardless of the level of production and sales. b. Variable cost: costs that are directly associated with increases in production and sales. c. See E-Services in Action – Turbocharged Software Sets Airline Pricing 75,000 Times a Day! 4. Service economies of scale tend to be limited. a. Economies of scale: based on the idea of the more you produce, the cheaper it is to produce it…the cheaper it is to produce it, the cheaper it can be sold…the cheaper it can be © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

 PowerPoint Slides: #814

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sold, the more it is sold…the more it is sold, the more it can be produced (and so on).

T.

Demand Considerations 1. Demand for services tends to be more inelastic.

2. Experts in the field suggest ten factors that influence customer price sensitivity. Figure 6.3 provides an overview of each of the 10 price sensitivity factors and their proposed relationship to price sensitivity. a. Perceived substitute effect b. Unique value effect c. Switching cost effect d. Difficult comparison effect e. Price-quality effect f. Expenditure effect g. End-benefit effect h. Shared-cost effect i.

Fairness effect

j.

Inventory effect

3. Clearly, price sensitivities will vary across different types of services, but in general the demand for services tends to be inelastic.

–Inelastic demand: the type of market demand when a change in price of service is greater than a change in quantity demanded.

4. Cross-price elasticity considerations need to be examined. a. Consumers of services often implicitly bundle prices. b. Cross-price elasticity: a measure of the responsiveness of demand for a service relative to a change in price for another service. © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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c. Complements: the effect of cross-price elasticity in which an increase in the price of Product A decreases the demand for Product B. d. Substitutes: the effect of cross-price elasticity in which the increase in the price of Product A increases the demand for Product B. 5. Price discrimination is a viable practice to manage demand and supply challenges.  PowerPoint Slides: #1516 a. Price discrimination: The practice of charging different customers different prices for essentially the same service. b. See Global Services in Action – Ethnic Pricing…Is this Ethical? c. There are 6 criteria for effective price segmentation: 1. Different groups of consumers must have different responses to price.

2. The different segments must be identifiable, and a mechanism must exist to price them differently.

3. No opportunity should exist for individuals in one segment who have paid a low price to sell their tickets to those in other segments.

4. The segment should be large enough to make the exercise worthwhile.

5. The cost of running the price segmentation strategy should not exceed the incremental revenues obtained.

6. The customers should not be confused by the use of different prices.  PowerPoint Slide: #17 U.

Customer Considerations 1.

Price tends to be one of the few clues available to consumers during prepurchase.

–Signpost items: items that customers buy often, so they are very

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well aware of typical prices.

2. Service consumers are more likely to use price as a cue to quality: a. Under the condition when price is the primary differential informational available. b. Under the condition when alternatives are heterogeneous. c. Under the condition when comparative price differences are relatively large.

3.

Service consumers tend to be less certain about reservation prices.

–Reservation price: the price a consumer considers to capture the value he or she places on the benefits.  PowerPoint Slide: #18

D.

Competitive Considerations 1.

Comparing prices of competitors is more difficult for service consumers.

2.

Self-service is a viable competitive alternative.  PowerPoint Slide: #19

E.

Profit Considerations 1.

Price bundling: the practice of marketing two or more products and/or services in a single package at a single price.

2.

Price bundling makes the determination of individual prices in the bundle of services more complicated.

3.

Price bundling is more effective in a service context.  PowerPoint Slide: #20

F.

Product Considerations 1.

Compared to the goods sector, there tend to be many different names for price in the service sector.

2.

Consumers are less able to stockpile services by taking advantage of discount prices.

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–forward buying: when retailers purchase enough product on deal to carry over until the product is being sold on deal again.

3.

Product-line pricing tends to be more complicated. a.

Product-line pricing: the practice of pricing multiple versions of the same product or grouping similar products together.

b.

For example, beginner, intermediate, and expert level for sports training.  PowerPoint Slide: #21

G. Legal Considerations 1.

The opportunity for illegal pricing practices to go undetected is greater for services than goods.

2.

To consumers, the issue is one of fairness and dual entitlement.

—Dual entitlement: cost-driven price increases are perceived as fair, whereas demand-driven price increases are viewed as unfair.  PowerPoint Slide: #22

IV.

Emerging Service Pricing Strategies – Figure 6.4  PowerPoint Slide: #23 A.

Satisfaction-Based Pricing –pricing strategies that are designed to reduce the amount of perceived risk associated with a purchase.

11.

Service guarantees are quickly becoming a popular way of attracting customers

12.

Benefit-driven pricing: a pricing strategy that charges customers for services actually used as opposed to overall ―membership‖ fees.

13.

Flat-rate pricing: a pricing strategy in which the provider agrees in advance to a fixed price and the provider assumes the risk of price increases and cost overruns.  PowerPoint Slide: #24

B.

Relationship Pricing

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–pricing strategies that encourage customers to enhance and expand their dealings with the service provider.

3. The primary objective is to enhance and expand the firm's relationship with its targeted consumers. a. Long-term contracts: offer price and nonprice incentives for dealing with the same provider over a number of years. b. Price bundling: the practice of marketing two or more services as a single package for a single price.

4. Generally, services are concerned with mixed bundling.

–price-bundling technique that allows consumers to either buy Service A and Service B together or purchase one service separately.  PowerPoint Slide: #25 C.

Efficiency Pricing –pricing strategies that appeal to economically minded consumers by delivering the best and most cost-effective service for the price.

1. Operations are streamlined, and innovations that enable further cost reduction become part of the operation‘s culture.

2. Understanding and managing costs are the fundamental building blocks of efficiency pricing.  PowerPoint Slide: #26

D.

Adaptive Pricing –the practice of offering discounts without conceding margins on a permanent basis.

1. The idea is to vary product attributes to appeal to a variety of customers and their ideas of value.

2. Common adaptive pricing strategies include: a. Altering the product size. b. Utilizing new distribution channels (online versus brick and mortar). c. Requiring purchase minimums. d. Price versioning (―good,‖ ―better,‖ and ―best‖ quality).

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e. Ala-carte pricing (unbundled offerings). f. Promotional pricing (two-for-one deals).  PowerPoint Slide: #27 E.

Some Final Thoughts on Pricing Strategies 1. Pricing services is a difficult task.

2. Successful service providers tend to abide by the following pricing guidelines: a. The price should be easy for consumers to understand. b. The price should represent value to the customer. c. The price should encourage customer retention and facilitate the customer's relationship with the providing firm.

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d. The price should reinforce customer trust. e. The price should reduce customer uncertainty.

VI.

Summary Successful service pricing depends on recognizing the value that a customer places on a service and pricing that service accordingly. Overall, traditional pricing strategies and cost accounting approaches offer little benefit to either service consumers or service providers. Understanding and managing costs are the fundamental building blocks of efficiency pricing.

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REVIEW QUESTIONS:

1. It is often suggested that service firms should set their prices based on customers’ perceived value of the service. What is value?

Buyers‘ perceptions of value represent a trade-off between the perceived benefits of the service to be purchased and the perceived sacrifice in terms of the costs to be paid (Figure 6.1). Total customer costs include more than simply the monetary price paid for the service. Other costs include time costs, energy costs, and psychic costs, which reflect the time and trouble the customer has to endure to acquire the service. Similarly, total customer value extends beyond product value and includes service value, personnel value, and image value.

2. Discuss the role of costs in setting final prices.

Service firms encounter a number of unique cost considerations that need to be addressed when formulating service pricing strategy: (1) service pricing is often not finalized until after provision, (2) services have no costs of goods sold, (3) services are often characterized by a high fixed-cost to variable-cost ratio, and (4) mass production of service leads to limited economies of scale. Pricing experts would agree that their role in setting the final price is often overemphasized. Service firms that overemphasize the role of cost in setting final prices are limited by their internal focus and tend to underprice their services in the market. Firms that rely solely on costs to set prices fail to look externally at the market and extract the full value that customers place on the services offered.

3. Discuss the role of price as an indicator of quality to consumers.

Research on the subject is mixed. However, it appears that in the absence of other search attributes and any other additional information, price acts as an indicator of quality to consumers.

4. Describe the trade-offs associated with taking hotel reservations from customers who pay lower rates than same-day customers.

Profitable hotel management depends on a balancing act between capacity utilization and revenues generated. Filling the hotel with low-rate guests who have booked six months in advance precludes higher-priced, same-day sales. On the other hand, keeping rooms unfilled until the last moment runs the risk that capacity will be unused.

5. Should self-service always be rewarded with lower prices? Please explain.

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commonly referred to as self-service options. The availability of self-service options has an effect on customer perceptions of the service. Initially, self-service options invariably provided the service customer with some form of price reduction (e.g., self-service gasoline). Today, the literature suggests that service customers often are seeking other benefits besides lower prices when purchasing self-service options. These benefits might include greater convenience, more control, less human contact, faster service time, greater efficiency, and greater independence. Self-service options must be considered in the formation of pricing strategy.

6. Under what conditions is price segmentation most effective?

Criteria for effective price segmentation include: (1) different groups of consumers must have different responses to price; (2) the different segments must be identifiable, and a mechanism must exist to price them differently; (3) individuals in one segment who have paid a low price should not have the opportunity to pass their savings on to other segments; (4) the segment should be large enough to be profitable; (5) the cost of running the segmentation strategy should not exceed the incremental revenues obtained; and (6) the customers should not be confused by the use of different prices.

7. Discuss the basic concepts behind satisfaction-based, relationship, and efficiency pricing.

The primary goal of satisfaction-based pricing is to reduce the amount of perceived risk associated with the purchase and appeal to target markets that value certainty.

Satisfaction-based pricing can be achieved through guarantees, benefit-driven pricing, and flat-rate pricing. Relationship pricing enhances and expands the firm's relationship with its targeted consumers through long-term contracts and price bundling strategies.

Efficiency pricing appeals to economically minded consumers by delivering the best and most cost-effective service for the price.

8. Provide three examples of relationship pricing not addressed in this chapter.

Answers will vary, but in the banking industry, relationship pricing strategies can be utilized to further nurture the relationship between the bank and its existing checking account customers by offering special savings accounts, deals on safe deposit boxes, and special rates on certificates of deposit.

9. Define price bundling, and provide three reasons why it makes sense for service firms to engage in price bundling practices.

Price bundling is the practice of marketing two or more products and/or services in a single package at a single price. Since most service organizations provide more than one service, the practice of bundling services has become more common. (1) Information theory would argue that the consumer finds value in easy access to information. (2) A second case argues that the bundling of Service B with Service A can © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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enhance a customer‘s satisfaction with Service A. (3) The final argument is that the addition of Service B to Service A can enhance the total image of the firm.

10. Define flat-rate pricing and provide an explanation for why a service firm may want to pursue a flat-rate pricing strategy.

Flat-rate pricing is a pricing strategy in which the provider agrees in advance to a fixed price and thus assumes the risk of price increases and cost overruns. Its primary objective is to decrease consumer uncertainty. Flat-rate pricing makes the most sense when price is competitive, the firm offering the flat rate has its costs under control and runs an efficient operation, and opportunities exist to engage in a long-term relationship and to generate additional revenues with the customer.

CHAPTER 7: DEVELOPING THE SERVICE COMMUNICATION STRATEGY

 PowerPoint Slide: #1

"Half the money I spend on advertising is wasted; the trouble is, I don‘t know which half.‖ John Wanamaker

Chapter Objectives: The purpose of this chapter is to provide an overview of communication strategy as it applies to the marketing of services.

Learning Objectives:

 PowerPoint Slide: #2

After reading this chapter, you should be able to 1. Discuss the steps necessary to manage the firm’s service communication strategy effectively. 

Service practitioners that adhere to the following service communication process substantially increase their odds of obtaining their communication objectives: (1) selecting target markets; (2) establishing communication objectives; (3) setting the communications budget; (4) formulating the positioning strategy; (5) establishing message and media strategies; and (6) monitoring, evaluating, and controlling the communication strategy.

2. Understand the special challenges associated with developing service communications. 

Special challenges associated with developing the service communication mix include managing expectations, mistargeted communications, the use of communications to target employees as well as consumers, and the

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selling/operations conflicts that often arise when turning doers into sellers.

3. Describe specific guidelines for developing service communications. 

Guidelines for the development of service communications include: o Develop a word-of-mouth communication network. o Promise what is possible. o Tangibilize the intangible. o Feature the working relationship between customer and provider. o Reduce consumer fears about variations in performance. o Determine and focus on relevant service quality dimensions. o Differentiate the service product via the service delivery process. o Make the service more easily understood.

4. Appreciate the special considerations faced by professional service providers and recommend solutions to overcome these challenges. 



The special problems encountered by professional service providers include: (1) third-party accountability, (2) client uncertainty, (3) the need for experience, (4) limited differentiability, (5) managing consumers in pursuit of maintaining quality control, (6) turning doers into sellers, (7) allocating the professional's time between marketing and operations, (8) tendencies to be reactive rather than proactive, (9) the effects of advertising are unknown, and (10) that most professionals have a limited marketing knowledge base.

The special considerations for professional service providers include: first impressions are everything, create visual pathways that reflect quality, establish regular communications with clients, develop a firm brochure, and an informed office staff is vital.  PowerPoint Slide: #3

Opening Vignette: TripAvisor: Much More than a Travel Site   

TripAdvisor became a very early adopter of user-generated content as consumer reviews far outpaced professional reviews within short time of its founding.

Now touted as the largest travel site in the world, TripAdvisor claims 60 million members and over 170 million reviews and suggestions about hotels, restaurants, and other travel-related attractions and businesses.

Positive reviews and personal recommendations can have a profound effect on the life of a single service provider at a destination.

Lecture Outline: I.

Introduction

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Communication strategy is one of the key components of the service marketing mix.

–Communication strategy: communicates the firm’s positioning strategy to its target markets, including consumers, employees, stockholders, and suppliers for the purpose of achieving organizational objectives.  PowerPoint Slide: #4

B.

The elements of the communications mix fall into five broad categories: –Communication mix: the array of communication tools available to marketers including advertising, personal selling, publicity, sales promotion, and sponsorships.

1. Personal selling: the two-way element of the communication mix in which the service provider influences a consumer via direct interaction.

2. Advertising: a one-way communications tool that utilizes such media as television and radio to reach a broadly defined audience.

3. Publicity and public relations: a one-way communications tool between an organization and its customers, vendors, news media, employees, stockholders, the government, and the general public.

4. Sales promotions: a one-way communications tool that utilizes promotional or informational activities at the point of sale.

5. Sponsorships: allow the service firm to target a narrow, but highly desirable target audience and provide an option for service firms to adapt to consumers’ changing media habits.

C.

II.

Using more than one communication tool to communication the same message (known as integrated marketing communications) or using any one tool repeatedly increases the chances that existing and potential customers will be exposed to the firm‘s message, associate it with the firm, and remember it.

Managing the Service Communication Process

 PowerPoint Slide: #5

A. Figure 7.1 Managing the Service Communication Strategy BB.

Selecting Target Markets

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–the segments of potential customers that become the focus of a firm’s marketing efforts.

C.

Establishing Communication Objectives 1. The primary role of a service firm‘s communication strategy is to inform, persuade, and/or remind customers of service offerings.  PowerPoint Slide: #6 2. Communication objectives often relate directly to the service offering‘s stage within the product life cycle (PLC).

3. Figure 7.2 Product Life Cycle Stage and Communication Objectives  PowerPoint Slide: #7 4. Objectives should be SMART―specific, measurable, achievable, relevant, and time-bound.

CC.

Setting the Communications Budget

 PowerPoint Slide: #8

1. Figure 7.3 An Overview of Communication Strategy Budget Setting Techniques 2. Budget-setting techniques include: 1. Top-down budgeting 2. Bottom-up budgeting 3. Bottom-up/top-down budgeting 4. Top-down/bottom-up budgeting 5. Percentage-of-sales technique 6. Incremental technique 7. All-you-can afford approach 8. Competitive parity 9. Objective-and-task method © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Formulating the Service Firm‘s Positioning Strategy 1. Positioning strategy: how the firm is viewed by consumers relative to its competitors; positioning strategy speaks to the firm’s differential advantage.

2. See Sustainability and Services in Action –  Starbucks‘ Subtle PowerPoint Slide: #9 Promotion about Its Environmental Mission.

3. Figure 7.4 provides examples of differentiation approaches for effective positioning.

1.

2.

3.

4.

Product – features, performance, conformance, durability, reliability, repairability, design Personnel – competence, courtesy, credibility, reliability, responsiveness, communication style Image – symbols, written, audio/visual media, atmosphere, events Service – delivery (speed, accuracy), installation, customer training, consulting service, repair, miscellaneous service

4. Effective positioning is particularly critical for service firms where intangibility clouds the consumer‘s ability to differentiate one service provider‘s offering for the next.

5. For the international market, the copy needs to be customized to the local culture.

–Copy: the content of the firm’s communication message.

EE.

Establishing Message and Media Strategies 1. Media Strategies for Targeting Nonusers: the choice is reduced to media advertising, selling performed by a sales force rather than a service provider, and publicity and public relations. a.

Television can reach a wide audience but is not particularly selective.

b.

Print media is more selective since many are targeted to specific groups.

c.

Direct mail is the most selective.

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Media selection is often based on cost per thousand and the risk of reaching the wrong segments.

e.

Mass media is unlikely to be effective for a specialty service.

f.

Public relations can be either broad or tightly focused.

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Personal or telemarketing is far more expensive per member of the target audience, but it does offer the flexibility of altering the message.  PowerPoint Slide: #10

2. Media Strategies for Targeting Users: the choice of media includes all of those previously mentioned and also includes communications through the service provider. Different providers are called upon to perform different communications functions.

FF.

a.

Type 1 service staff –Service staff who are required to deal with customers quickly and effectively in "once only" situations where large numbers of customers are present.

b.

Type 2 service staff –Service staff who deal with numerous, often repeat customers in restricted interactions of somewhat longer duration.

c.

Type 3 service staff –Service staff required to have more highly developed communication skills because of more extended and complex interactions with customers.

Monitoring, Evaluating, and Controlling the Communication Strategy 1. Managers should monitor reactions to the strategy, evaluate its effectiveness, and make adjustments when necessary.

2. Many service communications strategies are characterized by a lagged effect.

–Lagged effect: when demand for the service is infrequent, and therefore the success of the communication strategy may not be realized until a later point in time.  PowerPoint Slide: #11

III.

Special Challenges Associated with the Service Communications Strategy A. Mistargeted Communications –Occurs when the same communication message appeals to two diverse market segments.

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― Since the consumption of services is often not separated by time and space, mistargeted communications may spoil the service environment when two diverse groups share a common service experience.

B. Managing Expectations and Perceptions 1.

Service firms must often walk a thin line between making promises that differentiates them from competitors while at the same time not creating unrealistic customer expectations that lead to customer dissatisfaction.

2.

Technical service quality is an objective level of performance produced by the operating system of the firm.

C. Advertising to Employees 1.

In order for service firms to succeed, they must first sell the service job to the employees before they sell the service to the customer.

2.

Communications that are targeted to customers can also convey company goals and performance expectations to employees.

D. Selling/Operation Conflicts 1.

Individuals who sell the service are often the same people who provide the service.

2.

The conflicts associated with selling versus operations are at least twofold: a. Economic considerations: these individuals are typically paid for performing the service but not paid for selling activities. b. Role related: many service providers feel uncomfortable with their communications role.

3. See Global Services in Action – Personal Selling Approaches around the World.

IV.

Specific Guidelines for Developing Service Communications

A. Develop a word-of-mouth communications network.

 PowerPoint Slides: #12– 14

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a. See E-Services in Action – The Growth of Personal Communications via Social Media.

B. Promise what is possible.

C. Tangibilize the intangible.

1. The scale of market entities should be turned on its end.

2. See Figure 7.5.

 PowerPoint Slide: #13

D. Feature the working relationship between customer and provider.

E. Reduce consumer fears about variations in performance.

F. Determine and focus on relevant service quality dimensions.

G. Differentiate the service product via the service delivery process.

H. Make the service more easily understood.

V.

 PowerPoint Slides: #15– 16 Developing Communication Strategies for Professional Service Providers A. Third-Party Accountability 1. Investors, insurance companies, banks, governmental agencies, and even members of their own professions often hold professional service providers accountable for their actions or at least monitor those actions.

2. Creating credibility and projecting the image of a quality firm to third parties can be accomplished through the firm‘s communication mix.

B. Client Uncertainty 1. Many professional services are costly, associated with danger or importance, and, in some cases, technical and specialized, making them difficult for the customer/client to understand.

2. Effective communication can communicate the procedures involved, show the likely outcomes, answer consumers‘ common questions, and/or minimize consumers‘ areas of concern.

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C. Experience Is Essential 1. Communications must be effective in attracting and maintaining the customer base.

D. Limited Differentiability 1. As the level of competition increases among professional service providers, differentiation among providers decreases as they match one another‘s offerings with comparable alternatives.

2. Marketing communications that differentiate the provider on factors beyond the mere service product itself, such as personnel, customer service, and image, must be communicated to the marketplace to set the providers apart from the crowd.

E. Maintaining Quality Control 1. The customer plays a major role in the quality of the final outcome.

2. Communication that stresses the importance of following the professional‘s advice and its relationship to achieving positive outcomes educates the consumer.

F. Turning Doers into Sellers 1. No one should be able to sell the available service better than the provider.

2. The challenge of turning doers into sellers.

G. The Challenge of Dividing the Professional‘s Time between Marketing and Providing Services H. Tendencies to Be Reactive Rather than Proactive I. The Effects of Advertising Are Unknown a. Some members of professional societies still frown upon the use of certain communication methods such as traditional marketing. b. Many professionals are still struggling with pros and cons associated with advertising.

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J. Professional Providers Have a Limited Marketing Knowledge Base  PowerPoint Slide: #17 VI.

Special Considerations for Professional Service Providers A. First Impressions Are Everything. ― Halo effect: an overall favorable or unfavorable impression based on early stages of the service encounter.

B. Create Visual Pathways that Reflect the Firm‘s Quality. a. Visual pathways: printed materials through which the professional image of the firm can be consistently transmitted, including firm brochures, letterhead, envelopes, and business cards. b. Effective communication of the firm‘s logo assists the firm in establishing familiarity throughout the region in which it operates.

C. Establish Regular Communications with Clients. ― The most important piece of regular communication with clients should be the firm newsletter.

D. Develop a Firm Brochure.

E. An Informed Office Staff Is Vital.

VI.

Summary Communication strategy is one of the key components of a firm‘s overall marketing mix. Its role is to inform, persuade, and/or remind consumers about the services being offered. The objectives of a firm‘s communication mix often relate directly to the service offering‘s stage within the product life cycle. A variety of special considerations that pertain to services must be addressed when developing the communications mix.

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REVIEW QUESTIONS: 1. Discuss the process associated with managing an effective communication strategy.

Service practitioners that adhere to the following service communication process substantially increase their odds of obtaining their communication objectives: (1) selecting target markets; (2) establishing communication objectives; (3) setting the communication budget; (4) formulating the positioning strategy; (5) establishing message and media strategies; and (6) monitoring, evaluating, and controlling the communication strategy.

2. Describe the strategic differences among the five elements of the communication mix.

At a ―shotgun‖ level, television advertising can reach a very wide audience but is not especially selective except in the variation of audiences across channels by time of day.

National print media, trade magazines, and direct mail become more selective, respectively. Public relations and publicity can be either broad or tightly focused, depending on how they are used. Personal selling or telemarketing is far more expensive per member of the target audience, but it does offer the flexibility of altering the message during the two-way communications. Sales promotions often induce shortterm sales and are often used to support other forms of the firm's communication mix.

Sponsorships allow the service firm to target narrow, but highly desirable target audiences and provide an option for service firms to adapt to consumers‘ changing media habits.

3. Define what it means to develop communication objectives in SMART terms.

State three objectives that abide by the SMART guidelines.

When setting objectives, objectives should be SMART―specific, measurable, achievable, relevant, and time-bound. Answers will vary; e.g., an objective to increase sales by 10% in six months.

4. Compare the communication skills necessary to conduct type 1, type 2, and type 3 transactions. Which type of service staff should a firm recruit?

Type 1 service staff are required to deal with customers quickly and effectively in "once only" situations where large numbers of customers are present. Type 2 staff deal with numerous, often repeat customers in restricted interactions of somewhat longer duration. Type 3 staff are required to have more highly developed communication skills because of more extended and complex interactions with customers. A firm should recruit the type of service staff that matches its type 1, type 2, or type 3 needs.

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5. Why is the development of an effective positioning strategy particularly important for service firms?

Effective positioning is particularly critical for service firms where intangibility clouds the consumer‘s ability to differentiate one service provider‘s offering from the next. For example, one of the challenges faced by international service marketers is developing promotional campaigns that meet the needs of local clientele.

6. What problems are associated with mistargeted communications? Why do they occur?

Due to the customers‘ involvement in the service production process, other customers often share a common experience. Service consumption is often not separated by time and space; therefore, communications that attract diverse market segments may adversely affect the quality of the service experience for everyone involved.

7. Why should service employees be considered when developing communications materials?

In order for service firms to succeed, they must first sell the service job to employees before they sell the service to customers. Communications seen by the staff, if they empathize with it, can be highly motivating. However, if communications are developed without a clear understanding of the reality of the service provider‘s role in service delivery, it can imply service performance levels that are technically or bureaucratically impossible, which can have a detrimental effect on the staff. Simply stated, employees are very interested in the communications that are distributed to customers. Firms often communicate expected role behaviors of employees through the firm's communication mix. In the end, service communications not only provide a means of communicating with customers, but they also serve as a vehicle to communicate, motivate, and educate employees.

8. Discuss how insurance companies like Aflac and GEICO make their services more easily understood.

Given the intangible nature of services, service products are often abstract in the minds of potential customers. One of the principal guidelines for advertising a service is to make it more concrete. Insurance companies face this challenge on a daily basis—how to tangibilize the intangible? One possible solution for many insurance companies has been to use tangible symbols to represent their companies. Prudential has The Rock, Merrill Lynch has The Bull, and GEICO has The Gecko. However, no insurance icon has ever been as successful as the Aflac Duck!

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9. What problems arise in turning professional service providers into proactive marketing personnel?

The conflicts associated with selling versus operations are at least twofold. First are the economic considerations. Typically, service providers are paid for providing services and not for time spent on communications activities. Clearly, the provider must engage in marketing activities in order to generate future customers, but the time spent on marketing does not generate revenues for the provider at that point in time.

Complicating matters further, the time spent on communications activities with potential new customers often occurs while an ongoing project is conducted. This means that the time dedicated to communications activities must be considered when estimating completion dates for current customers. Often the firm‘s communications efforts must occur while previously sold services are being processed in order to avoid shut-down periods between customer orders. The second conflict that arises is often role related.

Many professional service providers believe that communications activities such as personal selling are not within their areas of expertise, and in some cases beneath them! Therefore, some providers feel uncomfortable with communications activities.

10. Discuss the concept of "visual pathways" and its potential use within a medical practice.

Visual pathways are the printed materials through which the professional image of the firm can be consistently transmitted, including firm brochures, letterhead, envelopes, and business cards. From the first time the firm's business card is put into a prospective client's hand, through the first letter the client receives, and on through finished reports delivered to the client and final billings, the presentation of printed material is making an impression. Answers may vary.

CHAPTER 8: MANAGING THE FIRM’S PHYSICAL EVIDENCE  PowerPoint Slide: #1 "I recently went to a new doctor and noticed he was located in something called the Professional Building. I felt better right away."

George Carlin, Comedian

Chapter Objectives: This chapter will provide you with an understanding of the importance of the service firm‘s physical evidence regarding customer perceptions of the quality of services provided.

Learning Objectives:

 PowerPoint Slide: #2

After reading this chapter, you should be able to © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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1. Appreciate the strategic role of physical evidence as it relates to the marketing of service firms. 

From a strategic perspective, the importance of managing the firm's physical evidence stems from the firm's ability to: (1) package the service; (2) facilitate the flow of the service delivery process; (3) socialize customers and employees alike in terms of their respective roles, behaviors, and relationships; and (4) differentiate the firm from its competitors.

2. Outline the stimulus-organism-response (SOR) model in forming service evaluations. 

The SOR model consists of three components: a set of stimuli, an organism component, and a set of responses or outcomes. The firm's physical evidence comprises the set of stimuli. The organism is the recipient of the set of stimuli, and the response is influenced by three basic emotional states—pleasuredispleasure, dominance-submissiveness, and arousal-nonarousal.

3. Discuss the major components of the servicescapes model. 

The servicescape framework presented in Figure 8.3 is a comprehensive application of the SOR model that directly applies to the influence of the service firm‘s physical evidence on the consumers‘ and employees‘ behavior.

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4. Describe the managerial use of sensory cues when developing tactical design strategies. 

Ultimately, individuals base their perceptions of a firm's facilities on their interpretation of sensory cues. Firms can utilize the senses of sight, sound, scent, touch, and taste in creating sensory appeals that enhance customer and employee attraction responses.

5. Compare design considerations for low-contact versus high-contact service firms. 

If customers are an integral part of the process, locations that offer customer convenience offer the firm a differential advantage over competitors. In contrast, low-contact businesses should consider locations that may be more convenient for labor, closer to sources of supply, and closer to major transportation routes.

Facility layout should also reflect the needs of the individuals involved in the service delivery process. Layouts will vary depending upon the amount of customer participation in the process. With regards to low-contact services, the outcome of the process defines the product. With regards to high-contact services, the process as well as the outcome defines the product. In high-contact operations, the physical presence of the customer in the process itself must be considered. Each stage in the process will influence consumer perceptions.  PowerPoint Slide: #3

Opening Vignette: Dinner in the Sky: Astonishing Views the World Wide 

In 2007, a Belgian events planner and a Dutch crane expert pooled resources to create Dinner in the Sky, a company that offers a unique dining experience to its consumers.



Why are people willing to pay thousands of dollars for this dining experience?

The servicescape makes all the difference. Not only are customers given the opportunity to literally dine among the clouds while suspended at 150 feet in the air, they are given the chance to hoist their company logos over the heads of everyone down below.



Dinner in the Sky continues to expand its partner base and services offered, including entertainment options, such as an opera singer or a band on a separate platform slowly circling your table. If the parent company‘s current monetary success is any indication, Dinner in the Sky will continue to see its global enterprise increase, thanks to a servicescape so unique it is nearly priceless.

Lecture Outline: © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Introduction A.

Since services are intangible, consumer evaluations of services are often subjectively based on the physical evidence that surrounds the service.

B.

Managing the firm‘s physical evidence includes everything tangible, from the firm‘s physical facilities, to brochures and business cards, to the firm‘s personnel.

C.

Service marketers must understand the signals their target customers perceive from their interpretations of the physical evidence that surrounds the service.  PowerPoint Slides: #4–5

II.

The Strategic Role of Physical Evidence A.

Physical evidence can fall into three broad categories: 1. Facility exterior: the physical exterior of service facility; includes exterior design, signage, parking, landscaping, and the surrounding environment.

2. Facility interior: the physical interior of service facility; includes interior design, equipment, signage, layout, air quality, and temperature.

3. Other tangibles: other items that are part of the firm’s physical evidence, such as business cards, stationary, billing statements, reports, employee appearance, uniforms, and brochures.

B.

Service firms need to recognize the importance of managing their physical evidence in its role of: (See Figure 8.1)  PowerPoint Slides: #6–7 1.

Packaging the service a. The firm's exterior, interior, and other tangibles create the package that surround the service b. The package sends quality cues to customers and adds value in terms of image development. c. Image development improves customer perceptions of the service and reduces the level of perceived risk associated with

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the purchase and levels of cognitive dissonance after the purchase. d. The firm's package also plays a role in creating customer expectations. e. See E-Services in Action – Google.com‘s Servicescape: ―61, Getting a Bit Heavy, Aren‘t We?‖  PowerPoint Slide: #8 2.

Facilitating the service process a. Can provide information to customers concerning how the service process works such as signage, menus, and brochures. b. Can provide physical barriers that direct the flow of customers through the service process. c. Can provide barriers that manage customers, such as dividers that create waiting rooms and help isolate the technical core from the customers.  PowerPoint Slide: #9

3.

Socializing employees and customers a. Physical evidence, such as the use of uniforms, facilitates the socialization of employees toward accepting organizational goals and affects consumer perceptions of the caliber of service provided. b. Socialization: the process by which an individual adapts to the values, norms, and required behavior patterns of an organization.

1.

Aids in identifying the firm‘s personnel.

2.

Presents a physical symbol that embodies the group's ideals and attributes.

3.

Implies a coherent group structure.

4.

Facilitates the perceived consistency of performance.

5.

Provides a tangible symbol of an employee‘s change in status.

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Assists in controlling the behavior of errant employees.  PowerPoint Slide: #10

A means for differentiation a.

The appearance of facilities and personnel directly impacts customer perceptions.

b.

Well-dressed individuals are often perceived as more intelligent, better workers, and more pleasant to engage in interactions.

c.

Upgrading facilities often assists in repositioning the firm in the eyes of consumers.  PowerPoint Slide: #11–12

C.

The Stimulus-Organism-Response (SOR) Model 1.

Environmental psychology: the use of physical evidence to create service environments and its influence on the perceptions and behaviors of individuals.

2.

Stimulus-organism-response model (presented in Figure 8.2): a model developed by environmental psychologists to help explain the effects of the service environment on consumer behavior; describes environmental stimuli, emotional states, and responses to those states.

3.

SOR model consists of three components:

4.

i.

A set of stimuli –the various elements of the firm’s physical evidence.

ii.

An organism component –the recipients of the set of stimuli in the service encounter; includes employees and customers.

iii.

A set of responses or outcomes –consumers’ reaction or behavior in response to stimuli.

Responses to the set of stimuli are influenced by three basic emotional states:

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i.

Pleasure-displeasure –the emotional state that reflects the degree to which consumers and employees feel satisfied with the service experience.

ii.

Arousal-nonarousal –the emotional state that reflects the degree to which consumers and employees feel excited and stimulated.

iii.

Dominance-submissiveness –the emotional state that reflects the degree to which consumers and employees feel in control and able to act freely within the service environment.

Responses to the set of environmental stimuli are characterized as approach or avoidance behaviors.

–Approach-avoidance behaviors: consumer responses to the set of environmental stimuli that are characterized by a desire to stay in or leave an establishment, explore/interact with the service environment or ignore it, or feel satisfaction or disappointment with the service experience.

III.

 PowerPoint Slides: #13– 14 The Development of Servicescapes –the use of physical evidence to design service environments.

V.

The Servicescapes Model 1. The model illustrated in Figure 8.3 is a framework for understanding environment-user relationships in service organizations.

2. See Sustainability and Services in Action – Colleges and Universities on the Cutting Edge of Creating Green Servicescapes.  PowerPoint Slide: #15

W.

Remote, Self-Service, and Interpersonal Services 1. A continuum of facility usage by type of service (Figure 8.4) a. Remote services: services in which employees are physically present while customer involvement in the service

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production process is at arm’s length. b. Self-services: service environments that are dominated by the customer’s physical presence, such as ATMs or postal kiosks. c. Interpersonal services: service environments in which customers and providers interact.

2. High-contact versus low-contact service firms a.

Facility location 1. If customers are an integral part of the process, locations that offer customer convenience offer the firm a differential advantage over competitors.

2. In contrast, low-contact businesses should consider locations that may be more convenient for labor, closer to sources of supply, and closer to major transportation routes.

b.

Facility layout 1. Facility layout should reflect the needs of the individuals involved in the service delivery process.

2. Layouts will vary depending upon the amount of customer participation in the process.

c.

Product design 1. With regards to low-contact services, the outcome of the process defines the product.

2. With regards to high-contact services, the process as well as the outcome defines the product.

d.

Process design 1. In high-contact operations, the physical presence of the customer in the process itself must be considered.

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2. Each stage in the process will influence consumer perceptions.  PowerPoint Slide: #16 X.

Stage 1: Physical Environmental Dimensions 1. Ambient conditions: the distinctive atmosphere of the service setting that includes lighting, air quality, noise, music, and so on.

2. Space/function: environmental dimensions that include the layout of the facility, the equipment, and the firm’s furnishings.

3. Signs, symbols, artifacts: environmental physical evidence that includes signage to direct the flow of the service process, personal artifacts to personalize the facility, and the style of decor.

Y.

 PowerPoint Slide: #17 Stage 2: Holistic Environment –overall perceptions of the servicescape formed by employees and customers based on the physical environmental dimensions.

1. Perceived servicescape: a composite of mental images of the service firm’s physical facilities.

2. The firm should develop the servicescape with its target market in mind. a. Economic customers: consumers who make purchase decisions based primarily on price. b. Personalized customers: consumers who desire to be pampered and attended to and who are much less price sensitive. c. Apathetic customers: consumers who seek convenience over price and personal attention. d. Ethical customers: consumers who support smaller or local firms as opposed to larger or national service providers.  PowerPoint Slide: #18

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Stage 3: Internal Response Moderators –the three basic emotional states of the SOR model that mediate the reaction between the perceived servicescape and customers’ and employees’ responses to the service environment.

1. pleasure-displeasure 2. arousal-nonarousal 3. dominance-submissiveness

AA.

Stage 4: Internal Responses

 PowerPoint Slide: #19

1. Cognitive responses: the thought processes of individuals that lead them to form beliefs and categorize and assign symbolic meaning to elements of their physical environment a. Beliefs: consumers’ opinions about the provider’s ability to perform the service. b. Categorization: consumer assessment of the physical evidence and a quick mental assignment of a firm to a known group of styles or types based on previous experiences. c. Symbolic meaning: meaning inferred from the firm’s use of physical evidence.

2. Emotional responses: responses to the firm’s physical environment on an emotional level instead of an intellectual or social level.

3. Physiological responses: responses to the firm’s physical environment based on pain or comfort.  PowerPoint Slide: #20 BB.

Stage 5: Behavioral Responses to the Environment 1. Individual behaviors in response to environmental stimuli are characterized as: a.

Approach behaviors.

1. Stay and explore 2. Spend time shopping 3. Spend money

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4. Repeat visit b.

Avoidance behaviors.

– Environmental stimuli may be purposely managed to discourage unwelcome market segments.

2. Social interactions between employees and customers, among customers, and among employees are encouraged by the firm‘s servicescape due to the inseparability inherent in interpersonal services.  PowerPoint Slide: #21 IV.

Managing the Senses When Creating Servicescapes A.

Experts suggest answering the following questions before implementing a servicescape development plan: 1. Who is the firm‘s target market?

2. What does the target market seek from the service experience?

3. What atmospheric elements can reinforce the beliefs and emotional reactions that buyers seek?

4. How do these same atmospheric elements affect employee satisfaction and the firm‘s operations?

5. Does the suggested atmosphere development plan compete effectively with competitors‘ atmospheres?  PowerPoint Slide: #22

B. Sight Appeals 14.

Stimuli that result in perceived visual relationships a. Size/shape/colors: the three primary visual stimuli that appeal to consumers on a basic level. b. Harmony: visual effects associated with quieter, plusher, and more formal business settings. c. Contrast/clash: visual effects associated with exciting, cheerful, and informal business settings.

15.

Size

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– Actual size of the firm‘s facility, signs, and departments convey different meanings to different markets. i. For many consumers, the larger the firm, the lower the perceived risk associated with the service purchase. ii. On the flip side, some customers may view large firms as impersonal and uncaring, and they may seek out smaller, niche firms that they view as more personal, intimate, and friendly.

16.

Shape a. Created from a variety of sources, such as the use and placement of shelves, mirrors, and windows, and even the design of wallpaper. b. Studies show that different shapes arouse different emotions in consumers. i. Vertical shapes and lines express strength and stability and tend to give the illusion of increased height. ii. Horizontal shapes and lines evoke perceptions of relaxation and restfulness. iii. Diagonal shapes and lines evoke perceptions of progressiveness, proactiveness, and movement. iv. Curved shapes and lines are perceived as feminine and flowing.

17.

c. Using similar and/or dissimilar shapes in facility design will create the desired visual relationship of harmony, contrast, or clash.  PowerPoint Slides: #2324 Color (Figure 8.5) a. Hue: the actual color, such as red, blue, yellow, or green. b. Value: the lightness and darkness of the colors. c. Shades: darker values. d. Tints: lighter values.

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e. Intensity: defines the brightness or the dullness of the hue. f. Hues are classified into warm and cool colors. i. Warm colors: red, yellow, and orange. ii. Cool colors: blue, green, and violet. g. For International markets, cultural perceptions of color must be taken into consideration (Figure 8.6).

18.

Location – Three questions need to be addressed: i. How visible is the firm? ii. How compatible is the firm with its surrounding environment? iii. How convenient is the location to target customers?

19.

Architecture a. Often a three-way tradeoff between a design that will attract the firm‘s intended target market, that maximizes the efficiency of service operations, and that is affordable. b. See Global Services in Action – An Extraordinary Servicescape in the Caribbean: The Katitche Point Greathouse.

20.

Signage a. Identifies the firm, indicating who, what, where, and when of the service offering. b. Attracts attention, projecting the firm‘s image.

21.

Entrance a. Entrance and foyer areas dramatically influence customer perceptions. b. Tactical considerations include lighting, safety, and functionality.

22.

Lighting

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a. Low light indicates formality and slower pace. b. Bright light is informal, exciting, and cheerful.

B.

Sound Appeals

 PowerPoint Slides: #25-26

5. Three major roles: a. Mood setter b. Attention grabber c. Informer 6. Music a. Background music affects sales in at least two ways: i. Enhances the customer‘s perception of the store‘s atmosphere. ii. Influences the amount of time spent in the store. b. Figure 8.7 shows the impact of background music on restaurant patrons.

7. Announcements a. Made over the intercom systems, such as: i. to alert restaurant patrons when their tables are ready. ii. to inform airline passengers of their current location. iii. to page specific employees within the firm. b. The professionalism with which announcements are made directly influences consumer perceptions of the firm.

8. Sound avoidance a. Desirable sounds attract customers.

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b. Strategically mask undesirable sounds by placing equipment away from customers and installing carpets, lower ceilings, and sound-absorbing partitions.

C.

Scent Appeals

 PowerPoint Slide: #27

1. Stale, musty, or foul odors affect everyone and are sure to create a negative impression.

2. Pleasurable scents often induce customers to make purchases and can affect the perception of products that don‘t naturally have their own scent.

D.

Touch Appeals – For pure services with little to no tangible component, touch appeals can be developed through the use of open houses, shaking hands, and engaging in face-to-face communications.

E.

Taste Appeals 1. Taste is the final sensory cue.

2. For intangible services, providing free samples of the service is the equivalent of taste tests.

VI.

Summary The effective management of physical evidence is particular important to service firms. Due to the intangibility of services, consumers lack objective sources of information when forming evaluations. As a result, customers often look to the physical evidence that surrounds the service when forming evaluations.

A firm‘s physical evidence includes, but is not limited to, facility exterior design elements, interior design elements, and other physical evidence surrounding the service that forms the basis of customer perceptions.

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REVIEW QUESTIONS: 1. Explain the relationship between physical evidence and the formation of customer perceptions and expectations.

Since services are intangible, consumer evaluations of service are often subjectively based on the physical evidence that surrounds the service. For example, since most consumers lack the specialized and technological knowledge necessary to objectively evaluate a doctor‘s skill set, consumers will rely on the physical evidence that comprises the doctor‘s office visit to form an opinion. In essence, the physical evidence serves as a package that contains the doctor‘s services. If the office is located in a questionable area of town, office furnishings are worn, office staff are unprofessional, and the magazines in the waiting room are outdated, consumer perceptions of the doctor‘s skill set are likely to coincide with the physical evidence at hand. Although the old adage states, ―one shouldn‘t judge a book by its cover,‖ this is exactly what consumers do when it comes to forming service evaluations.

2. Discuss the four strategic roles of physical evidence.

From a strategic perspective, the importance of managing the firm's physical evidence stems from the firm's ability to: (1) package the service; (2) facilitate the flow of the service delivery process; (3) socialize customers and employees alike in terms of their respective roles, behaviors, and relationships; and (4) differentiate the firm from its competitors 3. Discuss the relevance of low-contact versus high-contact service firms with respect to location, layout, product design, and process design decisions.

Depending on the level of contact, strategic differences exist regarding facility location, facility design, product design, and process design.

Facility Location: If customers are an integral part of the process, locations that offer customer convenience offer the firm a differential advantage over competitors. In contrast, low-contact businesses should consider locations that may be more convenient for labor, closer to sources of supply, and closer to major transportation routes.

Facility Layout: Layouts will vary depending upon the amount of customer participation in the process.

Product Design: With regards to low-contact services, the outcome of the process defines the product. With regards to high-contact services, the process as well as the outcome defines the product.

Process Design: In high-contact operations, the physical presence of the customer in the process itself must be considered.

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4. How should the servicescape of a firm that targets ethical shoppers be designed?

Ethical shoppers support smaller or local as opposed to larger or national service providers. Physical evidence that conveys the firm's involvement with the local community will reinforce the ethical shopper's commitment to the firm. Pictures of customers or their children on the firm‘s walls also attract ethical shoppers.

5. Discuss how internal response moderators influence the customer’s response to the servicescape.

Internal response moderators include the emotional states of pleasure-displeasure, arousal-nonarousal, and dominance-submissiveness. Customers will evaluate each service experience differently depending on their emotional state which, in turn, increases perceptions of service variability.

6. Discuss the three types of internal responses to the firm's environment.

Internal responses to the firm's environment can be on any of three levels: cognitive, emotional, or physiological. Cognitive responses include beliefs, categorization, and symbolic meanings. Emotional responses include moods and attitudes.

Physiological responses include pain, comfort, movement, and physical fit.

7. Describe the impact of music on customer and employee behavior.

Studies have shown that background music affects sales in at least two ways. First, background music enhances the customer's perception of the store's atmosphere, which in turn influences the consumer's mood. Second, music often influences the amount of time spent in stores.

8. Develop strategies for a service firm that would enhance the firm's touch and taste appeals.

Engaging in face-to-face communications, shaking hands, and promotional "open houses" increases the firm's touch appeal. Similarly, providing samples of the firm‘s services increases the firm's "taste appeal."

9. Discuss the use of employee uniforms as physical evidence as they relate to the unique service characteristic of heterogeneity.

Uniforms identify the firm's personnel, provide a physical symbol that embodies the group's ideals and attributes, implies a coherent group structure, facilitates the perceived consistency of performance, provides a tangible symbol of an employee‘s change in status, and assists in controlling the behavior of errant employees. © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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10. Go to www.colorquiz.com and complete the quiz. Do you agree or disagree with your psychographic profile that was generated based on your color selections?

Answers will vary.

CHAPTER 9: PEOPLE AS STRATEGY: MANAGING SERVICE EMPLOYEES

 PowerPoint Slide: #1

―Service occupations are jobs that involve assisting or caring for others ... Though among the least educated and lowest paid categories of employment, their share of U.S. labor hours grew by 30 percent between 1980 and 2005. This rapid growth stands in contrast to declining employment in all similar occupations such as production, construction, transport, etc.‖ David Autor and David Dorn, American Economic Review 2013

Chapter Objectives: The purpose of this chapter is to help you understand the many challenges associated with managing employees within the service experience. Service businesses, by their very definition, are people businesses, with very few exceptions, and require talented managers who can navigate the thin line between the needs of the organization, its employees, and it customers.

Learning Objectives:

 PowerPoint Slide: #2

After reading this chapter, you should be able to 1. Understand the importance of customer facing employees. 

As boundary spanners, contact personnel perform the dual functions of interacting with both the firm's external environment and its internal organization and structure. Boundary spanners have two main functions: information transfer and representation.

2. Understand the stresses and strains faced by typical service employees and how this is likely to influence their behavior. 

Service employees face three main sources of conflict: person/role conflicts, organization/client conflicts, and interclient conflicts. The consequences of stress

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produce dissatisfaction, frustration, and turnover intention in personnel. When faced with potential stress in their jobs, employees attempt a number of strategies such as ignoring the customer, move into a people-processing mode, overact their roles, or use physical symbols to regain some sense of control.

3. Understand that creating a “climate for service” among employees is a key determinant of customer satisfaction. 

There are three core drivers in creating a climate for service: work facilitation, interdepartmental support, and human resource practices, all of which must minimize role stress and ambiguity and reinforce the giving of good service.

4. Define the role that a service employee has to play based upon the service strategy. 

Individuals who occupy boundary-spanning roles can be classified along a continuum that ranges from subordinate service roles to professional service roles. The subordinate roles are usually subordinate to both the organization and the customer. They are the lowest of the low within the organizational hierarchy.

5. Understand how that role definition can be used to recruit the most appropriate service team. 

Any recruitment strategy should be designed to find the right people for the role as defined. Not everyone is suited to the stress and strains of a service provider.

Good service selection improves the performance of the person in the role and hence productivity and service. Creation of a suitable ―employer brand‖ refers to the brand that is created in the market for staff is analogous to the brand in the customer market.

6. Understand that role definition is at the center and drives all HR systems in a service business. 

Everything begins with the marketing strategy and the benefit concept the organization has chosen as it competitive edge. A definition of that role starts with the service strategy. This determines the system and technology created to support the concept. At the heart of the service HR wheel is the role that the service provider has to play.

7. Understand the place of empowerment within that logic. 

Employees who are empowered tend to feel better about their jobs and themselves. This is automatically reflected in the way they interact with customers. They will be genuinely warmer and friendlier, more customer focused, quicker in responding to customer needs, and more likely to respond in a positive

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way to service failures and engage in effective service recovery strategies.

Empowerment, therefore, not only can reduce unnecessary service recovery costs, but also can improve the quality of the product.

8. Understand the role of management in supporting the resultant “climate for service.” 

Managers should all be aligned with their role since it is based on the agreed strategy. Once the role has been defined it drives the next layer of the wheel: (a) recruiting the right people; (b) developing competent service employees; (c) controlling, rewarding and evaluating service employees; and (d) retaining service employees.  PowerPoint Slide: #3

Opening Vignette: That’s It, I’m Done 

After receiving abuse from a passenger, flight attendant Steven Slater declared over the loudspeaker at the end of the flight, ". . . that's it, I'm done," picked up his bag and two cans of beer from the beverage cart, walked to the door, pulled the emergency exit lever, inflated the emergency chute, and jumped.



An hour later he was arrested, and within another hour he was a hero on Facebook and became the star of numerous supportive t-shirts, including ―I Slide…. For Slater.‖

Lecture Outline: I.

Introduction A.

Employee satisfaction and customer satisfaction are clearly related. The public face of a service firm is its contact personnel.

B.

Despite their importance and the complexity of their activities, service personnel are often the lowest paid and least respected individuals in most companies, and often in society.  PowerPoint Slide: #4

C.

Figure 9.1 expresses the service-profit chain.

1.

Employee satisfaction and customer satisfaction are directly proportional.

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2. Internal service quality drives employee satisfaction and includes: a. Workplace and job design. b. Hiring practices. c. Training programs. d. Reward systems.

3.

Satisfied employees remain with the firm longer and increase their productivity. a. Recruitment and training costs are decreased. b.

Customers are the recipients of improved external service value.

4. Customer satisfaction is linked to increased revenues and profits.

5.

D.

II.

Profits reinforce the company's commitment to improve internal service quality.

Service personnel are an important source of product differentiation.

The Service Provider Role CC.

 PowerPoint Slide: #5 Boundary-Spanning Roles –the various ―parts‖ played by contact personnel who perform dual functions of interacting with the firm’s external environment and internal organization.

1. Boundary-spanners have two main purposes: a. Information transfer b. Representation 2.

Individuals who occupy boundary-spanning roles can be classified along a continuum that ranges from subordinate service roles to professional service roles.

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a.

Subordinate service roles: the parts played by personnel who work in firms where customers’ purchase decisions are entirely discretionary, such as waitresses, bellmen, and drivers

b.

Professional service roles: the parts played by personnel who have status independent of their place in an organization due to their professional qualifications  PowerPoint Slide: #6

DD.

EE.

Sources of Conflict for Contact Service Personnel 1.

Person/role conflict: a bad fit between an individual's selfperception and the specific role the person must play in the organization.

2.

Organization/client conflicts: disagreements that arise when a customer requests services that violate the rules of the organization.

3.

Inter-client conflicts: disagreements between clients that arise because of the number of clients who influence one another's experience; these have to be resolved by the service provider.

 PowerPoint Slides: #7– 8 Coping Strategies and Implications for Customers 1.

The effects of role stress often include employee dissatisfaction, frustration, and turnover intentions in personnel

2.

In the book At America’s Service, major customer complaints about service workers are classified into seven categories: a. Apathy b. Brush-off c. Coldness d. Condescension e. Robotism f. Rulebook g. Runaround

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In order to reduce their stress, employees often adopt a number of responses including: a. Avoiding the customer. b. Moving into a "people-processing" mode. c. Adding physical symbols in their office to increase control. d. Overacting their role. e. Siding completely with the customer. f. Service sabotage –willful and malicious acts by service providers designed to ruin the service.

FF.

How Can Marketing Make Things Better or Worse?

1. Reducing person/role conflicts – Marketing can reduce the person/role conflict of its employees by being sensitive to employees‘ feelings and by actively seeking input from employees about issues.

2. Reducing organization/client conflicts – Similarly, marketing can help reduce conflicts between the organization and its clients by making sure that customer expectations are consistent with capabilities of the service system.

3. Reducing inter-client conflicts – Interclient conflicts can often be reduced if the customers are relatively homogeneous in their expectations.

III.

Unleashing Service with the Right Climate A.

Personnel 23.

Personnel constitute the bulk of the product of most service firms.

24.

Service firms operate open systems, where the effects of human resources practices and policies as well as the organization‘s

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climate are visible to customers.

25.

Climate for service: the shared perception of the service practices, procedures, and kind of behaviors that get rewarded.  PowerPoint Slide: #9

B.

Creating a Climate for Service 1.

Three core drivers to create a climate for service.

c.

Work facilitation: the provision of the basic infrastructure and technology to enable service providers to deliver the desired service.

d.

Interdepartmental support: the support provided by other departments in the service organization that allow a service provider to do their job.

e.

Human resource practices  PowerPoint Slide: #10

2.

3.

Service human resource practices can be broken down into the broad categories shown in Figure 9.2 The Services HR Wheel. a.

Service HR Wheel: the HR functions that together support the creation of a climate for service.

b.

At the center of the wheel is the services benefit concept the firm is trying to deliver, from which it is possible to define the service provider role.  PowerPoint Slide: #11

Next layer of the wheel: (a) recruiting the right people; (b) developing competent service employees; (c) controlling, rewarding and evaluating service employees; and (d) retaining service employees a. Recruiting the Right People i. Some companies opt to use standardized tests. ii. Creation of a suitable ―employer brand.‖ –the brand that is created in the market for staff is analogous to the brand in the customer market

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Developing Competent Service Employees i.

Technical training: training focused on teaching service providers their operational role in delivering the service.

ii.

Interpersonal training: training focused on teaching service providers how to deal with customers; includes sensitivity training, role-playing, and behavior modeling.

iii.

Behavioral modeling: categorizing customers to enable providers to more easily process them and remove stress.  PowerPoint Slides: #12– 17 1. Five customer profiles have been developed, representing the worst that customers have to offer. The characteristics of each of the five ―customers from hell‖: 2. a. Egocentric Edgar i. Appeal to his ego. ii. Demonstrate action. iii. Don‘t talk policy.

– rephrase: ―for you, I can ….(policy).‖ iv. Don‘t let his ego destroy yours. b. Bad-Mouth Betty i. Try to move her off stage. ii. Ignore her language and listen to determine the core of the problem. iii. Use selective agreement (with some statements). iv. Force the issue (hang up). c. Hysterical Harold i. Move him offstage. ii. Let him vent. iii. Take responsibility for solving the problem.

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d. Dictatorial Dick i. Stick with your game.

1. Be consistent with customers.

2. Tell him what you can do for him. ii. Break up his game (fulfill his request). e. Freeloading Freda i. Give her what she wants. ii. Another possibility is to track Freda‘s actions and suggest possible legal action. iii. Don‘t let the 1% dictate policies for the 99% who are honest customers. c. Controlling, Rewarding and Evaluating Service Providers i. Rewards can be extrinsic (e.g., pay) or intrinsic, such as enjoying the job itself, receiving recognition from coworkers and supervisors, and/or accomplishing challenging and meaningful goals.  PowerPoint Slide: #18 ii. Effective reward systems pass the seven tests.

1. Availability 2. Flexibility 3. Reversibility 4. Contingent 5. Visibility 6. Timeliness 7. Durability iii. Different kind of intrinsic reward – redesigning the role of the service  PowerPoint Slide: #19 1. Empowerment: giving direction to front-line personnel to meet the needs of consumers creatively.

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2. Enfranchisement: empowerment coupled with a performance-based compensation method.

3. Benefits of empowerment: a. Quicker response to customer needs. b. More likely to respond in positive ways to service failures. c. Employees feel better about their jobs and themselves. d. Employees interact with customers with more warmth and enthusiasm. e. Empowered employees can be a great source of new ideas.  PowerPoint Slides: #20-22 iv. Levels of Empowerment 1. Suggestion involvement: low-level empowerment that allows employees to recommend suggestions for improvement of the firm’s operations. a. Formal suggestion programs b. Quality circles: empowerment involving small groups of employees from various department s in the firm who use brainstorming sessions to generate additional improvement suggestions. c. Examples: Big Mac, Egg McMuffin, and McDLT were all suggestions by employees.

2. Job involvement: allows employees to examine the content of their own jobs and to define their role within the organization. a. Employees use a variety of skills, have considerable freedom, and get more feedback. b. Firms engaged in job involvement use © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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teams of employees extensively.

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c. However, higher level decisions and reward allocation remains the responsibility of senior management.

3. High involvement: allows employees to eventually learn to manage themselves, utilizing extensive training and employee control of the reward allocation decisions. a. Train people to manage themselves. b. Employees receive extensive training in teamwork, problem-solving, and business operations. c. Employees control the majority of the reward allocation decisions through profitsharing and employee ownership of the firm. iv. When to Empower and Enfranchise 1. Unfortunately, empowerment and enfranchisement do carry costs. a. larger dollar investments in selection and training b. higher labor costs c. slower or inconsistent service delivery d. violations of fair play e. giveaways and bad decisions 2. The decision to empower depends upon the broad service strategy and the expected benefits weighed against the costs. d. Retaining the Service Providers i. Greatest problem facing service firms is staff turnover, often at levels of 20% to as high as 70% per year in many low-level subordinate service roles.

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ii. Managed directly (provision of benefits that are difficult to replace, or even the payment of retention bonuses) or indirectly (clearly defined role).

IV.

V.

The Role of Management A.

Our focus has been on the front-line service personnel.

B.

However, they need to be supported by all levels of management.

Information Technology and the Service Provider A.

Technology can be a great enabler for front-line staff, allow for empowerment, and free up time to focus on customers.

B. See Global Services in Action – Open 4 Sale.  PowerPoint Slide: #23 C. Customer Relationship Management

VI.

1.

Companies assemble huge databases, tracking the purchases and the individual behavior of customers and assessing customer profitability.

2.

The key is to use the data to improve the quality of service with recommendations.

3.

Firms can target different levels of service depending upon current or potential profitability to the firm.

4.

This leads to a disaggregation of customer contact roles.

Summary Successful service firms develop a seamless relationship among marketing, operations, and human resources all based on the service benefit concept. This chapter has focused on some of the human resources issues that must be considered when marketing services. Much has been written about the fact that, for many service firms, personnel constitutes the bulk of their product. It is thus important that the place of personnel within the organization be understood. By drawing on the concepts of organizational behavior and, in particular, the concepts of boundary-spanning roles, empowerment, enfranchisement, and reward and recognition, this chapter has provided a solid framework with which

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to execute the marketing implications of the benefit concept through personnel.

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REVIEW QUESTIONS: 1. How many different roles does Steven Slater, the cabin attendant in the opening vignette, play? Are they all subordinate service roles? Do the multiple roles produce role conflict and ambiguity for Steven? How do the different roles affect consumers?

As a member of boundary-spanning personnel, Steven had the dual role of representing the business to the customer and representing the customer to the business. Steven's position was one in which he was both subordinate to the organization and subordinate to the customer, demonstrated here by the fact that he had no way of enforcing rules when the customer refused to follow them. The role boundary-spanning personnel are called upon to play may be in conflict with their self-perception (person/role conflict). For example, boundary-spanning personnel often are called upon to suppress their personal feelings and are asked to smile and be helpful while feeling miserable and aggressive. This has been termed emotional labor and can certainly cause stresses on a person. More problematic yet are the organization/client conflicts when the customer wants to go against policy. Some consumers may take advantage of service providers in subordinate roles, or they may become the victims of unsavory behaviors to which some service providers resort in an effort to have a sense of control—service sabotage being the extreme case.

2. Describe a recent experience of inter-client conflict within a service setting and the role taken by the service provider. Is this the kind of situation for which the organization could create policies and procedures or provide service provider training?

Answers will vary. Inter-client conflicts arise because many service delivery systems have multiple clients who influence one another‘s experiences. Because different clients are likely to have different needs, they tend to have completely different scripts for themselves, the contact personnel, and other customers. When customers do conflict, it is usually the boundary-spanning personnel who are asked to resolve the confrontation. Conflicts between clients can be avoided if the clients are relatively homogeneous in their expectations. Successful service firms recognize the importance of effective segmentation, which minimizes the chances that two or more divergent groups will share the encounter simultaneously. As long as all the clients share the same script and expect the same standard of service, the chances of inter-client conflicts are much reduced.

3. Are airline pilots part of the service experience for passengers? How can they use their “professional” status to support cabin attendants?

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Yes, pilots are service providers and part of the service experience. As a professional, a pilot can back up cabin attendants in enforcing rules and invoke his or her status and expertise to help resolve organization/client conflicts and interclient conflicts. Of course, there are times when this would not be practical while the pilot is focused on critical piloting duties.

4. Collect a selection of advertisements that make promises that will be difficult to deliver within the service experience. As a service provider in those businesses, how would you react to them?

Answers will vary. Marketing may recommend a change in operating procedure in order to improve the quality of service. However, it is important to ensure that service providers are well trained in the new script. Should they not be, they may well become extremely embarrassed and frustrated in the presence of customers.

This situation can be aggravated if the new service is advertised in such a way that the customers are more aware of the new script than the staff.

5. To what extent do the tightly defined service benefit propositions for such things as fast food restaurants preclude empowerment and enfranchisement?

What kind of job enrichment programs can be used?

A branded service organization that guarantees consistency of product and service across multiple locations will build systems and structure accordingly. Fast food restaurants‘ processes and systems are built to standardize service delivery. Their pricing and economics determine the type and cost of the service provider. The behaviors required by the role can be derived and are tightly constrained. Overly friendly staff who talk to the customers and customize the orders are incompatible with the consistency and speed promised. The role of the service provider is part of a tightly designed formula. Fast food chains, like many service organizations, use intrinsic rewards such as ―employee of the month‖ schemes and ―promotion‖ within the front-line jobs based on the star ranking system. These are predominantly recognition systems, but they are often tied to a small financial reward. All of this is designed to reinforce the desired behaviors, which are articulated in the role definition.

6. What are the kinds of costs that you would have to include to calculate the “cost of churn” for service businesses?

Obvious employee turnover costs include the cost of recruitment and the cost of training new hires. However, there are even larger (but more difficult to quantify) hidden costs. When employees leave, they are not replaced immediately, and when they are, the new people have lower levels of technical and interpersonal competencies. This means that the providers in the team who stay are put under increased pressure. All of this puts the overall service climate under threat. © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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7. A retail chain is proposing to subscribe to the Open 4 Sale service described in the Global Services in Action feature and to introduce it as an added value service to all its customers. Discuss the service provider issues that would need to be addressed before the launch.

Retail sales personnel would need to be on board with the change in customer service. They would need to be equipped with tablets loaded with the video-link software, trained in how to use the tablets/software, and trained in new scripts of how to interact with online customers.

8. Does the Amazon Mechanical Turk outlined in the Sustainability and Services in Action feature provide a way of growing wealth in underdeveloped countries or parts of society or a way of exploiting people?

Opinions may vary. Under the terms of the agreement, requesters can reject Turkers‘ work without giving a reason, and this in turn can affect their ratings within the system. Together with the fact that Turkers earn less than the minimum wage per hour (estimates range from $1.00 to $1.50 per hour) and have no employee rights, this has started to raise ethical and social responsibility issues. The industry does export work to parts of the world where wages are much lower, but at the same time, it may be bringing income that otherwise would not exist.

9. Review the Job Board E-Services in Action feature. Have job boards helped firms recruit service providers or not?

Job boards help firms recruit service providers, as illustrated by the fact that firms are willing to use them to the point that recruitment expenditures on job boards now exceed those on newspapers. This is in spite of the fact that while job boards have revolutionized the number of applicants for each job, only 35% of applicants actually meet the job requirements, and additional time is now required for the screening process. A survey suggested that ―serial applicants‖ were the reason for the high number of poor-quality applicants.

CHAPTER 10: PEOPLE AS STRATEGY: MANAGING SERVICE CONSUMERS

 PowerPoint Slide: #1

"Unexpected item in the bagging area‖ is so synonymous with the twenty-first century grocery shopping experience it has become a T-shirt slogan.‖ Denise Winterman ®

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―The problem with self-service checkouts‖ BBC News

Chapter Objectives: The purpose of this chapter is to explore the special role of the service consumer. Due to the impact of inseparability, the consumer‘s role in service production can both facilitate and hinder the exchange process. Hence, it is critical to develop a strategic understanding of how the consumer can be effectively managed within the service encounter.

Learning Objectives:

 PowerPoint Slide: #2

After reading this chapter, you should be able to 1. Understand the importance of the consumer in the production of a service and the impact consumer performance can have on both the operational efficiency of the business and customer satisfaction. 

Increasing customer participation is associated with a number of advantages and disadvantages. The primary advantage to the customer and the service firm is that customers can customize their own service and produce it faster and less expensively than if the firm had produced it.

Customers who pump their own gas, make their own salads, and pick their own strawberries are classic examples. On the other hand, increased levels of customer participation are also associated with the firm‘s losing control of quality, increased waste, which increases operating costs, and customer perceptions that the firm may be attempting to distance itself from its customers.

2. Understand that there can be “novice” and “expert” consumers in their production role, and that the service firm has to cope simultaneously with both. 

A service is a performance in which consumers are often physically present and active participants. Consumer performance is an individual‘s participation in the production of their own service. Novice and expert performance is the spectrum of performance ability. Not all consumers are equally proficient. The novice does not know what to do and how to perform. Expert consumers are individuals who have expertise in the purchase process for a particular good or service. Expert performers are individuals who are expert in the service production process.

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3. Understand the power of the analogy of a theatrical performance with roles and scripts as a model for explaining performance from the consumers’ perspective. 

The best way to understand the consumer performance role is through a theatrical analogy with actors, roles, and scripts. The scene is set by the creation of the physical setting in which the performance is to be played.

There are two kinds of actors: employees and consumers. Actors are assigned roles in which they have to play in the ―production.‖ The performance is scripted and works to the extent that all the actors ―know their parts.‖ Individuals have a deep-set need for control and predictability.

4. Understand the steps management must take to manage service consumer performance rather than consumption. 

Four key tasks for management in applying the performance logic include (1) audit your consumer performance expertise, (2) increase your share of expert consumers, (3) manage script changes carefully, and (4) create systems to cope with novices and experts.

5. Understand that it is possible to influence consumers’ perception of the service they receive during consumption by manipulating the environment, in its broadest sense, in which it is received. 

Consumers will base their evaluation of the service they receive on their perceptions, not reality. Eight principles of waiting have been developed to help service firms effectively manage consumer perceptions of waits. Five of the eight principles can be understood from the idea that consumers need to feel in control of the service experience.

6. Understand how the inseparability of consumers can change the roles of marketing, operations, and HR managers. 

Marketing managers can use marketing toolkits to improve the operational efficiency of the firm by creating expert performers. Operations‘ managers need to include consumers in their planning. Important to be able to define an appropriate consumer script, given the nature of the service operations.

Human capital management systems need to be constructed to ensure that the service providers know and execute the correct script, which ensures that they are operationally efficient.  PowerPoint Slide: #3

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

I remember that I should be scanning as I go along and unpack my cart and start again.



I look at the CCTV cameras and wonder whether I am under suspicion of theft or just being laughed at.



I try to unscan a jar of peanut butter to change it for a better deal and am saved by an elitist who patiently shows me the unscan sequence.



As I face the ultimate test—the checkout—I am wracked with anxiety. . .

Lecture Outline: I.

II.

Introduction A.

We will examine unique role played by customers as they play their part in the delivery of their own services.

B.

Service customers are not only in the ―factory‖ but have a role as ―service workers.‖

C.

Customers can be involved at different levels and participate to a greater or lesser extent.

1.

Being present and actively participating throughout (tax service).

2.

Being physically present and merely conforming to norms (cinema).

Expert and Novice Consumers as Part of the Production Process A.

A service is a performance in which consumers are often physically present and active participants.

B.

Consumer performance: an individual’s participation in the production of their own service.  PowerPoint Slide: #4 1.

2.

3.

Novice and expert performance: the spectrum of performance ability.

Not all consumers are equally proficient. The novice does not know what to do and how to perform.

Expert consumers: individuals who have expertise in the purchase

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process for a particular good or service.

4.

III.

Expert performers: individuals who are expert in the service production process  PowerPoint Slide: #5

The Theatrical Analogy A.

Scene is set by the creation of the physical setting in which the performance is to be played.

B.

There are two kinds of actors: employees and consumers.

C.

Actors are assigned roles in which they have to play in the ―production.‖

D.

The performance is scripted and works to the extent that all the actors ―know their parts.‖ – Individuals have a deep-set need for control and predictability.

E.

Defining ―Novices‖ and ―Experts‖ Using the Script Idea 1.

A novice performer is an individual who uses more general scripts to handle situations that differ in quite significant ways. Their script will tend to be relatively simple and have very few ―if-then‖ branches within them.

2.

Expert performers will have rich and complicated scripts for the particular specific service. They can cope with unexpected changes and have plenty of ―if-then‖ branches in their scripts.  PowerPoint Slide: #6

IV.

Consumer Performance and Operational Efficiency A.

The extent to which the consumer is part of the process is regarded as the dominant constraint on the efficiency of the service system.

B.

This approach argues for the buffering of the technical core.

– Buffering of the technical core: the operations management concept of ensuring that the core of the production process is able to run as efficiently as possible. For manufacturing plants this is executed by creating buffers (stocks) of raw materials input and buffers (stocks) of the outputs to ensure the factory itself can run uninterrupted.

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C.

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The service production processes arranged on a spectrum according to how much the consumer is part of the process.

1.

High contact. system: the consumer is an integral part of the process

2.

Low contact system: although present, the consumer has a smaller role to play.

3.

Low-contact systems allow for the use of more traditional manufacturing ―production line‖ approaches.  PowerPoint Slide: #7

V.

Consumer Satisfaction and Consumer Performance A.

Chapter 11 covers the topic of consumer satisfaction in more detail.

B.

Expected script: the script the consumer carries with them into the service setting; what they expect to happen and the benchmark against which they will evaluate the experience.

C.

Performance can also influence satisfaction through attribution.

1.

Attribution: the allocation of responsibility to self and other people, or even chance. In the sense of satisfaction or dissatisfaction, consumers will allocate the cause of the satisfaction or dissatisfaction, and only in some cases blame the service organization.

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VI.

140

There is a proven tendency for people to claim more responsibility for success and less responsibility for failure in situations where the outcome is produced with others.

Managing Consumer Performance Scripts A.

 PowerPoint Slides: #8– 9

Four key tasks in managing consumer performance (Figure 10.1) 1. Audit your consumer performance expertise – Auditing consumer performance expertise: measuring the current extent to which the consumer understands the script that the service system has been designed to deliver.

2. Increasing the share of consumers who are expert performers a.

Attract consumers who are more likely to become experts.

b.

Accelerate the creation of your own experts i.

Is it possible to help consumers become experts by teaching them the script?

ii.

Four different approaches are available that ideally can be used together.

1)

Give clues about analogous services.

2)

Plant clues within the service experience. a) Partial employees: the operations management approach to consumer performance is to view the consumer as an employee (albeit only part f one) and to apply the same people logic to them as they would to an employee. b) Consumer socialization: from a human resource management perspective, employees have to ―on-board‖ successfully into the organization. They have to be taught their role, the places and procedures, and most importantly, ―how we do things around here.‖ Consumers too need to be ―on-boarded.‖

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3)

Let consumers watch each other.

4)

Build loyalty to keep your experts.

Change scripts carefully.

4. Coping with novices and experts.

VII.

a.

In the absence of an indication of performance expertise, all a service business can do is to allow users to self-select.

b.

Compatibility management: the management of a diverse group of customers (novices and experts) with different needs within the same services setting.

Managing Consumer Service Perceptions during the Service Experience A.

Due to the unpredictability of consumer demand inherent in many service operations, the only cases in which the supply of available service and consumer demand balance exactly—is by accident. As a result, consumers of services often find themselves waiting for service.

B.

Effectively managing consumer waits is particularly crucial due to the importance of first impressions on consumer perceptions of the service experience.  PowerPoint Slides: #10-11

C.

Eight principles of waiting have developed to help service firms effectively manage consumer waits.

1.

Principle #1: Uncertain waits are longer than known, finite waits.

2.

Principle #2: Unexplained waits are longer than explained waits.

3.

Principle #3: Anxiety makes the wait seem longer.

4.

Principle #4: Preprocess waits feel longer than in-process waits.

– Post-process waits feel longest of all.

5.

Principle #5: Unfair waits are longer than equitable waits.

6.

Principle #6: Unoccupied waits feel longer than occupied waits.

7.

Principle #7: Solo waits are longer than group waits. ®

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VIII.

Principle #8: The more valuable the service, the longer the customer will wait.

 PowerPoint Slides: #12– 13 Consumer Performance and the Role of Marketing and Operations A.

The greater the extent of consumer participation in the production of their own service, the greater is the need to manage consumer performance.

B.

Marketing managers can use marketing toolkits to improve the operational efficiency of the firm by creating expert performers.

C.

Marketing can also be applied to managing the consumers‘ perceptions rather than the actual service.

D.

Operations‘ managers need to include consumers in their planning.

Important to be able to define an appropriate consumer script, given the nature of the service operations.

E.

Technology imposes tighter scripts.

G.

IX.

142

1.

Machines cannot be empowered.

2.

―If-then‖ branches are regarded as tedious and boring.

Human capital management systems need to be constructed to ensure that the service providers know and execute the correct script, which ensures that they are operationally efficient.

Summary A service can be viewed as an experience in which the consumer is an active participant. This inseparability has two consequences for managers. Uniquely to services, consumers act to a greater or lesser extent as ―partial employees‖ of the service firm. Consumers vary to the extent that they know the script and therefore to the extent to which they are experts and novices.

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REVIEW QUESTIONS: 1. Give an example of a service experience in which you participated that was poor because of the presence of a novice customer. What was it that the novice did that identified that person as a novice? Describe the consequences for the expert consumer in terms of the theatrical analogy.

Answers will vary. Novice consumers may disrupt the service process by failing to comply with procedures or they may slow the process due to their need for additional instruction, which in both cases may negatively impact the service experience of expert consumers present at the same time. Expert performers have rich and complicated scripts for the specific service. Having had multiple experiences of the service, they can cope with unexpected changes, and they have plenty of ―if-then‖ branches in their script.

2. Describe a service environment in which the physical design, signage, or layout makes it easy to understand the script. Describe another where the environment makes it very difficult to understand the role of and the script of the consumer.

Answers will vary.

3 . Choose an example from your own experience of a service business that “changed the script” for their consumer. Suggest why they might have made the change and the problems it created.

Answers will vary.

4 . Who are the service providers in the Depop model? How much of the work is being done by the consumer?

The Depop company provides the service of making an app available to consumers that allows them to buy and sell using only their smart phones. Other than providing the app, all of the work is done by the consumer.

5. How different is the NEO Window Shopping script from the traditional window shopping script? How many different “analogous scripts” would consumers have to draw on to build their expertise in using the window?

How else can the consumer learn the script? Search YouTube.com with the term “Adidas Interactive Window” to view the video.

The script varies in that the window becomes interactive with the consumer‘s smart phone. Consumers can draw on the scripts they use with other shopping apps on their phones. © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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CHAPTER 11: SATISFACTION

DEFINING

144

AND

MEASURING

CUSTOMER

 PowerPoint Slide: #1

―If you can‘t measure it, goes the old cliché, you can‘t manage it. In fact, if you can‘t measure it, managers seem unable to pay attention to it.‖ Fortune Magazine

Chapter Objectives: The objectives of this chapter are to introduce you to the importance and benefits of customer satisfaction and the special factors to consider in measuring customer satisfaction.

Learning Objectives:

 PowerPoint Slide: #2

After reading this chapter, you should be able to 1.

Define customer satisfaction and understand the benefits associated with satisfied customers. 

2.

Appreciate various methods for measuring customer satisfaction and discuss the limitations of customer satisfaction measurements. 

3.

The most popular definition of customer satisfaction/dissatisfaction is that it is a comparison of customer expectations to perceptions regarding the actual service encounter. Meeting and exceeding customer expectations may reap several valuable benefits. It generates positive word-of-mouth communications; satisfied customers make more purchases more frequently; satisfied customers are less likely to be lost to competitors; high satisfaction ratings help insulate the firm from price competition; and firm‘s that pride themselves with customer satisfaction tend to have more positive work environments.

Measures of customer satisfaction are derived by indirect and direct methods.

Indirect methods include tracking and monitoring sales records, profits, and customer complaints. Direct measures are generally obtained through customer satisfaction surveys. Virtually all self-reports of customer satisfaction possess a distribution in which a majority of the responses indicate that customers are satisfied and the distribution itself is negatively skewed.

Discuss factors to consider when investing in customer satisfaction improvements.

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

4.

145

Whether to invest in improving customer satisfaction ratings depends upon several factors: (1) satisfaction ratings of the firm‘s competitors, (2) the dollar investment necessary to increase customer satisfaction relative to the impact of increasing the firm‘s marketing share, (3) the number of time periods required to recoup the investment, and (4) the opportunity costs associated with other uses of the firm‘s funds.

Understand the many factors that influence customer expectations.



Desired service expectations are developed as a result of six different sources: (1) enduring service intensifiers, (2) personal needs, (3) explicit service promises, (4) implicit service promises, (5) word-of-mouth, and (6) past experience.

Adequate service reflects the level of service the consumer is willing to accept and is influenced by five factors: (1) transitory service intensifiers; (2) perceived service alternatives, (3) customer self-perceived service role, (4) situational factors, and (5) predicted service.  PowerPoint Slide: #3

Opening Vignette: Ratemyprofessor.com: An Opportunity for Students to Voice their Satisfaction (or lack thereof) 

This website provides the means for students to rate their satisfaction with their professors. It contains over 10 million ratings of over 1 million instructors from 6,000 colleges and universities.



In addition to its rating service, ratemyprofessor.com offers a number of other services to its users. See Top 10 Funniest Ratings.

Lecture Outline: I.

 PowerPoint Slide: #4

Introduction A.

Customer satisfaction is one of the most studied areas in marketing.

B.

The rise of the consumer movement in the 1970s was directly related to the decline in service felt by many consumers that could be attributed to a number of sources.

1.

Skyrocketing inflation forced many firms to slash services to keep prices down.

2.

Deregulation led to price competition (price wars) and services

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were slashed to hold costs down.

3.

Labor shortages also contributed to the decline in customer service.

4.

Automation distanced customers.

5.

Customers have become more informed and difficult to please.  PowerPoint Slides: #5-6

II.

The Importance of Customer Satisfaction GG.

Technical Assistance Research Program (TARP) 1.

The average business does not hear from 96% of its unhappy customers.

2.

For every complaint received, 26 customers actually have the same problem.

3.

The average person with a problem tells 9 or 10 people; 13% will tell more than 20.

4.

Customers who have their complaints satisfactorily resolved tell an average of 5 people about the treatment they received.

5.

Complainers are more likely to do business with you again than noncomplainers if a.

54%–70% if the complaint is resolved at all.

b.

95% if the complaint is resolved quickly.  PowerPoint Slide: #7

HH.

What Is Customer Satisfaction and Dissatisfaction?

1.

Expectancy disconfirmation model: model proposing that comparing customer expectations to their perceptions leads customers to have their expectations confirmed or disconfirmed.

2.

Confirmed expectations: customer expectations that match customer perceptions.

– Perceptions = Expectations

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Disconfirmed expectations: customer expectations that do not match customer perceptions. a.

Negative disconfirmation: customer perceptions that are lower than customer expectations, resulting in customer dissatisfaction.

– Perceptions < Expectations

b.

Positive disconfirmation: customer perceptions that exceed customer expectations, resulting in delighted customers.

– Perceptions > Expectations  PowerPoint Slides: #8-11

C.

The Benefits of Customer Satisfaction 1.

Positive word-of-mouth communications translate to more customers. a.

See Figure 11.1 Customer Service Hall of Fame.

b.

See Figure 11.2 Customer Service Hall of Shame.

2.

Satisfied customers purchase more products more often.

3.

Satisfied customers are less likely to be lost to competitors.

4.

High satisfaction ratings help insulate the firm from price competition.

5.

Firms that pride themselves with customer satisfaction tend to have more positive work environments.

– See Figure 11.3 Eight Key Attributes of Reputation (including most admired companies).

 PowerPoint Slide: #12

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The Benefits of Customer Satisfaction Surveys 1.

Provide a formal means of customer feedback.

2.

Convey a caring message to customers.

3.

Are used to evaluate employee performance. a.

Merit and compensation reviews.

b.

Employee training programs.

4.

Are used for comparison against competition.

5.

Provide information for advertising.

Measuring Customer Satisfaction

 PowerPoint Slide: #13

2. Indirect vs. Direct Measures of Customer Satisfaction 1.

Indirect measures: customer satisfaction measures that include tracking and monitoring sales records, profits, and customer complaints.

2.

Direct measures: customer satisfaction measures that are generally obtained via customer satisfaction surveys a.

b.

The scale of 100 approach i.

The firm simply asks customers to rate the firm‘s performance on a scale from 1 to 100.

ii.

The number itself is difficult to interpret.

The ―very dissatisfied/very satisfied‖ approach i.

A 5-point scale, which is typically labeled utilizing the following format:

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    

ii.

c.

Very dissatisfied Somewhat dissatisfied Neutral Somewhat satisfied Very satisfied

 PowerPoint Slide: #14

See Figure 11.4 FedEx‘s ―Hierarchy of Horrors.‖        

iii.

149

Wrong-day delivery Right day late delivery Pick-up not made Lost package Customer misinformed by FedEx Billing and paperwork mistakes Employee performance failures Damaged packages

More meaningful than the "scale of 100 approach," however, it still lacks the diagnostic power to indicate areas of improvement.

The combined approach i.

Utilizes a quantitative score and adds a qualitative component to help guide the firm's improvement efforts.

ii.

Combining the qualitative and quantitative data outperforms either approach used alone.

iii.

Quantitative satisfaction rating provides a benchmark against which future satisfaction surveys should be compared.  PowerPoint Slides: #15-16

IV.

Understanding Customer Satisfaction Ratings A.

Virtually all self-reports of customer satisfaction possess a distribution in which a majority of the responses indicate that customers are satisfied and the distribution itself is negatively skewed.

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To feel above average is normal.

See Figure 11.5 Distribution of Satisfaction Measurements.  PowerPoint Slides: #17–19

D.

Several factors influence customer satisfaction ratings.

1.

2.

3.

4.

Genuinely satisfied customers a.

Unless existing customers have nowhere else to go to purchase their services, existing customers who voluntarily do business with the firm should be satisfied.

b.

See E-Services In Action – Enhancing Online Customer Satisfaction.

Response bias a.

Response bias: a bias in survey results because of responses being received from only a limited group among the total survey participants.

b.

Some argue that companies hear only from their satisfied customers.

c.

Dissatisfied customers do not want to take the time to complete the firm's questionnaire and/or do not think it will do any good.

Data collection method a.

Research suggests that higher ratings are obtained via personal interviews as compared to nonpersonal forms of data collection.

b.

Respondents to personal interviews may feel more awkward expressing negative statements than when expressing them anonymously on self-administered questionnaires.

Question form a.

Question form: the way a question is phrased, i.e., positively

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or negatively.

5.

6.

7.

8.

b.

Asking questions in a positive form ("How satisfied are you?") appears to lead to greater reported levels of satisfaction than does posing questions in a negative form ("How dissatisfied are you?").

c.

See Figure 11.6 Responses by Question Form.

Context of the question a.

Question context: the placement and tone of a question relative to the other questions asked

b.

Asking a general satisfaction question prior to a specific satisfaction question tends to increase satisfaction levels.

Timing of the questions a.

Question timing: the length of time after the date of purchase in which questions are asked.

b.

Customer satisfaction appears to be highest immediately after the purchase has been made.

Social desirability bias a.

Social desirability bias: a bias in survey results because of respondents’ tendencies to provide information they believe is socially appropriate.

b.

Some researchers believe that respondents tend to withhold critical judgment because to do otherwise would be socially inappropriate.

Mood – Respondents in positive mood states make more positive judgments, rate products they own more favorably, and tend to see the brighter sides of things.

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E. Are Customer Satisfaction Surveys Worth It? 1.

Customer satisfaction ratings may fall under the category of the Hawthorne effect.

2.

Due to the already high levels of customer satisfaction that already exist for most firms, it may not make sense to try to increase satisfaction levels across the board.

3.

Two areas that deserve special attention a. Company attempts to maintain satisfaction over time to counter the decay effect. b. Concentration on the tail of the satisfaction distribution – those customers who are dissatisfied

4.

Benchmarking: setting standards against which to compare future data collected.  PowerPoint Slide: #20

V.

VI.

Customer Satisfaction: How Good Is Good Enough?

A.

Should a firm invest funds to attempt to improve satisfaction ratings from 95% to 98%?

B.

The answer depends upon the: 1.

Satisfaction ratings of the firm‘s competitors.

2.

Dollar investment necessary to increase customer satisfaction relative to the impact of increasing the firm‘s marketing share.

3.

Number of time periods required to recoup the investment.

4.

Opportunity costs associated with other uses of the funds.

Does Customer Satisfaction Translate into Customer Retention?

A.

Between 65 and 85% of customers who defect to competitors say they were "satisfied" or "very satisfied" with their former providers.

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 PowerPoint Slide: #21 B. Criticisms of customer satisfaction research 1.

Satisfaction research focuses on whether current needs are being met but fails to investigate customers‘ future needs.

– See Sustainability and Services In Action – TerraPass: Enhancing Satisfaction with Social Conscience.

2.

Tends to focus on registered complaints.

3.

Tends to focus on global attributes and ignores operational elements.

– For example, the operational usefulness of the Sheraton Hotels and Resorts Guest Satisfaction Survey conducted by J. D. Power and Associates presented in Figure 11.8.

VII.

4.

It often excludes the firm‘s employees from the survey process.

5.

Customers may not know what they want and that sometimes ignoring the customer is the best strategy to follow, particularly when it comes to new product innovation.

Customer Satisfaction: A Closer Look A.

 PowerPoint Slide: #22

Types of Customer Expectations (Figure 11.9) 1.

Predicted service: the level of service quality a customer believes is likely to occur.

2.

Desired service: the level of service quality a customer actually wants from a service encounter.

3.

Perceived service superiority: a measure of service quality derived by comparing desired service expectations and perceived service received.

4.

Adequate service: the level of service quality a customer is willing to accept.

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Perceived service adequacy: a measure of service quality derived by comparing adequate service and perceived service.  PowerPoint Slide: #23

B.

C.

The Zone of Tolerance (Figure 11.10) 1.

Zone of tolerance: level of quality ranging from high to low and reflecting the difference between desired service and adequate service; expands and contracts across customers and within the same customer, depending on the service and the conditions under which it is provided.

2.

Desired service is less subject to change than adequate service.

Factors Influencing Service Expectations: Desired Service (Figure 11.11) 1.

Enduring service intensifiers: personal factors that are stable over time and increase a customer’s sensitivity to how a service should be best provided.

2.

Types of enduring service intensifiers: a. Derived expectations: expectations appropriated from and based on the expectations of others. b. Personal service philosophies: a customer’s own internal views of the meaning of service and the manner in which service providers should conduct themselves.

3.

D.

Personal needs: a customer's physical, social, and psychological needs.  PowerPoint Slide: #24

Factors Influencing Service Expectations: Desired Service and Predicted Service (Figure 11.11) 1.

Explicit service promises: obligations to which the firm commits itself through its advertising, personal selling, contracts, and other forms of communication.

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F.

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2.

Implicit service promises: obligations to which the firm commits itself by means of the tangibles surrounding the service and the price of the service.

3.

Word-of-mouth communications: unbiased information from someone who has been through the service experience, such as friends, family, or consultants.

4.

Past experience: the previous service encounters a consumer has had with a service provider.

Factors Influencing Service Expectations: Adequate Service (Figure 11.11) 1.

Transitory service intensifiers: personal, short-term factors that heighten a customer's sensitivity to service.

2.

Perceived service alternatives: comparable services customers believe they can obtain elsewhere and/or produce themselves.

3.

Self-perceived service role: the input a customer believes he or she is required to present in order to produce a satisfactory service encounter.

4.

Situational factors: circumstances that lower service quality but that are beyond the control of the service provider.

5.

Predicted service: the level of service quality a consumer believes is likely to occur.

The Link between Expectations, Customer Satisfaction, and Service Quality 1.

When evaluating the service experience, consumers compare the three types of expectations to the perceived service delivered.

2.

Customer satisfaction is calculated by comparing predicted service and perceived service.

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VIII.

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Perceived service adequacy, which compares adequate service and perceived service, and perceived service superiority, which compares desired service and perceived service, are measures of service quality.

Summary Customer satisfaction research is one of the fastest growing areas in market research. Defined as a comparison of perceptions and predicted service expectations, customer satisfaction has been associated with such benefits as repeat sales, more frequent sales, increased sales per transaction, positive wordof-mouth communications, insulation from price competition, and pleasant work environments for employees. Firms use a variety of methods to track customer satisfaction. Despite its problems, customer satisfaction assessment is a valuable management exercise.

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REVIEW QUESTIONS: 1. Discuss the differences between a confirmation, a positive disconfirmation, and a negative disconfirmation.

Confirmation of expectations occurs when expectations meet perceptions. A positive disconfirmation occurs when perceptions exceed expectations, and a negative disconfirmation occurs when expectations exceed perceptions.

2. What is meant by the description that most satisfaction scores are negatively skewed? Why does this score distribution occur?

Negatively skewed satisfaction score distributions indicate that most customers rate the firm's they patronize as ―above average.‖ The primary reason that this makes sense is that the firm is surveying its own customers. Unless customers have no other alternatives, current customers must be satisfied with the firm or why else would they continue to conduct business with their existing firm? Another possible explanation is that the firm's dissatisfied customers may not be willing to take the time to complete a survey and/or may not feel it will do any good to complain.

3. Discuss how the form of a question may influence satisfaction scores.

Satisfaction scores often vary depending on the data collection method. Higher scores are likely to be collected when the survey is conducted personally, questions are stated in a positive form, general questions are asked before specific questions, and the timing of the data collection is shortly after the purchase has been made.

4. Should a company always try to achieve 100 percent customer satisfaction?

Please explain.

Not necessarily. Investing in customer satisfaction improvements is contingent upon the amount of investment required, the number of time periods required to recoup the investment, the opportunity costs associated with the funds, the impact of customer satisfaction improvements on the bottom line, and competing firms' satisfaction levels.

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5. Discuss the relationship between customer satisfaction and customer retention.

Customer satisfaction does not necessarily translate into customer retention. Some experts note that 65 to 85 percent of customers who have defected were satisfied or very satisfied with their former supplier. The primary problem appears to be that customer satisfaction focuses on current needs and does not assess the customer's future needs.

6. What are the drawbacks of listening to customers and assessing customer satisfaction?

Listening to customers does have its faults. Customers often focus on current needs and have a difficult time projecting their needs into the future. Other problems such as social desirability bias, responses made in haste, not fully understanding what is being asked, and not making decisions with real money have led to negative feedback on a variety of products that eventually became huge market success stories.

7. Define and explain the relevance of the zone of tolerance.

Due to the heterogeneity of services provided, consumers learn to expect variation in service delivery from one location to the next and even in the same provider from one day to the next. Consumers who accept this variation develop a zone of tolerance, which reflects the difference between desired service and adequate service. The zone of tolerance expands and contracts across customers and within the same customer depending on the service and the conditions under which the service is provided. Other factors, such as price, for example, may influence the zone of tolerance. Typically, as the price increases, the customer‘s zone of tolerance decreases as desired service needs begin to dominate, and the customer becomes less forgiving of sloppy service.

8. What are the major factors that influence customer expectations for adequate service?

Adequate service reflects the level of service the consumer is willing to accept and is influenced by five factors: (1) transitory service intensified; (2) perceived service alternatives, (3) customer self-perceived service roles, (4) situation factors, and (5) predicted service.

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9. What are the major factors that influence customer expectations for desired service?

Desired service expectations are developed as a result of six different sources: (1) enduring service intensifiers, (2) personal needs, (3) explicit service promises, (4) implicit service promises, (5) word-of-mouth communications, and (6) past experience.

10. Go to http://www.theacsi.org/ and click on “ACSI Scores & Commentary.”

Next, click on “ACSI Quarterly Scores.” Based on the four quarters of information available, develop a “Top Ten” list for those firms that score highest in customer satisfaction. In addition, develop a “Bottom Ten” list for those firms that score lowest in customer satisfaction. Compare the two lists and comment on the major differences between the firms in the “Top Ten” list and the “Bottom Ten” list.

Discuss why you think this difference exists.

Answers will vary.

CHAPTER 12: DEFINING AND MEASURING SERVICE QUALITY  PowerPoint Slide: #1 "It‘s just the little touches after the average man would quit that makes the master‘s fame.‖ Orison Swett Marden, founder, Success magazine

Chapter Objectives: The major objectives of this chapter are to introduce you to the concepts of service quality, service quality measurement, and service quality information systems.

Learning Objectives:

 PowerPoint Slide: #2

After reading this chapter, you should be able to 1. Discuss the differences and the similarities between service quality and customer satisfaction. 

Some believe that customer satisfaction leads to perceived service quality, while others believe that service quality leads to customer satisfaction. Most experts agree that customer satisfaction is a short-term, transaction-specific measure, where service quality is an attitude formed by a long-term, overall evaluation of performance.

2. Identify the gaps that influence consumer perceptions of service quality and © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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discuss factors that influence the size of each of the service quality gaps. 

The knowledge gap: the difference between what consumers expect of a service and what management perceives that consumers expect; the standard gap: the difference between what management perceives that consumers expect and the quality specifications set for service delivery; the delivery gap: the difference between the quality standards set for service delivery and the actual quality of service delivery; and the communications gap: the difference between the actual quality of service delivered and the quality of service described in the firm‘s external communications.



The size of the knowledge gap is related to the firm's research orientation, the amount of upward communication in the company, and the number of levels in the management hierarchy. As the firm's research orientation increases, the size of the knowledge gap should decrease. As the firm begins to listen to its front-line employees and the amount of upward communication in the company increases, the size of the knowledge gap should decrease. Finally, as more levels of management are added and the firm's hierarchy increases, the size of the knowledge gap should increase due to the increased distance of the firm's management from the customer.

3. Understand the basic concepts of the SERVQUAL measurement scale and how “gap scores” are calculated. 

SERVQUAL is a 44-item scale that measures customer expectations and perceptions regarding five service quality dimensions—tangibles, reliability, responsiveness, assurance, and empathy. SERVQUAL consists of two sections: a 22-item section that records customer expectations of excellent firms in the specific service industry, and a second 22-item section that measures customer perceptions of a particular company in that service industry. Results from the two sections are then compared to arrive at "gap scores" for each of the five dimensions.

4. Describe the variety of customer and noncustomer research approaches a service firm can use to construct a service quality information system. 

A service quality information system is an ongoing research process that provides relevant data on a timely basis to managers who use the data in decision making. Components of a service quality information system include the proactive solicitation of customer complaints, after-sale surveys, customer focus group interviews, mystery shopping, employee surveys, and total market service quality surveys.  PowerPoint Slide: #3

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Opening Vignette: Pimalai Resort and Spa: Socially and Ecologically Responsible 

The resort epitomizes the five dimensions of service quality—tangibles, reliability, responsiveness, assurance, and empathy.



It has been recognized for its environmental protection, providing an authentic local experience, giving back to the community, and cultural commitment.



Ninety percent of flora and fauna found on the resort are indigenous to the area.



Indigenous wildlife living in harmony within the resort include flying dragon lizards, monkeys, and monitor lizards.

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Lecture Outline: I.

Introduction A.

Researchers agree that service quality is an elusive and abstract concept that is difficult to define and measure.

B.

Despite its elusiveness, it is readily apparent that increases in quality can have a dramatic impact on a firm‘s or industry‘s survival.  PowerPoint Slide: #4

II.

What Is Service Quality?

II.

Service quality: an attitude formed by a long-term, overall evaluation of a firm’s performance.

1.

In contrast, customer satisfaction is a short-term, transactionspecific measure.

2.

The two concepts of customer satisfaction and service quality are intertwined.

3.

Satisfaction assists consumers in revising service quality perceptions.

4.

The logic for this position consists of the following: a.

Consumer perceptions of the service quality of a firm with which he or she has no prior experience is based on the consumer‘s expectations.

b.

Subsequent encounters with the firm lead the consumer through the disconfirmation process and revised perceptions of service quality are formed.

c.

Each additional encounter with the firm further revises or reinforces service quality perceptions.

d.

Revised service quality perceptions modify future consumer purchase intentions toward the firm.

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The Difference in Quality Perspectives between Goods and Services 1.

Service Quality differentiation can generate increased market share and ultimately mean the difference between financial success and failure.

– See Sustainability and Services in Action – Certified ‖Green‖: Enhancing Perceptions of Service Quality.

2.

Ample evidence suggests that the provision of quality can deliver repeat purchases as well as new customers.

3.

Regular customers know the script and are efficient users of the service system.

4.

Goods manufacturers have made producing quality goods a priority issue. a.

Establishing efficient, smoothly running operations.

b.

Increasing consumer market share.

c.

Eliminating product failure.

d.

―Getting it right the first time.‖

e.

Reducing end-of-production-line failures to zero.

f.

Defining quality as delivering the right product to the right customer at the right time.

Service quality cannot be understood in quite the same way.

1.

Service firms depend on customer participation.

2.

Service firms cannot eliminate defects before the consumer sees the service.

3.

Service quality must be an ongoing part of all management and service production on a daily basis.

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Defining and Measuring Service Quality

 PowerPoint Slide: #5

164

Diagnosing Failure Gaps in Service Quality A.

Service gap: the distance between a customer’s expectation of a service and perception of the service actually delivered.

26.

See Figure 12.1 Conceptual Model of Service Quality

27.

Factors influencing the size of the service gap: a.

The knowledge gap: the difference between what consumers expect of a service and what management perceives that consumers expect.

b.

The standards gap: the difference between what management perceives consumers to expect and the quality specifications set for service delivery.

c.

The delivery gap: the difference between the quality standards set for service delivery and the actual quality of service delivery.

d.

The communications gap: the difference between the actual quality of service delivered and the quality of service described in the firm’s external communications.  PowerPoint Slide: #6

B.

The knowledge gap (Gap 1) 9.

The most immediate and obvious gap is usually between what customers want and what managers think customers want.

10.

Factors influencing the knowledge gap: a.

The firm‘s research orientation: a firm’s attitude toward conducting consumer research.

b.

The amount of upward communication: the flow of information from front-line personnel to upper levels of the organization.

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c.

C.

2.

D.

The levels of management: the complexity of the organizational hierarchy and the number of levels between top management and the customers.

The Standards Gap (Gap 2) 1.

165

 PowerPoint Slide: #7

Detailed standards can be written for the: a.

Way the system should operate.

b.

Behavior of contact personnel at each point in the system.

Factors influencing the standards gap: a.

Believing in the feasibility of meeting customer expectations.

b.

Commitment to service quality versus the commitment to cost reduction and short-term profitability.

c.

No culture for service quality.

d.

Insufficient measurements for quality or means of converting measurements into standards.

e.

Difficulty in writing specifications for particular employee behaviors.

The Delivery Gap (Gap 3)

 PowerPoint Slide: #8

1.

Depends on both the willingness and the ability of employees to provide the service according to specification.

2.

Factors influencing the delivery gap: a.

Employee‘s willingness to perform: an employee’s desire to perform to his or her full potential in a service encounter.

b.

Employee-job fit: the degree to which employees are able to perform a service to specifications.

c.

Role conflict: an inconsistency in service providers’ minds between what the service manager expects them to provide and the service they think their customers actually want.

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d.

Role ambiguity: uncertainty of employees’ roles in their jobs and poor understanding of the purpose of their jobs.

e.

Dispersion of control: the situation in which control over the nature of the service being provided is removed from employees’ hands. i.

Employee alienation is bound to increase.

ii.

Learned helplessness: the condition of employees who, through repeated dispersion of control, feel themselves unable to perform a service adequately.

f.

E.

IV.

Inadequate support: a management failure to give employees personal training and/or technological and other resources necessary for them to perform their jobs in the best possible manner.  PowerPoint Slide: #9 The Communications Gap (Gap 4) 1.

External communications are essentially promises the firm makes to its customers.

2.

Factors influencing the communications gap: a.

The propensity to overpromise in highly competitive business environments.

b.

The amount of horizontal communication between a firm‘s headquarters and its service firms in the field.

 PowerPoint Slides: #1011 Measuring Service Quality: The SERVQUAL Measurement Scale – A 44-item scale that measures customer expectations and perceptions regarding five service quality dimensions.  PowerPoint Slide: #12 A. The Tangibles Dimension – The SERVQUAL assessment of a firm’s ability to manage its tangibles.

3.

Assessed via four expectations questions (E1–E4): a.

E1. Excellent companies will have modern-looking equipment.

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b.

E2. The physical facilities at excellent companies will be visually appealing.

c.

E3. Employees of excellent companies will be neat in appearance.

d.

E4. Materials associated with the service will be visually appealing in an excellent company.

Assessed via four perception questions (P1–P4): a.

P1. XYZ has modern-looking equipment.

b.

P2. XYZ‘s physical facilities are visually appealing.

c.

P3. XYZ‘s employees are neat in appearance.

d.

P4. Materials associated with the service are visually appealing at XYZ.  PowerPoint Slide: #13

B.

The Reliability Dimension – The SERVQUAL assessment of a firm’s consistency and dependability in service performance.

3.

Expectations questions (E5–E9): a.

E5: When excellent companies promise to do something by a certain time, they will do so.

b.

E6: When customers have a problem, excellent companies will show a sincere interest in solving it.

c.

E7: Excellent companies will perform the service right the first time.

d.

E8: Excellent companies will provide their services at the time they promise to do so.

e.

E9: Excellent companies will insist on error-free records.

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Perception questions (P5–P9).  PowerPoint Slide: #14

C.

The Responsiveness Dimension – The SERVQUAL assessment of a firm’s commitment to providing its services in a timely manner.

1.

3.

D.

Expectations questions (E10–E13): a.

E10: Employees of excellent companies will tell customers exactly when services will be performed.

b.

E11: Employees of excellent companies will give prompt service to customers.

c.

E12: Employees of excellent companies will always be willing to help customers.

d.

E13: Employees of excellent companies will never be too busy to respond to customer requests.

Perception questions (P10–P13).

 PowerPoint Slide: #15 The Assurance Dimension – The SERVQUAL assessment of a firm’s competence, courtesy to its customers, and security of its operations.

1.

2.

Expectations questions (E14–E17): a.

E14: The behavior of employees of excellent companies will instill confidence in customers.

b.

E15: Customers of excellent companies will feel safe in their transactions.

c.

E16: Employees of excellent companies will be consistently courteous with customers.

d.

E17: Employees of excellent companies will have the knowledge to answer customer questions.

Perception questions (P14–P17).

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 PowerPoint Slide: #16 E.

The Empathy Dimension – The SERVQUAL assessment of a firm’s ability to put itself in its customers’ place.

1.

2.

Expectations questions (E18–E22): a.

E18: Excellent companies will give customers individual attention.

b.

E19: Excellent companies will have operating hours convenient for all their customers.

c.

E20: Excellent companies will have employees who give customers personal attention.

d.

E21: Excellent companies will have the customer‘s best interest at heart.

e.

E22: The employees of excellent companies will understand the specific needs of their customers.

Perception questions (P18–P22).  PowerPoint Slides: #17–18

F.

G.

Determining the Importance of Each of the Five Dimensions 1.

Information is key to prioritizing where a company should allocate its resources when considering service quality improvements.

2.

An easy method to determine customer perceptions of the various dimensions‘ importance is to simply ask respondents to allocate points among the five dimensions and then the mean rating can be gleaned.

Criticisms of SERVQUAL 1.

Length of the questionnaire a.

Expectation and perception questions seem redundant.

b.

What‘s the value of including the expectations set?

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c.

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Figure 12.2 provides a set of perception scores and SERVQUAL scores for a hypothetical firm.

2. Validity of the five dimensions

H.

a.

Do not hold up under statistical scrutiny.

b.

Measurement issues

c.

See Figure 12.3 Relative Importance of SERVQUAL Dimensions as Reported by Consumers.

SERVQUAL: Some Final Thoughts 1.

The importance of contact personnel – Customer perceptions of service are heavily dependent on the attitudes and performance of contact personnel.

2.

Process is as important as outcome – Customer satisfaction depends on the production of services as well as their consumption.

3.

Consumer perceptions Are unpredictable – Consumer perceptions are unpredictable and may be influenced by factors outside the control of the organization that may not be readily apparent to managers.

4.

Assessing the criticisms of SERVQUAL a.

Despite its opponents, SERVQUAL remains an often-used instrument to assess service quality.

b.

From the beginning, its developers have claimed that SERVQUAL is a useful starting point for measuring service quality and was never presented as the final answer.

c.

It is most valuable when compared with a firm‘s own past service quality trends and measures of performance.

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Service Quality Information System A.

Service quality information system: An ongoing research process that provides relevant data on a timely basis to managers, who use the data in decision making.

B.

Customer research: research that examines the customer’s perspective of a firm’s strengths and weaknesses.

C.

Noncustomer research: research that examines how competitors perform on service and how employees view the firm’s strengths and weaknesses.

D.

Components of a service quality information system: 1.

2.

3.

Solicitation of customer complaints

 PowerPoint Slide: #19

a.

Identify unhappy customers.

b.

Identify weaknesses in the firm‘s service delivery system.

c.

The firm‘s active follow-up efforts help to identify weaknesses in the firm‘s service delivery system and to retain dissatisfied customers before they defect to the competition.

After-sales surveys a.

A type of satisfaction survey that addresses customer satisfaction while the service encounter is still fresh in the customer’s mind.

b.

More proactive approach to assessing customer satisfaction than is soliciting customer complaints.

Customer focus group interviews

 PowerPoint Slide: #20

a.

Informal discussions with 8 to 12 customers that are usually guided by a trained moderator; used to identify areas of information to be collected in subsequent survey research.

b.

Probably the most widely used market research method.

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5.

6.

7.

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Mystery shopping a.

A form of noncustomer research that consists of trained personnel who pose as customers, shop at the firm unannounced, and evaluate employees.

b.

A form of observation research and is recommended to be conducted on a quarterly basis.

c.

Aids in coaching, training, and evaluating.

Employee surveys

 PowerPoint Slide: #21

a.

Internal measures of service quality concerning employee morale, attitudes, and perceived obstacles to the provision of quality services.

b.

Employee satisfaction is directly related to customer satisfaction.

c.

Employees often see the system breaking down before customers do.

Total market service quality surveys a.

Surveys that measure the service quality of the firm sponsoring the survey and the service quality of the firm’s competitors.

b.

Provides a comprehensive look at the firm‘s performance and overcomes many of the shortcomings of individual measures used in isolation.

Key components that need to be built into every service quality system  PowerPoint Slide: #22 a.

Listening i.

Quality is defined by the customer.

ii.

Expectations are a rising bar.

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Reliability – Little else matters when the service is unreliable.

c.

Basic service – Deliver the basics first, the frills can come later.

d.

Service design

 PowerPoint Slide: #23

– Design flaws hinder the basic service. e.

Recovery – Firms that do not respond to customer complaints escalate the service failure.

f.

Surprising customers – Exceeding customer expectations.

g.

Fair play

h.

Teamwork

 PowerPoint Slide: #24

i. Service team building should not be left to chance. ii. Customer service is everyone‘s responsibility. i.

Employee research – Is as important to service improvement as customer research.

j.

Servant leadership – Leadership must serve the servers—inspiring, coaching, and enabling.

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Summary This chapter has focused on defining and measuring service quality. Customer satisfaction can be defined as a short-term, transaction-specific measure.

Service quality is a long-term, overall measure. Firms that excel in service quality do so by avoiding potential quality gaps in their delivery systems. The goal of every firm is to minimize the service gap. The service gap is a function of the knowledge, standards, delivery, and communications gaps and responds accordingly in the combined direction of the four gaps.

One popular method for assessing service quality is the SERVQUAL scale. A service quality information system utilizes a variety of continuous measures to assess the firm‘s overall performance. Service quality offers a means of achieving success among competing firms that offer similar products.

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REVIEW QUESTIONS: 1. What are the basic differences between customer satisfaction and service quality?

Some believe that customer satisfaction leads to perceived service quality, while others believe that service quality leads to customer satisfaction. Most experts agree that customer satisfaction is a short-term, transaction-specific measure, where service quality is an attitude formed by a long-term, overall evaluation of performance.

2. Explain how a manager might use the conceptual model of service quality to improve the quality of his or her firm.

As stated throughout the text, services are evaluated based on both process and final outcomes. Conceptually, the service quality process can be examined in terms of gaps between expectations and perceptions on the part of management, employees, and customers. The conceptual model of service quality points to potential flaws in the service delivery system and the factors that contribute to these potential gaps in service quality. Managers may use this information to make their service delivery systems both more efficient and effective.

3. Discuss the knowledge gap and what factors contribute to the size of the knowledge gap.

The knowledge gap is the difference between what consumers expect of a service and what management perceives that consumers expect. The size of the knowledge gap is related to the firm's research orientation, the amount of upward communication in the company, and the number of levels in the management hierarchy. As the firm's research orientation increases, the size of the knowledge gap should decrease. As the firm begins to listen to its front-line employees and the amount of upward communication in the company increases, the size of the knowledge gap should decrease. Finally, as more levels of management are added and the firm's hierarchy increases, the size of the knowledge gap should increase due to the increased distance of the firm's management from the customer.

4. Interview a member of a restaurant’s wait staff. Provide five standards that are provided to them by management pertaining to greeting and serving their customers.

Answers will vary.

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5. How does the communication gap relate to success in e-business (See EServices in Action)?

Findings from a recent study conducted by the International Customer Service Association and e-Satisfy.com indicate that only 36 percent of the 50,000 e-shoppers that were surveyed report that they were satisfied with electronic commerce service.

One of the primary service gaps appears to be in the area of communications.

Customers report that they typically expect a reply to their e-mail requests within one hour; however, only 12 percent receive such a response, and only 42% of respondents were replied to within 24 hours.

A Rainer-Web index study of the Fortune 100 and FTSE 100 found that more than 2 in 5 U.S. and UK companies failed to reply to e-mail requests promptly. In fact 29 FTSE companies and 21 Fortune 100 could not be contacted at all from their Web sites.

These companies included Marks & Spencers, Thames Water, GTE, and Intel. Of the companies contacted by e-mail, 15 FTSE and 20 Fortune 100 never replied. These types of results led the chairman of Rainer to comment…‖all too often, companies focus on the content and look and feel of the site without considering its integration with existing customer contact systems. The result is [that these types of Web sites end up being] little more than corporate wallpaper.‖ 6. Discuss the basics of the SERVQUAL measurement instrument in terms of how “gap scores” are calculated for each of the five service quality dimensions.

SERVQUAL is a 44-item scale that measures customer expectations and perceptions regarding five service quality dimensions—tangibles, reliability, responsiveness, assurance, and empathy. SERVQUAL consists of two sections: a 22-item section that records customer expectations of excellent firms in the specific service industry and a second 22-item section that measures customer perceptions of a particular company in that service industry. Results from the two sections are then compared to arrive at "gap scores" for each of the five dimensions.

7. Why would a manager want to know the importance customers place on each of the five service quality dimensions?

Managers want to know because this information is important in prioritizing where the firm should allocate its resources when faced with service quality improvements. The mean importance rating for each dimension can be determined, providing management with additional insight into customer needs and wants and how these wishes should impact resources allocation decisions.

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8. Discuss the most and least important of the five service quality dimensions.

Why do you believe that most customers rank these two service quality dimensions in this particular order?

The reliability dimension is consistently reported as the most important. The tangible dimension is consistently reported as the least important. Customers believe that the other dimensions are more pressing. Answers may vary.

9. What are the criticisms of SERVQUAL? What is the limitation of only using the 22 perception questions?

SERVQUAL faces a number of criticisms such as the instrument itself it too long and the five service quality dimensions are not statistically valid. Despite its opponents, SERVQUAL remains a frequently utilized instrument to assess service quality.

SERVQUAL provides a valuable diagnostic tool for evaluating the firm's service quality performance and is most valuable when compared with a firm's own past service quality trends and when compared with measures of competitive service quality performance.

10. You have been hired by a firm to develop the firm's service quality information system. What are the components of this system?

A service quality information system is an ongoing research process that provides relevant data on a timely basis to managers who use the data in decision making.

Components of a service quality information system include the proactive solicitation of customer complaints, after-sale surveys, customer focus group interviews, mystery shopping, employee surveys, and total market service quality surveys.

CHAPTER 13: COMPLAINT AND SERVICE RECOVERY  PowerPoint Slide: #1 "Complaining customers may drive you nuts, but ultimately they are leading you to your future.‖ Fred Wiersema, Coauthor #1 Bestseller: The Discipline of Market Leaders

Chapter Objectives: The major objectives of this chapter are to introduce the concepts pertaining to complaint and service recovery management.

Learning Objectives: After reading this chapter, you should be able to

 PowerPoint Slide: #2

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1. Discuss the psychology of complaining behavior, including the types of complainers and the types of complaints. 

Every customer should encourage its customers to complain. Complaining is ―expressing discontent, dissatisfaction, protest, resentment, or regret.‖ Types of complaints include (1) instrumental complaints: complaints expressed for the purpose of altering an undesirable state of affairs; (2) noninstrumental complaints: complaints expressed without expectation that an undesirable state will be altered; (3) ostensive complaints: complaints directed at someone or something outside the realm of the complainer; and (4) reflexive complaints: complaints directed at some inner aspect of the complainer. Types of complainers include (1) the meek customer: a customer who generally never complains; (2) the aggressive customer: this customer complains on a regular basis, often at length and often loudly enough for everyone else to hear; (3) the high-roller customer: a customer who expects the best and is willing to pay for it and who typically complains in a reasonable manner; and (4) the rip-off customer: a customer who wants more than he or she is entitled to receive; and (5) the chronic complainer customer: a customer who is never satisfied yet continues to return.

2. Explain customer complaining behavior with regards to the reasons customers do or do not complain, and the outcomes associated with customer complaints. 

Reasons customers do complain include to correct the problem, as an emotional release from frustration, to regain some measure of control by spreading negative word-of-mouth, to solicit sympathy, to test for consensus, and to create an impression of being more intelligent and discerning.



Reasons customer do not complain include that they don't know what to do, they doubt it will do any good, they doubt their own subjective evaluation, they accept part of the blame because of their involvement in the production process, they want to avoid a confrontation with the service provider, and they feel they lack the expertise to make a judgment.



Complaining behavior results in three outcomes: voice, exit, and/or retaliation.

3. Describe the organic and mechanistic steps involved in developing a service recovery management program. 

Mechanistic processes are formalized steps that are developed to facilitate the firm‘s failure analysis and service recovery efforts. Organic processes are informal sets of values and beliefs that comprise the firm‘s service recovery culture.

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The steps in developing the program include: (1) developing a positive internal recovery culture, (2) service failure identification, (3) service failure attribution (identifying the root cause), (4) recovery strategy selection, (5) recovery strategy implementation, and (6) providing feedback to employees.

4. Understand the value of tracking and monitoring service failures and employee recovery efforts. 

Service recovery strategies are often industry specific, such as the restaurant example provided in the chapter. Successful tactics for recovery from failures attributed to the firm include acknowledging the problem, making the customer feel unique or special, apologizing when appropriate, explaining what happened, and offering to compensate the customer. Successful responses to service failures attributed to customer error include acknowledging the problem, taking responsibility for the problem, and assisting in solving the problem without embarrassing the customer. Successful service recovery efforts such as these play an important role in customer retention.

5. Discuss the basic rules of thumb of the art of service recovery. 

When the service delivery system fails, it is the responsibility of contact personnel to react to the complaint. Firms should consider the following issues: measure the costs, actively encourage complaints, anticipate needs for recovery, train employees, empower the front line, respond quickly, and close the loop.  PowerPoint Slide: #3

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Opening Vignette: Hell Now Hath No Fury Like a Customer Scorned! 

The customers have taken justice into their own hands and become consumer activists. This type of situation has become so common that BusinessWeek devoted a recent cover story to Consumer Vigilantes and the tagline: ―Memo to Corporate America: Hell now hath no fury like a customer scorned.‖



Two examples are discussed on how improperly handling customer complaints cost the company much more in bad publicity than would fixing the original problems in the first place.

Lecture Outline: I.

Introduction A.

Despite the service firm‘s best efforts, service failures are inevitable.

– Service failures: breakdowns in the delivery of service; service that does not meet customer expectations.

B.

The secrets to success are to take a proactive stance to reduce the occurrence of service failure.

– Service recovery: a firm’s reaction to a complaint that results in customer satisfaction and goodwill.

C.

The reason failures are inherent in the service encounter are directly related to the unique characteristics that distinguish services from goods.

1.

Intangibility: highly subjective evaluation, consequently not all customers are going to be satisfied.

2.

Heterogeneity: not every service encounter is going to be identical.

3.

Perishability: service customers will experience delays from time to time, and service workers will occasionally lose their patience.

4.

Inseparability: service providers are face to face with the customer, which provides a Pandora‘s Box of failure possibilities.

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The Psychology of Customer Complaining Behavior GG.

Every company should encourage its customers to complain.

HH.

Complaining is often defined as ―expressing discontent, dissatisfaction, protest, resentment, or regret.‖

II.

Types of Complaints

JJ.

KK.

 PowerPoint Slide: #4

1.

Instrumental complaints: complaints expressed for the purpose of altering an undesirable state of affairs.

2.

Noninstrumental complaints: complaints expressed without expectation that an undesirable state will be altered.

3.

Ostensive complaints: complaints directed at someone or something outside the realm of the complainer.

4.

Reflexive complaints: complaints directed at some inner aspect of the complainer.

Types of Complainers

 PowerPoint Slide: #5

1.

The meek customer: a customer who generally never complains.

2.

The aggressive customer: a customer who complains on a regular basis, often at length and often loudly enough for everyone else to hear.

3.

The high-roller customer: a customer who expects the best and is willing to pay for it, typically complain in a reasonable manner.

4.

The rip-off customer: a customer who wants more than he or she is entitled to receive.

5.

The chronic complainer customer: a customer who is never satisfied yet continues to return.  PowerPoint Slide: #6

Why Do Customers Complain? (Figure 13.1) 1.

To correct an undesirable situation

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182

2.

As an emotional release from frustration

3.

To regain some measure of control by spreading negative word-ofmouth

4.

To solicit sympathy

5.

To test for consensus

6.

To create an impression of being more intelligent and discerning  PowerPoint Slide: #7

Why Don‘t Customers Complain? (Figure 13.1) 1.

Don‘t know what to do

2.

Don't think it will change anything

3.

May doubt their own subjective evaluation

4.

May accept part of the blame because of their involvement in the production process

5.

May want to avoid confrontation

6.

May lack technical or specialized expertise  PowerPoint Slides: #8-9

MM.

Complaining Outcomes 1.

Complaining behavior results in three outcomes a.

Voice: a complaining outcome in which the customer verbally communicates dissatisfaction with the store or the product. i.

High: the customer complains to the manager.

ii.

Medium: the customer complains to front-line personnel.

iii.

Low: the customer does not complain to anyone who works for the firm.

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Exit: a complaining outcome in which the consumer stops patronizing the store or using the product. i.

High: the customer vows never to purchase anything again from the firm.

ii.

Medium: the customer only purchases from the firm if other alternatives are not available.

iii.

Low: the customer continues to shop as usual.

c. Retaliation: a complaining outcome in which the consumer takes action deliberately designed to damage the physical operation or hurt future business. i.

High: the customer tells lots of people about the problem with the firm and attempts to physically damage the firm.

ii.

Medium: the customer tells a few people and creates minor inconveniences for the firm.

iii.

Low: the customer engages in minor negative word-ofmouth and otherwise does not retaliate at all.  PowerPoint Slide: #10

III.

Developing a Service Recovery Management Program (Figure 13.2) A.

Firms can develop a step-by-step process consisting of both ―mechanistic‖ and ―organic‖ components.

1.

Mechanistic processes: formalized step-by-step processes that are developed to facilitate the firm’s failure analysis and service recovery efforts.

2.

Organic processes: informal sets of values and beliefs that comprise the firm’s service recovery culture.

B. Step 1. Developing a Positive Internal Recovery Culture 11.

Service recovery culture: an informal set of beliefs, behaviors, and practices that set the tone for how the firm wishes to address customer complaints.

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Firms that develop a positive internal recovery culture recognize the need to openly discuss the possibility of service failures and the company‘s desire to retain customers through effective service recovery strategies.

C. Step 2. Service Failure Identification

 PowerPoint #11

Slide:

A firm may receive hundreds of customer complaints pertaining to perceived service failures throughout the year, ultimately these complaints can be systematically categorized into four main groups. (Figure 13.3) 5.

6.

Core service delivery system failures: failures in the core service offering of the firm including unavailable service, unreasonably slow service, and other core service failures 

Unavailable service: services normally available that are lacking or absent.



Unreasonably slow service: services or employees perceived by customers as being extraordinarily slow in fulfilling their function.



Other core service failures: all remaining core service breakdowns or actions that do not measure up to customer expectations.

Failures relating to customer needs and requests: service failures relating to the implicit and explicit needs of customers, including special needs, customer preferences, customer errors, and disruptive others. 

Implicit needs: customer needs that are not requested but that should be obvious to service providers.



Explicit needs: customer needs that are overtly requested.



Consist of employee responses to four types of possible failures i.

Special needs: requests based on a customer’s special medical, psychological, language, or sociological difficulties

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ii.

Customer preferences: require the employee to modify the service delivery system in some way that meets the preferred needs of the customer.

iii.

Customer errors: service failures caused by admitted customer mistakes.

iv.

Disruptive others: customers which negatively influence the service experience of other customers.

Failures relating to unprompted/unsolicited employee actions 

Pertain to events and employee behaviors that are totally unexpected by the customer.



These actions are not initiated by the customer via a request, nor are they part of the core delivery system.



Subcategories in this group include: i.

8.

185

Level of attention: refers to employees who ignore a customer due to an indifferent attitude or pay too much attention to the point of making a customer uncomfortable.

Unusual action: both positive and negative events in which an employee responds with something out of the ordinary.

Cultural norms: service personnel actions that either positively reinforce or violate the cultural norms of society.

Gestalt: customer evaluations that are made holistically and given in overall terms rather than in descriptions of discrete events.

Adverse conditions: positive and negative employee actions under stressful conditions.

Failures relating to problematic customers 

Involves instances where neither the employee nor the service firm is at fault for the service failure.



The cause of the service failure lies with the customer‘s own misbehavior, involving:

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i.

Drunkenness: an intoxicated customer’s behavior adversely affects other customers, service employees, and the service environment in general.

ii.

Verbal and physical abuse: a customer verbally or physically abuses either the employee or other customer.

iii.

Breaking company policies: a customer who refuses to comply with policies that employees are attempting to enforce.

iv.

Uncooperative customer: a customer who is generally rude, uncooperative, and unreasonably demanding.  PowerPoint Slide: #12

D. Step 3. Service Failure Attribution: Identifying the Root Cause 1.

Locus: a service failure attribution pertaining to the possible source of the failure including the service provider, the firm, the customer, or external forces.

2.

Stability: a service failure attribution pertaining to the likelihood the service failure will recur.

3.

Controllability: a service failure attribution pertaining to whether or not the firm had control over the cause of the failure.  PowerPoint Slide: #13

E.

Step 4. Recovery Strategy Selection: What Should the Customer Receive to Offset the Failure?

1.

Compensatory strategies: a set of recovery strategies that compensate the customers to offset the costs of the service failure a.

Gratis (customer is provided with free good/services)

b.

Discount (customer receives an immediate discount)

c.

Coupon

d.

Free upgrade

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Free ancillary product (free dinner to compensate hotel guests for problems associated with their room)

2.

Restoration strategies: a set of recovery strategies offered to offset the situation by providing an identical offering, corrections to the original offering, or by offering a substitute.

3.

Apologetic Strategies: a set of verbal recovery strategies involving apologies from front-line providers and/or upper-level management.

4.

Reimbursement strategies: a set of recovery strategies that provide the customer with a refund or store credit.

5.

Unresponsive strategy: a recovery strategy in which the firm purposely decides not to respond to customer complaints.  PowerPoint Slide: #14

F.

Step 5. Recovery Strategy Implementation: How Should the Recovery Strategy Be Presented to the Customer?

1.

Perceived justice: the process in which customers weigh their inputs against their outputs when forming recovery evaluations.

2.

Perceived justice consists of three components: a.

Distributive justice: a component of perceived justice that refers to the outcomes (e.g., compensation) associated with the service recovery process.

b.

Procedural justice: a component of perceived justice that refers to the process (e.g., time) the customer endures during the service recovery process.

c.

Interactional justice: a component of perceived justice that refers to the human content (e.g., empathy, friendliness) that is demonstrated by service personnel during the service recovery process.

G. Providing Feedback to Employees 1.

 PowerPoint Slide: #15

Providing formalized feedback to employees regarding the types of service failures and failure attributions that are likely to happen prepares employees for failure situations before they actually occur.

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2.

Role conflict: a situation where the employee is caught between the opposing wishes of the firm’s customers and the firm’s management.

3.

Role ambiguity: a situation where the employee does not know how to perform his or her job.

4.

Employees need training and feedback: a.

About the types of service failures likely to happen.

b.

About the types of recovery strategies available to them.

c.

About the manner in which recovery strategies should be offered.

d.

To reinforce the firm‘s positive service recovery culture.

 PowerPoint Slides: #16– 17 The Art of Service Recovery: Basic Rules of Thumb A.

Service recovery paradox: situation in which the customer rates performance higher if a failure occurs and the contact personnel successfully recover from it than if the service had been delivered correctly in the first time.

B.

Improve service recovery efforts 1.

Measure the costs: compare the costs of keeping customers as opposed to gaining new ones.

2.

Actively encourage complaints: to "break the silence" of the vast majority of customers who have problems and do not complain.

3.

Anticipate needs for recovery: be prepared to recovery if the delivery system goes awry.

4.

Train employees: expecting employees to be naturals at service recovery is unrealistic. a. Create employee awareness of customer concerns b. Define management‘s expectation about recovery efforts

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5.

Empower the front line: often the rules and regulations of the firm tie the hands of employees when it comes to effective recovery efforts.

6.

Respond quickly: the faster the firm responds the more likely the recovery effort will result in a successful outcome.

7.

Close the Loop: provide feedback to customers regarding how their complaint made a difference.

Summary Many of today‘s service firms are great as long as the service delivery system is operating smoothly. However, once kinks develop in the system, many firms are unprepared to face unhappy customers who are looking for solutions to their problems. As evidence, nearly half the responses to customer complaints reinforce customers‘ negative feelings toward a firm. Consequently, firms that truly excel in customer service equip employees with a set of recovery tools to repair the service encounter when failure occurs and customer complaints are voiced.

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REVIEW QUESTIONS: 1. Discuss the following types of complaints: instrumental, noninstrumental, ostensive, and reflexive. Which types of complaints are voiced the most?

Instrumental complaints are expressed for the purpose of altering an undesirable state of affairs. Noninstrumental complaints are expressed without expectation that an undesirable state will be altered. Ostensive complaints are directed at someone or something outside the realm of the complainer. Reflexive complaints are directed at some inner aspect of the complainer. A consumer voicing a complaint to an employee is most likely making an ostensive and instrumental complaint.

2. Previous research has found that 96 percent of unhappy customers do not complain. Why is this so?

Reasons customers do not complain include that they don't know what to do, don‘t think it will do any good, may accept part of the blame because of their involvement in the production process, may doubt their own subjective evaluation, may lack technical or specialized expertise, and may want to avoid confrontation.

3. Which type of company is more likely to hear from unhappy customers—a company that produces goods or a company that provides services? Please explain.

Service firms are more likely to hear from unhappy customers. The reason failures are inherent in the service encounter are directly related to the unique characteristics that distinguish services from goods. Due to intangibility, customer comparison of perceptions to expectations is highly subjective; consequently, not all customers are going to be satisfied given their individual expectations and the individual perceptions of the world around them. Due to heterogeneity, variations in the service delivery process are going to occur, and not every service encounter is going to be identical to the last.

As a result, customers openly wonder why their past experiences with a firm are not quite the same as their current experiences. Due to perishability, supply and demand problems are a common occurrence within service firms, which in turn causes customers to wait for service. Finally, the unique service characteristic of inseparability often places the service provider in a face-to-face interaction with the customer, which provides a Pandora‘s Box of service failure possibilities.

4. Discuss the following types of failure outcomes: voice, exit, and retaliation.

High voice—the customer complains to the manager.

Medium voice—the customer complains to front-line personnel.

Low voice—the customer does not complain to anyone who works for the firm. © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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High exit—the customer vows never to purchase anything again from the firm.

Medium exit—the customer only purchases from the firm if other alternatives are not available.

Low exit—the customer continues to shop as usual High retaliation—the customer tells lots of people about the problem with the firm and attempts to physically damage the firm.

Medium retaliation—the customer tells a few people and creates minor inconveniences for the firm.

Low retaliation—the customer expresses minor negative word-of-mouth and otherwise does not retaliate at all.

5. Describe the basic differences between organic and mechanistic approaches to service recovery.

Mechanistic processes are formalized steps developed to facilitate the firm‘s failure analysis and service recovery efforts. Organic processes are informal sets of values and beliefs that comprise the firm‘s service recovery culture.

6. A national restaurant chain has hired you to categorize customer complaints.

Discuss the basic difference between the four main failure identification categories, and provide restaurant-related examples of each.

Group 1 Employee Responses to Core Service Failures Product defects: food was described as cold, soggy, raw, burnt, spoiled, or containing inanimate objects such as hair, glass, bandages, bag ties, and cardboard Slow/unavailable service: waiting excessively, not being able to find assistance Facility problems: cleanliness issues such as bad smells, dirty utensils, and animate objects (e.g., insects) found on the table or in the food Unclear policies: policies that were perceived as unfair by the customer, such as coupon redemption, or forms of payment Out-of-stock conditions: inadequate supply of menu items Group 2 Employee Responses to Implicit/Explicit Customer Requests Food not cooked to order: requested food be prepared in a particular manner and restaurant failed to meet request Seating problems: seating nonsmokers in smoking section and vice versa, lost or disregarded reservations, requests for special tables that were denied, seating among unruly and disruptive customers Group 3 Unprompted/Unsolicited Employee Actions Inappropriate employee behavior: rudeness, inappropriate verbal exchanges, and poor attitudes © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Wrong Orders: delivery of the incorrect food item, either to the table, or in the case of fast food, in packaging so that the mistake was not discovered until the customer had left the premises Lost orders: situations in which the customer‘s order was lost and never fulfilled Mischarged: being charged for items that were never sent, being charged incorrect prices for items that were ordered, and providing incorrect change Group 4 Problematic Customers Drunkenness: an intoxicated customer‘s behavior adversely affects other customers, service employees, and the service environment in general Verbal and physical abuse: a customer verbally or physically abuses either an employee or other customer Breaking company policies: a customer who refuses to comply with policies that employees are attempting to enforce Uncooperative customer: a customer who is generally rude, uncooperative, and unreasonably demanding 7. Define and discuss the subclass failures associated with the implicit/explicit request failure category.

The implicit/explicit customer request category includes special needs, customer preferences, customer error, and disruptive others. Special needs are requests based on a customer's special medical, psychological, language, or sociological difficulties.

Customer preferences require the employee to modify the service delivery system in some way that meets the preferred needs of the customer. Customer errors are service failures caused by admitted customer mistakes, and disruptive others are customers who negatively influence the service experience of other customers.

8. What is the service recovery paradox? What should managers learn from the service recovery paradox?

The service recovery paradox describes the situation in which the customer rates performance higher if a failure occurs and the contact personnel successfully recover from it than if the service had been delivered correctly the first time. Managers should learn the importance of service recovery efforts.

9. Define perceived justice. How is perceived justice used to evaluate a firm’s service recovery efforts?

The customer‘s perception of whether the recovery strategy is just includes evaluations of the recovery process itself, the outcomes connected to the recovery strategy, and the interpersonal behaviors enacted during the recovery process. Accordingly, perceived

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justice consists of three components: distributive justice, procedural justice, and interactional justice.

Distributive justice focuses on the specific outcome of the firm‘s recovery effort. In other words, what specifically did the offending firm offer the customer to recover from the service failure, and did this outcome (output) offset the costs (inputs) of the service failure? Typical distributive outcomes include compensation (e.g., gratis, discounts, coupons, free upgrades, and free ancillary services), offers to mend or totally replace/reperform, and apologies.

Procedural justice examines the process that is undertaken to arrive at the final outcome.

Hence, even though a customer may be satisfied with the type of recovery strategy offered, recovery evaluation may be poor due to the process endured to obtain the recovery outcome. For example, research has indicated that when implementing identical recovery strategies, those that are implemented ―promptly‖ are much more likely to be associated with higher consumer effectiveness ratings and retention rates than their delayed counterparts.

Interactional justice refers to the manner in which the service recovery process is implemented and how recovery outcomes are presented. In other words, interactional justice involves the courtesy and politeness exhibited by personnel, empathy, effort observed in resolving the situation, and the firm‘s willingness to provide an explanation why the situation occurred.

A limited amount of research exists that specifically examines the influence of perceived justice on recovery strategy effectiveness. However, the bottom line is that the three components of perceived justice must be taken into consideration when formulating effective service recovery strategies.

10. After a customer voices a complaint to an employee or a manager, what does it mean to “close the loop”? Why is this particular step important in handling complaints?

Customer-oriented firms that have a sound recovery strategy solve the customer‘s problem. However, firms that excel at recovery go the extra mile and reestablish contact with the customer for the purpose of informing the customer how their complaint made a difference. Incorporating the customer‘s complaint during a training session or developing new procedures to minimize future occurrences of the failure based on the customer‘s complaint closes the loop and wins a customer for life!

CHAPTER 14: CUSTOMER LOYALTY AND RETENTION  PowerPoint Slide: #1 "Loyalty cannot be blueprinted. It cannot be produced on an assembly line. In fact, it © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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cannot be manufactured at all, for its origin is the human heart—the center of selfrespect and human dignity. It is a force which leaps into being only when conditions are exactly right for it—and it is a force very sensitive to betrayal.‖ Maurice R. Franks

Chapter Objectives: This chapter focuses on the important service concepts of customer loyalty and retention.

Learning Objectives:

 PowerPoint Slide: #2

After reading this chapter, you should be able to 1. Understand the differences between the service marketing concepts of loyalty and retention and the relationship between the two. 

Customer loyalty reflects an emotional attachment as well as a business attachment to the service firm. Ultimately, customer loyalty leads to customer retention and all of its associated benefits. Customers that are retained by the service firm may be loyal customers or customers that simply continue to patronize the firm for other reasons. Customer retention focuses the firm‘s marketing efforts toward the existing customer base. Firms engaged in customer retention efforts work to satisfy existing customers in the hope of further developing the customer-provider relationship.

2. Discuss why the concept of customer retention has become increasingly important. 

Customer retention has become increasingly important for a number of reasons, including: slower population and GNP growth, the rising costs of advertising and the loss of "share of voice," increasing competition due to deregulation and product parity, distance marketing, and today's customers are more informed and more skeptical.

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3. Master successful tactics for retaining existing customers. 

Customer retention tactics include: developing a proper perspective, staying in touch, providing discretionary effort, leading through top-down loyalty, training and empowering employees, providing incentives, remembering your customers‘ purchases, building trust through reliability, flexibility, replacing technology with humans, being great with names, and being available when you are needed the most.

4. Describe emerging customer retention programs. 

Several relatively new marketing programs have surfaced that typify the recent interest in customer retention strategies, such as frequency marketing, relationship marketing, aftermarketing, service guarantees, and defection management.

5. Explain defection management. 

Defection management is a systematic process that actively attempts to retain customers before they defect. Steps in the process include: communicating to employees the importance of retaining customers; training employees in defection management—how to react to defecting customers; tying incentives to defection rates; and considering the creation of switching barriers that discourage defections.  PowerPoint Slide: #3

Opening Vignette: Harrah’s Looks Beyond Gamblers for New Loyalty Program 

Harrah‘s Entertainment is the world‘s largest provider of branded casino entertainment. ―Harrah‘s Entertainment is focused on building loyalty and value with its customers through a unique combination of great service, excellent products, unsurpassed distribution, operational excellence and technology leadership.‖



Harrah‘s was one of the first companies in the gaming industry to use its loyalty program, Total Rewards, to identify its best and most loyal customers, and to reward those customers in ways they had never been rewarded before.



Rewards include speedy check-ins, free rooms, free food, spa treatments, and show tickets.



Over 75% of its gaming revenues are tracked by the card.

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

The loyalty program has increased cross-market play.



Harrah‘s has expanded its loyalty program to offer reward points to nongamblers who spend money on entertainment, restaurants, and other services.



Harrah‘s generates approximately 20% of its revenues from nongambling sources and is serious about expanding its nongambling offerings.

Lecture Outline: I.

Introduction A.

Customer loyalty and Customer retention are key strategies in today‘s leading-edge service firms and reflect a more futuristic outlook than does the concept of customer satisfaction.

B.

Additional measures that assess the customer‘s commitment to the service firm, evolving customer expectations, the probability of future purchases with the firm, and the customer‘s willingness to conduct business with competitive firms are necessary in order to truly assess the firm‘s customer loyalty and retention efforts.  PowerPoint Slide: #4

II.

What Is Customer Loyalty?

A.

Customer Loyalty – reflects an emotional attachment as well as a business attachment to the service firm.

1.

A deeper conviction to the firm than pure retention alone.

2.

Service firms wishing to build their business and nurture strong customer relationships need to understand the added strategic value of customer loyalty over customer retention.

B. You‘re Great, but It‘s Over!

1.

Higher levels of customer satisfaction would be expected to be associated with higher levels of customer retention; the relationship does not always necessarily exist.

2.

Consider the following cases where: (1) customers are not

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satisfied, yet they are retained; and (2) customers are satisfied, yet they defect to competitive offerings: Low Satisfaction / High Retention  Regulated monopoly or few substitutes (hospitals, airlines)  Dominant brand equity (Microsoft)  High cost of switching (physicians, financial institutions)  Proprietary technology (Microsoft) High Satisfaction / Low Retention  Commodity products or little or no differentiation (rental cars)  Consumer indifference—low involvement (car wash, drycleaner)  Many substitutes (lawn care service)  Low costs of switching (trash collection services)  PowerPoint Slides: #5–6 C.

Strategies for Cultivating Customer Loyalty 1.

Developing a proper perspective—managers and employees of service firms need to remember that the company exists to meet the needs and wants of its consumers.

2.

Staying in touch—contacting customers between service encounters is a useful approach in building relationships with the service firm.

3.

Providing discretionary effort—discretionary effort is behavior beyond the call of duty. (See E-Services in Action: I Heart Zappos.)

4.

Leading through top-down loyalty—upper management that is loyal to its employees create a service culture where employees pass that loyalty onto their customers.

5.

Training and empowering employees—convey to employees the expectation for great service delivery and provide them with the tools, training, and autonomy necessary to deliver it.

6.

Providing incentives—although you may already have the hearts and minds of your customers, they love you more when you love them back.

7.

Remembering your customers‘ purchases—a good memory about past customer purchase signals to the customer that they are

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important individuals and not part of a mass known only as ―the customer.‖

III.

8.

Building trust through reliability—strategies include (1) protecting confidential information; (2) telling customers the truth, even when it hurts; (3) providing customers with full information—the pros and cons; and (4) being dependable, courteous, and considerate with customers.

9.

Flexibility—nothing depersonalizes a service faster than referring to a company policy.

10.

Replace technology with humans—technology is viewed as yet another tactic the firm implements to distance itself from its customers.

11.

Be great with names—nothing personalizes a relationship faster than calling the customer by name.

12.

Being available when you‘re needed the most—when a customer has a problem, this is not the time to crawl under a rock and hide.

 PowerPoint Slides: #7–8 What Is Customer Retention?

– focusing the firm’s marketing efforts toward the existing customer base.

JJ.

Firms engaged in customer retention efforts work to satisfy existing customers with the intent of developing long-term relationships between the firm and its current clientele for the purpose of growing the business (see Figure 14.1).

KK.

The Trend Toward Customer Retention 1.

The majority of marketers today have reacted to the new environment of ―brand parity‖ and ―nonbrand loyalty‖ by constantly chasing new customers.

2.

Firms that are constantly seeking new customers are engaged in conquest marketing.

– a marketing strategy for constantly seeking new customers by offering discounts and markdowns and developing promotions that encourage new business.

3.

Many companies spend the bulk of their marketing efforts on

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attracting new customers instead of on keeping the customer they already have.

4.

Coddling existing clients makes good economic sense.

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LL.

The Importance of Customer Retention 1.

200

 PowerPoint Slides: #9–10

Stagnant markets a. There has been a decrease in population growth. b. There are not as many new customers as there once were, and those customers that do exist are spending less.

2.

Increase in competition a. Market information is more accessible. b. Deregulated industries must now compete. c. Relative parity and lack of differential advantage among goods and services.

3.

Rising costs of marketing a. The cost of mass marketing has substantially increased b. Firms are competing for attention in a medium that is constantly expanding, resulting in a loss of "share of voice."

4.

Changes in the channels of distribution a. The physical distance between producer and consumer is increasing. b. Firms engaged in distance marketing should realize that ―out of sight‖ does not mean customers should be forgotten. c. Increasing use of market intermediaries, or ―third parties,‖ that assist in the transaction between provider and customer.

5.

Changes in customers a. Consumers are more informed about purchasing decisions. b. Today‘s consumers have more discretionary income. c. Consumers are increasingly skeptical.

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 PowerPoint Slides: #11–12 III.

The Benefits of Customer Retention NN.

OO.

PP.

QQ.

Profits Derived from Sales 1.

Studies have indicated that as much as 95% of profits come from long-term customers via profits derived from sales, referrals, and reduced operating costs (see Figure 14.2 Why Customers Are More Profitable Over Time).

2.

One of the key benefits of customer retention is repeat sales.

3.

Increasing customer retention rates can have a profound effect on a firm‘s profitability.

4.

Past studies have shown that a 5% increase in retention rate can translate into 85% higher profits for a branch bank, 50% higher profits for an insurance broker, and 30% higher profits for an autoservice chain.

Profits from Reduced Operating Costs 1.

Past research has indicated that it costs three to five times less to keep a customer than to get a new one.

2.

Long-term customers tend to have lower maintenance costs.

3.

Existing customers become accustomed to the company, employees, and procedures; therefore, they ask fewer questions and have fewer problems and require less attention.

Profits from Referrals 1.

Positive word-of-mouth advertising generated by satisfied customers.

2.

Existing customers are necessary in order for a firm to develop a reputation that attracts new business.

Clarifying the Benefits of Customer Retention

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1.

New research has found that the link between retention and profitability may be much weaker than most think.

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2.

Evaluating the worth of a customer has been traditionally measured through techniques such as RFM which stands for recency, frequency, and monetary value.

3.

Research indicates that companies must look beyond customer retention percentages alone and link retention to profitability to determine which customers are truly the best.  PowerPoint Slide: #13

RR.

Determining the Lifetime Value of a Customer 1.

Lifetime value (LTV) of a customer: the average dollar amount per sale multiplied by the average number of times customers reorder (discounted to the present).

Average Lifetime Value = (Average Sale) × (Estimated Number of Times Customers Reorder)

2.

Lifetime profit (LTP) of a customer: the average profit per sale multiplied by the average number of times customers reorder (discounted to the present).

Average Profit Value = (Average Profit per Sale) × (Estimated Number of Times Customers Reorder)

3.

Customer acquisition cost: the monetary amount spent on marketing and other activities to acquire a new customer.

Break-Even Customer Acquisition Cost = (Average Lifetime Profit) + (Average Customer Acquisition Cost)  PowerPoint Slide: #14

SS.

Is It Always Worthwhile to Keep a Customer?

1.

A controversial topic and opinions are divided.

2.

The answer is no when: a.

The account is no longer profitable.

b.

Conditions specified in the sales contract are no longer being met.

c.

Customers are abusive to the point that it lowers employee

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morale.

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d.

205

Customer demands are beyond reasonable, and fulfilling those demands would result in poor service for the remaining customer base.

The customer‘s reputation is so poor that associating with the customer tarnishes the image and reputation of the selling firm.  PowerPoint Slide: #15 Customer Retention Programs e.

V.

A.

B.

Frequency Marketing –marketing technique that strives to make existing customers purchase more often from the same provider.

5.

First step: collect data on the firm‘s best customers and determine their level of relationship with the firm.

6.

Second step: communicate with customers on a personal level. a.

Personal communications demonstrate to customers that the firm recognizes the importance of their patronage.

b.

Reward programs developed to prompt customers to act within a certain time frame make the communications actionoriented.

Relationship Marketing –marketing technique based on developing long-term relationships with customers.

5.

6.

Takes place on two levels a.

Macro: marketing activity impacts customer markets, employee markets, supplier markets, internal markets, and influencer markets (such as financial and government markets)

b.

Micro: marketing is changing from completing the single transaction and other conquest marketing practices to building a long-term relationship with existing customers (see Sustainability and Services in Action: Being ―Green‖ Increases Loyalty in Banking).

Emphasizes the importance of customer retention and a concern

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for quality that transcends departmental boundaries.

C.

D.

Aftermarketing –marketing technique that emphasizes marketing after the initial sale has been made.

1.

Identifying customers and building a customer database so that customers can be easily contacted after the sale has been completed

2.

Measuring customer satisfaction and continuously making improvements based on customer feedback.

3.

Establishing formal customer communication programs, including newsletters that convey information on how the company is using customer feedback in its continuous improvement efforts

4.

Creating an aftermarketing culture throughout the firm that reinforces the importance of maintaining a relationship with the customer after the initial sale.

Service Guarantees 1.

2.

Service guarantees appear to facilitate three worthwhile goals: a.

Reinforce customer loyalty.

b.

Build market share.

c.

Motivate the firm offering the guarantee to improve its overall service quality.

Types of guarantees a.

 PowerPoint Slide: #16

Unconditional guarantee: a guarantee that promises complete customer satisfaction, and at a minimum, a full refund or complete, no-cost problem resolution.  PowerPoint Slide: #17 i.

Customer-directed benefits associated with unconditional guarantees: 1)

Make customers perceive a better value.

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2)

Make customers perceive a lower risk.

3)

Make customers perceive the firm as more reliable.

4)

Help consumers decide among alternatives.

5)

Help the firm overcome consumer resistance.

6)

Reinforce customer loyalty.

7)

Help to overcome negative word-of-mouth.

8)

Increase brand recognition and differentiation.  PowerPoint Slide: #18

ii.

Organization-directed benefits of unconditional guarantees: 1) Force the firm to focus on the customer‘s definition of good service.

2) State a clear performance goal that is communicated to employees and customers.

3) Provide a measurable means of tracking poor performance when invoked.

4) Force the firm to examine its entire service delivery system for failure points.

5) Serve as a source of pride and motivation for team building.

3.

b.

Specific result guarantee: a guarantee that applies only to specific steps or outputs in the service delivery process.

c.

Implicit guarantee: an unwritten, unspoken guarantee that establishes an understanding between the firm and its customers.  PowerPoint Slide: #19

Professional service guarantees are most effective under the following conditions: a.

Prices are high.

b.

The costs of a negative outcome are high.

c.

The service is customized.

d.

Brand recognition is difficult to achieve.

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e.

Buyer resistance is high.

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VI.

209

Defection Management: Developing a Zero Defection Culture –Defection management: a systematic process that actively attempts to retain customers before they defect.

A.

Zero Defects vs. Zero Defections 1.

Zero defects model: a model used in manufacturing that strives for no defects in goods produced.

2.

Zero defections: a model used by service providers that strives for no customer defections to competitors.  PowerPoint Slide: #20

3.

B.

C.

See Figure 14.4: Reducing Defections 5% Boosts Profits 25 to 85%.  PowerPoint Slides: #21– 22 The Importance of Defection Management 1.

Businesses commonly lose 15% to 20% of their customers each year.

2.

Reducing customer defection is associated with immediate payoffs.

3.

See Figure 14.5: A Credit Card Company‘s Defection Curve.

4.

Customer defection rates may not be directly associated with customer satisfaction ratings.

5.

On average, 65% to 85% of defectors say they were satisfied or very satisfied with their former provider.

Defector Types 1.

Price defectors: customers who switch to competitors for lower priced goods and services.

2.

Product defectors: customers who switch to competitors who offer superior goods and services.

3.

Service defectors: customers who defect due to poor customer service.

4.

Market defectors: customers who exit the market due to relocation

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or business failure.

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D.

VII.

211

5.

Technological defectors: customers who switch to products outside the industry.

6.

Organizational defectors: customers who leave due to political considerations inside the firm, such as reciprocal buying arrangements.

The Defection Management Process 1.

First step is to communicate to employees the importance of retaining current customers and the benefits obtained by reducing defections.

2.

Second step is to train employees in defection management; defection management involves: a.

Gathering customer information.

b.

Providing specific instructions about what to do with the information.

c.

Instructing employees in how to react to the information.

d.

Encouraging employees to respond to the information.

3.

Third step is to tie incentives to defection rates.

4.

Fourth and final step is to consider creating switching barriers that discourage defections.

5.

The key to defection management is the realization that customer defections are measurable and manageable.

Summary Due to stagnant markets, increased competition, the rising costs of marketing, changes in channels of distribution, and the ever-changing needs of consumers, the concepts of customer loyalty and customer retention have increased in importance. Customer loyalty reflects attempts by the service firm to build an emotional attachment as well as a business attachment to the service firm.

Customer retention refers to focusing the firm‘s marketing efforts toward its existing customer base. Customer retention is associated with a wide variety of benefits. A number of effective customer retention tactics were presented in this chapter. Despite the importance of customer retention, not all customers may be

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worth keeping.

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REVIEW QUESTIONS: 1. Define the concepts and explain the relationship between customer loyalty and customer retention.

Customer loyalty reflects an emotional attachment as well as a business attachment to the service firm. Ultimately, customer loyalty leads to customer retention and all of its associated benefits. Customers that are retained by the service firm may be loyal customers or customers that simply continue to patronize the firm for other reasons.

Customer retention focuses the firm‘s marketing efforts toward the existing customer base. Firms engaged in customer retention efforts work to satisfy existing customers in the hope of further developing the customer-provider relationship.

2. Why has conquest marketing become an acceptable form of business for many of today's firms?

Due to relative parity among brand choices, consumer risk associated with switching brands has been drastically minimized. Firms have reacted to this environment by constantly chasing new customers with discounts, markdowns, and promotions.

3. Discuss the problems associated with conquest marketing.

The long-term profitability associated with conquest marketing is highly questionable.

When one considers the cost of a sales promotion to attract new customers, followed by sales at a discounted price, profits are minimal.

4. Is it always worthwhile to retain a customer?

The answer is no when the account is no longer profitable, contract conditions are no longer being met, the customer is abusive to the point that it lowers employee morale, customer demands are beyond reasonable, and the customer's reputation is so poor that association tarnishes the reputation of the selling firm.

5. Discuss the steps associated with frequency marketing as they relate to frequent-flyer programs.

The primary goal of frequency marketing is to make existing customers more productive. Perhaps the most successful frequency marketing programs are the frequent-flier programs. Frequency marketing combines the use of data collection, communications, recognition, and rewards to build lasting relationships. Passenger loyalty is rewarded with credit for ―miles,‖ which can be redeemed for discounted fares, free flights, upgraded seating, and a variety of other goods and services.

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6. How have changes within service distribution channels had an impact on customer retention?

In many cases, the physical distance between producer and consumer is increasing.

Whether the separation is through mail order or through the use of third parties, separation from the customer should not diminish the firm's obligation to its customers.

7. Discuss the distinction between zero defects and zero defections.

Because of the unique properties of the service delivery system, the zero defects model used in the manufacturing sector is out of touch with the realities of the service sector. A more appropriate philosophy for service firms would be zero defections. In contrast to the "defect pile" of unsellable goods for the manufacturing sector, the "defect pile" in the service sector consists of customers who will not come back.

8. How do service defectors differ from other defector types?

Product defectors switch to competitors who offer superior goods and services. In contrast, service defectors leave as a result of problems with the internal operations of the firm.

9. Discuss the characteristics of successful guarantees.

In general, successful guarantees are unrestrictive, stated in specific and clear terms, meaningful, hassle free when invoked, and quick to be paid out.

10. What are the trade-offs associated with utilizing implicit guarantees?

Benefits associated with an implicit guarantee include avoiding the appearance of a tacky marketing ploy and avoiding stating publicly that the possibility exists that the firm may not fulfill its promises. On the other hand, since it is not publicly stated, an implicit guarantee does little to differentiate a firm early in its business life cycle. In addition, customers may not be aware of the firm's stance on customer satisfaction and may not bring problems to the firm's attention.

CHAPTER 15: PULLING THE PIECES TOGETHER: CREATING A WORLD-CLASS SERVICE CULTURE  PowerPoint Slide: #1 "―Your customer doesn‘t care how much you know until they know how much you care.‖ Damon Richards

Chapter Objectives:

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The purpose of this chapter is to tie together the information presented in this book. In order to provide service excellence, the individual components of the firm must act in unison to create a ―seamless‖ organization. The firm will not act as one if the current culture of the organization is based on departmentalization and functionalism.

Consequently, creating and supporting a customer-focused organizational culture is fostered, as personnel throughout the organization come to appreciate the challenges faced and the contributions made by everyone involved in the firm‘s final service delivery efforts.

Learning Objectives:

 PowerPoint Slide: #2

After reading this chapter, you should be able to 1. Compare and contrast the concept of service seamlessness to departmentalization and functionalism. 

Seamless service firms manage to simultaneously provide reliable, responsive, competent, and empathetic services and have the facilities and resources necessary to get the job done. Firms that continue to cling to functional and departmental mindsets are often besieged by internal conflict as departments compete against one another for resources instead of pulling together to provide exceptional service.

2. Describe how a service firm’s internal logics affects its service culture. 

Service firms often find themselves in a three-cornered fight among marketing, operations, and human resources. If one department begins to dominate the other two, this places stress on the service delivery system, and seams will begin to form and subsequent service will begin to falter. When all three departments are on equal footing resulting in an equilateral triangle, seamless service will thrive. However, before firms can develop a service culture, they must first understand the business philosophies that drive their current culture.

3. Understand the fundamental differences between the industrial management approach and the market-focused management approach. 

In the effort to create an excellent service culture, the firm should first consider its current philosophical approach to running the organization. Two models of management presently dominate the manner in which service firms operate, thereby directly influencing the development of the firm‘s service culture.



The industrial management model is an approach to organizing a firm that focuses on revenues and operating costs and ignores the roles personnel play in generating customer satisfaction and sustainable profits. The market-focused

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management model is a new organizational model that focuses on the components of the firm that facilitate the firm‘s service delivery system.

4. Describe observational and indirect questioning approaches for assessing the organization’s current culture. 

Informal approaches such as the observational techniques often provide keen insights into the values and beliefs of the organization. Informal approaches include observing the current culture as an impartial observer, gauging employee emotions, observing objects and artifacts, observing what is missing, going for a culture walk, and conducting culture interviews and surveys.

5. Explain the basic components of a service audit. 

The key components include: (1) profit and growth, (2) customer satisfaction, (3) external service value, (4) employee productivity, (5) employee loyalty, (6) employee satisfaction, (7) internal service quality, (8) leadership, and (9) measurement relationship.

6. Discuss four fundamental strategies that facilitate cultural change. 

The firm‘s culture reflects the shared values and beliefs that drive the organization—the formally written, the unwritten, and actual occurrences that help employees understand the norms for behavior in the organization. Creating a more customer-focused organization can be accomplished by altering any one of the four components: structure, systems, people, and culture, individually or together.

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 PowerPoint Slide: #3 Opening Vignette: Zappos’ Core Values that Drive Its Service Culture 

Zappos is consistently ranked high on Fortune magazine‘s list of ―The 100 Best Companies to Work For.‖



Zappos embraces 10 core values known as ―The 10 Commandments of Zappos‖ that help shape the organization‘s culture, including: o

Deliver Wow through service.

o

Embrace and drive change.

o

Create fun and a little weirdness.

Lecture Outline: I.

 PowerPoint Slide: #4

Introduction A.

II.

Creating a Seamless Service Organization 1.

Seamless service: services that occur without interruption, confusion, or hassle to the customer

2.

Before an organization can change its culture, it must first understand its current culture.

Obstacles to World-Class Service: Departmentalization and Functionalism A.

Firms that continue to cling to functional and departmental mindsets (traditional industrial management model) are often besieged by internal conflict as departments compete against one another for resources instead of pulling together to provide exceptional service.

1.

Functionalism: the belief that the function of something rather than the experience it creates should determine its design.

2.

Departmentalization: the act of dividing an organization into departments that focus on their own set of activities.

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The conflict that often occurs among marketing, operations, and human resources is not personal—it is the result of their different cultures.  PowerPoint Slide: #5

C.

Overcoming the Silo Mentality: Understanding Internal Logics 2. Internal logic: implicit and explicit principles of individual departments that drive organizational performance.

3. Operations logic: the reasoning that stresses cost containment/reduction through mass production.

4. Typical goals of operations management and marketing concerns regarding these goals are displayed in Figure 15.1.

5. Marketing logic: the reasoning that stresses providing customers with options that better enable the service offering to meet individual needs.

6. Human resources logic: the reasoning that stresses recruiting personnel and developing training to enhance the performance of existing personnel.  PowerPoint Slide: #6 7. Figure 15.2 depicts the link between marketing, operations, and human resources 8. Service logic: promotes seamlessness by balancing the internal logics of marketing, operations, and human resources.  PowerPoint Slide: #7

D.

Business Philosophies: The Industrial Versus Market-Focused Management Models 1.

In the effort to create an excellent service culture, the firm should first consider its current philosophical approach to running the organization.

2.

Two models of management presently dominate the manner in which service firms operate, thereby directly influencing the development of the firm‘s service culture: a.

Industrial management model: an approach to organizing a firm that focuses on revenues and operating costs and

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ignores the roles personnel play in generating customer satisfaction and sustainable profits. b.

E.

The Industrial Management Model 1.

2.

F.

Market-focused management model

Organizations that follow this model believe: a.

Location strategies, sales promotions, and advertising drive sales revenue.

b.

Labor and other operating costs should be kept as low as possible.

Consequences of the industrial management model: a.

Dead-end front-line jobs, poor pay, superficial training, no opportunity for advancement, and little, if any, access to company benefits.

b.

Customer dissatisfaction, flat or declining sales revenues, high employee turnover, and little or no growth in overall service productivity.

The Market-Focused Management Model – A new organizational model that focuses on the components of the firm that facilitate the firm’s service delivery system.

1.

Suggests that although the purpose of the firm is to serve the customer, the firm should be organized internally in a manner that supports the people who serve the customer.  PowerPoint Slide: #8

2.

The service triangle framework presented in Figure 15.3 visually depicts the six key relationships that comprise the market-focused management approach. a.

(1) The firm‘s service strategy must be communicated to its customers.

b.

(2) The firm‘s service strategy (commitment to service excellence) needs to be communicated to employees.

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c.

(3) The firm‘s service delivery systems should flow logically from the service strategy and enhance the service encounter for all involved.

d.

(4) Interactions with the firm‘s systems should enhance the customer‘s service experience.

e.

(5) Organizational rules and regulations should not be obstacles in the way of employees wishing to provide great service.

f.

(6) Customer/service provider interaction. Also known as ―critical incidents‖ or ―moments of truth,‖ the importance of this interaction cannot be overstated.

Developing a Service Culture A.

B.

Organizational Culture

 PowerPoint Slide: #9–10

1.

Culture: the shared values and beliefs that drive an organization’s overall service philosophy.

2.

Organizational culture establishes the ―dos and don‘ts‖ of employee behavior and provides the basis on which various employee behaviors can coalesce.

3.

See Figure 15.4 Southwest Airlines 11 Primary Attitudes, which guide employee behavior.

Assessing the Current Culture of the Service Firm: Observation and Indirect Questioning Techniques 1.

Informal approaches such as the observational and indirect questioning techniques often provide keen insights into the values and beliefs of the organization. a.

Observe the current culture as an impartial observer.

b.

Gauge employee emotions.

c.

Observe objects and artifacts.

d.

Observe what is missing.

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C.

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e.

Go for a culture walk.

f.

Conduct culture interviews and surveys.

By determining the current culture, the firm‘s leadership gains a better understanding of how to move the firm forward to its new set of values and beliefs.

Assessing the Current Culture of the Service Firm: Conducting a Service Audit 1.

Service audit: a series of questions that force the firm to think about what drives its profits and suggests strategies for competitive differentiation and long-term profitability.

2.

The audit consists of 22 questions that address nine components:  PowerPoint Slide: #11 a.

The Service Audit: The Profit and Growth Component 7.

8.

9.

How does the firm define customer loyalty?

Does the firm measure profits from referrals?

What proportion of the firm‘s development funds are spent on retaining customers as opposed to attracting new ones?

10. When customers do not return, do we know why?  PowerPoint Slide: #12 b.

The Service Audit: The Customer Satisfaction Component 11. Is customer satisfaction data collected in a systematic manner?

12. What methods are used to obtain customer feedback?

13. How is customer satisfaction data used?  PowerPoint Slide: #13

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The Service Audit: The External Service Value Component 14. How does the firm measure value?

15. How is information on customer perceptions of the firm‘s value shared within the company?

16. Does the firm actively measure the gap between customer expectations and perceptions of services delivered?

17. Is service recovery an active strategy discussed among management and employees?

d.

 PowerPoint Slide: #14 The Service Audit: The Employee Productivity Component 18. How does the firm measure employee productivity?  PowerPoint Slide: #15

e.

The Service Audit: The Employee Loyalty Component 19. Does the firm actively pursue strategies to promote employee loyalty?

20. Does the firm set employee retention goals?  PowerPoint Slide: #16

f.

The Service Audit: The Employee Satisfaction Component 21. Are employee satisfaction measures linked to customer satisfaction measures?

22. Are customer and organizational needs considered when hiring?

23. Are employee reward programs tied to customer satisfaction, customer loyalty, and quality of employee performance?  PowerPoint Slide: #17

g.

The Service Audit: The Internal Service Quality Component 24. Are employees aware of internal and external customers?

25. Do employees have the support necessary to do their jobs?  PowerPoint Slide: #18

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The Service Audit: The Firm‘s Leadership Component 26. Does the firm‘s leadership help or hinder the service delivery process?

27. Is the firm‘s leadership creating a corporate culture that helps employees as they interact with customers?  PowerPoint Slide: #19

i.

The Service Audit: The Measurement Relationship Component 28. How do the preceding measures of service performance in the service audit relate to the firm‘s overall profitability?  PowerPoint Slide: #20

IV.

Strategies that Facilitate Cultural Change A.

Figure 15.5 presents a simple framework for considering the options available when implementing cultural changes in the service organization 1.

Structure: the formal reporting hierarchy normally represented in an organizational chart.

2.

B.

Systems: people-management systems of control, evaluation, promotion, and recognition.  PowerPoint Slide: #21 Changing Culture through Structure 28.

Marketing Department as Change Agent a.

Marketing department can be created simply to change the current orientation of the firm by creating a customer advocate within the organization.

b.

Some pro-customer experts are wary. i.

Other departments may quickly transfer complete responsibility for customer satisfaction to the marketing department

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c.

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Transfer is likely to create open warfare among departments

Strategies suggested by organizational-behavior theory i.

Interfunctional task force: problem-solving group in which individuals with diverse viewpoints work together and develop a better understanding of one another’s perspectives.

ii.

Interfunctional transfers: moving, via promotion or transfer, an employee from one organizational department to another to foster informal networks among departments.  PowerPoint Slide: #22

29.

Restructuring around the Customer Experience a.

C.

For example, one major airline has all departments that have direct customer contact report to the head of marketing.

Changing Culture through Systems 13. The firm‘s culture is also a function of the systems put into place that control, evaluate, promote, and recognize the firm‘s personnel.

14. Reward structures

D.

a.

Based on customer satisfaction scores.

b.

Based on revenue targets.

c.

Based on participation in marketing planning.

Changing Culture through People 1.

Outsiders increasingly are being brought into the marketing departments of service firms to try to change the orientation.

2.

One strategy is the creation of key leadership positions within the organization to champion the marketing effort.  PowerPoint Slide: #23

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Changing Culture Directly 1.

Culture-change programs are becoming increasingly popular.  PowerPoint Slide: #24

2.

V.

Figure 15.6 Categorizing Culture-Change Initiatives a.

Putting the customer first: the element of the culture-change initiative that teaches personnel to put the customer first.

b.

Orientation change: the element of the culture-change initiative that teaches ―families‖ of personnel to reinforce one another on the job.

c.

Change the way you work: the element of the culture-change initiative that allows personnel to break the rules in the context of serving their customers.

d.

Change the way we work: the element of the culture-change initiative that teaches personnel to flowchart their activities and to re-engineer the process to better serve their customers.

Summary In pursuit of creating a world-class service culture, the individual departments and functions of the firm must act in unison to create a seamless organization.

The firm will not act as one if the current focus of the organization is on departmental and functional needs. Before attempting to integrate the various departments of the firm, it is important to understand that each department is driven by its own internal logics—implicit and explicit principles that drive organizational performance. Ultimately, the firm‘s service logic stitches the departmental and functional seams together created by marketing, operations, and human resources in order to help provide flawless service. Creating and supporting a customer-focused organizational culture is critical when developing a seamless operation. Finally, by conducting a service audit, a seamless service culture is fostered as personnel throughout the organization come to appreciate the challenges faced and the contributions made by everyone involved in the firm‘s final service delivery effort.

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REVIEW QUESTIONS: 1. Discuss seamlessness as it relates to "tooth-to-tail' performance. Does departmentalization and functionalism facilitate or hinder seamlessness?

"Tooth-to-tail" performance is a term commonly used in the armed forces. The personnel out front in the trenches need to be backed up with coordinated supplies, information resources, personnel reinforcements, and so on. Similarly, the primary efforts of the service firm should focus on the service delivery process and on the personnel providing customer services.

2. Discuss the fight for control among marketing, operations, and human resources and how it impacts a service firm’s culture.

The fight for control is evident in each function's internal logic. Operations stress cost containment/reduction through mass production. Marketing stresses providing customers with options that better enable the service offering to meet individual consumer needs. Human resources stresses recruiting personnel and developing training to enhance the performance of existing personnel.

3. Describe the major philosophical differences between the industrial management approach and the market-focused management approach.

In the effort to create an excellent service culture, the firm should first consider its current philosophical approach to running the organization. Two models of management presently dominate the manner in which service firms operate, thereby directly influencing the development of the firm‘s service culture.

The industrial management model of firm organization focuses on revenues and operating costs and ignores the roles personnel play in generating customer satisfaction and sustainable profits. The market-focused management model focuses on the components of the firm that facilitate the firm‘s service delivery system.

4. Briefly discuss the six key relationships depicted in the service triangle.

(1) The firm‘s service strategy must be communicated to its customers. (2) The firm‘s service strategy (commitment to service excellence) needs to be communicated to the firm‘s employees. (3) The firm‘s service delivery systems should flow logically from the service strategy and enhance the service encounter for all involved. (4) Interactions with the firm‘s systems should enhance the customer‘s service experience. (5) Organizational rules and regulations should not be obstacles in the way of employees wishing to provide great service. (6) The importance of customer/service provider interaction (also known as ―critical incidents‖ or ―moments of truth‖) cannot be overstated. © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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5. What is organizational culture? Why is it important?

A service firm‘s culture is the shared values and beliefs that drive the organization—the formally written, the unwritten, and the actual occurrences that help employees understand the norms for behavior in the organization. It establishes the do's and don‘ts of employee behavior and provides the basis on which various behaviors can coalesce.

6. Discuss four observations that may provide insight into a service firm’s current culture.

Informal approaches such as the observational techniques often provide keen insights into the values and beliefs of the organization. Answers should include four of the following observational techniques: observing the current culture as an impartial observer, gauging employee emotions, observing objects and artifacts, observing what is missing, and going for a culture walk.

7. What are the key components of a service audit?

The key components include: (1) profit and growth, (2) customer satisfaction, (3) external service value, (4) employee productivity, (5) employee loyalty, (6) employee satisfaction, (7) internal service quality, (8) leadership, and (9) measurement relationship.

8. Explain the relevance of interfunctional task forces and interfunctional transfers as they relate to corporate culture.

Both approaches have been used to mesh the logics of different groups and to allow them to better understand one another. Interfunctional task forces are problem-solving groups in which individuals with diverse viewpoints work together and develop a better understanding of one another's perspectives. Interfunctional transfers are when an employee from one organizational department is transferred to another to foster informal networks among departments.

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9. Discuss the four approaches to directly changing culture as presented in the text.

The "putting the customer first" initiative teaches personnel to put the customer first.

The "orientation change" initiative teaches "families" of personnel to reinforce one another on the job. The "change the way you work" initiative allows personnel to break the rules in the context of servicing their customers. The "change the way we work" initiative teaches personnel to flowchart their activities and to re-engineer the process to better serve their customers.

10. Briefly describe what you believe to be the top 10 characteristics of a service firm that exhibits a world-class service culture.

Answers will vary.