Essentials of Services Marketing, 4th edition Jochen Wirtz Solution Manual

Essentials of Services Marketing, 4E By Wirtz &Lovelock

Email: Richard@qwconsultancy.com

TEACHING INSIGHTS FOR THE CHAPTERS OVERVIEW In this section, you’ll find the following teaching material for each of the 15 chapters: • • •

Learning objectives.

Teaching suggestions.

Brief answers to the end-of-chapter review questions and comments on what to expect of students from each of the application exercises. Note that review questions can either form the basis for in-class discussions or be assigned as written work.

Many review questions and application exercises would work well for quizzes or exams.

Additional teaching resources can be found in Section 4. Table 4-1 provides suggestions on which exercises could be used with the chapters, which will encourage students to get actively involved with the course material.

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CHAPTER 1 INTRODUCTION TO SERVICES MARKETING

LEARNING OBJECTIVES By the end of this chapter, students should be able to

 (LO 1) Understand how services contribute to a country’s economy.  (LO 2) Know the principal industries of the service sector.  (LO 3) Identify the powerful forces that are transforming service markets.

 (LO 4) Understand how B2B services improve the productivity of individual firms and drive economic development.

 (LO 5) Define services using the non-ownership framework.  (LO 6) Identify the four broad “processing” categories of services.  (LO 7) Be familiar with the characteristics of services and the distinctive marketing challenges they pose.

 (LO 8) Understand the components of the traditional marketing mix applied to services.

 (LO 9) Describe the components of the extended marketing mix for managing the customer interface.

 (LO 10) Appreciate that marketing, operations, and human resource management functions need to be closely integrated in service businesses.

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 (LO 11) Understand the implications of the service–profit chain for service management.

 (LO 12) Know the framework for developing effective services marketing strategies.

CHAPTER OUTLINE (L01) Understand how services contribute to a country’s economy Services dominate almost all types of economies today. The service sector accounts for a majority of the gross domestic product in all industrialized countries and provides most of the new jobs in many developing and highly developed nations worldwide.

(LO2) Know the principle industries of the service sector Figure 1.8 shows various service industries and their contributions to U.S GDP. The service sector is a very diverse sector with contributions from various industries that target individual and business customers. Key industries are: • Government services • Real Estate • Wholesale and Retail trade • Business and Professional service • Finance and Insurance • Healthcare services • Transport, utilities and communication services • Accommodation and food services • Arts, entertainment and recreation services (L03) Identify the powerful forces that are transforming service markets • Changes in government policies • Social changes • Business trends like productivity and cost savings, franchising • etc.

• Advances in information technology • Internationalization and • Globalization

Digital and technological revolution related to robotics, AI, Analytics, big data and Internet of Things (IoT), mobile, geo tagging, biometrics, text-speech-image processing and virtual reality has dramatically improved the way services are delivered .

and experienced by the customer.

(LO4) Understand how B2B services improve the productivity of individual firms and drive economic development Many manufacturing firms outsource their non-core support activities to independent service providers that focus on providing those activities in cost-efficient structures. This development leads to an increased specialisation with significant improvements in overall productivity and living standards.

(L05) Define services using the non-ownership of service framework • •

Services are distinguished as benefits without ownership.

5 broad categories within the non-ownership framework o Rented goods services – provides customers with temporary right to exclusive use of physical good o Defined space and place rentals – obtain a defined portion of a larger space and sharing its use with other customers, under varying degrees of privacy o Labor and expertise rentals – hire others to work that they either choose not to do, or lack the necessary expertise and tools to do o o

Access to shared physical environments – may be located indoors or outdoors or a combination Systems and networks: access and usage – rent the right to participate in specified networks like telecommunications, utilities etc.

(L06) Identify the four broad “processing” categories of services Figure 1.15 highlights the four broad categories of services, such as: 1) people processing 2) possession processing 3) mental stimulus processing 4) information processing (L07) Be familiar with the characteristics of services and the distinctive marketing challenges they pose The most common characteristics of services are often cited as intangibility, heterogeneity, inseparability and perishability. These can

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be translated further into eight common differences between products and services: • Most goods cannot be inventoried • Intangible elements dominate value creation • Services are often difficult to visualise • Customers may be involved in co-production • People may be part of the service experience • Operational inputs and outputs tend to vary more widely • The time factor often assumes great importance • Distribution may take place through non-physical channels.

It is important to note that these differences are useful generalisations and do not apply equally to all services.

Table 1.1 gives managerial implications and challenges these differences pose.

(L08) Understand the components of the traditional marketing mix applied to services Strategies to market manufactured goods usually address the traditional four elements of the marketing mix—product, price, place, and promotion. These four Ps, when applied to services, have additional considerations: 1) Product elements: All components of the service performance that create value for customers.

2) Place and time: When, where, and how to deliver services to customers.

3) Price and other user outlays: All the outlays incurred by customers in obtaining benefits from the service product costs of service, including money, time expenditures, physical and mental effort, and exposure to negative sensory experiences.

4) Promotion and education: All communications activities and incentives designed to inform and educate customers, build preference for a particular service, and encourage them to take action. Services are often difficult to visualize due to intangible elements, so service firms must create customer confidence over firm’s experience, credentials, and expertise.

(L09) Describe the components of the extended marketing mix for managing the customer interface In addition to the traditional 4Ps, services include the following additional Ps in their marketing mix:

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Processes: It is how a firm does things by designing and implementing processes for the creation and delivery of services. Since services are variable, the operational inputs and outputs can vary widely also and often customers are involved in co-production to design a suitable process. In services processes are often not a smooth flow because services cannot be inventoried, thus wait systems are built into the service process.

Physical Environment: The “servicescape” of the service is its physical environment including building, vehicles, landscape, interior and all other visible cues.

People: Services are often delivered through people therefore the selection, training and motivation of the service employees is essential.

(LO10) Appreciate that marketing, operations, and human resource management functions need to be closely integrated in service business.

The key deliverables and objectives of these various functions need to compatible and mutually reinforcing and tightly integrated. In service organisations, operations functions are actively involved in the design of products and processes to improve productivity and quality. HR provides quality front-line service providers to ensure the service experience and IT provides real-time information at every customer touch-point to create value with updated customer data.

(LO11) Understand the implications of the Service-Profit Chain for Service Management Figure 1.27 provides the Service-Profit chain and explains how internal operating strategies of workplace design, rewards and recognition, adequate employee training yield higher service quality and this in turn leads to revenue growth and profitability through customer loyalty and satisfaction.

(LO12) Know the framework for developing effective service marketing strategies The framework for services marketing strategies is the same as the structure of this book. The 5 parts of this structure are provided on Pages 26 and 27 and involve understanding of services, applying 4Ps to services, using the additional 3Ps to design and manage customer interface, developing customer relationships and quality management in services using Gaps model to move to higher levels of performance.

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TEACHING SUGGESTIONS Chapter 1 provides students with an introduction to some of the basic concepts of service marketing and management. It’s important to spend enough time to make sure students really comprehend this material, because conceptual frameworks and background information introduced in this chapter will underlie topics discussed in later chapters.

Forces for change. There are several interesting ways to approach this topic. You can ask students to find a print ad illustrating one of the forces for change in service management (see Figure 1.9) and to write a one-page paper discussing the ad and the applicable force(s). If students turn in their ads and papers in advance of class, you can make overheads of the best ads and ask the students who submitted them to describe why they chose the ads.

Non-ownership of services. This is a fresh perspective on services and advances our thinking in this area. This should be impressed upon students and they can be encouraged to challenge this view to see if they can find exceptions.

Differences between goods and services. It’s very helpful to use services that are familiar to students to illustrate the distinguishing characteristics of services. Banking, insurance, airlines, service garages, hotels, and broadcasting/cable provide good starting points.

As the course proceeds, however, you should start introducing professional and business-to-business services.

Seven Ps. When you introduce the 7 Ps, you should clarify how this framework differs from the 4 Ps of the traditional marketing mix (especially if students have previously taken an introductory marketing management course). Students should be advised that the 7 Ps framework will be revisited in subsequent chapters. In fact, each component of the 7 Ps forms the topic of a separate chapter.

Students can be assigned Application Exercise 3, which asks them to show how each of the 7 Ps relates to a specific service.

Service-Profit Chain. Service-profit chain is an important guiding philosophy of this book and it demonstrates the links in the managerial process that are essential for success in service business. Figure 1.27 describes these links that are both internal and external to the organization. Application Exercise 4 can be assigned to the students to discuss service quality improvements suggested through Service-Profit Chain.

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QUESTIONS AND EXERCISES Review Questions 1. What are the main reasons for the growing share of the service sector in the major economies of the world?

Increased productivity and automation in agriculture and industry, combined with growing demand for both new and traditional services, have jointly resulted in a continuing increase over time in the percentage of the labor force that is employed in services. Increased international trade and tourism drives demand for freight and passenger transportation, international finance, communications, and hotel entertainment, and food services. Increased spending on services by individuals is often associated with higher standards of living.

People eat out more, take more vacations, spend more on entertainment, and employ other people to undertake household chores they used to undertake for themselves.

Similarly, as companies become larger and more sophisticated, they may choose to outsource so-called internal services such as recruitment, legal and accounting services, payroll administration, office cleaning, landscape maintenance, supply-chain management, advertising, etc. to specialist subcontractors. When such tasks are outsourced, they become part of the competitive marketplace and are therefore more easily identifiable as contributing to the services component of the economy. Technology has resulted in the creation of entire new service industries.

2. What are the five powerful forces transforming the service landscape and what impact do they have on the service economy?

The five powerful forces are: • Government policies • Social changes • Business trends • Advances in information technology • Globalization Refer to Figure 1.10 for a more detailed explanation.

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3. Why would growth in business services help individual firms and entire economies become more productive?

A key driver of successful economies is their ecosystem of advanced, competitive and innovative business services. Many manufacturing firms have recognised the importance of outsourcing their non-core support activities to other specialised service providers that have more costefficient structures. This development results in the growth of B2B service sector and helps these specialised firms run successful businesses and in the broader perspective, better economic productivity creates more jobs and improves the overall standard of living.

4. “A service is rented rather than owned.” Explain what this statement means, and use examples to support your explanation.

In service consumption, ownership does not occur, but customers value and are willing to pay for desired experiences and solutions. Services deliver these through a form of rent or access through which customers can obtain the desired benefits. Examples of such renting of services include hotel room reservations, car repair, medical check-up, and airplane seats.

5. Describe the four broad “processing” categories of services, and provide examples for each of them.

Figure 1.15 highlights the four broad categories of services, such as: •

People processing (directed at people’s bodies): hair stylists, healthcare • Possession processing (directed at physical possessions): refueling, recycling • Mental stimulus processing (directed at people’s minds): education, training, advertising/ PR consultancy • Information processing (directed at intangible assets): accounting, financial 6. What is so special about services marketing that it needs a special approach?

Each of the eight distinctive characteristics of services listed in Table 1.2 has important implications for marketing strategy.

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No ownership o Customers obtain temporary rentals, hiring of personnel, or access to facilities and systems. o Pricing often based on time. o Customer choice criteria may differ for renting versus .

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purchase—may include convenience, quality of personnel.

Can’t own people (no slavery!) but can hire expertise and labor.

Services cannot be inventoried after production o Service performances are ephemeral—transitory, perishable. o Exception—some information-based output can be

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recorded in electronic/printed form and reused many times.

Balancing demand and supply may be vital marketing strategy.

Targeting right segments at right times at right price is often key to profitability.

Marketers must determine whether benefits are perishable (e.g., meal, entertainment, hotel night) or durable (e.g., many surgeries, education).

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Customers may be involved in production process o Customer involvement includes self-service and cooperation with service personnel. o Think of customers in these settings as “partial employees.” o Customer behavior and competence can help or hinder productivity, so marketers need to educate, train customers. o Changing nature of service delivery process may affect role played by customers in that process. o Design service facilities, equipment, and systems with customers in mind: user-friendly, convenient locations/schedules.

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Intangible elements dominate value creation o Understand value added by labor and expertise of service personnel. o Effective HR management is critical to achieve service quality. o Try to make highly intangible services more “concrete” by creating and communicating physical images or metaphors and tangible clues.

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Other people are often part of the service product o Achieve competitive edge through perceived quality of employees. o Ensure job specs and standards for front-line service personnel reflect both marketing and operational criteria. .

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Recognize that appearance and behavior of other customers can influence service experience positively or negatively.

Avoid inappropriate mix of customer segments at same time.

Manage customer behavior (the customer is not always right!).

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Greater variability in operational inputs and outputs o Must work hard to control quality and achieve consistency. o Seek to improve productivity through standardization, and by training both employees and customers. o Need to have effective service recovery policies in place because it is more difficult to shield customers from service failures.

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

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Time factor assumes great importance o Offer convenience of extended service hours, even 24/7. o Understand customers’ time constraints and priorities. o Minimize waiting time. o Look for ways to compete on speed.

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Distribution channels take different forms o Tangible activities must be delivered through physical channels. o Use electronic channels (e.g., the Internet, telephone) to deliver intangible, information-based activities, expand geographic reach, and achieve instantaneous delivery, anywhere.

7. “The 4 Ps are all a marketing manager needs to create a marketing strategy for a service business.” Prepare a response that argues against this and support it with examples.

The traditional 4 Ps provides a starting point for marketing services but falls short of providing the full array of tools and strategic elements needed. We have to recast the existing 4 Ps (for instance, .

speaking of time as well as place) and introduce new elements that address management of the physical environment to create differentiation and shape service experiences, people management to account for the important role of both service providers and other customers in the service experience, and process to help us understand and manage the customer’s involvement in service delivery.

Management must look into the other 3 Ps as well: process and productivity, people and physical environment in order to stay ahead of the competition. Students need to elaborate on the advantages/ strengths of concentrating on the other 3 Ps in their argument.

8. Why do the marketing, operations, human resource management and IT functions need to be closely coordinated in service organizations?

The integrated model of service marketing in Figure 1.28 requires a close coordination between operations, human resource management and IT for it to be fully productive. Figure 1.26 presents the interdependency of these functions to meet customer needs. In service organisations, operations functions are actively involved in the design of products and processes to improve productivity and quality. HR provides quality frontline service providers to ensure the service experience and IT provides real-time information at every customer touch-point to create value with updated customer data.

9. What are the implications of the service-profit chain for service management?

One of the biggest implications of the service-profit chain is how the leadership role from top management underlies the chain’s success. This leadership role will be the driver for internal quality delivered by operations, IT and other departments to improve employee satisfaction which can lead to employee loyalty and can drive the quality and productivity of service upwards resulting in higher customer satisfaction and loyalty that will eventually result in growth and profitability.

10. What are the key elements in the framework for developing effective service marketing strategies?

A framework for service marketing strategy follows five interlinked parts: • Part I: Understanding consumer, markets and competition • Part II: Apply traditional 4Ps to service marketing • Part III: Manage the 3Ps of extended service marketing mix into the customer interface • Part IV: Develop lasting customer relationships using Wheel of Loyalty and CRM • Part V: Improve service quality and productivity APPLICATION EXERCISES .

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Visit the websites of the following national statistical bureaus: U. S. Bureau of Economic Analysis (www.bea.gov); Statistics Canada (www.statcan.ca); National Bureau of Statistics of China (www.stats.gov.cn/english/); Eurostat (http://europa.eu.int/en/comm/eurostat/); Japanese Statistics Bureau (www.stat.go.jp); Central Bureau of Statistics (Indonesia) (www.bps.go.id); Statistics South Africa (www.statssa.gov.za) and the respective websites for your home country if it is not covered here. In each instance, obtain data on the latest trends in services as (a) percentage of gross domestic product; (b) the percentage of employment accounted for by services; (c) breakdowns of these two statistics by type of industry; and (d) service exports and imports. Looking at these trends, what are your main conclusions for the main sectors of these economies, and within services, for specific service sectors.

This exercise will help students learn how to access and analyze data from different national statistical agencies. Note that as of late 2003, the United States had not yet converted its industrial statistics to the new NAICS format, but progress is being made toward this goal.

Canada’s statistics are further along in this conversion process.

Canadian data tend to be more recent than those in the United States (this probably reflects the country’s much smaller economy and population). Comparison of service statistics across these three countries can provide the basis for in-class discussion and debate you wish. Additional national statistical agencies can be added as desired, but you should first check out the extent of the data being presented on the Web site in question.

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Give examples of how AI, analytics, robotics, apps and mobile technologies (e.g., m-commerce and apps) have changed some of the services you use.

Some examples are • AI in services like online customer support that uses automated responders • robotics used in surgeries for precision and minimal invasiveness • apps and mobile technologies, which are now changing the way we order transport (Uber) or order food (FoodPanda) Students should be encouraged to bring regional and SME examples that have become possible due to these technological advancements. .

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Choose a service company you are familiar with, and show how each of the 7 Ps of services marketing applies to one of its service products.

Students can use existing services (hospitals, transport, government services, etc.) to include the following: 1. Core Product 2. Place and time: There must be discussion distribution of core and complementary service and time pressures to need fulfilment 3. Price 4. Product elements 5. Promotion and education 6. Service products 4.

Explain how the concepts in Chapter 1 are relevant to the marketing of a religious institution, or a non-profit organization such as World Wildlife Fund.

Students can relate Service-Profit chain to explain unique marketing of religious institution or non-profit organisations such as WWF by explaining how these services do not measure their success by the profitability rather they view growth of their ideology as the main measure of success. Students can also discuss the additional 3Ps of service • People: The imam of a mosque and pastor of a church are critical to the delivery of service.

• Processes: Although for non-profit firms like WWF, or an adoption centre, profit is not the main aim, nevertheless, poorly designed service process will lead to wasted time and ineffective service delivery. This can reduce the social support and funds that are so essential for such businesses.

• Physical Environment: As in any service, physical features like building of a church and office of the non-profit firm will reflect its values and beliefs. Religious symbology, or ideological depictions like pictures of animals or WWF projects to save wildlife will be the key feature of physical environment.

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CHAPTER 2 CONSUMER BEHAVIOR IN A SERVICES CONTEXT This chapter emphasizes the point made in Chapter 1 that service success requires a focus on both customers and competitive markets. Accordingly, Chapter 2 establishes a theme that runs throughout the book: the need for service firms to be customer focused, to understand customer concerns and expectations, and to recognize the customer’s often dynamic role in service operations.

LEARNING OBJECTIVES By the end of this chapter, students should be able to:

 (LO 1) Understand the three-stage model of service consumption.  (LO 2) Use the multi-attribute model to understand how consumers evaluate and choose between alternative service offerings.

 (LO 3) Learn why consumers often have difficulty evaluating services, especially those with many experience and credence attributes.

 (LO 4) Know the perceived risks customers face in purchasing services and the strategies firms can use to reduce consumer risk perceptions.

 (LO 5) Understand how customers form service expectations and the components of these expectations.

 (LO 6) Know the “moment of truth” metaphor.  (LO 7) Contrast how customers experience and evaluate high- versus lowcontact services.

 (LO 8) Be familiar with the servuction model and understand the interactions that together create the service experience.

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 (LO 9) Obtain insights from viewing the service encounter as a form of theater.

 (LO 10) Know how role, script, and perceived control theories contribute to a better understanding of service encounters.

 (LO 11) Describe how customers evaluate services and what determines their satisfaction.

 (LO 12) Understand service quality, its dimensions and measurement, and how quality relates to customer loyalty.

 (LO 13) Know why customer loyalty is such an important outcome of excellent service experiences

CHAPTER OUTLINE (L01) Understand the three-stage model of service decision The three stages are: • • •

Pre-purchase stage Service encounter stage Post-purchase stage

During the pre-purchase stage, issues to note include: • • • •

Understanding that customers seek solutions to aroused needs Evaluating a service may be done using the multi-attribute model, and service attributes Uncertainty about service outcomes increase perceived risk Understanding customers’ service expectations

(L02) Use the multi-attribute model to understand how consumers evaluate and choose among alternative service offerings Students need to understand that with the multi-attribute model, a consumer is very likely to arrive at a different decision depending on whether they are using the simple linear compensatory rule or the conjunctive rule. The example in the text is worked out on page 39.

The key is that, given that consumers do make decisions in this way, what can firms do to influence that decision process? This is discussed in this section. .

(L03) Learn why consumers often have difficulties evaluating services, especially those with many experience and credence attributes.

Students need to grasp the distinction between search, experience, and credence attributes. Product attributes include all features (both tangible and intangible) of a good or service that can be evaluated by customers. Most goods are high in search attributes, which makes it easier for customers to evaluate their quality. Many services are high in experience and/or credence attributes, reflecting two of the basic differences between goods and services discussed in Chapter 1: the dominance of intangible elements and the variability of operational inputs and outputs, leading to quality control problems. As a result, service marketers need to find ways to reduce the perceived uncertainty and risk of purchasing services, especially for a first time customer.

(L04) Know the perceived risks that customers face in purchasing services and the strategies firms can use to reduce consumer risk perceptions Students should understand the concept of perceived risk during the pre-purchase stage (and also be able to extend this to the service encounter stage). They should be able to enumerate the seven different types of perceived risks listed in Table 2.2 (functional, financial, temporal, physical, psychological, social, and sensory).

Examples are provided for each. A variety of risk reduction strategies are discussed and it students can be assigned to discuss which strategies listed might be appropriate for the different kinds of perceived risks.

(L05) Understand how customers form expectations and the components of these expectations Understanding customer expectations plays a central role not only in satisfaction research but also, more practically, in service design, and quality control. Students should be thoroughly familiar with the factors influencing customer expectations of services, as shown in Fig. 2.11 and be able to define each of the components of customer expectations.

It’s particularly important to distinguish between the desired (wished for) service level, adequate (minimum acceptable) level, predicted services level (anticipated level of service) and zone of tolerance (accepted variation in service). Students should be able to explain the zone of tolerance that lies between the three levels.

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(LO 6) Understand the “moment of truth” metaphor.

“Moment of Truth” refers to the direct interaction of the customer with the service firm and it involves the skills, motivation and tools employed by the firm to prove to the customers that they are the best alternative for them.

(L07) Contrast how customers experience and evaluate highversus low-contact services The level of customer contact is the extent to which customers interact directly with service personnel, physical service elements, or both.

Services range from high-contact to low-contact.

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High-contact services tend to be those where the customer visits the service facility and is actively with service personnel and the organization’s physical facilities throughout service delivery. All people-processing services are defined as high contact. As contact is reduced, customer interactions with service providers are often limited to: establishing a relationship and defining a service need; dropping off and picking up a physical possession that is being serviced; or trying to resolve a problem.

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Low-contact services typically require minimal direct contact between customers and service providers. Contact occurs at arm’s length through electronic or physical distribution channels.

Many mental stimulus- and information-processing services are delivered this way. Possession processing can also be a lowcontact service if the possession to be serviced can be shipped to the service provider’s location or processing can occur electronically to customers’ premises.

(L08) Be familiar with the servuction model and understand the interactions that together create service experience The servuction system has two elements: • •

Technical core (invisible to the customer) Service delivery system (where final assembly takes place)

Figure 2.17 presents these two elements of the service organization’s physical environment that is visible to and experienced by the customer.

(L09) Obtain insights from viewing service delivery as a form of theater

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The theater is a good metaphor for services because service delivery consists as a series of processes that customers experience as a performance. It is a particularly useful framework for examining highcontact services in which customers come to a physical facility (the stage), encounter a variety of service personnel (actors), are part of a broader group of customers (the audience), and are exposed to a tightly scripted and choreographed service delivery process. The role and script theories are apt in describing how consumers should behave and what steps are needed in order for them to obtain maximum satisfaction from a service encounter.

(L10) Know how role and script theories contribute to a better understanding of service encounters The actors in a theater need to know what roles they are playing and need to be familiar with the script. Similarly, in service encounters, knowledge of role and script theories can help organizations to understand, design and manage both employee and customer behaviors during service encounters.

(L011) Describe how customers evaluate services and what determines their satisfaction When customer expectations are positively disconfirmed, customers are satisfied. High levels of positive disconfirmation lead to customer delight. For negative disconfirmation of expectations, the reverse is true. Students should note that there are strategic links between customer satisfaction and a firm’s performance. Service quality is defined as the high standard of performance that consistently meets or exceeds customer expectations. Consumers form their repurchase intentions by their general beliefs about the service quality which are formed as a result of evaluation of services along the five dimensions of tangibles, reliability, responsiveness, assurance and empathy.

Customers’ evaluation of a firm’s service quality can be understood with the help of a tool called SERVQUAL. Table 2.4 provides 21 questions that measure customer’s perceptions of a service with their own expectations.

(L012) Understand service quality, its dimensions and measurement, and how quality relates to customer loyalty.

Excellent service quality means that a firm consistently meets or exceeds customer expectations. While customer satisfaction is transaction-specific and refers to a single service experience, service quality refers to a consumer’s beliefs and attitudes about the general performance of a firm. Consumers use five broad dimensions to evaluate service quality: (1) tangibles, (2) reliability, (3) responsiveness, (4) assurance, and (5) empathy. In situations where customer satisfaction and service quality deviate (e.g., “I think the firm in general is great, but the last transaction was poor”), customers use their relatively stable perception of service quality to form their .

performance expectations for the next purchase. However, a second or third dissatisfaction evaluation will reduce the overall service quality perception of the firm more dramatically and jeopardize repeat visits. SERVQUAL is a 21-item scale that was designed to measure the five dimensions of service quality.

(L013) Know why customer loyalty is such an important outcome of excellent service experiences Loyalty is an important outcome of customer satisfaction. Customer loyalty extends beyond behavior and includes preference, liking, and future intention. The term customer engagement is increasingly used to refer to non-repurchase-related loyalty behaviors such as recommending a firm’s product to friends, helping other customers, providing feedback, and writing reviews.

TEACHING SUGGESTIONS This chapter covers a broad array of topics. All are important in laying the groundwork for future chapters, although depending on your objectives for the course, you may choose to give greater emphasis to some topics rather than others. You should be able to find many opportunities to bring behavioral concepts to life in class (or through written assignments) by getting students to evaluate their own service encounters, appraise the pros and cons of high- versus low-contact delivery systems in the services they patronize (especially banking),

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analyze their own expectations for different types of services, and discuss their roles as passive or active audience members in a variety of service “dramas.”

A suggested case to consider is Case 5: Kiwi Experience.

Pre-purchase stage. Students can be asked to describe a recent service purchase of some significance (enrolling in college or taking a big holiday could be examples) and to identify what could be done to reduce the perceived risks in the pre-purchase stage and also how the various costs might be reduced.

Evaluating service performances. The continuum of evaluation is a concept that looks simple; however, students sometimes have a difficult time applying it. Review question 4 addresses this topic. We highly recommend that you assign application exercise 2 so that students will gain experience in using the continuum with some familiar service businesses.

Service encounters. To help students understand that the numbers and types of service encounters vary significantly depending on the level of contact service providers have with their customers, students need to grasp that the nature of these encounters varies widely across services. In high-contact services, customers are exposed to many more tangible clues and experiences than they are in medium-contact and low-contact services. Both opportunities and risks are associated with service encounters—key steps in these encounters represent “moments of truth” for the service provider. Review questions 6 and 8 can be used to help students understand this stage better.

Levels of customer contact. It is often helpful to discuss Figure 2.15 in class as a way of making sure that students understand the implications of the different levels of customer contact. You may want to point out that the same core service (e.g., banking) can be located in different parts of the figure depending on how the total service system is defined and operationalized. Students can be asked to provide other examples of services from the same industries that have different levels of customer contact. It’s important to note that many traditionally high-contact services are reducing their levels of customer contact although still satisfying customers by using new technologies.

Application Question 6 can also be used as a basis for discussion about levels of customer contact.

Customer expectations. From studying Figure 2.11, students will learn how customers form expectations of a specific service. They will recognize that a zone of tolerance exists between the desired level of service (what a customer hopes to receive) and the lower adequate level of service (the minimum pre-purchase stage will still accept). It may help to get students to talk about their own expectations of a recently purchased service, where these expectations came from, and

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how these expectations compared to the reality of the service they actually received. Review question 7 and application exercise 3 can be used to understand what impacts customer expectations.

Service as theater, roles, and script theory. The notion of service as theater is a useful metaphor, especially in high-contact services, and one to which students usually relate well.

QUESTIONS AND EXERCISES Review Questions 1. Explain the three-stage model of service consumption.

In the pre-purchase stage, consumers identify an underlying need.

They start to look for a solution, search for relevant information and obtain advice from friends and relatives. Once they have identified a possible set of potential suppliers, they will evaluate them based on their benefits and risks, before making their final decision. At the same time, they will start to from some expectations of the forthcoming service experience. After making a purchase decision, customers move on to the core of the service experience. They start to form contacts with the service provider when placing an order or requesting a reservation. During this service delivery, customers tart evaluating the quality of service they are receiving and deciding whether it meets their expectations. The final stage is the post purchase stage. Here, customers, continue the ongoing evaluation of service quality that determines if their expectations were met. It will affect their loyalty to the provider as well as the amount of positive or negative recommendations made to others.

2. How can consumer choice between consideration set be modeled?

services

in

their

Consumer choice can be modeled using the multi-attribute model where consumer options are compared, using attributes that are important to the customers, and attaching importance weights to those attributes.

3. What is the difference between the linear compensatory rule and the conjunctive rule?

With the linear compensatory rule, the decision is arrived at by computing a global score for each of the competing brands. This is

.

done by multiplying the score for each brand on the attributes by the importance weight. The scores are then added up for each of the three brands. Under the conjunctive rule, the consumer makes the decision based on the total overall score in conjunction with minimum performance levels on one or several attributes.

4. Describe search, experience, and credence attributes and give examples of each.

These attributes can be divided into three different categories: 1) Search attributes (characteristics that can be readily evaluated prior to purchase). These include such tangible elements as color, texture, taste, sound, and the visible elements of style.

2) Experience attributes (features that can be evaluated only during service delivery). These include the nature of interactions with service personnel and other customers, the ambience of a service facility, the amount of time spent in different activities and the customer’s comfort level during each, and how the customer reacts to different stimuli, and finally the outcome of the service process—the appearance of a haircut, newly cleaned clothes, or landscaping work; knowledge learned in a course, physical and mental feelings after medical treatment, and whether a package was delivered on time 3) Credence attributes (characteristics that are difficult to evaluate even after service purchase and consumption.). These may include a variety of professional services where the customer is dependent on the expertise of the service provider but may be unsure for some time (or ever) if their work was of good quality.

Examples include legal advice, investment counseling, and complex medical interventions.

5. Explain why services tend to be harder for customers to evaluate than goods.

Most physical goods are high in search attributes —tangible characteristics that allow prospective consumers to try out, taste test, or even “test drive” the product prior to purchase. By contrast, services contain fewer tangible clues that can be evaluated in advance of purchase and emphasize experience attributes that can only be evaluated after exposure during or immediately following service delivery. In some instances, services are high in credence attributes that customers have to take on trust because they find it impossible to evaluate them confidently even after purchase.

.

Despite these generalizations between goods and services, we should note that inexperienced consumers are likely to have more difficulty in interpreting search attributes of goods prior to purchase although experienced users of a particular type of service will know what to look for, especially in terms of clues from physical facilities and the demeanor of service personnel.

6. Why does consumer perception of risk play an important role in choosing between alternative service offers? How can firms reduce consumer risk perceptions?

Perceived risk is an important aspect as customers face a great deal of uncertainty. This is even more so when the purchase requires a substantial amount of resources. Furthermore, services are difficult to evaluate before purchase and consumption making customers worried about the probability of a negative outcome. Firms can reduce this perceived risk by offering performance warranties, money-back guarantees and providing 24/7 access by a toll-free telephone call to a customer service center or informative web site.

7.

How are customers’ expectations formed? Explain the difference between desired service and adequate service with reference to a service experience you’ve had recently.

You should expect students to employ the diagram in Fig. 2.11 as the basis for their response. In using their own experience to illustrate the desired service level, they should be able to discuss how their personal needs, belief about what is possible (where does this come from in the specific example?), explicit and implicit service promises from the provider in question, word of mouth, and their own past experiences collectively defined the level of service they hoped to receive.

Then they should describe how past experience, word of mouth, interpretation of explicit/implicit service promises, situational factors (such as time of day, weather, day of week, etc.), and any perceived alterations combined to set the adequate service level. Realistically, responses to this question should also state where the actual service experience fell within the zone of tolerance or whether it occurred above (customer delight) or below (dissatisfaction) this zone.

8. What are “moments of truth”?

“Moments of truth” are the contact points between customers and .

service providers. They are “portals” from which customers get to interact with providers and influence their overall experience. They represent the skill, motivation and tools employed by the firm’s representative and the expectations and behavior of client which together will create the service delivery process.

9. Describe the difference between high-contact and low-contact systems, and explain how the nature of the customer’s experience may differ between the two.

As the level of contact increases between a customer and a service operation, there are likely to be more and longer service encounters.

Contact may take place with service personnel, with service equipment/facilities, or both. High-contact services tend to involve personal visits by customers to a physical service facility where they may be actively involved with service personnel. This situation creates a service experience that contains many different impressions and “moments of truth,” and is sharply different from a low-contact service, such as one using electronic channels, in which the customer doesn’t have physical contact with service personnel and doesn’t need to visit a service facility. In between high- and low-contact services is an array of medium-contact services.

10. How do the concepts of the theater, role theory and script theory help to provide insights into consumer behavior during the service encounter?

In role theory, consumers understand their roles from social cues and expectations of society that guide their behavior in a specific setting or context. Customers need to “play by the rules” or risk causing problems for the firm, its employees and even other customers.

Script theory suggests a service script that specifies the sequences of behavior that customers are expected to learn and follow during service delivery. Customers learn scripts through experience, education and communications with others. The more experience a customer has with a service company, the more familiar that particular script becomes.

Customers will be less likely to deviate from the known script which may frustrate themselves and others. However, this may occur when customers are new to the service as they may not know what to expect and may be fearful of behaving incorrectly.

A theatrical perspective provides insights of service delivery which .

consists of a series of events that customers experience as a performance. Customers imagine service facilities as containing the stage on which the drama unfolds. These stages may change when they move through the delivery process and may be elaborate in settings or simple in appearance. Customers learn to watch the whole setting, from the service facility to the actors involved in the drama and react accordingly.

11. What are the dimensions of perceived control, and why is perceived control important?

Perceived control theory holds that customers feel a need for control during the service encounter. Higher levels of perceived control will lead to higher level of satisfaction. There are three types of control that can be designed into a service encounter: behavioral control (customers can change the service encounter according to their preference), decisional control (they can choose between fixed options), and cognitive control (they understand what is happening and why, and they know what will happen next; the latter is also called predictive control).

12. Describe the relationship between customer expectations and customer satisfaction.

Customers have expectations prior to consumption. They observe service performance and outcome, and then compare the experience against their expectations. Satisfaction judgments are based on this comparison: Positive disconfirmation if better than expected (high satisfaction or even “delight”) • Confirmation if same as expected (satisfaction) • Negative disconfirmation if worse than expected (dissatisfaction) •

Satisfaction can be defined as an attitude-like judgment following a service purchase (or series of service interactions). It reflects perceived service quality, price/quality tradeoffs, personal, and situational factors. Satisfaction is important to companies as well as to customers, because research shows links between customer satisfaction levels and a firm’s overall financial performance.

13. What is service quality? How is it different from customer satisfaction? .

Service quality is defined as a high standard of performance that consistently meets or exceeds customer expectations. Although customer satisfaction is also determined by comparing perceptions with expectations but it is an evaluation of a single consumption experience whereas, service quality refers to a relatively stable attitude of belief about a firm.

14. What are the five dimensions of service quality?

The five dimensions of service quality are: Tangibles, Reliability, Responsiveness, Assurance and Empathy.

15. How can you measure service quality?

Service quality can be measured using the tool called SERVQUAL, whereby service quality perceptions can be measured against customer expectations.

16. Explain the engagement.

meaning

of

customer

loyalty

and

customer

Customer loyalty refers to the customer’s willingness—preferably exclusive—to continue patronizing a firm over the long term. Customer engagement is involves non-repurchase-related loyalty behaviors such as recommending a firm’s products to friends, helping other customers, providing feedback, and writing reviews.

APPLICATION EXERCISES 1. Construct a multi-attribute model to compare three different restaurants for an important celebration in your family. Apply the two different decision rules and determine the choices that arise from that.

This exercise can be set to see if students do know how to apply the two different decision rules. They can also then see for themselves how the application of the different rules leads to different choices.

2. What are the backstage elements of (a) a car repair facility, (b) an airline, (c) a university, and (d) a consulting firm.

Under what circumstances would it be appropriate or even desirable to allow customers to see some of these backstage elements and how would you do it?

Backstage operations involve the technical core of the total service system and are typically invisible to customers. Thus, students should .

identify elements of the services listed above that are not viewed by customers, such as the following examples: • • • •

car repair—diagnosis and repair of vehicles. airline—maintenance of aircraft, training of crews, preparation of meals, handling of baggage between aircraft and terminal. university—administration, staff meetings, behind the scenes maintenance, marking of exams. consulting firm—staff meetings to hire/fire/promote consultants, preparing proposals, fieldwork other than at client site, analysis, report writing.

There are some situations where it might be appropriate to give customers a peek at backstage activities. These activities can actually become part of the service performance if they are carefully orchestrated (but they should then be treated more like front stage activities in terms of managing their impact on customers.) Examples of this include: car repair facilities where the service operations are fully visible through large plate glass windows and advertisements for consulting firms that describe their approach to projects. Many of the backstage activities described above, however, would be boring, incomprehensible, inappropriate or unpleasant for customers to experience.

3. Visit the facilities of two competing service firms in the same industry (e.g. two banks, restaurants, or gas stations) that you believe have different approaches to service. Compare and contrast, using suitable frameworks from this chapter.

Students should be able to apply the script theories and follow them through to map out the service. Using the table on perceived risks, students can also evaluate the service.

4. Apply the script theory and role theories to a service of your choice. What insights can you give that would be useful for management?

Students will find it useful to apply these theories as they get to see how it works out in reality. They will find that these theories may apply to some situations and not in others.

5. How can a firm implement principles from perceived control theory in a service encounter? Apply it to one face-to-face and one online encounter of your own choosing.

This exercise can be undertaken as two groups where students in one group play the roles of customers in face-to-face and online encounters and the other group play the service providers.

.

6. Describe an unsatisfactory encounter you experienced recently with (a) a low-contact service provider via email, mail, or phone and (b) a high–contact, face-to face service provider.

What were the key drivers of your dissatisfaction with these encounters? What could the service provider have done to improve the situation?

This makes a great in-class discussion exercise. Have the students form teams and identify the best unsatisfactory encounter they experienced in the last six months. They can then present to the rest of the class.

7. How would you define “excellent service quality” for an enquiry/information service provided by your cell phone or electricity service provider? Call a service organization, go through a service experience, and evaluate it against your definition of excellence.

.

Students can be made to develop their own SERVQUAL scale for the 5 dimensions of service quality in cell phone and electricity provider.

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CHAPTER 3 POSITIONING SERVICES IN COMPETITIVE MARKETS Chapter 3 establishes a theme that runs throughout the book: the need for a service firm to be oriented toward competitors as well as toward customers; to select a position in the marketplace that plays to its strengths; and to develop a service offering that is differentiated in meaningful ways from the competition and will appeal to customers in chosen market segments.

LEARNING OBJECTIVES By the end of this chapter, students should be able to:  (LO 1) Understand how customer, competitor, and company analyses (i.e., the 3 Cs) help to develop a customer-driven services marketing strategy.  (LO 2) Know the key elements of a positioning strategy (i.e., STP) and explain why they are so crucial for service firms. 

(LO 3) Segment customers on the basis of needs before using other common bases to further identify and profile the segments.

 (LO 4) Distinguish between important and determinant attributes for segmentation.  (LO 5) Use different service levels for segmentation.  (LO 6) Target service customers using the four focus strategies for competitive advantage.  (LO 7) Position a service to distinguish it from its competitors.  (LO 8) Understand how to use positioning maps to analyze and develop competitive strategy.  (LO 9) Know how to apply positioning to digital services and platform business models. .

 (LO 10) Develop an effective positioning strategy.

CHAPTER OUTLINE (LO1) Understand how the customer, competitor and company analysis (i.e., the 3 Cs) helps to develop a customer-driven services marketing strategy Customer analysis contributes to helping to design and analyze the market segments and their needs. Competitor and company analysis contributes to understanding which customers to select as target segments to serve. Figure 3.1 identifies basic steps involved in identifying a suitable market position.

Opening Vignette: Bright Horizons. The childcare industry has low profit margins and economies of scale the industry was also labour intensive and has no clear brand differentiation. With such weakness, Bright Horizons, instead of marketing their service directly to parents, formed partnerships with companies seeking to create on-site day-care centres for employees with small children.

(LO2) Know the key elements of a positioning strategy (i.e., STP), and explain why these elements are so crucial for service firms to apply Segmentation, targeting and positioning are basic steps in identifying a suitable market position and developing a strategy for the firm, such that it has competitive advantage over its competitors. These are key concept of a services positioning strategy.

(LO3) Segment customers by needs first before using other common bases to further identify and profile the segments Traditionally, demographic segmentation is a popular way to segment customers. However, that is not useful in differentiating customers with different needs. Hence, it is more useful to segment customers by needs first, before using common bases for segmentation.

(L04) Distinguish between important attributes for segmenting services

and

determinant

Students need to recognize that the attributes that distinguish competing services from one another are not always the most important ones. If competing services, however, are perceived as well matched on the important attributes, then decisions may be made on

.

the basis of less important (but still valued) attributes where differences between alternatives are evident. Determinant attributes are those that actually influence consumer’s choices.

(L05) Understand how to use service levels for positioning services After segmentation, decision needs to be made on the service level to offer on each attribute. Customers often can be segmented according to their willingness to give up some level of service for a lower price, or contrary wise, on their willingness to pay extra to obtain a higher level of service.

(LO6) Target service customers using the four focus strategies to achieve competitive advantage When market growth slows, the only way for a firm to grow is to take share from the competition. To stand out from its competitors, a firm needs to differentiate itself in ways that are meaningful for consumers.

Failure to do so will result in a commodity environment in which competition becomes price based and the winner is the player with the lowest costs.

Four basic focus strategies (Figure 3.5) are available to firms, reflecting the number of markets served and the breadth of services offered: •

• • •

Unfocused. Unfocused service providers try to be all things to all customers by trying to serve broad markets with a wide variety of services.

Market-focused. A market-focused company concentrates on a narrow market segment but has a wide range of services.

Service-focused. Service-focused organizations offer a narrow range of services to a fairly broad market.

Fully-focused. A fully-focused firm provides a very limited range of services to a narrow and specific market segment.

(LO7) Position a service to distinguish it from its competitors Positioning involves establishing a distinctive place in the minds of competitors relative to competing products. The essence of positioning can be distilled into these four principles: 1) A company must establish a position in the minds of its targeted customers.

2) The position should be singular, providing one simple and consistent message.

3) The position must set a company apart from its competitors.

4) A company cannot be all things to all people—it must focus its efforts.

.

Once a service provider has positioned itself in the marketplace, it must constantly monitor this position. Competitive activity, new technologies, and market changes all may make repositioning necessary. Repositioning involves changing the position the firm holds in a consumer’s mind relative to competing services and can include adding or deleting service offering or withdrawing from some markets completely.

The concept of positioning forces service managers to analyze their firm’s existing offerings and provide specific answers to the following six questions for developing an effective positioning strategy: 1. What does our firm currently stand for in the minds of current and potential customers?

2. What customers do we serve now, and which ones would we like to target in the future?

3. What is the value proposition for each of our current service products, and what market segments is each one targeted at?

4. How does each of our service products differ from those of our competitors’?

5. How well do customers in the chosen target segments perceive our service products as meeting their needs?

6. What changes do we need to make to our service products in order to strengthen our competitive position within our target segment(s)?

(LO8) Develop an effective positioning strategy To develop an effective positioning strategy, the company needs to have a position statement that shows their service concept, their customers, what they want to become, and the actions to take to get there. There are four basic elements to writing a good positioning statement: 7. Target audience 8. Frame of reference 9. Point of difference 10.Reason to believe (LO9) Know how to apply positioning to digital services and platform business models.

The newly emerging digital services and platforms include entire new categories of largely digital and often AI-empowered services that can be based on apps, platforms, sharing economies, and service ecosystems. Two important differences to consider in the case of positioning for digital services and platforms are the following: 1. Attributes of digital service available for positioning: The number of attributes that a digital service can position on are reduced because .

digital services aim to be scalable and have no or limited headcount in customer service. This reduction in attributes makes it difficult to differentiate one market offer from the next but is often viable in niche services.

2. Attributes of ecosystems of digital services: Many digital services are based on platforms and ecosystems that need orchestration with its many players (e.g., Airbnb). The way a platform orchestrates and governs can be the differentiating factor. The ecosystems of digital services and platforms can lead to a direct or indirect network effect.

(LO10) Demonstrate how positioning maps help to analyze and develop a competitive positioning Many companies use positioning maps (also known as perceptual maps) to help them develop competitive positioning—or repositioning—strategies. Positioning maps help managers identify the most critical attributes of competing services from a customer’s perspective. They also provide a visual picture of a firm’s unique characteristics, identifying the nature of competitive threats and opportunities and highlighting gaps between customer and management perceptions about competing services. Any two attributes that are important to customers can be placed on the vertical and horizontal axes of a two-dimensional perceptual map (threedimensional maps can handle three attributes). For multiple attributes, several maps may be needed. Commonly used attributes include price, quality, type or frequency of use, and service characteristics that offer a unique benefit. (Figures 3.13 and 3.14 provide a description of how a large hotel used perceptual mapping to develop a better understanding of potential threats to their established markets.)

TEACHING SUGGESTIONS Positioning Services. Have students in class select a favorite service firm and identify three major competitors. Have them discus how their favorite firm is positioned against each competitor.

Positioning Maps. Have students identify determinant attributes for their favorite service. Draw a position map for this service firm using two of the determinant service attributes.

Case Study 4, on Banyan Tree Hotels & Resorts, can be used to fulfil the learning objectives in more detail.

QUESTIONS AND EXERCISES Review Questions 1. What are the elements of marketing strategy?

a .

customer-driven services

A customer-driven services marketing strategy starts with defining and analyzing the market segments based on the needs, as well as attributes and service levels of the different segments. Then it targets the segments to serve, and articulates a desired position in the market that give sustainable competitive advantage over competition. A customer analysis will help the firm to better define and analyze their market. Competitor and company analysis will help firms choose which segments to target and serve.

2. In segmentation, what are the most common bases to use?

Provide examples for each of these bases.

Demographic – age, gender, educational level etc.

Psychographic – personality, lifestyle etc.

Behavioral – benefits sought, usage rates, loyalty status etc.

3. What is the difference between important and determinant attributes in consumer choice decisions?

When asked about the different attributes of a particular product category, consumers can often rank order these attributes in terms of their relative importance. The characteristics that distinguish competing services from one another, however, are not always the most important ones. If competing services are perceived as well matched on the important attributes, then decisions may be made on the basis of less important (but still valued) attributes where differences between alternatives are evident.

Determinance relates to those attributes that actually influence consumer’s choices. To identify importance, researchers can ask customers to make a list of all the attributes that they consider when using a particular type of service. Respondents can then be asked to rank order these attributes according to how important they are or to rate each attribute on (say) a five-point scale from “very important” to “very unimportant.” To identify the determinant attributes, researchers can ask respondents (a) to rate competing firms within that industry on how well they are performing on each attribute—to see how much difference there is between ratings —and (b) to identify what factors led them to select one supplier over others in a recent choice decision.

4. Why should service firms focus their efforts? Describe the basic focus options, and give examples of how these work.

It’s not realistic for a firm to try to appeal to all actual or potential buyers in a market, because customers are too numerous, too widely scattered geographically, and too different in their needs, purchasing behavior and consumption patterns. Different services also vary widely in their abilities to serve different types of customers. Thus, each service provider needs to focus its efforts on those customers it can serve best by providing a relatively narrow product mix designed to meet the needs of a particular market segment. The four basic focus .

strategies (see Figure 3.6) are fully focused; market-focused; servicefocused; and unfocused.

A fully focused firm provides a very limited range of services to a narrow and specific market segment (e.g. five- s t a r hotels like Ritz Carlton). A market-focused company concentrates on a narrow market segment but has a wide range of services (e.g. private investment banking). Service-focused organizations offer a narrow range of services to a fairly broad market (e.g. budget airlines). Unfocused service providers try to be all things to all customers by trying to serve broad markets with a wide variety of services (e.g. public utilities).

5. What are the six questions for developing an effective positioning strategy?

The concept of positioning forces service managers to analyze their firm’s existing offerings and provide specific answers to the following six questions for developing an effective positioning strategy: 1. What does our firm currently stand for in the minds of current and potential customers?

2. What customers do we serve now, and which ones would we like to target in the future?

3. What is the value proposition for each of our current service products, and what market segments is each one targeted at?

4. How does each of our service products differ from those of our competitors’?

5. How well do customers in the chosen target segments perceive our service products as meeting their needs?

6. What changes do we need to make to our service products in order to strengthen our competitive position within our target segment(s)?

8. How can positioning maps help managers better understand and respond to competitive dynamics?

Positioning maps provide a visual way of summarizing research data and display how different firms are perceived as performing relative to each other on determinant attributes. When combined with information on the preferences of different segments, including the level of demand that might be anticipated from such segments, positioning maps help to identify opportunities for creating new services or repositioning existing ones to take advantage of unserved market needs.

7. Do the 3 Cs and STP apply to digital services and platforms as well? Is the way positioning works for these services different from that of other services? .

Conceptually, when developing a positioning strategy for digital services, the focus on 3 Cs and STP remains the same, except these services tend to have fewer attributes they can position on, and the network effect can become important differentiators.

8. Describe what is meant by positioning strategy and how do the market, internal and competitive analyses relate to a positioning strategy?

Positioning involves establishing a distinctive place for a company’s service (or the company itself) in the minds of consumers relative to competing services (companies). The essence of positioning can be distilled into these four principles: 1) A company must establish a position in the minds of its targeted customers.

2) The position should be singular, providing one simple and consistent message.

3) The position must set a company apart from its competitors.

4) A company cannot be all things to all people—it must focus its efforts.

Positioning strategy is concerned with seeking a marketing advantage over the competition based upon consumer perceptions of differences on specific service attributes between competing alternatives. An important issue in positioning strategy is to understand which particular competitors (the evoked set) consumers will think of when making their comparisons. Positioning strategy must be based on three types of analysis: market analysis, internal analysis, and competitive analysis. A key marketing concept in positioning is market segmentation, reflecting the fact that consumers in different segments have different needs and preferences and may seek different benefits.

The objective is to create and communicate meaningful differentiation through perceived superior performance on key attributes.

APPLICATION EXERCISES 1. Select a company of your choice. Identify the variables that the company has used to segment their customers. Support your answers with examples from the company.

The Internet is a great option for students to use to search for a company and identify how they segment their customers. The key is to see which kinds of segmentation bases are used.

2. Provide two examples of service firms that use service levels (other than airlines, hotels, and car rentals) to differentiate their products. Explain the determinant attributes and service levels used to differentiate the positioning of one service from .

another?

Students can contrast and compare a fast food restaurant with a fullservice restaurant. Another good example is to compare private versus public universities in terms of service levels to students.

3. Find examples of companies that illustrate each of the four focus strategies discussed in this chapter.

This question can be set in conjunction with Review Question 6. The answer to Review Question 6 give students a starting point as to what kinds of companies to look for.

4. Imagine that you are a consultant to the Palace Hotel.

Consider the options facing the hotel based on the four attributes appearing in the positioning charts (3.13, 3.14, 3.16, and 3.17).

What actions do you recommend the Palace take in these circumstances? Justify your recommendations.

Students should recognize that the Palace’s most distinctive competitive advantage is its geographic positioning—the fact that it is the only hotel close to the financial district. This convenience offered by this location (at least for some business guests) explains the hotel’s ability to charge a higher rate than its service level (room-to-employee ratio) would suggest possible. Comparing Figures 3.15 vs. 3.16 shows that this advantage is about to be lost as a result of the construction of two new hotels (Mandarin and Continental) in the same area. What options does the Palace have? Of the four variables depicted in the positioning diagrams, only one (physical location) is fixed. Price is easy to change, improving service will take time and money, and so will improving the level of physical luxury.

As indicated by Figures 3.17 and 3.18, the four new hotels are going to be very expensive (reflecting the high costs of construction) and so will need to be physically luxurious with excellent levels of service to justify these prices (which will significantly exceed the current top rates charged by the Grand and the Regency). The Grand has already signaled its intent to upgrade and go head-to-head with the new entrants.

One option for the Palace is to upgrade its facilities and service to compete with the new entrants, perhaps coming in slightly below the new top tier (Ritz and newcomers) although separating itself from the rest of the pack (Shangri-La, Atlantic, Sheraton, Italia). The Regency, being some distance away, is probably not a close competitor. The cost of funding these improvements can come from a significant price increase, because the newcomers are raising a price umbrella in the market that allows other competitors to nudge their prices up (very different from a new competitor that seeks to appeal with lower prices).

Although many students will recommend this repositioning option (which .

is what the Palace actually did), others may argue that the Palace should bide its time for now, choosing to remain as a less expensive option in the financial district in the hope that many of its existing customers will feel they cannot afford the high prices demanded by the newcomers.

Students need to recognize that a decision to make no improvements to service or physical facilities may disappoint existing customers. However, their expectations may rise as a result of the greater choice now available in the marketplace. Without any renovations at all, the hotel will slowly deteriorate, thus sliding down the luxury scale. Further, the best performers among the existing staff may become disillusioned and defect to the newcomers, thus leading to a decline in service quality levels.

5. Examine the positioning strategy of two or more ride-sharing platforms in your home market. How differentiated is their positioning with regards to riders and drivers? Propose an improved positioning strategy for one of the firms.

Students should be able to generate analysis of Uber, Lyft, etc. and discuss points of differentiation with regard to markets targeted in various ride categories, price points, locations, ease of usage of their apps or reliability of their platform, driver safety background checks, etc.

Some suggestions for improvements can be made in the following: target audience, frame of reference, point of difference, and reason to believe by strategizing positioning along the 7 Ps of services marketing, its customer relationship management and loyalty strategies, and its service quality and productivity strategies.

6. Choose an industry that you are familiar with (such as cell phone service, credit cards, or an online music store) and create a perceptual map showing the competitive positions of the different service providers in that industry. Use attributes you believe are determinant attributes. Identify gaps in the market, and generate ideas for a potential “blue ocean” strategy.

Students should be able to identify the attributes relevant to the services of choice which they are more familiar with. Get the students to discuss the reasons for their answers.

There are two basic requirements for successful completion of this exercise. First, identifying one or more major market segments for the industry in question. Second, clarifying what criteria (attributes) are important to customers in this (these) segment(s). Tell students that they will need to satisfy you that they can justify their stated customer choice criteria (this could be done by citing published research or by documenting some original research—e.g., a survey of a sample of customers in the segment under consideration). To keep the project in manageable bounds, suggest that they select four criteria and create two, two-dimensional positioning maps. (A highly creative student may .

want to try to attempt a four-dimensional map, using height for the third dimension and color or thickness of the vertical poles for the fourth).

Students will find it useful to refer to the perceptual maps shown in Figures 3.14 and 3.15 when undertaking this assignment. As you check their work (or discuss it in class if you have students present their maps), make sure that the perceptual maps contain the following things. First, both the horizontal and vertical axes should be labeled with attributes that would be important to customers. Second, the set of competitors should match what might realistically be included in a customer’s evoked set. For example, if the businesses are all fast food restaurants, are they close enough to each other to be considered as reasonable alternatives by a hungry customer?

To generate ideas for “blue ocean” strategy, students need to think out of the box and be creative. Encourage creativity first, then get them to think about the pros and cons of their suggestions. These must be justified.

.

CHAPTER 4 DEVELOPING SERVICE CONCEPTS: CORE AND SUPPLEMENTARY ELEMENTS In order to understand how to plan and market service products, students need to understand exactly what a service product is.

Accordingly, a central theme in this chapter is the notion of the augmented service product, composed of a core service offering plus both facilitating and enhancing supplementary services.

LEARNING OBJECTIVES By the end of this chapter, students should be able to:  (LO 1) Understand what a service product is.  (LO 2) Understand the benefits of having a well-defined service product.  (LO 3) Know the three components of a service product.  (LO 4) Be familiar with the Flower of Service model.  (LO 5) Know how facilitating supplementary services relate to the core product.  (LO 6) Know how enhancing supplementary services relate to the core product.  (LO 7) Understand service branding.  (LO 8) Know the four brand architecture options at the corporate level.  (LO 9) Understand how individual services and experiences can be branded.  (LO 10) Understand how branding can be used to tier service products.  (LO 11) Discuss how firms can build brand equity.  (LO 12) Understand what is required to deliver a branded service experience.  (LO 13) List the categories of new service development, ranging from simple style changes to major innovations.  (LO 14) Know how design thinking applies to new service design  (LO 15) Describe how firms can achieve success in new service development.

CHAPTER OUTLINE .

(L01) Understand what a service product is Services are intangible; therefore, a service “product” is often experienced rather than owned. Even when there are physical elements to which customers take a title of ownership, a service product comprises all the elements of the service performance, both physical and intangible, that create value for the customer.

(L02) Understand the benefits of having a well-defined service product Well-defined service products offer a clear value proposition, have a brand, and include a defined pricing structure and way of buying that can be used in external communication to help customers better understand the value of the service, what it is, and its unique features.

(L03) Know the three components of a service product Service product requires designing and integrating the following three components: Core Product: This is “what” the customer is fundamentally buying.

Supplementary Services: These augment the core product, both facilitating its use and enhancing its value.

Delivery Processes: The processes used to deliver the core and supplementary services.

(L04) Describe the two components of the Flower of Service The Flower of Service consists of core service and a range of supplementary services. They are: Facilitating services – information, order taking, billing and payment.

Enhancing services – consultation, hospitality, safekeeping, and exceptions.

(L05) Know how facilitating supplementary services relate to the core product Students will learn that supplementary services can be divided into two broad groups, facilitating and enhancing, each of which can subsequently be divided into four clusters (for a total of eight), based on their more specific functions. Facilitating supplementary services are those that are required in service production, although enhancing supplementary services add extra value to the product core.

Facilitating Services •

Information: supplementary services that facilitate purchase and .

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•

•

use by telling customers about service features and performance before, during and after service delivery.

Order-taking: supplementary services that facilitate purchase by establishing fast, accurate and responsive procedures for taking applications, placing orders, or making reservations.

Billing: supplementary services that facilitate purchase by providing clear, timely, accurate and relevant documentation of what customers owe, plus information about how to pay.

Payment: supplementary services that facilitate purchase by offering a choice of easy procedures for making prompt payments.

(L06) Know how enhancing supplementary services relate to the core product •

•

•

•

Consultation: supplementary services that add value by providing responses to customers who require advice, counseling, or training to help them obtain maximum benefit from the service experience.

Hospitality: supplementary services that add value by treating customers like guests and providing amenities that anticipate their needs during interactions with the service provider.

Safekeeping: supplementary services that add value by assisting customers with personal possessions that they have brought with them to a service delivery facility site or purchased there.

Exceptions: supplementary services that add value by responding to special requests, resolving problems, handling complaints and suggestions, and providing compensation for service failures.

(L07)

Understand service branding

Strong brands enable customers to better visualize and understand intangible services. They reduce perceived monetary, social, or safety risk.

(L08) Know the four brand architecture options at the corporate level Figure 4.17 provides a spectrum of branding alternatives available for service firms and these include branded house, sub brands, endorsed brands and house of brands.

(L09) Understand how individual services and experiences can be branded Most service organizations offer not just product but a line of service offerings. Branding these individually helps to differentiate one bundle of outputs from another. Individual services can be branded on the basis of clear and distinct value propositions to develop sub-brands. .

(L010) Understand how branding can be used to tier service products Within a company, branding of products can serve to differentiate one service package from another—as exemplified by the array of hotel brands offered by the Intercontinental Hotel Group, and the support levels available from Sun Microsystems (pp. 108 – 109). In the competitive arena, branding serves to differentiate one firm’s offering from another’s. The marketer’s objective is to become a “brand champion”, create preference for a specific brand and build loyalty.

(L011) Discuss how firms can build brand equity.

Brand equity is the value premium that comes with a brand. Figure 4.21 shows the six components of service branding: • Company’s presented brand • External brand communications • Customer experience with the company • Brand awareness • Brand meaning • Brand equity (L012) Understand what is required to deliver a branded service experience In order to be successful, service firms need to offer a promise or value that is discernibly different from others. To do this firms must offer a customer experience where the product is perfectly aligned with the delivery process and servicescape and people are aligned with the brand proposition. This can be achieved by having a great process in place along with an effective emotional experience for the customer.

(L13) List the categories of new service development, ranging from simple style changes to major innovations There are seven categories of new service, ranging from major innovations to simple style changes.

• • • • • • •

Style changes Service improvements Supplementary service innovations Process-line extensions Product-line extensions Major process innovations Major service innovations

(L014) Know how design thinking applies to new service design .

The following five principles are seen as central to service design thinking • User-centered • Co-creative • Sequential • Evident • Holistic

(L15) Describe how firms can achieve success in new service development • • •

Market synergy Organizational factors Market research factors

Service Insights 4.1 As digital startups are reshaping the entire industries, technologies for startup production have also become cheap, evolved and ubiquitous. The Internet plays a role in making these technologies easily accessible. Innovations in hardware are also creating new opportunities and managers with deep knowledge of the service consumer and service marketing can exploit these opportunities to create well-designed service products.

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TEACHING SUGGESTIONS Flower of Service. To reinforce understanding of the Flower of Service (Figure 4.3).

Branding and product lines. The Flower concept also helps students to understand what is involved in service branding and creating service product lines. The objective of branding at the product level lies in both differentiation of the “bundle of output” against competitors and consistency across many different elements within a particular service offering to distinguish it from other offerings from the same service supplier.

Point out to students that service firms often offer a “menu” of products, representing an assembly of carefully prescribed elements that are built around the core product. By creating different menus, containing different bundles of value-enhancing supplementary services, firms can offer several versions of the same core offering.

Mention transportation, where intercity trains, ships, and airlines often offer several different service classes, then challenge students to identify other services that offer similar arrays (examples include: regular, gold, and platinum credit cards; hotel chains that operate several categories from discount to deluxe; and high-tech firms offering several levels of support service at varying fees —see the Sun Microsystems web site: www.sun.com/service/support/sunspectrum).

Study questions 4 and 5 address branding.

New service design. Finally, students will learn about the task of new service design. They need to be familiar with the different hierarchies of new services and know the design implications of each.

Review question 7 can be used to ensure they understand the success factors of new service development.

Case Study 21, on LUX* resorts, can be used to illustrate the learning objectives in more detail.

QUESTIONS AND EXERCISES Review Questions 1. What is a service product?

Services are intangible; therefore service “product” is often experienced rather than owned. Even when there are physical elements to which customers take a title of ownership, a service product comprises all the elements of the service performance, both physical and intangible, that create value for the customer.

2. What are the benefits of well-developed service for customers and frontline employees? .

Well-defined service products offer a clear value proposition, have a brand and include a defined pricing structure and way of buying that can be used in external communication to help customers better understand the value of the service, what it is and its unique features.

Well-designed services also help employees to understand them and enable them to better explain and sell these products to the customer.

3. Explain what is meant by core product and supplementary services.

Core product is the basic function/nature of the service offering.

Supplementary services can enhance any type of core product —a service or a physical good. In many industries, most core products are relatively mature; without differentiation and augmentation. Such products could easily become commodities with competition based solely on price. The concept of supplementary services emerged from the notion of the “augmented product” in which services were often seen as a way to add value to manufactured goods. For example, the mobile phone (core product) now comes with camera/video, WAP functions, which form the supplementary services (augmented product).

The essence of the Flower of Service concept is that supplementary services can be categorized into eight distinct groups. Because supplementary services are often common to many different types of core products, marketing managers can benchmark performance on any given supplementary element outside their own industry – be it in the goods or services industries.

The marketing significance of supplementary services is fourfold: 1) Different segments may seek different levels of supplementary services.

2) The cost of providing an increased level of supplementary service on any one element can be related to the extra perceived value that it offers the customer and to the incremental price increase that the customer might be willing to pay to obtain it.

3) Supplementary services offer the possibility for differentiation against competitive offerings.

4) In a mature product category, product innovation usually centers on improvements or additions to supplementary service elements.

4. Explain the “flower of service” concept and identify each of its petals. What insights does this concept provide for service marketers?

The “flower of service” concept is used to illustrate the relationship between the core service and its supplementary services. The latter consists of facilitating (information, order taking, billing and payment) and enhancing (consultation, hospitality, safekeeping and exceptions) .

services which serves to augment the “beauty” of the service. In a well-designed and well-managed service organization, the petals and core are fresh and well formed. This makes the service attractive to customers. Conversely, a badly designed or poorly executed service is like a flower with missing, wilted, or discolored petals. Even if the core is perfect, the overall impression of the flower is unattractive. This concept is useful for service marketers in identifying supplementary services needed to increase the attractiveness of the overall service.

Also, it also serves as a guide for marketers for areas in the service which may need to be improved to prevent the flower from wilting further.

5. What is the difference between enhancing and facilitating supplementary services? Give several examples of each relative to services you have used recently.

Enhancing supplementary services add extra value for customers and help to position the core product away from the competition. The nature of these enhancements is often tailored to suit the needs of customers in specific market segments. Facilitating supplementary services facilitate use of the core product or are required for service delivery and sale. If well executed, they make the company “easy to do business with.”

6. How is branding used in services marketing? What is the distinction between a corporate brand such as Marriott and the names of its various inn and hotel chains?

A brand is a name, phrase, design, symbol, or some combination of these that identifies a company or its individual service offerings, servicing to distinguish these from the competition’s. Branding is used at both the corporate level (e.g., Marriott vs. Hilton; British Airways vs. United), and also at the product level (e.g., branding the different levels of hotel offered by Marriott, or the different types of service offered by a specific airline such as BA, or by a software support firm such as Sun Microsystems. The corporate brand is often referred to as the umbrella brand because it stands for a certain service style and set of corporate values, being held above all the product sub-brands.

Historically, service companies emphasized the corporate name but today, in an era of greater competition and product proliferation, product brand names (sometimes referred to as sub-brands) have been given greater prominence.

7. What is meant by using brands to tier service levels?

Branding is used to differentiate service levels, called service tiering, in many industries, such as hotels, airlines. B2B services often tier with a “platinum” service offering the highest level of responsiveness and more senior technicians. .

8. How can service firms build brand equity?

They need to focus on building brand awareness and brand meaning.

9. What are the approaches the firms can take to create new services?

There are seven categories of new service, ranging from major innovations to simple style changes.

• • • • • • •

Style changes Service improvements Supplementary service innovations Process-line extensions Product-line extensions Major process innovations Major service innovations

With the use of flowcharts, students can also discuss that the core products may differ widely and common supplementary elements like billing, information etc. may keep recurring. Different types of supplementary services play different roles. In designing a service concept however, both core and supplementary service elements must meet consistent standards and mutually reinforce each other.

10. Why do new services often fail? What factors are associated with successful development of new services?

The failure of new services may be attributed to inability to meeting a demonstrable consumer need, inability to cover costs from revenues, and poor execution. For success development of new services, some will argue that it is the quality of the total service offering, and also of the marketing support that goes with this, that are vital. In order to achieve this, deep market knowledge is essential. The core product is also important, but it may take on a secondary role as compared to those listed above.

APPLICATION EXERCISES 1. Select a specific service product you are familiar with and identify the core product and supplementary services. Then select a competing service and analyze the differences in terms of core product and supplementary services between the two services.

Answers will vary depending on the services and companies selected.

This exercise will provide for a lively class discussion, and help them understand the concepts better. .

2. Identify two examples of branding in financial services (e.g., specific types of retail bank accounts or insurance policies) and define their characteristics. How meaningful are these brands likely to be to customers?

You should encourage students to study both corporate branding (often found in newspaper and magazine advertising) and product branding (often obtained from brochures available from retail offices or from corporate Web sites). Suggest that they bring examples to class, where possible in transparency form, so that they can be projected onto a screen. Ask students about the imagery presented, the use of memorable (or forgettable) trademarks, logos, symbols, and slogans.

How effectively has the firm used different colors in its corporate design (retail signage, vehicle or aircraft paintwork, employee uniforms, etc.) to distinguish its offerings from those of the competition?

In the case of individual products, are the brand names used meaningful and memorable? How do they compare with competitors’ product-level branding? Do they translate well into other languages? Is it easy for customers to understand that there are real differences between each of several different offerings within a given company (consumer bank accounts are a good example, because the differences are not always clear)?

3. Select a service firm that you believe is highly successful and has strong brand equity. Conduct a few interviews to find out how consumers experience its service. From the findings, identify the factors that helped that service firm to build strong brand equity.

This question can be set as a student assignment.

4.

Using a firm that you are familiar with, analyze what opportunities it might have to create line extensions for its current and/or new markets. What impact might these extensions have on its present services?

You can expect a broad array of examples. Get students to discuss how firms may offer several service products with different performance attributes and brand each package with a distinctive name. They can use a variety of branding strategies like branded house, sub-brands, endorsed brands and house of brands. Students can refer to Figure 4.17 to help them form the framework to their answers.

5. Identify two failed new service developments. Analyze the causes for their failure. .

Have students get into groups of four and identify the failures. Next, have them note the needs that the service developments were supposed to meet and what elements of the 7Ps were not met.

6. Select a service brand you consider to be outstanding. Explain why you think it is outstanding. Also explore any weaknesses of this brand. (You should select an organization you are very familiar with) This also makes a good student assignment. It helps students to understand what makes brands outstanding.

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CHAPTER 5 DISTRIBUTING SERVICES THROUGH PHYSICAL AND ELECTRONIC CHANNELS This chapter highlights some of the key distinctions between distributing a service and distributing a physical good, emphasizing the role of time as well as place and the opportunity to distribute information-based services in cyberspace through electronic rather than physical channels. Significant coverage is given to international distribution of services.

LEARNING OBJECTIVES By the end of this chapter, students should be able to:  (LO1) Know the four key questions that form the foundation of any service distribution strategy: What? How? Where? When?  (LO2) Describe the three interrelated flows that show what is being distributed.  (LO3) Know how services can be distributed using three main options, and understand the importance of distinguishing between the distribution of core and supplementary services.  (LO4) Recognize the issues of delivering services through electronic channels, and discuss the factors that have fueled the growth of service delivery via cyberspace.  (LO5) Understand the determinants of customers’ channel preferences.  (LO6) Know the importance of channel integration.  (LO7) Describe the where (place) decisions of physical channels, and be familiar with the strategic and tactical location considerations.

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 (LO8) Describe the when (time) decisions of physical channels and the factors that determine extended operating hours.  (LO9) Understand the role, benefits, and costs of using intermediaries in distributing services.  (LO10) Know why franchising is such a common way of delivering services to end users.  (LO11) Understand the challenges of distribution in large domestic markets.  (LO12) Be familiar with the forces that drive service firms to go international.  (LO13)

Appreciate

the

special

challenges

of

distributing

services

internationally.  (LO14) Explain the determinants of international market entry strategies.

CHAPTER OUTLINE (L01) Know the four key questions that form the foundation of any service distribution strategy: What? How? Where? and When?

Developing responses to these questions is key to any service distribution strategy.

(L02) Describe the three interrelated flows that show what is being distributed 1) Information and promotion flow 2) Negotiation flow 3) Product flow (L03) Know how services can be distributed using three main options, and understand the importance of distinguishing between the distribution of core and supplementary services.

The nature of interaction between the customer and service organization determine the available options for service delivery. The various modes of delivery are as follows: a) Customers visit the service site. b) Service providers go to their customers.

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c) Service transactions conducted remotely (at arm’s length).

The use of different channels to deliver the same service has not just cost implications but also significantly alters the nature of the service experience for the customer. Consumers now have more options to choose from to obtain the same service. The motivations behind the choice of each channel differ. Convenience is a key driver of channel choice, often favoring at arm’s length channels. Conversely, consumers rely more on personnel channels when the perceived risk is higher, when there are social motives behind the transaction, and when the consumer does not have high confidence or knowledge about the product. Firms often use different channels to serve the different needs of their various customer segments.

Service Insights 5.1 Nothing is too difficult for the company, Aggreko which rents out mobile electricity generators and temperature control devices to clients located all over the world.

The company emphasizes on solving customer problems rather than just renting equipment. And that has been the cornerstone of Aggreko’s success. Students can use this to discuss what other services are amenable to this mode of distribution.

(L04) Recognize the issues of delivering services through electronic channels, and discuss the factors that have fueled the growth of service delivery via cyberspace.

Electronic channels are now enabling service firms to provide their service remotely to the customer often by engaging reliable, costeffective and fully integrated partners if any tangibles need to reach customers. The web and app-delivered services are becoming so sophisticated that firms’ are delivering the Information Processes petals of Flower of Services using online channels. Customers are attracted to these online services due to convenience, ease of search, broader selection, and potential for better prices, and 24/7 services with prompt delivery factors influencing their choice of channels.

(LO5) Understand the determinants preferences.

of customers’ channel

1) Complexity and perceived risk of the service 2) Individual confidence and knowledge 3) Choice of functional or social motives 4) Convenience

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(LO6) Know the importance of channel integration Channel integration refers to a successful delivery of service through multiple channels including traditional channels, ATM branches and call centres. Multiple channels can create inconsistency and disjoint experience for customers, it is therefore important to deliver a seamless and consistent user experience.

(LO7) Describe the where (place) decisions of physical channels, and be familiar with the strategic and tactical location considerations Location decisions are important for firms because they usually involve sizeable investments and long-term commitments. Hence, a two-step approach is used where first a strategic location is developed to help identify the general locations and then tactical locations as specific sites of similar type are selected that fit an overall location strategy.

Pages 132 and 133 provide details of strategic and tactical location considerations.

(LO8) Describe the when (time) decisions of physical channels and the factors that determine extended operating hours When decision of physical channels are effected by the customer needs and wants and the economics of opening hours. Routines and schedules of channels are also determined by the social norms and cultures.

Service Insights 5.2 provides factors that determine extended operating hours.

Service Insights 5.2 As the world becomes a more competitive place to do business in, companies are forced to extend operating hours 24/7 in order to stay ahead. There are five possible factors: - Economic pressure from consumers - Change in laws - Economic incentives to improve the use of assets - Availability of employees to work during “unsocial” hours - Automated self-service facilities

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(LO9) Understand the role, benefits intermediaries in distributing services

and

costs

of

using

Service organizations often outsource certain aspects of distribution because they frequently add reach and generate business. It can also be cost effective but the challenge is for the original supplier to act as a guardian of the overall process. Different channels have different costs and many service firms that have achieved brand equity try to migrate their customers to lower-cost channels. This process is called disintermediation.

(LO10) Know why franchising is such a common way of delivering services to end users Franchising is a popular way to expand delivery of services because it allows firms with limited resource to enter markets and operate there with franchisees that have better local knowledge. As franchisees are usually highly motivated entrepreneurs, they ensure a long-term commitment and high customer satisfaction.

(LO11) Understand the challenges of distribution domestic markets

in large

The biggest challenge of distribution to large geographic areas is physical logistics. Other challenges include multiculturalism and different law and taxation policies.

(LO 12) Be familiar with the forces that drive service firms to go international Factors that favor adoption of internationalization include market drivers of customer needs, competition drivers, technology drivers, cost drivers, and government drivers.

Service Insights 5.3 This insight provides a snapshot of Hong Kong’s crowded harbor to show a changing world of global service marketing.

(LO13) Appreciate the special challenges of distributing services internationally Some service markets are highly regulated and distribution in these markets .

becomes challenging. Capacity limits, blocked access, or regulatory roadblocks can make it difficult for new entrants to enter the international markets.

(LO14) Explain what determines which market entry strategy a firm should use when it goes global The key determinants are the control of intellectual property (IP) and sources of value creation, as well as the degree of required customer interaction required. If IP and value creation source is high and degree of customer interaction is low, then exporting directly would be the mode of entry. At the other extreme, with low need to control IP and the source of value creation lies within the firm and the level of customer interaction required is high, then entry through direct foreign investment is desirable (see Figure 5.22).

TEACHING SUGGESTIONS Distribution modes and the factors limiting physical or electronic distribution. Get students to recognize the challenges involved in distributing services and some of the pros and cons associated with the various modes of distribution available. Invite them to discuss how, as consumers, they choose between differing alternatives, either in terms of physical location or in terms of electronic systems versus human systems. Review with them the implications and opportunities presented by new developments such as mobile technology (see review question 5). Consider assigning review question 5 as well as application questions 1 and 2, all of which address these issues.

Role of intermediaries. Students should be able to appreciate franchising as a growing tool of outsourcing the core service offering.

Highlight the challenges faced by the firm in creating a consistent and seamless branded service experience. Review question 7 and application question 3 are good starters to get the students thinking about franchising. Encourage students to supply additional examples of successful franchised service businesses from their own experience.

Case Study 8, on Aussie Pooch Mobile, offers great insight into franchise distribution strategies for services. This case can be used to discuss the distribution issues of an innovative service. Distribution at American Airlines case is a good one to assign if you want to dig into distribution issues through discussion of an innovative service.

Globalization of services, their international distribution, and challenges. Review questions 7 and 8 as well as application question 3 provide good background to this question. Students must understand that the international distribution of services has distinctive challenges depending on the nature of the service.

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QUESTIONS AND EXERCISES Review Questions 1. What is meant by “distributing services”? How can an experience or something intangible be distributed?

Distribution of services relates to both the core and supplementary services. Although core services may be distributed via franchising or licensing by replicating the business model, many of the supplementary services (particularly information-based ones) can also be distributed via the digital language of computers. An increasing number of businesses that involved physical products are also shifting delivery of many services to the Internet to enable a new strategy of arm’s length transaction with the customer.

2. Why is it important to consider the distribution of core and supplementary services both separately and jointly?

Many core services require a physical location, and this strictly restricts distribution. However, many supplementary services can be distributed widely and cost-effectively via other channels. Another way of understanding this is with the help of three interrelated flows of information and promotion, negotiation and product flows. Product flows, especially involving people or possession processing require physical facilities for delivery whereas information and negotiation flows can often be conducted through electronic means.

3. What are the different options for service delivery? For each of the options, what factors do service firms need to take into account when using that option? a) Customers visit the service site. b) Service providers go to their customers. c) Service transactions conducted remotely (at arm’s length).

The goals behind the choice of each channel differ. Convenience is a key drive of channel choice often favoring at arm’s length channels.

However, consumers rely more on personal channels when the perceived risk is high and when there are social motives behind the transaction.

4. What are the key factors driving place and time decisions of service distribution?

The place and time decisions must reflect customer needs and expectations, competitive activity and the nature of the service

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operation. The strategies employed may also differ between those used to deliver the supplementary elements and the core product.

• For physical distribution, constraints include o Customer convenience o Operational aspects (e.g., noise and environmental factors associated with the building of a new airport near a residential estate) o Geographical factors (e.g., beach resorts have to be on beaches, while ski resorts have to be in the mountains) o Cost economies involved with performing varied services in a single facility (e.g., major hospitals).

5. What risks and opportunities are entailed for a retail service firm in adding electronic channels of delivery by (a) paralleling an existing channel involving physical stores, or (b) replacing the physical stores with a combined Internet and call center channel? Give examples.

Adaptive strategies employ the Internet to supplement other marketing arrangements—for instance, setting up a web site as another channel of communication or (in the case of information-based services) as another delivery channel. In such situations, the company continues to function much as it did previously, but now offers customers additional convenience. One risk could be brand dilution, if either channel cannot deliver the brand promise, (e.g., if the online store delivery time falls short of the brand promise of “getting your goods by the next day”). Other risks may include the initial cost involved in maintaining the web site and the technology involved such as CRM and the forecasting applications. Opportunities will include the possible growth of a new market and allow for greater market segmentation of the market.

In a transformative application, the Internet becomes the major driver of the firm’s strategy. As a result, the firm restructures its organization around the Internet, and other channels are used (if at all) to supplement Internet-led transactions. The risk involves losing the customer base if the transition to the online channel is not managed properly. A service that involves highly tangible products and/or service levels such as tailored suits, or customer interaction such as a consultation firm may face greater challenges moving to an online presence as this mode would possibly take away several of the fi rm’s competencies. Opportunities include saving manpower and store overheads, there could also be greater convenience for the customer.

6. Why should service marketers be concerned with new developments in mobile communications?

Each new technological development has the potential to change .

marketplace dynamics. One aspect of technology is to increase geographic reach—through enhancements in both physical transportation and telecommunications links—which expands the market. Another is to increase the speed with which services can be delivered, thus reducing the turnaround time between order and fulfillment. IT developments combined with miniaturization allow services to be more mobile and transactions to be conducted in cyberspace. Improvements in methods technology often result in higher productivity, which can bring down costs, leading to reduced prices and perhaps an increase in demand. Increased computer power, new ways of capturing consumer information, and powerful analytical software have led to the development of massive data banks that can be “mined” for new insights and relationships between variables.

These data banks also contain information about individual customers and their behavior that are valuable for tracking and managing relationships The communication element of the marketing mix has been particularly affected by developments in telecommunications and the Internet, providing new and more interactive ways to communicate with customers. Service marketers should be concerned with new developments in mobile communications as broadband telecommunications channels are capable of moving vast amounts of data at great speed and this development, together with the growing accessibility to the Internet, could open up new channels and markets across the world especially for information based services. Other developments in mobile technology such as short message services (SMS), multimedia messaging (MMS) and third generation technology (3G) are drastically changing the way by which services are being distributed, (e.g., SMS alerts are now being used to notify subscribers to plane departures or news updates, etc.).

7. What marketing and management challenges are raised by the use of intermediaries in a service setting?

Although many service organizations find it cost effective to delegate certain tasks to intermediaries, there can be challenges related to this option. A disadvantage of delegating activities is that service providers give up some control over the delivery system, and thereby, over how customers experience the core service. Some companies try to achieve consistent quality by insisting that intermediaries adopt exactly the same priorities and procedures. Franchisors usually carry this to an extreme by controlling output specifications, appearance of the servicescape, employee performance, and service schedules. Even if intermediaries do their work well, there’s still a risk that customers will perceive differences between the intermediary’s service delivery and the overall positioning sought by the core service supplier.

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8. Why is franchising a popular way to expand distribution of an effective service concept? What are some disadvantages of franchising, and how can they be mitigated?

Franchising has become a popular way to expand delivery of an effective service concept, embracing all of the 7 Ps (see Chapter 1), to multiple sites, without the level of investment capital that would be needed for rapid expansion of company owned and managed sites.

Franchising is an appealing strategy for growth-oriented service firms because franchisees are highly motivated to ensure customer orientation and high-quality service operations.

9. What are the key drivers for the increasing globalization of services?

Market factors that stimulate the move toward transnational strategies include common customer needs across many countries, global customers who demand consistent service from suppliers around the world, and the availability of international channels in the form of efficient physical supply chains or electronic networks. The presence of competitors from different countries, the interdependence of countries, and the transnational policies of the competitors are among the key competition drivers. Technology drivers tend to center around advances in information technology. There may be economies of scale to be gained from operating on a global basis and favorable logistics and lower costs in certain countries may result in sourcing efficiencies and economies of scale. Government policies can also serve to encourage or discourage the development of a transnationally integrated strategy.

10. What factors do service companies need to understand to choose a strategy for going international that still allows it to control its IP and sources of value creation?

They need to understand the degree of customer interaction required.

If it is moderate, then it can go international via licensing, franchising and joint ventures. If a high degree of customer interaction is required, then the way to enter international markets is through setting up a branch, having a subsidiary, or through mergers and acquisitions.

APPLICATION EXERCISES 1. An entrepreneur is thinking of setting up a new service business (you can choose any specific business). What advice would you give regarding the distribution strategy for this business? Address the What? How? Where? When? of service distribution.

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Some of the issues that the entrepreneur needs to consider are: o Customer convenience o Operational aspects (e.g., noise and environmental factors associated with the building of a new airport near a residential estate) o Geographical factors (e.g., beach resorts have to be on beaches, while ski resorts have to be in the mountains) o Cost economies involved with performing varied services in a single facility (e.g., major hospitals).

2. Think of three services that you buy or use either mostly or exclusively via the Internet. What is the value proposition of this channel to you over alternative channels (e.g., phone, mail, or branch network)?

Students should be encouraged to discuss the value proposition of Internet or mobile buying vis-à-vis the other channels. Possible value propositions raised may include convenience of home shopping (e.g., Barnes & Noble gifts), discreet buying (e.g., Victoria’s Secrets), reputation of online firm (e.g., eBay, Amazon.com), etc. Possible disadvantages of buying via the Internet or a mobile app include the uncertainty in the security of the online transactions or the intangibility of the service.

3. What advice would you give to (a) a weight reduction clinic, (b) a pest control company, and (c) a university offering undergraduate courses about going international?

Students should be encouraged to give their advice based on well-rounded discussion. Some points to consider are: • Targeting based on demographics, lifestyles, and needs etc.: Each of these businesses may need to alter their offering based on unique customer profiles in the international scenario.

• Drivers for transitional strategies Figure 5.20 makes for useful discussion and can be used to classify each service in various categories according to degree of required customer interaction and control of IP. For instance, if these businesses have any intellectual/proprietary processes (medicines, sprays, courses etc.) they might want to have greater control on their international distribution. On the other hand, a and c have a high degree of customer interaction and this may their physical presence for customer experience. It might also be worthwhile to consider how technology is making it possible for such to interact effectively with remote customer without

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compromising on quality of service encounter.

4. Which market entry strategy into a new international market should (a) an architectural design firm, (b) an online discount broker, and (c) an advertising-funded travel app? a) The architectural design firm has high requirements for customer interaction and the control of IP and value creation is low, services firms that require direct contact with the customers so entry should be through foreign direct investment. b) Online discount broker – this is information based, and the IP can be protected through copyright and distributed via the internet so a company can simply export the service. c) An advertising-funded travel app – customer experience in each region is key when a travel app enters a new international market.

Another important factor to maintain its IP is through service quality assurance checks from corporate teams or through contracts or copyrights.

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CHAPTER 6 EXPLORING BUSINESS MODELS: PRICING AND REVENUE MANAGEMENT Although most students will have previous exposure to pricing from other marketing courses, they will gain new perspectives from this chapter with its emphasis on value-based pricing, coverage of both the monetary and non-monetary costs incurred by customers in purchasing and using a service, revenue management, and discussion of ethical concerns and perceived fairness in establishing pricing policies.

LEARNING OBJECTIVES By the end of this chapter, students should be able to:  (LO1) Recognize that effective pricing is central to the financial success of service firms.  (LO2) Outline the foundations of a pricing strategy as represented by the pricing tripod.  (LO3) Define different types of financial costs and explain the limitations of cost-based pricing.  (LO4) Understand the concept of net value and know how gross value can be enhanced through value-based pricing and reduction of related monetary and non-monetary costs.  (LO5) Describe competition-based pricing and situations where service markets are less price-competitive.  (LO6) Define revenue management and describe how it works.  (LO7) Discuss the role of rate fences in effective revenue management.  (LO8) Be familiar with the issues of ethics and consumer concerns related to .

service pricing.  (LO9) Understand how fairness can be designed into revenue management policies.  (LO10) Discuss the six questions marketers need to answer to design an effective service-pricing strategy.

CHAPTER OUTLINE (LO 1) Recognize that effective pricing is central to the financial success of service firms Pricing is the mechanism by which sales are transformed into revenues.

Today, as more service businesses enjoy increasing freedom in setting prices, there is likewise increasing room for creative pricing, sophisticated revenue management systems, and profit maximization.

Pricing is more complex in services than in manufacturing because it’s more difficult to calculate the financial costs involved in serving a customer than it is to identify the labor, materials, storage, and shipping costs associated with producing a physical good. The variability of inputs and outputs means that units of service may not cost the same to produce, nor will they be of equal value to customers if quality is not consistent. The inability to inventory services also places a premium on balancing demand and supply, a task where pricing plays a large part. Time may influence customers’ perceptions of value. Customers may be willing to pay more for a service delivered fast than one delivered more slowly (like express mail or one -hour photo developing).

Thus, effective pricing can greatly enhance (or even maximize) revenues by discriminating between different market segments based on their value perceptions and their willingness to pay, and between the different time periods based on variations in demand levels over time.

(LO 2) Outline the foundations of a pricing strategy as represented by the pricing tripod The three foundations for pricing, also called the pricing tripod, are costs to the provider, competition, and value to the customer. Costs that the firm needs to recover impose a minimum price, although the customer perceived value of the service offering sets a ceiling. Prices charged by competition then typically determine the point, in between the floor and ceiling range, at which the price can be set. Accordingly, the three approaches to pricing services are cost-based, value-based, .

and competition-based pricing.

(L03) Define different types of financial costs and explain the limitations of cost-based pricing Companies incur fixed, variable, and semivariable costs in providing services to customers.

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Fixed costs (or overhead) are economic costs that a supplier would continue to have in the short run even if no services are sold. These can include rent, depreciation, utilities, taxes, insurance, salaries and wages for managers and long-term employees, security, and interest payments.

• Variable costs refer to the economic costs associated with serving one additional customer, such as selling just a single additional seat in a theater or an airplane, or making a bank transaction. For many service businesses, the incremental costs associated with serving an additional customer are relatively low.

• Semivariable costs fall between fixed and variable costs. They include expenses that rise or fall in stepwise fashion as the volume of business increases or decreases. Examples include hiring part time employees for busy periods and opening additional ski lifts to handle weekend traffic.

The traditional cost accounting approach of cost cutting often also results in a reduction in value generated to the customer as the activity that is being pruned may be in fact be crucial in providing essential level and quality of service. This may prompt the customer to take their business elsewhere. As such, companies are moving away from traditional cost accounting systems into Activity Based Costing (ABC). ABC recognizes that all activities taking place in a firm directly or indirectly support the production, marketing and delivery of goods and services. By yielding reasonable cost information about the business processes that create and deliver the service, the model allows the company to pinpoint the profitability of different services, channels, market segments and individual customers.

(LO 4) Understand the concept of net value and how gross value can be enhanced through value-based pricing and reduction of related monetary and nonmonetary costs Net value is the sum of all the perceived benefits of a service (its gross value) minus the sum of all of its perceived costs. The greater the positive difference between the two, the greater the net value. If the perceived costs of a service are greater than the perceived benefits, then the service will have a negative net value. Customers will probably describe the service as having “poor value” and are not likely to .

(re)purchase it. When customers evaluate competing services, they are basically comparing the relative net values. A marketer can increase the net value of a service by adding benefits to the core product, and reducing monetary (financial and opportunity cost) and non-monetary costs (time cost, physical cost, psychological, and sensory cost). The company can also enhance value by enhancing supplementary services.

(L05) Describe competition-based pricing and situations where service markets are less competitive In relatively undifferentiated industries, the firm with the lowest cost per unit of service typically assumes price leadership. Price competition increases with increasing competitive offers, surplus capacity, and increasing substitutes. Competitor pricing, however, cannot be compared dollar for dollar as services tend to be location and time specific, and each competitor’s service can have its own set of related monetary and non-monetary costs, such that actual prices charged may become secondary for competitive price comparisons. Managers should avoid a price war and take into account the total cost to customers, the distribution, time and capacity issues of their own and their competitors’ offerings when pricing services.

Service markets are also less price competitive when the following conditions are present: • Non-price related costs of using alternatives are high • Personalization, customization, and switching cost matter • When there is restricted choice due to time and location factors.

(L06) Define revenue management and describe how it works Revenue management (also called yield management) is a sophisticated form of supply and demand management that focuses on strategies to maximize the revenue derived from available capacity at any given point of time. Revenue management is most effective when • Operations that have relatively fixed capacity • High fixed cost structure • Perishable inventory • Demand that is variable and uncertain • Varying customer price sensitivity.

Revenue management in practice often means setting prices according to the predicted demand levels among different market segments.

That is, the least price sensitive segment is allocated capacity first at the highest price, followed by the next segment at a lower price, and so on, thus maximizing revenue from each of these segments.

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Revenue management has been strategically implemented and has drastically improved profitability of industries such as airlines, car rentals, hotels, and more recently, hospitals, restaurants, golf courses and even non-profit organizations.

Revenue management seeks to maximize the revenue derived by offering the least price sensitive segment capacity first at the highest price followed by the next segment at a lower price and so on. As such, for revenue management to work effectively, we require two or more segments that attach different price elasticity to the service.

Service Insights 6.1 shows how revenue management has been implemented at a major U.S. airline. The use of a well -designed revenue management system ensured a pleasant flight experience for its passengers and a profitable business for the airline company.

(L07) Discuss the role of rate fences in effective revenue management Properly designed rate fences allow customers to self-segment themselves based on the basis of the service and their willingness to pay. There are two major categories of fences (Table 6.2). They are: •

Physical fences that refer to tangible product differences such as the basic product, the amenities, and the service level that are related to the different prices (e.g., business/economy airline class, complimentary breakfast at a hotel, and dedicated service hotlines)

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Non-physical fences that refer to consumption, transaction, or buyer characteristics (e.g., minimum stay in hotels, advance bookings, and priority pricing for loyalty scheme members).

(L08) Be familiar with the issues of ethics and consumer concerns related to service pricing Service pricing policies often are complex and not easily understood by customers due to their intangible nature. There is also difficulty involved in evaluating quality of a service. Although price can serve as a surrogate for quality, it is often hard to see the extra value attached to a higher priced service. Thus, services often invite performance and pricing abuses. This is especially the credence services whose quality and benefits are harder to evaluate even after consumption. Abuses include cynical overbooking and cancellation penalties without consideration for the customer, and unethical practices such as car rental firms advertising bargain rental rates. In actual fact, other significant fees such as for insurance also have to be incurred, but are

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not included in the package. Any successful revenue management strategy must consider consumers’ fairness perceptions of the pricing schedule.

(L09) Understand how fairness can be designed into revenue management policies Pricing strategies (particularly revenue management) need to consider customer issues of perceived fairness, trust and ethics and must not be a blind pursuit of short-term yield maximization. The following approaches can help to design fairness into the firm’s revenue management strategy: • Design price strategies that are clear, logical and fair • Use high published rates and frame fences as discounts • Communicate benefits of revenue management • Use bundling to “hide” discounts • Take care of loyal customers • Using service recovery to compensate for overbooking Service Insights 6.2 When meting out penalties and fines, it is important for companies to provide advanced notification/ information to the customers, and to provide enough explanations and a fair reason for the penalty. This will hopefully make the penalties come across as fair and equitable to those “charged” with a penalty or fine.

(L010) Discuss the seven questions marketers need to answer to design an effective service pricing strategy Service pricing requires marketers to ask several questions: • How much to charge • What should be the basis for pricing • Who should collect payment • Where should the payment should be made • When should the payment be made • How the payment should be made • How can the company communicate the prices to the target market

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TEACHING SUGGESTIONS Service Insights 6.3 The psychology of menu pnc1ng in restaurants shows the most effective ways of designing a menu in terms of layout and pricing information, such that the diner will spend more.

One of the challenges in teaching pricing is that students often see it as a rather dry subject, particularly if they associate it with courses in accounting, finance, or economics. Broadening the concept to include non-financial costs provides a dramatic conceptual enhancement of this topic and raises the question of when a “benefit” (e.g., time savings) is actually a cost reduction for customers. They also find the concept of revenue (also know as yield) management intriguing.

Pricing is one of the categories in the traditional 4Ps of marketing. For services, it is one of the 7Ps—and for many services, it is the fastest and easiest element to change. As the chapter points out, pricing presents some unique challenges for service providers.

The foundations of a pricing strategy. This topic is covered in review questions 1, 2, 3, 4 and 5. You should ensure that students develop a rigorous understanding of the pricing tripod (Figure 6.4) with an appreciation of how each of the three main approaches interacts to provide the firm with the best pricing strategy. Devote particular attention to valuebased pricing and get students to understand how a service creates value in the first place. The notion of consumers incurring both monetary and nonmonetary costs to search for, purchase, and use a service will be novel to many students.

Revenue management. Covered in review questions 6 and 7. The focus is first on understanding the basic concept of revenue management, and thereafter appreciating issues concerning perce ived fairness and the implications of revenue management. Application question 6 is a good avenue to encourage students to apply revenue management and their understanding of rate fences to some service businesses. Make the point that revenue management i s essential for financial success in capacity-constrained organizations that face swings in demand and are patronized by a variety of different market segments.

Ethical concerns and fairness in service pricing. No discussion of service pricing strategy is complete without a review of ethical considerations and the role of price fairness in building consumer trust and loyalty. Because many students have Internet connections, they will respond well to a discussion of the issues raised in Service Insights 6.2 and application exercise 4. Case 7, on re ve nue manage me nt of G o ndo las , has a high de gree of appl icabi li ty to co nce pts discusse d in this chap te r . This case will help stude nts discuss re ve nue manage me nt of go ndo las, their pr icing str u ct ur e s, and str ate gie s to incr ease capacit y. Ask those .

with credit cards to examine the terms of use and identify the numerous ways in which banks seek to add income through sizeable fees for late payments, cash advances, returned checks, and “overlimit” expenditures—in addition to very high interest rates. Ask: When does proving policy move beyond value pricing and sharp business practices to reach the point of becoming exploitative, unfair, and even unethical—despite the fact that the practice may be perfectly legal?

Putting service strategy into practice. Review the many elements involved in implementing service pricing (Table 6.3). A company’s decisions about how to operationalize its strategy will depend on the nature of the service and the needs and expectations of specific target segments. This is covered in Application Exercise 5.

QUESTIONS AND EXERCISES Review Questions 1. Why is the pricing of services more difficult than the pricing of goods?

Pricing is more complex in services than in manufacturing because i t’s more difficult to calculate the financial costs involved in serving a customer than it is to identify the labor, materials, storage, and shipping costs associated with producing a physical good.

The variability of inputs and outputs means that units of service may not cost the same to produce, nor will they be of equal value to customers if quality is not consistent.

The inability to inventory services also places a premium on balancing demand and supply, a task where pricing plays a large part. Time may influence customers’ perceptions of value. Customers may be willing to pay more for a service delivered fast than one delivered more slowly (like express mail or onehour photo developing).

2. How can the pricing tripod approach to service pricing be useful in setting a good pricing point for a particular service?

In answering this question, students should be aware that the three main approaches i.e. cost-based pricing, value-based pricing and competitionbased pricing are all essential components providing crucial inputs in the pricing tripod. Costs that the firm needs to recover impose a minimum price, while the customer’s perceived value of the service offering sets a ceiling.

Prices charged by competition then typically determine the point, in between the floor- and ceiling-range, at which the price can be set. .

Students should consider each approach per se, and then subsequently look at the implications brought about by combining the inferences or insights taken from the three approaches to get a better picture of the feasible pricing range.

With these in mind and taking in consideration the pricing objectives of the particular firm, a good pricing point can be achieved.

3. How can a service firm compute its unit costs for pricing purposes? How does predicted and actual capacity utilization affect unit cost and profitability?

To compute unit cost for pricing purpose, the service firm can utilize traditional cost accounting (for services with significant variable cost) or activity-based costing (for services with complex product lines with shared infrastructure) that relates resource expense to the variety and complexity of products produced, and not just to the physical volume.

Predicted and actual capacity utilization will affect unit cost and profitability as the firm’s break-even figures will be affected. If the actual capacity utilization is less than the initial estimation based on predicted capacity utilization—contribution is less than expected, the firm will take a longer period to break even and achieve profitability.

4. What is the role of non-monetary costs in a business model, and how do they relate to the consumer’s value perceptions?

Non-monetary costs affect consumers’ overall judgment of the perceived value of the service offering. These costs include time, effort and discomfort associated with search, purchase and use of a service which may be collectively known as “effort” or “hassle”. These costs represent the “hidden” costs for consuming a service.

In evaluating the value of the service being offered in the exchange, customers may factor in such considerations which either increase or decrease its perceived value. In some instances, customers may place a higher priority on non-monetary costs than monetary ones. Therefore, firms need to ensure that they can reduce such non-monetary costs that can negatively affect the perceived value of its service.

5. Why can’t we compare competitor prices dollar for dollar in a service context?

Students should be able to raise the fact that the very nature of services (very often the selling of experiences) makes it relatively difficult to quantify in terms of dollars. Hence, comparing competitors’ prices dollar for dollar is often difficult. Revenue management involves rapid changing of prices as a response to updated demand forecasts for specific price/inventory buckets, and therefore makes comparisons difficult—yesterday’s posted price may not be valid today anymore. Finally, services are often location and time dependent, and different locations and service times may include different related monetary and non-monetary costs to the consumer. For example, the .

hair salon in a customer’s suburb may be more expensive than one further away, but its non-monetary costs (e.g., travel time and effort), and related monetary costs (e.g., travel expenses) are much lower.

Better than comparing dollar for dollar, it is better to take the total cost to customers, the distribution, time and capacity issues of their own, and their competitors’ offerings into account when pricing services.

6. What is revenue management, how does it work and what type of service operations benefit most from good revenue management systems and why?

Revenue management is concerned with strategies for maximizing the revenue that can be derived from the sale of available capacity at any given time. It is particularly important for organizations whose capacity is relatively fixed, which serve large numbers of customers from multiple market segments, and which face wide swings in demand as well as competitive pricing pressure.

In revenue management, the challenge is to work within the constraints listed above to maximize revenue yield by discriminating among its target market and carefully controlling the matching demand and capacity.

Different prices are charged at different times, different service segments and for different markets. Hotels and airlines are important examples.

The challenge is to capture sufficient customers to fill all or most of the firm’s perishable capacity without excessive price discounting that creates consumer surplus for customers, who would have been willing to pay more. Mathematical modeling plays an important role in yield management. Advances in software and computing power have made it possible for firms to use historical databases to predict the probability of future demand levels at different prices, thus making better pricing decisions.

7. Explain the difference between physical and non-physical fences using suitable examples.

Physical fences refer to tangible product differences. These give rise to the ability to price the product differently. Examples of physical fences would be charging different prices for different class of travel on a plane. Non-physical fences refer to difference in consumption, transaction, or buyer characteristics, but the service is basically the same. For example, early bird discounts for a seminar would be an example of a non-physical fence based on consumption characteristics.

8. Why are ethical concerns important issues when designing service pricing and revenue management strategies? What are potential consumer responses to service pricing or policies that are perceived .

as unfair?

Customers may use price as a heuristic to evaluate service quality.

However, some firms may use highly sophisticated pricing strategies to mask the real value of their service by making it very difficult for consumers to evaluate its price. Customers may not get what they pay for. For example, there may be some services that promote a very low price but fail to mention to customers the “hidden” costs until they have made a purchase. Such tactics do not go well with consumers. Dissatisfaction will occur when customers realize that they did not receive a fair value of exchange and may feel cheated. This will in turn lead to negative word of mouth, which may be more harmful to the business as consumers find a need to protect others from such unfair and unethical business behavior.

9. How can we charge different prices to different segment of customers without customers feeling cheated? How can we even charge the same customer different prices at different times, context, and/or occasions, and at the same be seen as fair?

Customers may use price as a heuristic to evaluate service quality.

However, some firms may use highly sophisticated pricing strategies to mask the real value of their service by making it very difficult for consumers to evaluate its price. Customers may not get what they pay for. For example, there may be some services that promote a very low price but fail to mention to customers the “hidden” costs until they have made a purchase. Such tactics do not go well with consumers.

Dissatisfaction will occur when customers realize that they did not receive a fair value of exchange and may feel cheated. This will in turn lead to negative word of mouth, which may be more harmful to the business as consumers find a need to protect others from such unfair and unethical business behavior.

The following approaches can help to design fairness into the revenue management strategy:

firm’s

• Design price strategies that are clear, logical and fair • Use high published rates and frame fences as discounts • Communicate benefits of revenue management • Use bundling to “hide” discounts • Take care of loyal customers • Using service recovery to compensate for overbooking

10. What are the six key decisions managers need to make when designing an effective pricing schedule?

In pricing, managers need to consider the following, (1) How much should be charged for this service? (2) What should be the basis of pricing? (3) Who should collect payment, and where should payment be made? (5) When should payment be made? (6) How should payment be made? (7) How should prices be communicated to the target market? .

APPLICATION EXERCISES 1. Select a service organization of your choice, and find out what its pricing policies and methods are. In what respects are they similar to, or different from what has been discussed in this chapter?

For this exercise to have value, students must be prepared to do field research and interview managers about their firm’s pricing strategies. This assignment can make a good written exercise or a small group report 2. Review recent bills you have received from service businesses, such as those for telephone, car repair, cable TV, credit card, etc.

Evaluate each one against the following criteria: (a) general appearance and clarity of presentation, (b) easily understood terms of payment, (c) avoidance of confusing terms and definitions, (d) appropriate level of detail, (e) unanticipated (“hidden”) charges, (f) accuracy, (g) ease of access to customer service in case disputes.

This exercise should prove both educational and intriguing for students.

Presentation of findings can generate good class discussion. It may help to form students into groups and to select those bills that best illustrate their points.

3. How might revenue management be applied to (a) a professional firm (e.g., law firm), (b) a restaurant, and (c) a golf course?

The elements of revenue management can be modified and applied in different scenarios such as in a law firm, a restaurant, and the golf course.

Some suggested methods and appropriate rate fences are listed below to help spur the class discussion: Law firm: 1) Have different lawyers assigned to different cases depending on the type of case and the type of expertise needed. The team often understands the service needs and pricing points of their clients rather well, and is therefore able to effectively position and price services.

2) Use differential pricing to differentiate the clients based on the complexity of the case handled, and the time needed in terms of manhours to handle the case.

3) While demand may seem to be unpredictable, assess the patterns for more mundane cases like that of drawing up a will, and allocated paralegals to help in such cases.

Restaurant: 1) Advance reservations only with credit card guarantees. .

2) Overbooking to compensate for no-shows and cancellations.

3) Implement a table management system.

4) Improve communication between host and seaters.

5) Do not suggest dessert and coffee during peak hours.

6) Use differential pricing, bundle items, and introduce special promotions so that lower prices are offered during low demand periods to shift demand patterns.

7) Decrease table size to allow more customer parties to be seated. (Also see teaching notes for the Coyote Loco case that provides a detailed discussion of specific revenue management strategies for the restaurant context.)

Golf Course: 1) Multi-tiered membership systems with exclusives benefits (e.g., free golf cart at the golf course or free breakfast) for the top- tier customers.

2) Billing of payment 3) Group membership or group discounts based of size of groups.

4) Use differential pricing, bundle items, and introduce special promotions so that lower prices are offered during low demand periods to shift demand patterns.

4. Explore two highly successful business models that are based on innovative service pricing and/or revenue management strategies, and identify two business models that failed because of major issues in their pricing strategy. What general lessons can you learn from your analysis?

For this exercise to have value, students must be prepared to do field research and interview managers. This assignment can make a good written exercise or a small group report and should include reference to the seven questions that the marketer needs to answer in designing an effective pricing schedule.

5. Consider a service of your choice and develop a pricing schedule.

Apply the seven questions marketers need to answer to design an effective pricing schedule.

This exercise can be used as an individual project or as a component of a group project. The exercise will allow students to apply what they have learnt in the course by making viable pricing recommendations to the service providers in an actual competitive market scenario. Presentation of findings can generate good class discussion. It may be helpful to form students into groups and to assign each group to each part of the exercise.

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CHAPTER 7 PROMOTING SERVICES AND EDUCATING CUSTOMERS Students often have a short-term, tactical view of marketing communications, with an emphasis on advertising, PR, and sales promotions. This chapter presents a much broader view, emphasizing not only the long-term goals associated with building service brands but also the wide array of tools available for service marketing communications, and the distinctive challenges in services that communications strategy must seek to address.

LEARNING OBJECTIVES By the end of this chapter, students should be able to:  (LO1) Know the 5 Ws of the Integrated Service Communications Model, i.e., Who, What, How, Where, and When.  (LO2) Be familiar with the three broad target audiences (i.e., “Who”) for any service communications program.  (LO3) Understand the most common strategic and tactical service communications objectives (“What”).  (LO4) Be familiar with the Services Marketing Communications Funnel and the key objectives in that funnel.  (LO5) Know a few important roles that service marketing communications can assume.  (LO6) Understand the challenges of service communications and know how they can be overcome (“How”).  (LO7) Be familiar with the Services Marketing Communications Mix (“Where”).  (LO8) Know the communications mix elements of the traditional marketing communication channels.

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 (LO9) Know the role of the internet, mobile phones, apps, QR codes, and other electronic media in service marketing communications.  (LO10) Know the communications mix elements available via service delivery channels.  (LO11) Know the communications mix elements that originate from outside the firm.  (LO12) Understand when communications should take place (“When”), how budgets for service communications programs may be set, and how these programs may be evaluated.  (LO13) Appreciate ethical and consumer-privacy-related issues in service marketing communications.  (LO14) Understand the role of corporate design in communications.  (LO15) Know the importance of Integrated Marketing Communications to deliver a strong brand identity.

CHAPTER OUTLINE (LO1) Know the 5 Ws of the Integrated Service Communications Model, i.e., Who, What, How, Where, and When.

An effective marketing communication strategy begins with a good understanding of the service product and its prospective buyer. The Integrated Communication Model represented in Figure 7.1 presents the 5W’s which offer a useful checklist for marketing communication planning.

These are: 1. Who is our target audience?

2. What do we need to communicate?

3. How should we communicate this?

4. Where should we communicate this?

5. When do the communication need to take place?”

(LO2) Be familiar with the three broad target audiences (i.e., “Who”) .

for any service communications program.

Prospects, users and employees represent the three broad target audiences for any service communication strategy.

(LO3) Understand the most common strategic and tactical service communications objectives (“What”).

Strategic objectives of communication include building a service brand and positioning it and its service products against competition. Tactical objectives relate to shaping and managing customers’ perceptions, beliefs, attitudes, and behaviour during any of the three stages of service consumption process.

(LO4) Be familiar with marketing communications mix in a service context Figure 7.3 shows a Marketing Communication Funnel where common tactical communication objectives are mapped along the three stages of service consumption.

(LO5) Know the communications mix elements of the traditional marketing channels The traditional marketing channels are advertising, direct marketing, sales promotion, personal selling, and public relations. Some important roles that service marketing communication can assume are: • Promote tangible cues to communicate quality • Add value through communication content • Facilitate customer involvement in service production • Promote the contribution of service personnel and back-stage operations • Stimulate and shift demand to match capacity (LO6) Understand the challenges of service communications and know how they can be overcome (“How”).

Since services are about performances rather about objects, it can be difficult to communicate the benefits to customers. This is especially true when it involves tangible actions to customers or their possessions.

Some of the challenges that service companies face are: • Problems with intangibility – this will include: generality, nonsearchability, abstractness and mental impalpability • Overcoming the problems of intangibility – this can be rectified with the use of tangible cues and metaphors to overcome the problems of intangibility, service companies can make use.

Refer to Table 7.1 that discusses the advertising strategies for overcoming .

Intangibility.

Service Insights 7.1 Google – the online marketing powerhouse. Google’s success is almost entirely through word of mouth from satisfied users.

“Google” has now entered common use in English as a verb. Google allows advertisers to reach customers through sponsored links or content ads.

AdWords allows advertisers to display their ads at websites that are part of the Google content network, so ads are not initiated by a search but are simply displayed when a user browses a website. AdWords is complemented by AdSense, which is used by website owners who wish to make money by displaying ads on their websites.

(LO7) Be familiar with the Services Marketing Communications Mix (“Where”).

Messages transmitted through the internet include the company’s website and online advertising. Increasingly, consumers are the ones deciding which messages they should read and how they would like to be reached.

(LO8) Know the communications mix elements of the traditional marketing communication channels.

Messages can be transmitted through traditional marketing channels like advertising, public relations, direct marketing, sales promotion, personal selling and trade shows. These originate from within the organization.

(LO9) Know the role of the internet, mobile phones, apps, QR codes, and other electronic media in service marketing communications.

Message transmitted through the internet include the company’s website, and online advertising. Increasingly, consumers are the ones deciding which messages they should read and how they would like to be reached.

(LO10) Be familiar with the Services Marketing Communications Mix (“Where”).

Service delivery channels are also channels that originate from the organization. These would include service outlets, frontline employees and self-service delivery points. These can be controlled and changed by the organization if necessary.

Service Insights 7.2 There are many new media elements that have an impact on marketing communications. This service insights box discusses the impact of mobile advertising, mobile apps, social media, Web 2.0 and podcasting on marketing communications. .

(LO11) Know the communications mix elements that originate from outside the firm.

Messages that originate from outside the organization are less controllable by the firm. They include word-of-mouth, blogs, twitter and media coverage.

(LO12) Understand when communications should take place (“When”), how budgets for service communications programs may be set, and how these programs may be evaluated.

The timing of service firms is such as to not generally promote during heavy usage period due to capacity constraints. Rather, timing is closely matched to the various perceptions and behaviours the firm wants to manage. Often different communication channels are used and the timing is typically managed with the help of media plans.

Service Insights 7.3 Zappos, an e-tailer, still uses telephone calls as a way of building brand equity in the age where customers are bombarded with thousands of advertising messages. Zappos uses this opportunity with customers to create an emotional impact and a lasting memory.

(LO13) Appreciate ethical and consumer-privacy-related issues in service marketing communications.

Firms need to consider the ethical and privacy issues associated with communications. Services are harder to evaluate so customers are often more dependent on marketing communication for information and advice. Hence, firms have to be careful about overpromising and under-delivering. A different type of ethical issue is privacy concerns due to the intrusion of marketing into our lives. Government agencies and trade associations have been acting to protect consumers.

(LO14) Understand the role of corporate design in communications.

Increasingly, companies have come to realize that corporate design is an important feature that aims to ensure a consistent style and message that is communicated to through all the firm’s communication mix channels.

A good corporate design will help companies to differentiate themselves from other competitors – where it is necessary to stand out from the crowd and be easily recognizable as a global brand.

(LO15) Know the importance of Integrated Communications to deliver a strong brand identity.

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Marketing

With so many channels delivering messages to customers and prospects, it becomes crucial for firms that the various media deliver the same messages and have the same look and feel, and the communications from the different media become parts of a single, overall message about the service firm and its products.

TEACHING SUGGESTIONS Although we tend to think of communications directed at end-users, the marketing communications mix also plays a role in business marketing. In the weeks preceding the communications section of your course, look out for advertising that can be used to illustrate points in your lectures or generate good discussion by students.

You should try to make sure that some of the illustrations you provide relate to business-to-business services marketing or to professional services. Be sure to emphasize that most communication campaigns combine several different elements like personal selling, advertising through a variety of media, brochures, PR, and sales promotions. A current campaign in your area may offer great opportunities for “real time” analysis by students (individually or in groups). If possible, get students to analyze campaigns that employ several communication elements and ask them how well each of the pieces fits together. If a web site address appears in printed or TV communications, get students to check it out and determine whether a conscious effort has been made to integrate one of more components of the web site with the current campaign.

The marketing communications mix. You can get students to apply the chapter material by having them: (a) find a service print ad that they think is particularly effective or ineffective; (b) write a short paper (1 to 2 pages) analyzing the ad by using concepts presented in Chapter 7; and (c) turning in both the ad and the analysis. If you have students submit their assignments a class period in advance of when you want to discuss the material, you can make overheads of the most interesting ads and have the students who submitted them share their analyses with the rest of the class.

Ethical issues in services marketing communication. You may want to provide relevant illustrations of your own or ask students to find some specific examples of particularly ethical or unethical behavior as it relates to different types of marketing communication (or to an entire campaign).

New marketing communications technologies. Several of the study questions and application exercises can be used to explore the new communications technologies. If your classroom is mediated (has access to the web), you can demonstrate some service web sites in class and ask students to comment on the design and effectiveness.

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QUESTIONS AND EXERCISES Review Questions 1. What are the 5 Ws along which the Integrated Service Communications Model is structured?

The Integrated Communication Model represented in Figure 7.1 presents the 5W’s which offer a useful checklist for marketing communication planning. These are: • Who is our target audience?

• What do we need to communicate?

• How should we communicate this?

• Where should we communicate this?

• When do the communication need to take place?

2. What are the three broad target audiences of service communications?

Prospects, users and employees represent the three broad target audiences for any service communication strategy.

3. In what ways do the objectives of services communications differ substantially from those of goods marketing? Describe four common educational and promotional objectives in service settings and provide a specific example for each of the services that you list.

Whereas the product marketer’s objective is to add abstract ideas, the service communication’s objective is to add physical evidence and imagery to abstract offers. In services business, many communication objectives are concerned with educating and training customers in new service features, their importance and usage. The emphasis of services marketing is on not only improving external communication, but also improving internal communication within the organization, so as to motivate employees to serve the customers well.

Students can be expected to offer a wide array of examples with differing objectives depending on the situation. Page 196 shows a basic list. The challenge for students is to relate some of these to their specific examples.

Promotion and education are often closely related in service marketing. For instance, there isn’t much point in promoting a new service or service feature if customers don’t understand the benefits or how to use the service product. The teaching role can also be an important part of providing value to customers in the form of supplementary services like information and consultation.

4. What can you learn from the Services Marketing Communications .

Funnel?

The Service Marketing Communication Funnel helps us discover communication objectives and consider how communication can be used to shape consumer behaviour in the direction desired by the firm in any of the three stages.

5. What are some challenges in service communications and how can they be overcome?

Because services are performances rather than objects, their benefits can be difficult to communicate to customers, especially when the service in question does not involve tangible actions to customers or their possessions.

Intangibility creates four problems for marketers seeking to promote its attributes or benefits: abstractness, generality, nonsearchability, and mental impalpability. Table 7.1 displays several strategies.

6. Why is the marketing communications mix larger for service firms compared to firms that market goods?

Refer to Figure 7.1. Have students identify the customer’s problems that are overcome by the marketing communication mix to answer this question.

7. What roles do personal selling, advertising, and public relations play in (a) attracting new customers to visit a service outlet and (b) retaining existing customers?

Personal selling, advertising, and public relations all play a role in attracting new customers to a service business by providing information about a company and the benefits its services can offer to customers. Personal selling is most often used in business marketing, where sales calls play a large role in informing corporate clients about a supplier’s products.

Advertising and public relations are widely used communications tactics in both the corporate and consumer arenas. All three elements can be used to retain existing customers. Personal selling provides a good opportunity to build relationships with customers by carefully listening to their needs and addressing their concerns. Sales people can offer information and consultation (two of the petals of the Flower of Service presented in Chapter 4) during sales calls, which adds value for customers. Advertising can help retain existing customers by reminding them about the service and motivating them to purchase. It can also be used to inform existing customers about new services or features. Public relations generate goodwill for a company and remind current customers of a firm’s existence.

8. What are the different forms of online marketing? Which do you .

think would be the most effective online marketing strategies for (a) an online broker, (b) a new discotheque in Los Angeles?

The two main options for Internet advertising include banner advertising and search engine advertising. An online broker might want to consider using banner advertising. For example, Yahoo’s stock quotes page features a sequence of advertisements for various financial service providers. The discotheque could consider employing search engine advertising. This allows advertisers to know exactly what consumers want through their keyword search, and they can then target relevant marketing communications directly at these consumers. They can sponsor a short text message with a clickthrough link, located parallel to the search results, or they can put top rankings in the display of search results through a “pay-for-placement” option.

This may make the marketing efforts more effective.

9. Why is permission-based marketing gaining so much focus in service firms’ communications strategies?

Permission marketing encourages customers to self select themselves into the target segments without the company annoying their prospects by interrupting their personal time. By reaching out only to individuals who have expressed prior interest in receiving a certain type of message, permission marketing enables service firms to build stronger relationships with their customers. Furthermore this form of marketing becomes more effective when combined with falling prices and improving the quality of customer relationship management and online technology.

10. Why is word of mouth (WOM) considered so important for the marketing of services? How can a service firm that is a quality leader in its industry induce and manage word of mouth?

WOM is the only promotional method that is of consumers, by consumers, and for consumers. People always ask other—friends, relatives, and professionals for a recommendation for doctor, insurance agent, and consultant. Because the recommender is assumed to be a neutral person, his advice carries more weight than firm initiated communications. In fact, the greater the risk involved in the services, the more effective WOM communication is.

There are various strategies to stimulate positive WOM communication.

Involving customers in delivering the service, creating exciting promotions that get people talking about the services, developing referral incentive schemes, publicizing testimonials from satisfied customers, and faster complaint handling are some of the ways to manage WOM properly.

11. How can companies use corporate design to differentiate themselves?

Corporate design is particularly important for companies operating in .

competitive markets where it’s necessary to stand out from the crowd and to be instantly recognizable in different locations. Some companies stand out in your mind because of the colors they use, the widespread application of their logos, the uniforms worn by their employees, and the design of their physical facilities.

12. What are the potential ways to implement IMC? IMC ties together and reinforces all communication to deliver a strong brand identity. This means that a firm’s various media deliver the same message and have the same look and feel and the communication from different media become parts of a single, overall message about the firm and its product.

APPLICATION EXERCISES 1. Which elements of the marketing communications mix would you employ for each of the following scenarios? Explain your answers. a) A newly established hair salon in a suburban shopping center. b) An established restaurant facing declining patronage because of new competitors. c) A large, single-office accounting firm in a major city that serves primarily business clients. d) a new app-based financial service.

Each of these businesses requires different communications objectives to match its specific situation. Students should start by developing objectives for each service. They can then determine which marketing communications mix elements might be most appropriate for meeting these objectives. (The marketing communications mix is discussed in detail on pp. 197–202).

The hairdresser needs to build a clientele, none of whom will have previously used the salons services. Hence, providing information and obtaining trial are key challenges. A geographically specific communications campaign will therefore be appropriate. Local newspapers and radio might be appropriate media. Perhaps the printed ads could include a coupon for a reduced price to encourage trial. Advertising in the Yellow Pages should also be considered.

The restaurant needs to win back former customers and attract new ones.

Advertising will have something to talk about to this first group if there have been changes in the menu, décor, prices, or hours of service. If the restaurant has a list of customer’s names, addresses, and phone numbers, it might consider a direct mail campaign or even telemarketing. Otherwise, local media such as radio, cable TV, and newspapers may be needed. New customers may be addressed in similar ways to the hairdresser. In addition, they can place listings in tourist brochures if this is a tourist area. .

The accounting firm may choose to publicize client testimonials in local business newspapers and magazines. Organizing seminars on accounting practices, new accounting developments, and inviting representatives from major business organizations would increase the awareness about the firm.

Advertising about the firm (using billboards) at the commercial centers of the city may attract attention of a large segment of target audience.

The app-based financial service would benefit the most from social media, WOM and as for any financial service aiming to build consumer trust, they would also benefit from PR. 2. Identify one advertisement (or other means of communication) that aims mainly at managing customer behavior in the (a) choice, (b) service encounter, and (c) pre-consumption stages. Explain how they try to achieve their objectives and discuss how effective they may be.

You may wish to specify print media if students are expected to include a copy of the advertising with a written report. You can expect a wide array of submissions. If desired, this exercise can form the basis for in-class presentations 3.

In what ways do the objectives of servic es c omm unic at ions differ substant ia lly fr om those of goods marketing? Describe four common educa tio nal and p romo tiona l objectives in service settings, and provide a spec ific example for each of the o bject ives you l ist.

You may wish to specify print media if students are expected to include a copy of the advertisement with a written report. You can expect a wide array of submission. If desired, this exercise can form a basis for in-class presentations.

4. Discuss the significance of search, experience, and credence attributes for the communication strategy of a service provider.

Assume that the objective of the communications strategy is to attract new customers.

New customers are likely to be unfamiliar with the service in question and to need information that will help them evaluate the characteristics of the service, including (in some cases) how to use it for best results. The discussion of search, experience, and credence attributes in Chapter 2 suggests the following strategies for products high in each type of attribute.

• Search attributes. Services that involve many physical elements (e.g., restaurants) lend themselves to advertising and promotions that can demonstrate tangible attributes such as style, color, texture, taste, and sound in advance of purchase. In some instances, such as restaurants located in shopping malls, promotions can be organized to enable prospective customers to “taste test” samples of the food itself.

• Experience attributes. Advertising, especially in the form of video (TV, .

cinemas, CDs, videotapes, web sites, electronic kiosks), can present experiences that show customers what they can expect during service delivery and even demonstrate superiority over competing alternatives.

Customers can learn what they themselves need to do during service delivery. Testimonials from other customers can simulate word-of-mouth recommendations from friends and acquaintances.

• Credence attributes. To build the confidence of prospective customers who may not be able to evaluate the quality of service they have received, providers of services that are high in credence attributes need to provide tangible cues about their services. This may include display of and reference to professional credentials or other training, documentation of experience, PR releases about the outcome of past engagements, and an emphasis on evidence management in terms of carefully selected corporate design elements (interior décor, uniforms, equipment, etc.).

5. If you were explaining your current university or researching the degree program you are now in, what could you learn from blogs, reviews and any other online word of mouth you can find? How would that information influence the decision of a prospective new applicant to your university? Given that you are an expert about the school and degree you are pursuing, how accurate is the information you found online?

Students will learn about the Internet word of mouth or online personal blogs. As this information is highly personal experiences, they may not represent an accurate picture of the university. In fact, they may run contrary to student’s own experiences and they will learn to be more discerning of information from blogs as another form of word of mouth.

You may wish to get students to discuss the use and effectiveness of Facebook, MySpace and other social networking sites as a new medium for online word of mouth.

6. Identify an advertisement that runs the risk of attracting mixed segments to a service business. Explain why this might happen and convey any negative consequences there may be.

You may wish to specify print media if students are expected to include a copy of the advertising with a written report. You can expect a wide array of submissions. If desired, this exercise can form the basis for in-class presentations 7. Describe and evaluate recent public relations efforts made by service organizations in connection with three or more of the following: (a) launching a new offering, (b) opening a new facility, (c) promoting an expansion of existing services, (d) announcing an upcoming event, or (e) responding to a negative situation that .

has arisen. (Select a different organization for each category.)

The marketing communications mix in Figure 7.10a includes six categories of PR/publicity activity: press releases/kits, press conferences, special events, sponsorships, trade exhibitions, and media initiated coverage. Students can be asked to review articles in the business section of the newspaper and to indicate how they believe that these articles came to be written—did they reflect the work of an enterprising reporter or were they based on a press release or press conference? To identify local sponsorships by service companies, students might want to start with sports activities, events related to trade shows, or even artistic performances.

8. What tangible cues could a scuba diving school or dentist’s office use to position itself as appealing to upscale customers? a)

Scuba diving School could use sophisticated and well-maintained equipment, have nice offices located in better parts of town, require diving instructors to dress in cool attire to reflect the nature of the sport, feature upscale customers in their advertising, emphasize expertise and successful results rather than low prices.

b) Dentist may have an attractive office in an upscale part of town, be formal rather than casual in making appointments, conversing with patients, offer upscale magazines and newspapers as reading material in the waiting room, have all staff dress smartly and somewhat conservatively.

9. Explore the web sites of a management consulting firm, an online retailer and an insurance company. Critique them for ease of navigation, content and visual design. What, if anything, would you change about each site?

Numerous service providers have developed Web sites to communicate with their customers. You should make sure that students’ answers relate to the material in Chapter 7 when addressing the issues raised in this question.

10. Register at Amazon.co m and Hallmark.com, and analyze their permission-based communications strategy. What are their marketing objectives? Evaluate their permission-based marketing for a specific customer segment of your choice—what is excellent, what is good, and what could be further improved.

Such web sites often allow customers to self-select themselves into target groups when firms ask them if they would like to receive more information about certain products. This works well because customers will then only receive information that they are interested in, without having to deal with an overload of advertising that they may deem irrelevant. Students should be able to identity areas for improvement as these web sites are generally .

more relevant to them.

11. Conduct a Google search for (a) undergraduate business programs, and (b) holiday resorts. Examine two or three contextual ads that are triggered by your searches. Critique these contextual ads. What are they doing right, and what can be improved?

There is a wide variety that students can choose from. Students will give an array of MBA programs from the United States and the United Kingdom.

Popular holiday resorts may include those in United States and Asia. This exercise may be used as a class assignment.

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CHAPTER 8 DESIGNING AND MANAGING SERVICE PROCESSES This chapter emphasizes the importance of designing and managing service processes from the customer’s experience. It introduces service blueprints as a key tool to gain an in-depth understanding of service processes and to guide process redesigns, emphasizes the role of the customer as a co-producer and the increasing use of selfserving technologies (SSTs) in service production.

LEARNING OBJECTIVES  (LO1) Know the difference between a service experience and a service process.  (LO2) Tell the difference between flowcharting and blueprinting.  (LO3) Develop a blueprint for a service process with all the typical design elements in place.  (LO4) Understand how to use fail-proofing to design fail points out of service processes.  (LO5) Know how to set service standards and performance targets for customer service processes.  (LO6) Appreciate the importance of consumer perceptions and emotions in service process design.  (LO7) Explain the necessity for service process redesign.  (LO8) Understand how service process redesign can help improve both service quality and productivity.  (LO9) Understand the levels of customer participation in service processes.  (LO10) Be familiar with the concept of service customers as “co-creators” and the implications of this perspective.

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 (LO11) Understand the factors that lead customers to accept or reject new selfservice technologies (SSTs).  (LO12) Know how to manage customers’ reluctance to change their behaviors in service processes, including the adoption of SSTs.  (LO13) Appreciate the dramatic impact service robots and artificial intelligence will have on customer service processes.  (LO14) Understand the difference between service robots and traditional SST.  (LO15) Know the type of service that can best be delivered by service robots, by service employees and by service employee-robot teams.

CHAPTER OUTLINE (L01) Explain what we can learn from flowcharting a service The difference between the two is the difference in perspectives. When customers engage in a service, it’s called service experience and when firms deliver it, it’s called a service process.

(LO2) Tell the difference between flowcharting and blueprinting A key tool we use to design new services (or redesign existing ones) is known as blueprinting. It’s a more sophisticated version of flowcharting. As we distinguish between these terms in a service context, a flowchart describes an existing process often in fairly simple form; a blueprint specifies in detail how a service process should be constructed and includes details as to what is visible to the customer and where there are potential fail points in the service process. The term customer journey explores what a service process looks like from the customer’s perspective for various personas or customer profiles that represent a particular user segment. Personas help in understanding a segment’s attitude, motivation, needs and capabilities.

(LO3) Develop a blueprint for a service process with all the typical design elements in place The objective of a service blueprint is to identify all the main activities involved in creating and delivering the service.

The key components of the blueprint, reading from top to bottom, are: .

1. Service standards for each front-stage activity (only a few examples are actually stated in detail in the figure) 2. Physical and other evidence for front-stage activities (stated for all steps) 3. Main customer actions (Shown by pictures) 4. Line of interaction 5. Front-stage actions by customer contact personnel 6. Line of visibility 7. Backstage actions by customer contact personnel 8. Support processes involving other service personnel 9. Support processes involving information technology

(LO4) Understand how to use fail-proofing to design fail points out of service processes Many service firms are adopting the application of poka-yoke, which is a Total Quality Management (TQM) method, that advocates fail-safe methods to prevent errors in manufacturing.

In understanding poka-yoke, service firms are ensuring that all employees follow certain procedures to ensure consistency in the delivery of service quality.

(LO5) Know how to set service standards and performance targets for customer service processes The standards for each step in the service process should be high enough to satisfy and even delight customers. Process performance needs to be measured and compared against standards, and performance targets need to be set. Standards must be measurable.

While it may not be possible to achieve high standards at each step of the service delivery process, it is important to start and finish strongly. In order to manage the customer experience well, firms can also look at the expected associated emotions at each stage of the service processes. Flowcharts that describe how customers feel are called “emotionprints.”

(LO6) Appreciate the importance of consumer perceptions and emotions in service process design.

Consumer perceptions and emotions play a role in designing smart service processes that start and finish strong but also keep building in quality during the process. These designs make at least one step of the process exceptional and any bad experiences that must be encountered like long waits for instance are dealt with early in the full experience. These processes also extend the feeling of pleasurable experience by dividing them and combining the unpleasant experiences into a single event. .

(LO7) Explain the necessity for service redesign Service processes become outdated over time due to changes in technology, customer needs, added service features, new service offerings, and even changes in legislation. Internal processes, rules and procedures can also become outdated. This is why service redesign is necessary.

(LO8) Understand how service redesign can help improve both service quality and productivity The goal of services business is to achieve synergies between productivity and quality strategies so that value can be created for both customers and the firm. Service standards should reflect both productivity and quality goals.

Redesign efforts typically focus on achieving: • Reduced number of service failures • Reduced cycle time

• Enhanced productivity • Increased customer satisfaction

Although performance measures (2) and (3) focus on productivity, (1) and (4) contribute to a better perception of quality.

(LO9) Understand the levels of customer participation in service processes.

Service process redesign for productivity and efficiency often requires customers to become more involved in the delivery of the service. Blueprinting helps to specify the role of customer and identify the extent of contact between them and service providers.

(LO10) Be familiar with the concept of service customers as “cocreators” and the implications of this perspective In co-production, customers work as partial employees whose performance will affect the productivity and quality of output. Their involvement could be at the low, moderate or high participation level. Services such as a weight reduction program, marriage counseling, and management consulting require highly customized service. Client’s ineffective participation will jeopardize the quality of service outcome in such cases so customers should co-produce the outcome by active participation. Service managers need to educate and train customers so they will have the skills needed to perform their co-production tasks well.

(LO11) Understand the factors that lead customers to accept or reject .

new self-service technologies (SSTs) People love self-service technologies (SSTs), when SST machines provide more convenience and quick service, as they can operate 24/7 at more number of locations. ATM machines are a good example of SSTs. Users get angry, however, when machines are out of service or when they are poorly designed and make it difficult for customers to understand the process and use them properly. Companies must be smart to enable customers to call the company when they need more information than the SSTs provide or when SSTs are down. Poorly designed technology and improper training and are the main reasons for customers to reject SSTs. Factors that lead to quick adoption of SST or service robot-/AI-delivered service include greater convenience, greater control over service delivery, more information and higher perceived level of customization, and lower price and fees. However, there are some factors that can cause the customers to reject such services, especially when social robots replace human interaction, which can lead to difficulty in using a Web site, lengthy online registrations, faulty apps, etc.

Service Insights 8.1: This article highlights how Poka-Yokes can be an effective tool to design fail points out of service processes. Students can be encouraged to come up with other creative ideas on how else to prevent fail points from occurring.

(LO12) Know how to manage customers’ reluctance to change their behaviors in service processes, including adoption of SSTs Increasing customer participation in SSTs may not be easy as some customers do not like to change their behavior.

Service Insights 8.2: This insight discusses how USAA uses IBM Watson to deliver exceptional personalized service to military members and helps them transition from the military to civilian life.

(LO13) Appreciate the dramatic impact service robots and artificial intelligence will have on customer service processes Our economies are facing a service revolution and the service sector is being affected dramatically as technologies rapidly become smarter and more powerful while at the same time getting smaller, lighter, and cheaper.

In combination with these technologies, service robots and AI will lead to rapid innovation that will improve customer experience, service quality and .

productivity.

(LO14) New LO added, “Understand the difference between service robots and traditional SST Table 8.1 contrasts service robots with traditional SSTs. As shown, service robots can deal with unstructured interactions with customers and guide them through the process. They have flexible scripts, unlike SSTs, where deviations from the script tend to lead to service failure. Service robots are customer-error-tolerant whereas SSTs generally are not effective in recovering from customer errors. SSTs tend to break down when there is a service failure, but service robots can recover the service by offering alternative solutions.

(LO15) Know the type of service that can best be delivered by service robots, by service employees and by service employee-robot teams Figure 8.19 shows that tasks requiring low levels of emotional skills but high levels of cognitive/analytical skills can be best delivered by robots. As more emotional skill is required to complete the task, more and more human interaction is necessary, but combinations can be used to have robots assist in the analytical/cognitive components of the task.

TEACHING SUGGESTIONS A key concept in this chapter is the use of blueprinting as a powerful tool to understand, make tangible, analyze, and improve service processes.

Developing a service blueprint requires identifying all the key activities involved in service delivery and production and specifying the linkage between these activities. You should plan to work through the restaurant example (Figure 8.6) in detail, asking students to identify what may go wrong at the various fail points (marked as “F” on the diagram), and how such problems might be avoided or minimized. Ask them too, about how much wait time is acceptable at each point marked with a “W” As a follow up, you may want to invite students to identify the key activities involved in providing specified services that they use themselves. At the conclusion of this discussion, be sure to relate the learning from discussion of service blueprints to service product policy, new service design, and the concept of the augmented service product (Flower of Service) from Chapter 4. Case Study 12, “Dr. Mahalee Goes to London,” can contribute in the understanding of service flowcharting and analysis of service encounters.

Customers as co-producers. Clarify how the level of customer participation .

varies across services. You should seize the opportunity to discuss the implications of replacing human contact with self-service through new electronic (or mechanical) technologies, thus moving the service from high contact to low(er) contact. Ask students to describe their experiences with SSTs and state if it was better or worse (and why) than their interaction with a service employee. Ask them what could have been done to make their experiences better.

QUESTIONS AND EXERCISES Review Questions 1.

How does blueprinting help us to better understand the service process from the perspectives of the key actors (i.e., customers and the employees from different service departments and functional areas) in a serviced process?

Blueprinting specifies in detail how a service process is constructed and map customer, employees, and service-system interactions. They show a full customer journey from service initiation to final delivery of desired benefits. In this way, blueprinting is an important exercise to understand the key customer actions, the ways in which customer and employees from different departments interact, the front-stage actions by these service employees and how these are supported by back-stage activities and systems.

2. What are the typical design elements of a service blueprint?

They include: 1) front-stage activities; 2) physical evidence of front-stage activities; 3) line of visibility; 4) backstage activities; 5) support processes and supplies; 6) potential fail points; 7) identifying customer waits; and 8) service standards and targets.

3. How can fail-safe methods help to reduce service failures?

Many service firms are adopting the application of poka-yoke, which is a Total Quality Management (TQM) method, that advocates fail-safe methods to prevent errors in manufacturing.

In understanding poka-yoke, service firms are ensuring that all employees follow certain procedures to ensure consistency in the delivery of service quality.

A framework to reduce service failures would be to: • Systematically collect information on the most common failure points • Identify the root causes of the service breakdowns • Create strategies to prevent the failures identified .

4. Why is it important to develop service standards and targets?

It allows for the measurement of process performance. If standards and targets are not set, then it will be difficult to measure process improvements.

5. How can consumer perceptions and emotions be considered in the design of service processes?

Consumer perceptions and emotions play an important part in the design of service processes. Service processes need to be designed with emotional intelligence considering that consumers are after all co-creators in these processes. An emotionally smart process will consider the cumulative effect of customer perceptions of the experiences they have during service encounter and will try to start and finish strong to create lasting first and last impressions. However, they will try to deliver consistently high standards of quality throughout the process to elate the customers.

6.

Why is periodic process redesign necessary? What are the typical symptoms that indicate a service process is not working well?

Periodic process design becomes necessary due to external environmental factors and internal factors. External factors may be changes in legislation, technology, or customer needs. Internal factors may be deterioration of internal processes, bureaucracy, or evolution of spurious standards over time.

Service processes can be mainly classified as follows: • Eliminating non-value adding steps • Shifting to self service • Delivering direct service • Bundling services • Redesigning the physical aspects of service processes There are many symptoms that indicate the processes are not working well and need to be redesigned: • A lot of information exchange with the customer and between different service units • A high ratio of checking or control activities to value-adding activities • Increased processing of exceptions • Growing number of customer complaints ab out inconvenient and unnecessary procedures 7. What are the four key objectives of service process redesign?

The goal of services business is to achieve synergies between productivity and quality strategies so that value can be created for both customers and .

the firm. Service standards should reflect both productivity and quality goals.

Redesign efforts typically focus on achieving: • Reduced number of service failures • Reduced cycle time • Enhanced productivity • Increased customer satisfaction 8. What efforts are typically involved in service process redesign?

Service redesign efforts usually include reconstruction, rearrangement, and substitution of service processes. They typically include: examining the service blueprint with key stakeholders, eliminating nonvalue-adding steps, and shifting to self-service.

9.

Why does the customer’s role as a co-creator need to be designed into the service processes?

In many services, customers act as “co-producers” in the process of creating and delivering services. It requires active inputs from customers to ensure successful service delivery. Customer performance in the process needs, however, to be appraised and procedures be redesigned to change their roles if performance is not up to the mark.

Self-service technologies are the ultimate form of a customer acting as coproducer, where customer’s efforts and time replace those of a service provider. In this case, service process should be designed to make it convenient for customers to understand the technology and encourage adoption, by providing the advantage of cost and speed. When customers become partial employees, part of the service costs get transferred to customers.

10.

Explain what factors make customers like and dislike self-service technologies (SSTs, online services, apps, AI and service robots-delivered services)?

People love self-service technologies (SSTs), when SST machines provide more convenience and quick service, as they can operate 24/7 at a higher number of locations. Increasingly, these services are being enhanced and facilitated through service robots and AI-based systems. An ATM machine is a good example of SSTs. Users get angry, however, when machines are out of service or when they are poorly designed and make it difficult for customers to understand the process and use them properly. Companies must be smart to enable customers to call the company when they need more information than the SSTs provide or when SSTs are down. Poorly designed technology and improper training and are the main reasons for customers to reject SSTs. .

11.

How can you test whether an SST has the potential to be successful, and what can a firm do to increase its chances of customer adoption?

SSTs are more likely to succeed if they work reliably, are highly personalized and yet efficient as an alternative, and there are systems, structures and recovery technologies that will allow timely service recovery if things go wrong.

12.

What are the likely implications of service robots on customer service processes?

Service robots and AI, in combination with technologies that allow speech processing, augmented reality, machine learning, biometrics, etc., will lead to rapid innovation that has the potential to dramatically improve the customer experience, service quality, and productivity all at the same time. Service robots can guide the customer through the service process very much like a service employee would and can recover customer errors and guide customers to conclude a successful service transaction. They can even offer alternative solutions in case of service process breakdown or failure.

13.

What are service traditional SSTs?

robots

and

how

are

they

different

to

Service robots have been defined as “system-based autonomous and adaptable interfaces that interact, communicate and deliver service to an organization’s customers.”

They are different from traditional SSTs along three dimensions: 1. Customer Service Script and Roles: Robots have flexible interactions 2. Customer Error Tolerance: They can recover from customer errors 3. Service Recovery to Other Service Failures: They can recover the service by offering alternative solutions.

14.

What type of services will be more and more provided by service robots, by service employees and by service employee– robot teams?

Figure 8.19 illustrates the services that use robots, humans, or a combination. Robots are useful in performing tasks that require cognitive/analytical skills, but as the task increases in complexity, a combination team of human and robot is used. However, for tasks that require a high level of emotional skills like patient care, childcare, counselling etc., human interaction is necessary.

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APPLICATION EXERCISES

1. Review the blueprint of the restaurant visit in Figure 8.5. Identify several possible “OTSUs” (opportunity to screw up) for each step in the front-stage process. Consider possible causes underlying each potential failure and suggest ways to eliminate or minimize these problems.

Restaurant service (Figures 8.6, pp. 242–245) indicates many points at which failures might occur or the customer might encounter excessive waits. At each step marked as a potential failure point or excessive wait, management should review possible causes and solutions. To the extent that breakdowns in information might cause these problems, the solution may lie in more effective capture and sharing of information through IT systems. In other instances, a process redesign may be needed to speed up service and minimize the waits.

2. Prepare a blueprint for a service with which you are familiar. On completion, consider (a) the tangible cues or indicators of quality from the customers’ perspective (keeping the line of visibility in mind); (b) whether all steps in the process are necessary; (c) the extent to which standardization is possible and advisable throughout the process; (d) the location of potential fail points and how they could be designed out of the process; (e) what service recovery procedures could be introduced; and (f) the potential measures of process performance.

Make sure that students are aware of the intricacies of the processes and take time to study then well.

3. Think about what happens in a doctor’s office when a patient comes for a physical examination. How much participation is needed from the patient in order for the process to work smoothly?

If a patient refuses to cooperate, how can that affect the process?

What can the doctor do in advance to ensure the patient cooperates in the delivery of the process?

This question can serve as the basis for an excellent class discussion. Get students to prepare a service blueprint of a scenario in a doctor’s office.

Students should also consider the three acts or stage of the servicescape: Act I – introductory scenes Act II – Delivery of the core product Act III – Drama ends 4. Observe supermarket shoppers who use self-service check lanes and compare those shoppers to ones who use the services of a .

checker. What differences do you observe? How many of those conducting self-service scanning appear to run into difficulties and how do they resolve their problems?

Analyze the two different situations in terms of quickness of service delivery and perception of service by customers. List the advantages and disadvantages of self-service lanes. For example, some customers may be too slow with self-service and the need to identify and help such customers.

5. Identify three situations in which you use self-service delivery.

For each situation, what is your motivation for using self-service delivery, rather than having service personnel do it for you?

Have students discuss what they like and dislike about the self -service delivery.

6. What actions could a bank take to encourage more customers to bank by phone, mail, Internet, or through ATMs rather than visiting a branch?

Students can interview bank managers and identify strategies that are used such as reward programs and advertisements.

7. Identify one web site that is exceptionally user friendly and another that is not. What factor makes for a satisfying user experience in the first instance and a frustrating one in the second? Specify recommendations for the improvement in the second web site.

A good web site assumes minimum IT awareness from the customer. It should be measured in terms of speedy access, easy navigation, and up-to- date content. Web sites may provide a link to self-service options or service personnel, depending on the context. Remember that a technically advanced Web site does not necessarily make a good Web site.

8. Find an advanced physical service robot (e.g., in a hotel lobby or hospital), hologram-based robot, or voice-based chatbot. Conduct a few service interactions with this robot (e.g., ask for information or advice) and assess its effectiveness and your satisfaction with the service provided. Contrast this experience with similar services delivered by employees. What implications do you draw from this experience for the service firm?

Students should be able to appreciate how Robots are able to handle complex tasks with flexible scripts. They would perhaps be able to discuss how human interactions were more suitable in providing advanced customer care and emotional content. .

CHAPTER 9 BALANCING DEMAND AND PRODUCTIVE CAPACITY This chapter examines in depth a key challenge problem for services— managing demand for a "perishable" product. Inability to inventory services requires managers to develop strategies for bringing demand and capacity into balance. The chapter focuses on defining the nature of service capacity and understanding the patterns and determinants of demand, including the periodicity of demand cycles. Students will learn that marketing strategies for managing demand involve smoothing demand fluctuations and inventorying demand through reservation systems and formalized queuing. Understanding customer motivations in different segments is one of the keys to successful demand management.

LEARNING OBJECTIVES By the end of this chapter, students should be able to  (LO1) Know the different demand–supply situations that fixed-capacity firms may face.  (LO2) Describe the building blocks of dealing with the problem of fluctuating demand.  (LO3) Understand what is meant by productive capacity in a service context.  (LO4) Be familiar with the basic ways to manage capacity.  (LO5) Recognize that demand patterns vary by segment and examine how segmentspecific variations in demand may be predicted.  (LO6) Be familiar with the five basic ways to manage demand.  (LO7) Understand how to use the marketing mix elements of price, product, place, and promotion to smooth out fluctuations in demand.

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 (LO8) Know how to use waiting lines and queuing systems to inventory demand.  (LO9) Understand how customers perceive waits and how waiting may be made less burdensome for them.  (LO10) Know how to use reservations systems to inventory demand.  (LO11) Be familiar with strategic approaches to utilize residual surplus capacity even after all other options of matching demand and capacity have been exhausted.

CHAPTER OUTLINE (LO1) Know the different demand–supply situations capacity firms may face

that

fixed

• Excess demand exceeding maximum available capacity • Demand exceeding optimum capacity

• Demand and supply well balanced at the level of optimum capacity • Excess capacity

(LO2) Describe the building blocks of dealing with the problem of fluctuating demand There are two basic approaches. 1) adjust capacity to meet demand, and 2) manage the level of demand. Together these necessitate four building blocks – a) define productive capacity, b) manage capacity, c) understand demand and d) manage demand.

(LO3) Understand what is meant by productive capacity in a service context In a service factory, productive capacity refers to at least five forms: 1) Facilities designed to “hold” customers (used for people- processing or mental stimulus-processing services).

2) Physical facilities designed for storing or processing goods that either belong to customers or are being offered to them for sale.

3) Equipment used to process people, possessions, or information (including equipment such as machinery, hair dryers, cooking ovens, and .

cash registers).

4) Labor, which is used for both physical and mental work (this is a key element in all high-contact services and many low-contact ones).

5) Infrastructure (either public or private) in sufficient capacity to allow an organization to deliver quality service to its own customers.

Measures of capacity utilization include the percentage of total available time and space that facilities, labor, and equipment are productively involved in revenue generation.

(LO4) Be familiar with the basic ways to manage capacity Possible capacity management strategies include: •

Level capacity: Make no changes in level of capacity despite variations in demand.

• Stretch capacity: o o o

Squeeze more people into an existing facility Push service personnel to work faster for brief periods of peak demand Reduce in-process time, etc.

• Chase demand: Vary amount of capacity to match anticipated demand: o o o o o o

Schedule downtime (vacations, maintenance) for periods of low demand.

Use part-time employees as needed Rent extra facilities and equipment (or share them with countercyclical organizations) Ask customers to share Invite customers to perform self-service Cross-train employees so they can do different tasks and can be directed to bottlenecks

(L05) Recognize that demand patterns vary, and examine how segment-specific variations in demand may be predicted.

There are certain ways to predict variations in demand and their underlying causes.

• •

Analyze, if demand levels follow a predictable cycle and if so, find out the duration of the demand cycle.

Identify the underlying causes of these cyclic variations such as .

employment schedules, holidays, seasonal changes etc.

• Increase demand levels seem to change randomly, try to identify the underlying causes like weather, accidents, natural disasters etc.

• Disaggregate demand for a particular service over time, by market segment.

(L06) Be familiar with the four basic ways to manage demand 1) Take no action (situation ranges from disorganized queuing to wasted capacity).

2) Manage demand through marketing mix elements during “hot” and “cold” periods.

3) Inventory demand through reservations.

4) Inventory demand through formalized queuing.

(L07) Understand how to use the marketing mix elements of price, product, place, and promotion to smooth out fluctuations in demand •

Use price and other costs to manage demand. If the firm understands the shape of demand curves for different market segments, then prices may be raised/lowered to discourage/attract particular segments at particular times.

•

Change product elements. Features may be varied according to the time of day (e.g. restaurants) or season of the year (hotels) to attract different market segments.

•

Modifying time and place of delivery to reflect changing market needs over the product demand cycle.

•

Use promotion and education. Signage, advertising, and promotion can be used to inform customers of peak periods (encouraging them to avoid using the service during these times, if possible) and promoting off-peak times when the service facility is less crowded and service faster.

(L08) Know how to use waiting lines and queuing systems to inventory demand Waiting lines or queues are a symptom of unresolved capacity management problems. Queues are boring and time-wasting and sometimes physically uncomfortable therefore they need managing. Here are some ways in which it is done.

1. Managing Wait lines • Rethinking the design of queueing system .

• Tailoring the queueing system to different segments • Managing customer behaviour and their perceptions of the wait • Installing a reservation system • Redesigning process to shorten transaction time.

2. Different Queue Configurations 3. Virtual Waits 4. Tailoring Queueing system to market segments based on urgency, duration of transaction, payment method, etc.

Service Insights 9.1 Queue management at Disney is taken to a whole new level. At Walt Disney World, there is a Disney Operational Command Center, where technicians monitor queues throughout the park to ensure people are not waiting too long, and queues move along. If a wait is a problem, they will send a Disney character to entertain the waiting customers. With this system in place, they have managed to increase the number of rides a visitor takes in the park.

Service Insights 9.2 Everyone who has been to a Disney theme park knows that it can take forever to wait for one’s turn on a popular ride. To avoid unnecessary frustrations or disappointments from the wait, Disney created the FASTPASS queue system that allows guests to come back at an appointed time for their rides. In the meantime, guests can enjoy other rides or have a meal whilst they wait for the appointed time. Just like Fastpass system, call centres also use virtual queues and give callers an option to wait in the queue or receive a call back.

(L09) Understand how customers perceive waits and how to make waiting less burdensome for them Boredom results from being attentive to the passage of time itself. Service providers should try to make wait pleasant by providing magazines, television, and other innovative ways to keep people engaged in something.

Research indicates that in long waits it is useful to inform people (1) how long the wait is likely to be and (2) how their number in the line is changing.

People prefer to see that the line is moving rather than watching the clock.

Best of all, they would prefer to shorten or even eliminate waiting for service.

(L010) Know how to use reservation systems to inventory demand A well-organized reservation system should allow the organization to deflect demand from a first-choice time to other times, from one class of service to another and even from first-choice locations to alternative ones. Problems, .

however, arise when customers fail to show up or service firms overbook.

Solution lies in requiring a deposit for making reservation and compensating to victims of overbooking.

.

Many firms allow customers to make their reservations on the Web site to make it fast and user-friendly. Reservation system should aim at maximizing yield—(average revenue received per unit of capacity). Based on analysis of past performance and current market data, capacity should be allocated on specific dates to various types of customers at specific prices. Formalized yield management systems help in formulating reservation strategies based on the historical data and forecasts of demand.

(L010) Be familiar with strategic approaches to utilize residual surplus capacity even after all other options of matching demand and capacity have been exhausted.

Even after capacity and demand management actions are taken, some surplus capacity might still exist and service firms can create alternative uses of this otherwise wasted capacity. Some possible uses include; use capacity to wow the customers through outstanding customer service, reward loyal customers through special promotions, provide free or heavily discounted special promotions as a part of loyalty program, reward the employees and their families, or barter free capacity (L011) Be familiar with strategic approaches to utilize residual surplus capacity even after all other options of matching demand and capacity have been exhausted.

Even after capacity and demand management actions are taken, some surplus capacity might still exist and service firms can create alternative uses of this otherwise wasted capacity. Some possible uses include; use capacity to wow the customers through outstanding customer service, reward loyal customers through special promotions, provide free or heavily discounted special promotions as a part of loyalty program, reward the employees and their families, or barter free capacity.

TEACHING SUGGESTIONS Students should realize that fluctuating demand is a problem that affects many businesses in both the corporate and consumer sectors because service inventories tend to be highly perishable. (This distinctive characteristic of services was discussed in Chapter 1). A service firm must control these demand fluctuations as much as possible to provide quality service and remain profitable in the long run. Effective use of productive capacity is vital to the success of service organizations. The goal, however, should not be simply to use staff, labor, equipment, and facilities as much as possible, but to use them as productively as possible.

Consider

assigning students

the task .

of interviewing managers of local

service businesses about their firm’s demand-management and capacitymanagement strategies.

Patterns of demand. Students should have little difficulty in appreciating the notion of cyclic variations in demand. Get them to talk about their own experience with peak and off-peak conditions in different types of services.

For example, the demand for flu shots is at its peak during the fall and early winter. Late winter and spring are the shoulder seasons. The demand drops off completely in the off-peak summer season—which is typically the time when new vaccines are developed in preparation for the shoulder and peak periods.

Demand management. Understanding Figure 9.3 and relating it to Table 9.1 is central to this topic. The four approaches to managing demand consist of: 1) Take no action (let customers figure things out for themselves).

2) Manage demand through marketing mix elements.

3) Store demand through a reservation system (consider priority for best customers).

4) Store demand by formalized queuing (consider priority for best customers).

Consider asking students how well each strategy might apply to a selection of services that they use themselves, particularly services at your own university, the local area, or vacation areas that they have visited. Case Study 6, Accra Beach Hotel can contribute in the understanding of demand fluctuations and how companies deal with them.”

Psychology of waiting Students must appreciate the importance of waiting lines and queuing systems and how they help firms inventory demand over short periods of time. It is important to point out what a good system requires and how it affects the customers and their perceptions of service encounter.

Application exercises 4 & 5 will prove useful in carrying this discussion further.

QUESTIONS AND EXERCISES Review Questions 1. What is the difference between ideal capacity and maximum capacity? Provide examples of a situation where a) the two may be the same and b) the two are different.

•

Maximum capacity is the upper limit to a firm’s ability to meet .

•

customer demand at a particular time.

Optimum capacity is the point of capacity utilization beyond which a firm’s efforts to serve additional customers will lead to a perceived deterioration in service quality.

Note that in sports and entertainment, optimum and maximum may be one and the same because a big crowd creates excitement. In the case of restaurants both capacities are different because when all tables are occupied, it is noisier and service quality deteriorates.

2. Describe the building blocks for managing capacity and demand.

There are two basic approaches. 1) adjust capacity to meet demand, and 2) manage the level of demand. Together these necessitate four building blocks – a) define productive capacity, b) manage capacity, c) understand demand and, d) manage demand.

3. What is meant by productive capacity in services?

In a service factory, productive capacity refers to at least five forms: 1) Physical facilities designed to contain customers (used for peopleprocessing or mental stimulus-processing services).

2) Physical facilities designed for storing or processing goods that either belong to customers or are being offered to them for sale.

3) Physical equipment used to process people, possessions, or information (including equipment such as machinery, hair dryers, cooking ovens, and cash registers).

4) Labor, which is used for both physical and mental work (this is a key element in all high-contact services and many low-contact ones).

5) Infrastructure (either public or private) in sufficient capacity to allow an organization to deliver quality service to its own customers.

4. Why is capacity management particularly significant for service firms?

Because a service is a deed or performance, rather than a tangible item that the customer keeps. The performance is time bound and “perishable,” so it cannot be stockpiled for later resale. The necessary facilities, equipment, and labor can be kept available to create the service, but these represent productive capacity rather than the product itself. Unused capacity is a wasted asset. When demand exceeds capacity, customers may be sent away disappointed, because no inventory is available for backup. An important task for service marketers, therefore, is to find ways of smoothing demand

.

levels to match capacity.

5. What actions can firms take to adjust capacity to more closely match demand?

Capacity can be managed in a number of ways, including: • Stretching capacity—some capacity is elastic and more people can be served with the same capacity through crowding (e.g., in a subway car), extending operating hours, or speeding up customer processing times.

• Scheduling downtime during low periods.

• Cross-training employees, use part-time employees.

• Inviting customers to perform self-service.

• Asking customers to share capacity.

• Designing capacity to be flexible.

• Renting or sharing extra facilities and equipment.

6. How can firms identify the factors that affect demand for their services?

There are certain ways to predict variations in demand and their underlying causes.

• Analyze, if demand levels follow a predictable cycle and if so, find out the duration of the demand cycle.

• Identify the underlying causes of these cyclic variations such as employment schedules, holidays, seasonal changes etc.

• Increase demand levels seem to change randomly, try to identify the underlying causes like weather, accidents, natural disasters etc.

• Disaggregate demand for a particular service over time, by market segment.

7. What actions can firms take to adjust demand to more closely match capacity?

Demand can be managed in the following five basic ways: • Take no action, and leave demand to find its own levels.

• Reduce demand during peak periods.

• Increase demand during low periods.

• Inventory demand through waiting lines and queuing systems.

• Inventory demand through reservation systems.

8. How can marketing mix elements be used to reshape demand patterns? .

The following marketing mix elements can be used to help smooth out fluctuations in demand: • Use price and other costs to manage demand. If the firm understands the shape of demand curves for different market segments, then prices may be raised/lowered to discourage/attract particular segments at particular times.

• Change product elements. Features may be varied according to the time of day (e.g., restaurants) or season of the year (hotels) to attract different market segments.

• Modifying time and place of delivery to reflect changing market needs over the product demand cycle.

• Use promotion and education. Signage, advertising, and promotion can be used to inform customers of peak periods (encouraging them to avoid using the service during these times, if possible) and promoting off-peak times when the service facility is less crowded and service faster.

9. What are the advantages and disadvantages of the different types of queues for an organization serving large numbers of customers? For which type of service might each of the queuing types be more suitable?

Figure 9.16 shows various queue configurations.

• Single line sequential stage queues are appropriate for small waiting time and each stage is simple with little chances of stand-offs.

• Single line to multiple servers (snake) is always preferable over multiple lines to multiple servers, as multiple lines may not move at the same speed.

• Designated lines to designated servers configuration are suitable for different segments of customers and different jobs.

• Take a number approach saves from the hassles of standing in the queue, if waiting time is too long. In the meantime customers can do something else.

Organizations may also adopt hybrid approaches to suit their requirements.

10.

How can firms make waiting more pleasant for their customers?

.

Pre- and post-process waits feel longer than in-process waits. There is an element of anxiety in pre-process wait, although in post-process wait (waiting to pay the bill) there is an element of frustration due to a sense of hurry.

Therefore, service providers should design the process such that most of the pre- and post-process waiting periods are shifted into in-process waiting period. We discussed 10 possible steps, including keeping customers occupied or entertained while waiting, informing customers how long the wait is likely to be, providing them with an explanation of why they have to wait, and avoiding perceptions of unfair waits.

11.

What are the benefits of having an effective reservation system?

A well-organized reservation system should allow the organization to deflect demand from a first-choice time to other times, from one class of service to another and even from first-choice locations to alternative ones. Problems, however, arise when customers fail to show up or service firms overbook.

Solution lies in requiring a deposit for making reservation and compensating to victims of overbooking.

Many firms allow customers to make their reservations on the Web site to make it fast and user-friendly. Reservation system should aim at maximizing yield—(average revenue received per unit of capacity). Based on analysis of past performance and current market data, capacity should be allocated on specific dates to various types of customers at specific prices. Formalized yield management systems help in formulating reservation strategies based on the historical data and forecasts of demand.

12. How can service firms use residual service capacity after all strategies of matching supply and demand have been exhausted?

Even after capacity and demand management actions are taken, some surplus capacity might still exist and service firms can create alternative uses of this otherwise wasted capacity. Some possible uses include; use capacity to wow the customers through outstanding customer service, reward loyal customers through special promotions, provide free or heavily discounted special promotions as a part of loyalty program, reward the employees and their families, or barter free capacity

APPLICATION EXERCISES 1. Explain how flexible capacity can be created in each of the following situations: (a) a local library, (b) an office-cleaning service, (c) a technical support helpdesk, (d) an inter-flora franchise.

.

Students need to take into account the capacity level in relation to the variations in demand. Some possible answers: a) a local library – allow library users to borrow more books during the school holidays; organize a national reading month to promote reading b) an office-cleaning service - have its employees to work harder and faster during peak periods (end of year or during offices lull periods like during the summer or winter vacations) c) a technical support helpdesk – encourage automated services or selfservice transactions d) an inter-flora franchise –promote international or overseas deliveries 2. Identify some examples of firms in your community (or region) that significantly change their product and/or marketing mix in order to increase patronage during low demand periods.

This is a straightforward exercise. Weaker students are likely to miss some of the less obvious capacity elements that are situated “backstage.” Capacity variation (chasing demand) may not be readily apparent, so encourage students to ask questions of management.

3. Select a service organization of your choice, and identify its particular patterns of demand with reference to the checklist provided in Table 9.1 and answer: (a) What is the nature of this service organization’s approach to capacity and demand management? (b) What cha nges would you recommend in relation to its management of capacity and demand and why?

Have students think about budgeted marketing strategies that would improve firm performance.

4. Review the 10 suggestions on the psychology of waiting. Which is the most re levant in (a) a supermarket, (b) a city bus stop on a rainy, dark evening, (c) a doctor’s office and (d) a ticket line for a football game that is expected to be a sell-out?

Waiting time and the state of mind differ in all of the above situations. Refer to the 10 suggestions in the text to find out which all propositions are applicable in the above cases.

5. Give examples, based on your own experience, of a reservation system that worked really well, and of one that worked really .

badly. Identify and examine the reasons for the success and failure of these two systems. What recommendations would you make to both firms to improve (or further improve in case of the good example) their reservation systems?

Students need to take into account the reservation done through Web sites and telephones also. In both the cases, find out the convenience offered and the conditions imposed on the customer in order to avoid fake reservations.

Also try to look into reservation system from company’s point of view in terms of additional revenue generated by balancing demand and capacity.

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CHAPTER 10 CRAFTING THE SERVICE ENVIRONMENT This chapter examines the role of the service environment in shaping customer’s perceptions of a firm’s image and positioning, and in helping to engineer the customer’s service experience. The servicescape model, which emphasizes the impact of physical surroundings on customers and employees, is used as a central framework. The chapter advocates that apart from an aesthetic and experiential perspective, service design should aim to facilitate smooth movement through the service process.

LEARNING OBJECTIVES By the end of this chapter, students should be able to  (LO1) Recognize the four core purposes service environments fulfill.  (LO2) Know the theoretical underpinning from environmental psychology that helps us to understand how customers and employees respond to service environments.  (LO3) Be familiar with the integrative servicescape model.  (LO4) Know the three main dimensions of the service environment.  (LO5) Discuss the key ambient conditions and their effects on customers.  (LO6) Determine the roles of spatial layout and functionality.  (LO7) Understand the roles of signs, symbols, and artifacts.  (LO8) Know how service employees and other customers are part of the servicescape.  (LO9) Explain why designing an effective servicescape has to be done holistically and from the customer’s perspective.

.

CHAPTER OUTLINE (LO1) Recognize the four core purposes service environments fulfill.

The service environment, also known as servicescape, has a purpose. Many service firms take a lot of trouble to shape the environment. The servicescape is to • Shape customers’ experiences and behavior • Establish the image, positioning and differentiation for the service firm • Form part of the value proposition • Facilitate the service encounter and enhance productivity Service Insights 10.1 This article discusses how hospitals are making a conscious effort to make its servicescape a much more pleasant place for its patients to stay and recuperate, and for its employees, a better place to work in. Get students to give some examples of hospitals that are changing its servicescape to be a friendlier place to get well.

(L02) Know the theoretical underpinning from environmental psychology that helps us to understand how customers and employees respond to service environments.

Stimulus-Organism Response model displayed in Figure 10.7 holds that our feelings are central to how we respond to different elements in the environment. Valence and Intensity Model of Affect in Figure 10.8 suggests that emotional responses to environments can be classified along two main dimensions, pleasure and arousal. In addition, affect can be caused by perceptions and cognitive processes of any degree of complexity. The more complex a cognitive process becomes, the more powerful its impact on affect. In such a situation, the interpretation of events that trigger the cognitive process eventually determines affect.

(L03) Be familiar with the integrative servicescape model Bitner’s servicescape framework (Figure 10.9) includes employees as a determinant of customer response to service environments. It is important to realize that the behavioral responses of customers and employees must be shaped in ways that facilitate production and purchase of high quality service.

.

(L04) Know the three main dimensions of the service environment The servicescape model shows the key dimensions of a service environment.

They are: ambient conditions, space and functionality, and signs, symbols and artifacts.

(L05) Discuss the key ambient conditions and their effects on customers Ambient conditions are characteristics of the environment pertaining to our five senses, which work together to create the desired service environment.

The resulting atmosphere creates a mood that is perceived and interpreted by the customer. Ambient conditions are perceived both separately and holistically, and include lighting and color schemes, size and shape perceptions, sounds (noise/music), temperature, and scents. Together they can be designed to elicit desired behavioral responses from customers.

(L06) Determine the roles of spatial layout and functionality The environmental dimension of the service also includes its spatial layout and functionality, which together will affect buying behavior, customer satisfaction, and consequently, the business performance.

(L07) Understand the roles of signs, symbols and artifacts The last aspect of the environmental dimension in Bitner’s servicescape model (Figure 10.9) consists of signs, symbols, and artifacts. These not only provide directions for first-time customers, they also connote the firm’s image. The challenge for service firms is to use signs, symbols, and artifacts to clearly navigate customers through the service process, as well as what the appropriate behavior for that service is.

Service Insights 10.2 This article provides guidelines and the need for effective parking designs.

.

(L08) Know how service employees and other customers are part of the servicescape The appearance and behavior of both service personnel and customers can strengthen, or weaken, the impression created by a service environment.

Marketing communications can be used to attract those who will not only appreciate the ambience created by the service provider, but also actively enhance it by their appearance and behavior.

(L09) Explain why designing an effective servicescape has to be done holistically and from the customer’s perspective In designing the ideal servicescape, it is not about getting individually perfect components and putting them together to form the “perfect environment.”

Instead, servicescapes have to be viewed holistically, whereby anything in the service environment depends on everything else in order to give it the “right” feel. No dimension can be optimized in isolation. This makes designing a service environment an art. Nevertheless, feedback and the observations of customers do help guide companies in designing their servicescape. This brings forth a key point—that is to design from a customer’s perspective.

This is the most important factor often overlooked by designers and companies alike.

Service Insights 10.3 This insight exhibits how emerging technologies such as virtual reality (VR) and augmented reality (AR) will increasingly become part of servicescape at Disney Tokyo in 2050.

Service Insights 10.4 This exhibit showcases how Disney’s servicescape design and upkeep help to script customer experiences and create pleasure and satisfaction.

TEACHING SUGGESTIONS This chapter illustrates the issues that are relevant for designing service environments and brings to attention the importance of the service environment as part of the entire service delivery. At appropriate points you should plan to ask students to illustrate key points with examples from their own experiences as customers and/or employees.

Role of the service environment. Students should understand the role of the service environment as part of the overall strategy as well as the product delivered by the company. Review question 1 can be used to address this issue.

How does the servicescape affect customers? Students should be able .

to describe how the different servicescape elements work together in a holistic manner to influence consumer behavior. Review questions 2 and 3 can be used to familiarize students with the two models used in the text. In addition, review questions 4 and 5 highlight how ambient conditions work in a real world setting and are useful as a basis for future discussion.

Who is the servicescape designed for? Students should be aware that ultimately the servicescape should be designed with the customers in mind while enhancing the firm’s productivity. From the picture of the two hotel lobbies (Figure 10.4), get students to discuss what types of customers are targeted and what impressions these two lobbies are designed to make on customers. Firms must take a balanced approach in their designs.

Nevertheless, companies can turn to a variety of feedback tools and techniques to uncover consumer preference, which review question 5 covers.

In addition, application question 2 is also appropriate for bringing across this point. The Shouldice Hospital case study at the end of the book can help students appreciate how hospitals use environment to improve the overall customer service experience.

QUESTIONS AND EXERCISES Review Questions 1. What are the four main purposes service environments fulfill?

The service environment, also known as servicescape, has a purpose. Many service firms take a lot of trouble to shape the environment. The servicescape is to • Shape customers’ experiences and behavior • Establish the image, positioning and differentiation for the service • Form part of the value proposition • Facilitate the service encounter and enhance productivity

firm

2. Describe how the Stimulus-Organism-Response (SOR) model and the Valence and Intensity Model of Affect explain customer responses to a service environment.

Mehrabian and Russell developed a model (Figure 10.7) proposing that feelings rather than perceptions or thoughts drive behavior. In turn, Russell further developed a model of affect (Figure 10.8), which suggests that emotional responses to environments can be classified along two main dimensions, pleasure and arousal. In addition, affect can be caused by perceptions and cognitive processes of any degree of complexity. The more complex a cognitive process becomes, the more powerful its impact on affect. In such a situation, the interpretation of events that trigger the cognitive process eventually determines affect.

Bitner’s servicescape framework (Figure 10.9) includes employees as a .

determinant of customer response to service environments. It is important to realize that the behavioral responses of customers and employees must be shaped in ways that facilitate production and purchase of high quality service.

3. What is the relationship between valence and intensity model of affect and the servicescape model?

Russell’s model (Figure 10.8) suggests that customer’s emotional responses to environments can be categorized into four groups along two dimensions, namely—pleasure and arousal. The Russell model has been mostly used in services marketing to understand target and actual affective states of consumers and their response behaviors to these states.

Bitner’s servicescape model (Figure 10.9) builds on Russell’s model, and includes the various dimensions of servicescapes, as well as including employee responses into the model as well. Employee responses (cognitive, emotional, and psychological) can lead to overt behaviors, thus affecting the overall service delivery.

4. Explain why different customers and service staff respond very differently to the same service environment?

Student can use the servicescape models to explain such differences in responses. Different customer segments and even different individual customers within the same segment may have different likes and dislikes with regards to the service environment. The perception and effects of environmental stimuli on individuals are affected by response moderators.

The same stimulus (e.g., Rap music) may be perceived as sheer pleasure or sheer torture in a service environment, depending on the response moderators of those who listens to it.

5. Explain the dimensions of ambient conditions and how each can influence customer behavior in a service environment.

In essence, ambient conditions refer to those characteristics of t he environment pertaining to our five senses and can be viewed separately or holistically. These include lighting, color schemes, size and shape perceptions, sound, temperature, and scents.

Music has a very powerful effect on perceptions and behaviors, even at barely audible volume. The tempo of music has an impact on arousal levels.

When used appropriately, it can enhance customer’s perceptions about the service environment and personnel.

An ambient scent pervades the environment, may or may not be consciously perceived by customers and is not related to any product. It is able to impact the mood, affective and evaluative responses of the customers. In addition, it may even influence purchase intentions and in-store behaviors. .

Table 10.2 provides an illustration of scent in the form of aromatherapy.

Color is something that permeates every aspect of our daily lives. It encompasses various dimensions and could have varied meanings to an individual at any given time. Research has shown that colors have a strong impact on feelings. In a service environment context, it is known that warm colors generally have a positive impact on people. Care, however, must still be taken while managing color schemes in specific contexts—there is no single fixed solution to adhere to. Table 10.3 provides an overview on common associations of colors.

6. What are the roles of signs, symbols and artifacts?

Sign, symbols, and artifacts are important in helping to guide customers clearly through the process of service delivery. This is especially so for first time customers, who draw cues and meaning from these signs/symbols/artifacts in the service environment to help them form expectations about the type and level of service available to them. In addition, they should be designed to help communicate the service script, especially to first time or otherwise inexperienced customers.

7. What are the implications of the fact that environments are perceived holistically?

Although customers may only perceive specific aspects of the service environment consciously, the above statement brings forth the point that customers are ultimately still affected by the entire service environment taken as a whole. Care has to be taken to design environments that help to “engineer” the service experience customer’s desire, or would expect from the encounter.

8. What tools are available for aiding our understanding of customer responses, and for guiding the design and improvement of service environments?

Some of the tools available to firms are: (1) Keen observations by staff with regards to customer behaviors and responses to the service environment.

(2) Feedback and ideas from frontline staff and customers —this can be done using a wide array of feedback tools to “listen” to what your customers say.

(3) Field experiments whereby specific dimensions of the service environment (color schemes, layout, etc.) are manipulated and effects observed. (4) Blueprinting/service mapping (Chapter 8) can be extended to included physical environmental elements and customers response/cues documented along each stage of the service process.

APPLICATION EXERCISES 1. Identify firms from three different service sectors where the .

service environment is a crucial part of the overall value proposition. Analyze and explain in detail the value that is being delivered by the service environment in each of the three industries.

This can be used for class discussion. Some possible suggestions are hotels, restaurants, amusement parks, and spas. Students can use Bitner’s servicescape model (Figure 10.9) and its basic dimensions as a framework for analyzing their chosen service environments.

2. Visit a service environment and have a careful look around.

Experience the environment and try and feel how the various designs parameters shape what you feel and how you behave in that setting.

This question can be used to highlight the point about looking at the service environment from a holistic perspective—about how every element in the servicescape comes together as part of the service delivery and how ambient conditions influence the student’s behavior in that setting.

3. Select a bad and a good waiting experience and contrast the two situations with respect to the service environment and other people waiting.

This question can be used as a prelude to question 5 below. The idea is for students to identify the services environment elements that resulted in their eventual service experience. Students can also examine the Ten Propositions on the Psychology of Waiting Lines in Chapter 9 and discuss the role the service environment would play in shortening perceived waits, and making them less stressful and more comfortable.

4. Visit a self-service environment and analyze how the design dimensions guide you through the service process. What do you find the most effective for you, and what seems least effective?

How could that environment be improved to further ease the “way finding” for self-service customers?

Ask students to pick at least one more extensive or larger environment that would include way finding, such as automated multistory car parks, international airports, or large hospitals. What signs and artifacts are being used for guiding first-time customers or visitors through the site and through self-service processes (e.g., from parking the car, to finding a specialists practice). Possible examples of less complex or extensive self-service environments would be automated teller machines (ATMs) or even virtual environments on the Internet/web sites. Again, students can use the servicescape framework to analyze the overall service environment provided.

5. Take a digital camera and conduct a photo audit of a specific .

servicescape. Photograph examples of excellent and very poor design features. Develop concrete suggestions on how this environment could be improved.

Students will enjoy this exercise. Have students apply the audit concept to competing firms. Compare different categories of servicescapes such as outdoor versus indoor servicescapes.

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CHAPTER 11 MANAGING PEOPLE FOR SERVICE ADVANTAGE This chapter examines the role of human resource management in achieving service excellence. From a customer’s perspective, frontline employees represent the service firm and are the brand ambassadors. Recognizing that frontline work is difficult and stressful, the chapter covers various types of conflicts faced by staff. It uses the Service Talent Cycle to discuss HR tasks especially relevant to services, ranging from hiring, to training, and motivation of the frontline, showing how these relate to the task of moving a firm from the Cycle of Failure to the Cycle of Success. The chapter also highlights the role of a strong service culture and the need to establish value-driven leadership.

LEARNING OBJECTIVES  (LO1) Explain why service employees are so important for the success of a fi rm.  (LO2) Understand the factors that make the work of front-line staff demanding and often difficult.  (LO3) Describe the cycles of failure, mediocrity, and success in human resources for service fi rms.  (LO4) Understand the key elements of the Service Talent Cycle for successful human resource management in service firms.  (LO5) Know how to attract, select, and hire the right people for service jobs.  (LO6) Explain the key areas in which service employees need training.  (LO7) Understand the role of internal marketing and communications.  (LO8) Understand why empowerment is so important in many front-line jobs.  (LO9) Explain how to build high-performance service delivery teams. .

 (LO10) Know how to integrate teams across departments and functional areas.  (LO11) Know how to motivate and energize service employees so that they will deliver service excellence and productivity.  (LO12) Understand what a service-oriented culture is.  (LO13) Know the difference between service climate and culture, and describe the determinants of a climate for service.  (LO14) Explain the qualities of effective leaders in service organizations.  (LO15) Understand different leadership styles and realize the importance of role modeling and focusing the entire organization on the front line.

CHAPTER OUTLINE (LO1) Explain why service staff is so important to the success of a service firm The service level delivered and the way the service is delivered can be an important source of differentiation and competitive advantage.

Service staff is the most visible element of the service and the component that significantly delivers service quality. As the service staff represent the company in its interactions with the customers and deliver the brand promise, the service staff are also very much the service firm (from the customers’ point of view) and the brand.

Highly motivated service staff plays a key role in anticipating customer needs, building personalized relationships with customers, and thus building customer loyalty. Other than being an invaluable asset in high contact services, frontline staff is also crucial in low contact services where technology is largely commoditized. The firms’ differentiation will then rest on these few moments of truth whether it is through the phone, email or face-to-face.

(L02) Understand that the factors that make the work of frontline staff so demanding and often difficult

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High performing, satisfied employees are a key ingredient in achieving service excellence and customer loyalty. Frontline work, however, can be very demanding. Frontline staff are boundary spanners, as they operate at the boundary of the company, linking and transferring information from the inside of the organization to the outside world. As such, they often have conflicting roles particularly in areas such as service quality, productivity, and sales, as they have to fulfill both operational and marketing goals.

Conflict comes from three sources: Person/role conflict occurs when the job requirements are inconsistent with the staff’s own personalities, self-perception, and beliefs.

• Organization/client conflicts occur when service staff face the dilemma of whether they should follow the company’s rule or satisfy customer demands.

• Inter-client conflicts; i.e., when there are conflicts between customers, can also be a source of stress as the staff are often called in to resolve conflicts between customers.

•

Emotional labor is a very real problem faced by frontline staff and arises when there are discrepancies between the way the frontline staff feel inside and the emotions that they are expected to portray in front of customers.

(L03) Describe the cycles of failures, mediocrity, and success in HR for service firms.

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Cycle of Failure (Fig 11.7) begins with employee cycle of failure due to narrow job design, low wages, minimal training, and overemphasis on rules. This failure results in customer cycle of failure, which emphasizes on attracting new customers, as the old customers are dissatisfied due to poor employee performance.

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Cycle of Mediocrity (Fig 11.9) occurs in large bureaucratic organizations (e.g. state monopolies) which offer adequate pay and job security and but little scope for personal initiative. There is little incentive for the customers to cooperate with the organization to achieve better service. Customers are frustrated and resent the bureaucratic approach and lack of service flexibility.

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Cycle of Success (Fig 11.11) is the integrative employment cycle that managers should work toward. This cycle takes into account the long-term financial performance of the company and seeks to prosper through investment in their staff. Attractive compensation packages, broadened job designs, training, and empowerment practices help in keeping employees happier and in turn delight .

customers.

(LO4) Understand the key elements of the Service Talent Cycle and know how to get HR right in service firms Recruitment, selection, training, motivation, and retention of employees are the main functionalities of human resource management. These functions are critical for services, because customers tend to remember the role played by frontline employees better than any other aspect of the operation.

The Service Talent Cycle (Figure 11.12) shows how successful service providers take a long-term view of financial performance, investing in their employees to create a profitable cycle of success.

(LO5) Know how to attract, select and hire the right people for service jobs It is a known fact that when you want happy customers, they must be served by happy employees. It is, therefore, important that recruitment of individuals who are best fit for the job. The strategies are: • Hire the right people o Be the preferred employer o Select the right people •

How to identify the best candidates? o Observe behavior o Conduct personality tests o Employ multiple, structured interviews o Give applicants a realistic job preview

Services Insights 11.1: Southwest Airlines goes through an extensive hiring process to select candidates that have the right attitude for their organization. By doing so, the company is able to foster Southwest Spirit—a quality in people that causes them to go an extra mile when they need to.

(LO6) Explain the key areas service employees need training in.

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Service champions show a strong commitment in words, dollars and action to training.

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Train service employees actively. They need to learn about o Organizational culture, purpose and strategy o Interpersonal and technical skills o Product/service knowledge

(LO7) Understand the role of internal marketing and communications.

The success of service firms largely depends upon inculcating a service culture where all employees share the same value of service quality.

Internal Communications to employees play a vital role in maintaining and nurturing a corporate culture founded on specific service values.

(LO8) Understand why empowerment is so important in many frontline jobs After being the preferred employer, selecting the right candidate and training the staff well, the next step is to empower and trust the frontline staff to be able to conduct their job effectively.

• Empower the frontline.

• Empowerment is most appropriate when o Firm’s business strategy is based on competitive differentiation o Approach to customers is based on extended relationships o Organization uses technology that’s complex and nonroutine o Business environment is unpredictable o Existing managers are comfortable in letting employees work o

independently Employees have a strong need to grow, improve their skills and interact

• Levels of employee involvement are: suggestion involvement, job involvement and high involvement

(LO9) Explain how to build high-performance service delivery teams • • • • •

Identify what the team will achieve Select team members with care Monitor the team and its member and provide feedback Keep team members informed of goal achievement, update them and reward them for their efforts Coordinate with other managers to achieve overall company objectives

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(L10) Know how to integrate teams across departments and functional areas.

Part of a challenge for service management is to ensure that different departments and functions cooperate with each other. Potential ways to integrate teams across departments and functional areas are: • Transferring individuals internally • Establish cross-departmental and cross-functional project teams • Having cross-departmental and cross-functional service delivery teams • Appointing individuals whose job is to integrate specific objectives, activities and processes between departments.

• Carrying out internal marketing, training and integration programs • Having top management’s commitment.

(LO11) Know how to motivate and energize service employees so that they will deliver service excellence and productivity • Motivate and energize people through o Job content o Feedback and recognition • Goal achievement

(LO12) Understand what a service-oriented culture is.

A strong service culture is a belief in the importance of delivering superior customer value and service excellence. Some of the core values in a service culture include, innovation, joy, teamwork, respect, integrity, and social profit.

(LO13) Know the difference between service climate and culture, and describe the determinants of a climate for service.

While culture is more overarching and value focused, organizational climate is the part of organization’s culture that can be felt or seen.

Employees form their perceptions of company values through interaction with management and leaders and this translates into their behavior and eventually, customer outcome.

(LO14) Explain the qualities of effective leaders in service organizations.

Some qualities of effective leaders are; • Leaders should love their business .

• • • • •

Their core values should be related to service excellence and performance They need to believe in people who work for them They ask great questions and get answers from the team They are role models for the behaviors they expect from their teams They have a talent for communicating in a way that is easy to understand

(LO15) Understand different leadership styles and realize the importance of role modeling and focusing the entire organization on the front line.

There are two leadership styles: management of the “basics” versus transformational leadership that sets strategy and drives change.

Management of the basics is important to create a strong climate for service and transformational leadership provides a strong service vision and inspiration. Successful leaders have an ability to role model the behaviour they expect from managers and other employees. Often this requires leaders to observe both employees on the front line and their interaction with customers. This focus of the entire organisation on the front line helps in creating an understanding of what happened during the service encounter.

Service Insights 11.2: This insight shows the importance of “walk around” to learn how the organization is operating and also it provides an opportunity to role model the behaviors that senior management wants employees to emulate.

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TEACHING SUGGESTIONS The demanding nature of the front-line work. The importance of the service staff to the success of the service business must be clearly established with a balanced view of the emotional labor and stressful nature of front-line work. One of the chapter’s main objectives is to teach students how the service firm can better understand the front line, harness their best potential, and manage the front line to better enhance the firm’s service advantage. Review questions 1, 4 and 5 as well as application questions 3 and 4 provide excellent insights into this issue. You can invite students who have worked in front -line jobs to share with the class their perspectives about the conflicting demands between achieving productivity and delivering quality service to customers. Be sure to ask them, too, whether their jobs involved emotional labor and how they dealt with this. Have students describe boundary spanning issues and how they dealt with it on the job.

The cycles of failure, mediocrity, and success in service firms.

The Cycles of Failure, Mediocrity, and Success as presented in Figure 11.7, Figure 11.9 and Figure 11.11 respectively, are excellent vehicles for illustrating and discussing the interrelations between the functions of marketing, operations, and human resources. And if all three are handled effectively, the combination should lead to a successful strategy of integrated service management. Review question 3 gives good background to this issue and offers reasons why it is often so hard to break free from the current reality facing many service firms.

Human resource management. Students should learn how human resource strategies and tools such as hiring, training, motivation, empowerment, and teamwork can be utilized to move service firms into the Cycle of Success. The new organization pyramid in Figure 11.26 (with the entire organizational focusing on the front line) also serves as a good illustration for teaching the new paradigm in service leadership and culture. Review questions 4 to 9 cover the HR issues while review question 12 investigates how the service firm can build a service culture focusing on service excellence and productivity.

Students can learn more about managing people for service advantage through Case 11, on Singapore Airlines Human Resource Management.

QUESTIONS AND EXERCISES Review Questions 1. Why are service personnel so important for service firms?

Service personnel, often the most visible element of the service, are often a core part of the brand and are the means by which the brand .

promise is delivered. The moments of truth provided by the service personnel at the front line are crucial in building customer loyalty. If delivered well, the enhanced personnel relationships built will lead to repeat purchase and increased loyalty. Conversely, a bad service experience can quickly lead to customer switching and churning.

2. What is emotional labor? Explain the ways in which it may cause stress for employees in specific jobs. Illustrate your answer with suitable examples.

Many service encounters involve more than just correct technical execution of a task. They also involve human elements like personal demeanor, courtesy and empathy. Because these factors are a basic part of the service from the customers’ point of view, employees must sometimes undergo emotional labor to make sure that their behavior meets or exceeds company and customer expectations. Some service jobs require workers to be friendly, others to act compassionate, sincere, or even self-effacing. Trying to conform to customers’ (and employers’) expectations on these dimensions can be stressful for employees, who may be required to act out emotions they don’t feel at times during the course of their jobs. Special training on how to handle these emotions is often an important part of employee training in service jobs like policing, firef ighting and emergency medical care.

(Students may be able to offer insights from their own working experience in front-stage service jobs—you may want to encourage this.)

3. What are the key barriers for firms to break the Cycle of Failure and move into the Cycle of Success? How should an organization trapped in the cycle of mediocrity proceed?

The barriers impeding the move to the Cycle of Success from the Cycle of Failure include: Shortsighted management. Management resistance can be a big barrier. The current management often makes too many shortsighted assumptions particularly about low-pay/high-turnover HR strategies, the cost, and the revenue variables. The move to the Cycle of Success first requires a mindset shift from the management, (i.e., requiring them to adopt a more far-sighted and strategic approach to human resource management before the rest of the process can be improved or changed).

Low margins. The company operating in the Cycle of Failure tend to have low profit margins and the cost involved in recruiting and training .

new staff, increasing salaries and benefits, engaging new resources, and job redesign are major considerations as the company may simply be unable to cope with the increasing financial burden of this change.

The transition to the Cycle of Success requires a period of readjustment and learning. A company that is only earning weak profits without significant resources may find it hard to go through this period of readjustment as the company may risk poorer performance during this learning and readjustment stage.

Inertia. The company may face difficulty in breaking free from the Cycle of Failure as many of the practices or policies may have become too entrenched or rigid over the years such that the company simply finds it hard to change, preferring to choose the path of less resistance, (i.e., staying with the current reality and thus remaining in the vicious Cycle of Failure).

Organizations trapped in the cycle of mediocrity will find it very difficult to get out because employees have relatively few incentives to serve customers better. Perhaps organizations should consider making employees more competitive through performance-based compensation and bonuses to encourage creative services. However, this requires more competitors in the industry so that organizations will be more motivated to improve their service through training, skills upgrading, and new product and service innovations.

4. List five ways in which investment in hiring and selection, training, and ongoing motivation of employees will pay dividends in customer satisfaction for such organizations such as: (a) a restaurant, (b) an airline, (c) a hospital, and (d) a consulting firm.

Students should refer to the material on the Cycle of Success in answering this question. They should also point out that all four examples listed above are high-contact services; this means that the behavior and attitude of front-line staff will have a significant impact on customers’ perceptions of service quality. The investment in their employees is likely to yield, amongst others, a more proactive, trained, and motivated workforce that fits nicely into and personifies the culture of the service firm. This will in turn translate into a better service experience and satisfaction for the customer in these high- contact services.

5. Describe the key components of the service talent cycle.

Recruitment, selection, training, motivation, and retention of employees are the main functionalities of human resource .

management. These functions are critical for services, because customers tend to remember the role played by frontline employees better than any other aspect of the operation.

The Service Talent Cycle (Figure 11.12) shows how successful service providers take a long-term view of financial performance, investing in their employees to create a cycle of success.

6. What can a service firm do to become a preferred employer and, as a result, receive a large number of applications from the best potential candidates in the labor market?

It is a known fact that when you want happy customers, they must be served by happy employees. It is, therefore, important that recruitment of individuals who are best fit for the job. The strategies are: • Hire the right people o Be the preferred employer o Select the right people

To effectively compete in the labor market means having an attractive value proposition for potential employees, including a good image in the community as a place to work, and delivering high quality products and services which make employees feel proud to be part of a team.

7. How can a firm select the best-suited candidates from a large number of applicants?

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How to identify the best candidates? o Observe behavior o Conduct personality tests Employ multiple, structured interviews o Give applicants a realistic job preview o

8. What are the key types of training service firms should conduct?

To enable their frontline employees, firms need to: Conduct painstaking extensive training on (1) the organizational culture, purpose, and strategy; (2) interpersonal and technical skills; and (3) product/service knowledge.

•

9. Identify the factors needed to make service teams successful .

in (a) an airline, (b) a restaurant, and (c) a customer contact center. What are the factors that favor a strategy of employee empowerment?

Some common factors needed to have successful teams in all of these scenarios are shared emotional commitment to organizational culture and purpose, interpersonal and technical skills, and product knowledge.

Specifically, these factors can be a.

An Airline: All members of the team must have clear goals, which they will coordinate and integrate with other teams and functions throughout the airline. b.

A restaurant: The teams here will need members that have the skills to achieve the goals for the entire team. There are technical skills involved in restaurant management, members must be skilled in these. c.

A customer contact center: Teams must have excellent product knowledge to be able to successfully handle the customer. They must also be well trained in interpersonal communication skills and customer handling.

The factors favoring a strategy of employee empowerment include: • When business strategy is based on competitive differentiation, and on offering personalized, customized service • When approach to customers is based on extended relationships rather than on short-term transactions • When the organization uses technologies that are complex and nonroutine in nature • When the business environment is unpredictable and surprises are to be expected • Existing managers are comfortable with letting employees work independently for the benefit of both the organization and its customers • Employees have a strong need to grow and deepen their skills in the work environment, are interested in working with others, and have good interpersonal and group process skills 10. How can frontline employees be effectively motivated to deliver service excellence and productivity?

• Motivate and energize people through

o o o o

Job content Feedback and recognition Goal accomplishment Monetary rewards

11. How can a service firm build a strong service culture that emphasizes service excellence and productivity?

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To do so, the top management must take the lead in embracing a service culture that is conducive to the development of service excellence and productivity. Once the management has committed itself to building this strong service culture, the next most important thing is to filter this message, in a manageable and meaningful form, down to the service personnel. Employees gain their understanding of the firm’s direction through daily interactions with the management.

Management should spend time with the service personnel, shari ng and impressing onto them the importance of the front line and how they are a big source of the company’s competitive advantage.

A strong communications plan should also be in place to shape the culture and spread the message. Examples include the Ritz-Carlton Gold Standards (see Service Insights 11.6).

12. What is the relationship among organizational culture, climate for service, and leadership?

Organizational culture defines the values that guide organizational action whereas service climate is the surface layer on top of culture which is more concrete aspect that can be experienced by the employees. Strong leaders set core value of organizational culture but also provide role model for behavior that they expect in the climate.

13. Why is role modeling a desirable quality in service leaders?

Role modelling helps the employees to understand the behaviours they must exhibit to comply with the leadership’s expectations of culture and climate.

APPLICATION EXERCISES 1. An airline runs a recruiting advertisement for cabin crew that shows a picture of a small boy sitting in an airline seat and clutching a teddy bear. The headline reads: “His mom told him not to talk to strangers. So what’s he having for lunch?”

Describe the types of personalities that you think would be (a) attracted to apply for the job by that ad and (b) discouraged from applying. a) The situation calls for skills in gaining a reticent child’s confidence.

The flight attendant (FA) must persuade the boy that s/he is not a scary stranger but someone he can comfortably talk to. The FA, however, must be able to build this confidence quickly—there are lots of other passengers to serve—so a warm, disarming smile will .

probably help. Finally, the FA must help the child to choose something he will like from the limited menu. This ad will appeal to people with warm, friendly personalities who are good at establishing rapport with others, like children, can sum up situations quickly, and are flexible enough to tailor their approach to different situations. b) This ad will discourage individuals who see working as an FA as an occupation that brings them into contact with glamorous people and takes them to exciting destinations. It will be a particular turn off to those who dislike children, are inflexible in their dealings with others, and have a manner that quickly turns brusque and impatient when a standardized greeting and questioning procedure doesn’t work.

2.

Use the Service Talent Cycle as a diagnostic tool on a successful and an unsuccessful service firm you are familiar with. What recommendations would you prescribe to each of these two firms?

Students (who have had some working experience) may use their own experiences to discuss companies that have a good or poor service culture. Alternatively, students may recite on companies which they have heard from families or friends.

3.

Think of two organizations you are familiar with, one that has a very good and one that have a very poor service culture. Describe the factors that contributed to shaping those organizational cultures. What factors do you think contributed most? Why?

Students (who have had some working experience) may use their own experiences to discuss companies that have a good or poor service culture. Alternatively, students may recite on companies which they have heard from families or friends.

Students need to discuss the cycles of failure and success.

4. What issues do you see as most likely to create boundaryspanning problems for customer-contact employees in a customer call center at a major cable service provider? Select four issues and indicate how you would mediate between operations and marketing to create a satisfactory outcome for all three groups

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Boundary spanning issues at a customer call center at a major cable service provider may include the following: (operations versus marketing).

• Customer demands free on-site servicing • Customer demands to talk to the top management for

small

complaints

• Upgrading of service plans • Customer demands for immediate resolving of problem

Students should be encouraged to draw on own experiences, give their own examples, and discuss why those boundary-spanning situations are particularly difficult. A class role-play may help the students better understand the difficulties of handling such situations.

5. Identify the factors needed to make service teams successful in (a) an airline, and (b) a restaurant, and a customer contact center.

Refer back to Review Question 9.

6. Profile an individual whose leadership skills have played a significant role in the success of a service organization, identifying personal characteristics that you consider important.

Students should talk about business leaders of their own choice but they must be careful to discuss how the traits of being a role model, focus on vision, focus on front-line, etc. have played a role in the success of the organization.

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CHAPTER 12 MANAGING RELATIONSHIPS AND BUILDING LOYALTY Chapter 12 shows how firms can develop a loyal and profitable customer base. It introduces the Wheel of Loyalty, which shows three systematic steps in building customer loyalty. Starting with the foundations for loyalty (including segmentation, selective customer acquisition, tiering of service, and service quality), it shows how to create loyalty bonds (including deepening the relationship through cross- selling and bundling, loyalty rewards, and higher-level social, customization, and structural bonds).

Emphasis is also placed on reducing customer churn/defections.

The chapter closes with a discussion on customer relationship management (CRM) systems.

LEARNING OBJECTIVES By the end of this chapter, students should be able to  (LO1) Recognize the important role customer loyalty plays in driving a service firm’s profitability.  (LO2) Calculate the life-time value (LTV) of a loyal customer.  (LO3) Understand why customers are loyal to a particular service fi rm.  (LO4) Know the core strategies of the Wheel of Loyalty that explain how to develop a loyal customer base.  (LO5) Appreciate why it is so important for service firms to target the “right” customers.  (LO6) Use service tiering to manage the customer base and build loyalty.  (LO7) Understand the relationship between customer satisfaction and loyalty.  (LO8) Know how to deepen the relationship through cross-selling and .

bundling.  (LO9) Understand the role of financial and non-financial loyalty rewards in enhancing customer loyalty.  (LO10) Appreciate the power of social, customization, and structural bonds in enhancing loyalty.  (LO11) Understand what factors cause customers to switch to a competitor and how to reduce such switching.  (LO12) Know why loyalty programs and customer relationship management (CRM) systems are important enablers of delivering loyalty strategies.  (LO13) Understand the part played by CRM systems in delivering customized services and building loyalty.

CHAPTER OUTLINE (L01) Recognize the important role customer loyalty plays in driving a service firm’s profitability The longer a customer stays with a firm, the more profitable that customer is to serve (Figure 12.4). The sources of this greater profitability (Figure 12.5) include the following: • Increased usage over time

Reduced operating costs as loyal customers become more efficient to serve • Profits from referrals, and willingness—at least on occasion—to pay a price premium. The economic benefits of customer loyalty often explain why one firm is more profitable than another.

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(L02) Calculate the lifetime value (LTV) of a loyal customer Loyal customers may not always be more valuable than those making a one-time transaction. The profit impact of a customer may also vary dramatically depending on the stage of the product life cycle the service is in. Managers must analyze the situation and look within the customer segments in their organization and determine the profitability levels for the different groups of customers.

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Refer to the worksheet for calculating a long-term customer’s value to a firm (page 376 of the text). Managers should be concerned with the gap between actual and potential customer value to maximize profitability.

(LO3) Understand why customers are loyal to a particular service firm One cannot expect customers to become loyal just because they have bought from our stores. A repeat customer does not make a loyal customer. We need to give customers a reason to continue to buy from us instead of going to the competitors.

(LO4) Know the core strategies of the Wheel of Loyalty that explain how to develop a loyal customer base The Wheel of loyalty (Figure 12.6) shows that arriving at customer loyalty involves 3 components: • Building a foundation for loyalty • Creating loyalty bonds • Reducing churn drivers

The rest of the chapter is organized around these 3 components.

(LO5) Appreciate why it is important for firms to target the “right” customer Companies need to be selective about the segments they target if they want to build successful customer relationships. Leading service firms are picky about acquiring only the “right” customers for whom their firms have been designed to deliver truly special value. Acquiring the right customers often brings long-term revenues and continued growth from referrals as well as employee satisfaction.

Companies must give sufficient attention to the value of each customer rather than the number of customers. Generally, heavy users who buy more frequently and in larger volumes are more profitable, but managers shouldn’t assume that the “right customers” are always the big spenders. Service Insights 12.1 showcases how Vanguard Group designed its products and pricing to attract and retain the “right” customers.

Service Insights 12.1: Vanguard managed to achieve low redemption rates, making it the fastest-growing mutual fund in its industry. Their secret was careful customer acquisition. They managed to recruit customers who were long-term index holders.

This stability of its loyal customer base gave it a cost advantage.

Vanguard also introduced changes to a number of industry practices, discouraging active traders from buying funds. Finally, it’s pricing was set up to reward loyal customers. These factors in combination helped Vanguard to become the success that it is .today.

(LO6) Use service tiering to manage the customer base and build loyalty Customer loyalty can be increased in the series of steps illustrated in the Wheel of Loyalty in Figure 12.6. Service tiering, building loyalty bonds, and creating membership programs are three of the strategies.

Customer tiers can be developed around different levels of profit contribution, needs (including sensitivities to variables such as price, comfort, and speed), and identifiable personal profiles such as demographics. Each customer tier requires significantly different service levels based on customer requirements and customer value to the firm.

Slicing the customer base per se allows the firm to see clearly where the profits and the loss- making segments are and tailor their marketing accordingly in response. The Customer Pyramid (Figure 12.9) shows how this is done through a four-level tier: platinum, gold, iron and lead.

Service Insights 12.2 A study was made to determine if a firm’s customer satisfaction had a correlation with its stock price.

Results showed that satisfied customers improve the level and the stability of cash flow.

(LO7) Understand the relationship between customer satisfaction and loyalty The satisfaction-loyalty relationship can be divided into three zones: 1) zone of defection – occurs at low satisfaction levels 2) zone of indifference – found at moderate satisfaction levels 3) zone of affection – occurs at very high satisfaction where customers do not find the need to seek alternative service providers (LO8) Know how to deepen the relationship through cross-selling and bundling To deepen one’s relationship with the customers, many firms crosssell, up-sell or offer bundled services to their customers. The rationale is that the more involved a customer is with the company, the lesser the opportunity that he will move his business elsewhere.

(LO9) Understand the role of financial and non-financial loyalty rewards in enhancing customer loyalty In many instances, consumers are loyal to several brands. In such .

cases, the marketing goal is to strengthen the customers’ preference for one brand over others. Such bonds can be strengthened using reward systems that can be financial or non-financial in nature. a) Financial rewards: incentives that have a “hard” financial value including discounts, frequent flyer miles, cashbacks, etc. There are, however, pitfalls to financial reward programs. Customers can become deal loyal rather than brand loyal, or they may not ascribe sufficient value to the loyalty program. Deferred timing of the financial gain also reduces the appeal of the program. b) Non-financial rewards: “Soft” rewards that cannot be translated into monetary terms. Intangible rewards include special recognition and appreciation, status value, and higher-tier service levels.

Service Insights 12.3: Shares how British Airway’s frequent flyer program rewards not just frequency of use, but value of use. There is a table illustrating the benefits offered by British Airways to its most valued passengers.

(LO10) Appreciate the power of social, customization and structural bonds in enhancing loyalty Loyalty bonds can help in building on the loyalty created. Some specific strategies include: • • • • •

Deepening the relationship via bundling or cross selling Providing both tangible (i.e., both financial and non-financial) and intangible rewards Building social bonds based on personal relationships Building customization bonds where the service to an individual is heavily customized Forming structural bonds through joint investment in projects, etc.

(LO11) Understand what factors cause customers to switch to a competitor, and how to reduce such switching Figure 12.14 give good illustrations of the causes behind customer defections. Equally important as the strategies to build loyalty are the strategies to reduce churn. Some strategies include effective complaint management and service recovery, as well as increasing switching barriers and maintaining churn alert systems.

(LO12) Know why loyalty programs and customer relationship management (CRM) systems are important enablers of delivering loyalty strategies.

CRM signifies the whole process by which relations with the customers are built and maintained. CRM systems allow the company to better understand, segment, and tier its customer base, better target promotions and cross selling, and implement churn alert systems. .

CRM is an enabler, capturing customer information (such as history of transactions, customer preferences, etc.) and delivering it to the various touch points thus offering a “united customer interface” and a better service experience for the customer.

Service Insights 12.4 Companies are making use of CRM applications to develop a profitable relationship with customers.

Some of the popular applications include sales force automation and call center automation.

(LO13) Understand the part played by CRM systems in delivering customized services and building loyalty.

CRM systems should be seen as enabling the successful implementation of the Wheel of Loyalty. An effective CRM signifies a whole process by which relations with customers are built and maintained. Figure 12.15 presents an integrated framework for a CRM strategy where the focus is on profitable development and management of customer relationships.

TEACHING SUGGESTIONS This chapter links four themes: (1) the importance of loyalty as a driver of profitability especially over the lifetime value of the customers; (2) relationship marketing, defined here as marketing strategies designed to create extended relationships with customers; (3) the strategies of building loyalty through segmentation and building bonds; and (4) the use of CRM in building customer loyalty and delivering customized services.

Loyalty as an important driver of profitability. Students should be able to appreciate the reasons why loyalty is an important driver of profitability and also be able to calculate the lifetime value generated by a loyal customer. Review question 3 covers this calculation. Figures 12.4 and 12.5 each provide a good foundation for students to understand this issue.

Relationship marketing and targeting the right customers.

Students should be able to understand relationship marketing as marketing strategies designed to create extended relationships with customers. How customers are targeted is a crucial first step in the building of such relationships. Review questions 2 address the issues of targeting the right customers. You can also ask students to provide examples from their own service experiences: where different target segments mixed successfully, and where they did not mix successfully.

Encourage them to discuss examples of relationship marketing. They may have suggestions about how the service provider could have handled segmentation and tiering of services more effectively.

Creating valued relationships and maintaining customer loyalty.

Review questions 4, 6, and 7 as well as application questions .

1 through 6 address issues related to customer loyalty and maintaining relationships. The Wheel of Loyalty (see Figure12.6) should be used as a reference for this discussion. Reference should be made as to how specific steps such as customer tiering and bond buildings are salient steps in the Wheel of Loyalty.

What makes customers loyal or disloyal? What benefits are they looking for? Application exercises 1, 2, 3, and 4 are a great way for students to relate academic learning on what makes customers loyal or disloyal to their own experience. You can relate insights from this assignment to Service Insights 12.1, and Figure 12.14 What Drives Customers to Switch Away from a Service Firm?

Tiering of relationships: advantages and disadvantages. Students can be encouraged to give examples of where they have experienced tiering or when their families or themselves were are part of a certain loyalty program. To demonstrate the prevalence of loyalty programs, some instructors like to pull out their wallets in class and show all the frequent user cards they have in there (which may represent a wide range of service businesses from video rental companies to credit cards associated with various airlines to fast food restaurants). Application questions 1 and 2 can be used to get the class to critically assess, from both the consumer and the service firm viewpoints, the loyalty programs that they are involved in. Application questions 3 and 4 on the other hand, look at reasons for defection and thus offers a balanced discussion. Application questions 5 and 6 also provide good insights into loyalty programs.

Applications of CRM. Students should be encouraged to understand the concept and subsequently appreciate the benefits that CRM brings to the company. Review question 8 covers this issue. Application question 7 is a useful exercise for students to obtain real life and recent applications of CRM in service companies. These can be shared in class and used to generate class discussion. Students can also be encouraged to talk about and share their interactions with CRM.

QUESTIONS AND EXERCISES Review Questions 1. Why is customer loyalty an important driver of profitability for service firms?

The longer a customer stays with a firm, the more profitable that customer is to serve (Figure 12.4). The sources of this greater profitability include the following: • Increased usage over time

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Reduced operating costs as loyal customers become more efficient to serve Profits from referrals, and willingness—at least on occasion—to pay a price premium. The economic benefits of customer loyalty often explain why one firm is more profitable than another.

2. Why is targeting the “right” customers so important for successful customer relationship management?

Attracting the right customers is important as they bring in long-term revenues, continued growth in referrals etc. Emphasis must also be given to prevent attracting the wrong customers that typically results in costly churn, a diminished company reputation and disillusioned employees. Targeting the right customers also helps to ensure that customer acquisition is consistent with the firm’s goals and capabilities.

3. How can a firm calculate the lifetime value of customers?

Refer to the worksheet for calculating a long-term customer’s value to a firm (page 376 of text). Managers should be concerned with the gap between actual and potential customer value to maximize profitability.

Students should be encouraged to try the worksheet for a service of their choice.

4. How do the various strategies described in the Wheel of Loyalty relate to one another?

The Wheel of loyalty (Figure 12.7) shows that arriving at customer loyalty involves 3 components: • Building a foundation for loyalty • Creating loyalty bonds • Reducing churn drivers

Managers need to first ensure that they are selective in acquiring customers who fit the core value proposition through careful market segmentation. This will allow them to manage their customer base more effectively through tiering of services and allow them to deliver quality service. Achieving this will allow the firm to build the foundation necessary for loyalty. When this achieved, creating loyalty bonds will help to deepen the relationship and build social and structural bonds of a higher level. When customers feel that they can be loyal to a firm, managers can further retain their customers by installing an effective complaint handling and service recovery process as well as to increase switching costs for customers. These measures will help to reduce churn drivers, while forming more loyalty bonds with customers.

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Students should be able to discuss the Wheel of Loyalty. The may want to relate the Wheel to a specific company for discussion.

5. How can a firm build a foundation for loyalty?

Managers should choose a portfolio of target segments that is consistent with the firm’s goals, capabilities, and positioning strategy.

They must think carefully about how customer needs relate to such operational elements as speed and quality, when service is available, the firm’s capacity to serve many customers simultaneously, and the physical features and appearance of service facilities. They also need to evaluate how well their service personnel can meet the expectations of specific types of customers in terms of both personal style and technical competence. Finally, they should consider whether the company can match or exceed competing services directed at the same customers.

6. What is tiering of services? Explain why it is used and what its implications are for firms and their customers.

Students should use the Customer Pyramid (Figure 12.9) as a reference in answering this question. Tiering of services refers to the segmentation of the customer base around different levels of profit contribution, needs (including sensitivities to variables such as price, comfort and speed), and identifiable personal profiles such as demographics. Slicing the customer base per se allows the firm to see better where the profits and the loss-making segments are and tailor their marketing accordingly in response.

7. Identify some key measures that can be used to create customer bonds and encourage long-term relationships with customers.

Relationship marketing involves activities aimed at developing longterm, cost-effective links between an organization and its customers for the mutual benefit of both parties. Service firms can use a variety of strategies to maintain and enhance relationships, including treating customers fairly, offering service augmentations, and treating each individual customer as if he or she was especially important. Frequent user programs are also a widely used strategy for rewarding customer loyalty and building long-term relationships. Tiering of service, loyalty bonds, and membership programs can all help in building customer loyalty and encouraging long-term relationships.

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Why are benefits related to the core service (e.g., customization, transaction convenience, and service priority) generally more effective in building loyalty than rewards that .

are unrelated to the core service (e.g., air miles)?

Only customers who are in the Zone of Affection are truly loyal. These customers have a higher-level bond, which includes social, customization and structural bond. Competing firms usually find these bonds more difficult to copy than reward-based bonds.

9. What is the role of churn management in an effective loyalty strategy, and what tools can be used to understand and reduce customer churn?

It is important in loyalty strategies to understand why customers leave and then systematically reduce this customer churn. To prevent customers from switching firms should; analyse and address the key reasons why their customers leave, have good complaint-handling and service-recovery process and, increase “positive” customer switching costs.

10. Why are loyalty programs often important for a customer loyalty strategy?

Loyalty programs are often important for a customer loyalty strategy because they help to build and maintain the three bonds firms have with their customers.

11. What is the role of CRM in delivering a customer relationship strategy?

CRM systems are enablers in the successful implementation of customer relationship strategy. To be effective they include strategy development, value creation, multi-channel integration, information processing and performance assessment processes.

APPLICATION EXERCISES 1. Identify three service businesses that you patronize on a regular basis. Now, for each business, complete the following sentence: “I am loyal to this business because… ” Go round the room asking students to volunteer the types of services they are loyal to and the reasons. Put this information on the board and either comment on the results yourself or ask the students to do so. Sum up the discussion by identifying common loyalty drivers mentioned by the class, and link those back to the Wheel of Loyalty (Figure 12.6).

2. What conclusions can you draw about (a) yourself as a .

consumer, and (b) the performance of each of the businesses? Assess whether any of these businesses managed to develop a sustainable competitive advantage through the way it won your loyalty?

This follow-up exercise to application question 1 can be assigned as a take-home project or it can simply be assigned in class after running through application question 1(give students five minutes to write down their responses). Go a round the room asking students to draw conclusions about themselves as a consumer and the performances of the businesses. Put this information up on the whiteboard and either comment on the results yourself or ask the students to do so focusing on critically assessing whether the firms have managed to develop a sustainable competitive advantage through their membership or loyalty marketing programs.

3. Identify two service businesses that you used several times but have now ceased to patronize (or plan to stop patronizing soon) because you were dissatisfied. Complete the sentence: “I stopped using (or will soon stop using) this organization as a customer because ” The same approach as for application question 1 can be used here.

4. Again, what conclusions do you draw about yourself and the firms in exercise 3? How could each of these firms potentially avoid your defection?

The same approach as for application question 2 can be used here.

5. Evaluate the strengths and weakness of two frequent user programs, each one from a different service industry. Assess how each program could be improved further.

This exercise can be assigned as a take-home project, as part of class evaluation, or it can simply be assigned in class (give students five minutes to write down their responses). Go around the room asking students to comment on the strengths and weakness of frequent user programs in different service settings. Put this information up on the whiteboard and either comment on the results yourself or ask the students to do so.

6. Design a questionnaire and conduct a survey asking about .

two loyalty programs.

The first should be a membership/loyalty program your classmates or their families like best and which make them loyal to that firm. The second is about a loyalty program that is not well perceived, and does not seem to add value to the customer. Use open-ended questions, such as: What motivated you to sign up in the first place? Why are you using this program? Has participating in the program changed your purchasing/usage behavior in any way? Has it made you less likely to use competing suppliers?

What do you think of the rewards available? Did membership in the program lead to any immediate benefits in the use of the service? What role does the loyalty program play in making you loyal? What are the three things you like best about this loyalty/membership program? … liked least? What are some suggested improvements? Analyze what features make loyalty/membership programs successful and what features do not achieve the desired results. Use frameworks such as the Wheel of Loyalty should be used to guide your analysis and presentation.

Airlines and hotels are likely to figure prominently in student papers, but there will probably be a variety of other enterprises represented as well. Students should be encouraged to stress the features driving the success or failure of the loyalty programs selected. Frameworks should also be prominently applied in the discussions to enable better learning and application of core concepts. If desired, you can either develop a brief lecture commenting on the findings for the class as a whole or give students a chance to discuss their own insights in class.

What has worked well in our classes is to ask one group to collect and analyze all the individual student reports and analyses. This group can then present what features make loyalty/membership programs successful (using the class and their parents and friends as a sample), and what features do not achieve the desired results. Students can be asked to use frameworks such as the Wheel of Loyalty to guide their analysis and presentation.

7. Approach service employees in two firms with implemented CRM systems. Ask the employees about their experiences interfacing with these systems, and whether the CRM systems help them understand their customers better. Does this lead to improved service experiences for their customers? Do interview them about potential concerns and improvements suggestions they may have about their organization’s CRM systems. .

Students should be able to apply some of the materials they have learnt from the chapter and identify areas of CRM which can be improved by analyzing the responses from interviewees. Students are likely to discover that while companies try to implement CRM systems, they focus too much on the hardware aspects of CRM, and forget that it should be a total company culture. Hence, many CRM initiatives are abandoned.

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CHAPTER 13 COMPLAINT HANDLING AND SERVICE RECOVERY This chapter discusses consumer complaining behavior and principles of effective service recovery systems. Service guarantees are discussed as a powerful way of institutionalizing effective service recovery and as an effective marketing tool signaling high quality service. Jaycustomers are those that might take advantage of the firm and they need to be managed.

LEARNING OBJECTIVES By the end of this chapter, students should be able to  (LO1) Recognize the actions that customers may take in response to service failures.  (LO2) Understand why customers complain.  (LO3) Know what customers expect from the firm when they complain.  (LO4) Understand how customers respond to effective service recovery.  (LO5) Explain the service recovery paradox.  (LO6) Know the principles of effective service recovery systems.  (LO7) Be familiar with the guidelines for front-line employees on how to handle complaining customers and recover from a service failure.  (LO8) Recognize the power of service guarantees.  (LO9) Understand how to design effective service guarantees.  (LO10) Know when firms should not offer service guarantees.

 (LO11) Be familiar with the seven groups of jaycustomers and understand how to manage them effectively.

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CHAPTER OUTLINE (LO1) Recognize the actions that customers may take in response to service failures When customers experience a service failure (defined as a perception that one or more specific aspects of service delivery have not met customer expectations), they can take one or more of three major courses of action (see Figure. 13.4): (1) Take no action, (2) take some form of private action by switching the provider or generate negative word of mouth, (3) take some form of public action in the form of complaint to the firm or a third party or seeking redress through legal action.

(LO2) Understand why customer complain Customers generally complain to serve four main purposes: (1) Obtain restitution or compensation, (2) vent their anger, (3) help improve the service, (4) for altruistic reasons. Research shows that only 10% of unhappy customers complain. Customers don’t complain if they see the service as unimportant to be worth the effort and customers that belong to higher socio-economic levels are more likely to complain.

(LO3) Know what customers expect from the firm when they complain When customers complain they expect: • Procedural justice • Interactional justice • Outcome justice

(LO4) Understand how customers respond to effective service recovery Customers who complain give the firm a chance to correct problems, restore relationships with the complainer, and improve future satisfaction for all customers. An effective service recovery as a result of a complaint can improve customer satisfaction and loyalty.

(LO5) Explain the service recovery paradox The service recovery paradox – the effect that customers who experience a service failure and then have it resolved to their full satisfaction are sometimes more likely to make future purchases than customer who have no problem in the first place. However, this of course depends on the severity and “recoverability” of the failure. .

The best strategy is to do it right the first time!

(LO6) Know the principles of effective service recovery systems Managers should also consider developing guidelines for employees on how to handle customer complaints effectively when designing a system to address service failures. Table 13.1 highlights the strategies to reduce barriers to customer complaints.

Principles of effective service recovery systems: • Make it easy for customers to give feedback • Enable effective service recovery • Make service recovery proactive • Have planned recovery procedures • Teach recovery skills • Empower employees for recovery

Service Insights 13.1: Illustrates how recovery can be planned and taught. It’s humorous how the desk clerk knows the drill inside out and therefore treats each customer in a similar manner when the hotel has overbooked their rooms. While the recovery procedure was planned, the clerk was able to deliver it in a spontaneous way.

(LO7) Be familiar with the guidelines for frontline employees on how to handle complaining customers and recover from a service failure Service Insights 13.2 provides specific guidelines for handling customer complaints and how to engage in customer service recovery: 1) Act fast 2) Acknowledge the customer’s feelings 3) Don’t argue with the customer 4) Empathize with the customer 5) Clarify the truth and sort out the cause 6) Give customers the benefit of doubt 7) Propose the steps needed to solve the problem 8) Keep customers informed of progress 9) Consider compensations 10) Continue to regain customer goodwill 11) System audit and improve on flaws and shortcomings (LO8) Recognize the power of service guarantees Well-designed, unconditional service guarantees are an effective way of identifying and justifying needed improvements, plus creating a .

culture in which employees and management take proactive steps to satisfy guests. Why? They force firms to: • Focus on what their customers want an expect • Set clear performance standards for both customers and employees

Require the development of systems for generating and acting on customer feedback • Force service organizations to identify existing and potential failure points and take actions to correct them • Build marketing muscle by reducing pre-purchase risk and building long-term loyalty •

(LO9) Understand how to design effective service guarantees Although it is possible for dishonest customers to take advantage of unconditional service guarantees, research has shown that such behavior is limited. Companies can make use of data management techniques to sieve out these dishonest customers and take action, while maintaining a unconditional service guarantee.

Effective service guarantees should be: • • • • • •

Unconditional Easy to understand and communicate Meaningful to the customer Easy to invoke Easy to collect on Credible

(LO10) Know when firms should not offer service guarantees Not all firms are suited to introduce service guarantees. A service leader may not need to take such actions as this may undermine its reputation. Conversely, if all the offerings are similar in a very competitive market environment with no distinct market leader, the first firm to introduce unconditional guarantees could enjoy first mover advantage.

(LO11) Be familiar with the seven groups of jaycustomers and understand how to manage them effectively In this chapter, we use the term jaycustomers to denote badly behaved or abusive customers. There are seven types of jaycustomers.

• Cheat • Thief • Rulebreaker • Belligerent • Family feuders

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• Vandal • Deadbeat

Students must recognize that although procedures must be developed to deal with problem customers, service businesses should not allow fear and suspicion of possible abuses to degrade the experience of the vast bulk of honest, well-behaved customers. Educating customers about the rules, through signboards and warnings should reduce the need for taking corrective action. Employees should be trained to deal with abusive customers and a course of action need to be laid down explicitly to protect employees and punish wrongdoings by customers.

Service Insights 13.3: This is a very humorous example of how guests of Hampton Inn, who attempt to cheat can be tracked down, if there is a guarantee tracking system in place.

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TEACHING SUGGESTIONS You should demonstrate to students on how the concepts in this chapter relate to the Wheel of Loyalty (Figure 12.7 in Chapter 12).

Students should be able to pick up quickly that topics covered in this chapter (especially complaint handling, service recovery, and service guarantees) are directly related to the aim of retaining those valuable customer relationships whose economic importance is highlighted in Chapter 12. It’s important, however, to clearly communicate that the objective of retaining or regaining dissatisfied customers is necessary but not sufficient for a service leader. Rather, the service organization has to learn from its mistakes and from customer feedback. Customer feedback systems should be offered as a way to institutionalize systematic customer-driven learning and to drive continuous service improvements.

Consumer complaints. This topic is covered in the review questions.

Application exercises 1 and 3 are particularly well suited for class discussion, because they require students to apply the concepts to their own experiences. It helps to show an overhead of Figure 13.4 in class to ensure that students are aware of the different courses of action open to a dissatisfied customer and the alternative outcomes.

Service recovery efforts and customer loyalty. Application Exercise 5 can be used to highlight the guidelines for effective problem solving to students by actively involving them in discussions. This can also be a good opportunity for a guest speaker from a local service business to describe its service recovery strategies.

Service guarantees. The chapter text, including types of guarantees and some examples of service guarantees (see Service Insights 13.3) together with Review Question 8, provide good coverage of this topic.

Another interesting option is to ask students to bring other examples of either effective or ineffective service guarantees to discuss in class.

QUESTIONS AND EXERCISES Review Questions 1. How do customers typically respond to service failures?

When customers experience a service failure (defined as a perception that one or more specific aspects of service delivery have not met customer expectations), they can take one or more of four major courses of action (see Figure. 13.4):

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• do nothing; • complain to the service firm; • take action through a third party (e.g., regulatory agencies or the

courts); or • switch suppliers and spread negative word of mouth about the service provider.

2. Why don’t many more unhappy customers complain?

What do customers expect the firm to do once they have filed a complaint?

Customers usually give the following three reasons for not complaining: (1) they don’t think it’s worth their time and/or effort; (2) they don’t believe the service provider will be concerned about their problem and/or resolve it; or (3) they don’t know where to go and what to do. Cultural and social norms may also affect complaining behavior. In some European and Asian countries, customers feel awkward or embarrassed about making a complaint. Social norms may discourage criticisms of professional service providers, because they are viewed as experts in their fields Once a complaint is made, customers expect to be adequately compensated in a fair manner. The firm is expected to assume responsibility in having a convenient and responsive recovery process.

Not only must the employees of the firm be able to explain and resolve the failure, they have to come across as genuine, honest, and polite throughout. Lastly, the compensation given has to cover the losses incurred by the customer both in terms of actually monetary loss and other potential cost incurred as a result of the failure (e.g., time, effort).

3. Why would a firm prefer its unhappy customers to come forward and complain?

Firstly, it is impossible for a customer base to have no complaints over an extended period of time. Furthermore, it is known that unhappy customers who do not complain are more likely to defect. In addition, the impact of defection goes beyond the loss of that customer’s future revenue stream. Not only does it cost much more to attract new customers, but also angry customers often end up giving the company bad publicity—with the Internet, customers are able to reach millions all over the world in a fast and efficient manner. Thus, it makes perfect sense for a company to prefer customers to complain to it, rather than to everyone else.

4. What is the service recovery paradox? Under what conditions is this paradox most likely to hold? Why is it best to deliver the service as planned, even though the paradox does hold in a .

specific context?

It’s been observed that customers who experience service failure and then have it resolved to their full satisfaction are more likely to make future purchase than customers who did not experience a problem in the first place—this is essence is the service recovery paradox. This only holds true for the initial service failure, however. Customers may not be as forgiving for subsequent failures as they may have higher expectations from their previous experience. At the same time, the success of a service recovery very much depends on severity and “recoverability” of the failure—some mistakes are simply not recoverable to full satisfaction.

Thus, it is always best to do it right the first time. Even with the most well executed recoveries, failure should not be tolerated. Empirical evidence has also shown that between 40% to 60% of customers are not satisfied with their service recovery experience.

5. What could a firm do to make it easy for dissatisfied customers to complain?

Table 13.1 recommends some strategies companies can adopt to reduce customer complaint barriers. The activities suggested have three main objectives: (1) making feedback easy and convenient— make feedback tools easily accessible to customers, (2) reassuring customers that their feedback will be taken seriously and acted upon— publish feedback from customers and subsequent actions in company newsletters/publications, and (3) make the feedback process a positive experience for the customers—training frontline staff to make customers feel comfortable giving feedback; thanking customers for feedback.

6. Why should a service recovery strategy be proactive, planned, trained and empowered?

Recovering from service failure is something that requires commitment.

If it is not proactive, planned, trained and empowered, firms may lose their dissatisfied customers, and even have them spread negative word of mouth. The consequences of this can be quite severe on the profitability of the firm.

7. How generous should compensation be for a service failure?

There is not hard and fast rule to how much to compensate, but there are some rule of thumb that companies can turn to for reference. (1) Position of the firm—are you a service leader or laggard? The higher you are, the more customer expect from the service recovery. (2) How .

severe was the service failure—naturally the greater the damage caused, greater the cost to the consumer (e.g., monetary cost, time, effort, distress), the greater the amount of the compensation. (3) Relationship between the affected customer and the firm—if it is a long-term customer, naturally more is demanded, at the same time, it pays to retain loyal customers. On the other hand, first time customers can become loyal if treated right.

The rule-of-thumb for recovery policies should be that customers should be compensated with ‘well-dosed generosity.’ On the one hand, the firm cannot be perceived as stingy and calculating, and on the other hand, it should not be seen as overcompensating.

Overcompensation does not only fail to increase satisfaction much further beyond a recovery perceived as fair, it also may give the wrong incentives to the wrong customers (jaycustomers?) to complain too much.

8. How should service guarantees be designed? What are the benefits of service guarantees over and above a good complaint handling and service recovery system?

Hart offers a perspective whereby service guarantees should be designed with the following criteria, (1) unconditional, (2) easy to understand and communicate, (3) meaningful to customers, (4) easy to invoke, (5) easy to collect, and (6) credible. In essence, a service guarantee should be simple, meaningful and easily understood by customers. Guarantees also benefits the firm in many ways, (1) it forces the firm to pay attentions to the needs of their customers in each service process, (2) it provides a clear standard and direction to staff on what is required from them, (3) it requires firms to develop efficient customer feedback systems, act on problems, or potential fail points, and (4) it also serves as a marketing tool for the company in helping to build long term loyalty. Finally, it reduces the purchase risk of customers.

9.

Under what conditions is it not suitable to introduce a service guarantee?

Not all firms are suited to introduce service guarantees. A service leader may not need to take such actions as this may undermine its reputation. Conversely, if all the offerings are similar in a very competitive market environment with no distinct market leader, the first firm to introduce unconditional guarantees could enjoy first mover advantage.

10.

What are the different types of jaycustomers and how can a service firm deal with the behavior of such customers?

.

Jaycustomers can be categorized into six broad categories.

1) The Thief–First step should be to find out how people steal a service, in order to prevent theft and then catch them to prosecute appropriately. Provision, however, must be made for honest but absent-minded customers who forget to pay.

2) The Rulebreaker—Educate customers about the rule, and course of action needs to be laid down explicitly to protect employees and punish wrongdoing by customers.

3) The Belligerent—Role-playing training exercises to help employees develop assertiveness to deal with upset customers.

4) The Family Feuders—Need to analyze the situation on the spot.

5) The Vandal—Prevention through improved security, good lightning, printed warnings, and security deposits.

6) The Deadbeat—Insist on prepayment and promptness in presenting the bill.

APPLICATION EXERCISES 1.

Think about the last time you experienced a less-thansatisfactory service experience. Did you complain? Why? If you did not complain, explain why not.

Students’ answers should refer to some of the factors listed in the chapter that affect customer complaining behavior (either positively or negatively) as they attempt to describe their own experiences. You should also ask what the result of the complaint was and how satisfied they were with this response, if any. Alternatively (or additionally) you may want to assign students the written exercise on making a formal complaint.

2. When was the last time you were truly satisfied with an organization’s response to your complaint. Describe in detail what happened and what made you satisfied.

Answers will vary depending on the experiences they discuss. You may want to use their responses as a basis for exploring the following issues: (a) how the organization’s response impacted the students’ loyalty to the firm; and (b) the relationship between students’ reactions of delight, and the material on levels of expectations and zone of tolerance 3. What would be an appropriate service recovery policy for a wrongly bounced check for (a) your local savings bank, (b) a major national bank, or (c) a high-end private bank for high.

net-worth individuals? Please explain your rationale, and also compute the economic costs of the alternative service recovery policies.

•

Local savings bank—Immediately clear the check. An apology from the staff handling the case and the branch manager would probably be sufficient as it is likely that less is expected from a local bank. The economic cost incurred is minimal.

•

Major national bank—Immediately clear the check. Letter of apology from the management would be ideal. At the same time, some form of complementary product could be offered, for example a checkbook. This economic cost incurred is relatively low. In this case, as a major national bank, customer expect more, at the same time, the letter from management gives the recovery a personal touch. Together with the complementary checkbook, it signals to the customers that the bank takes customer service seriously.

•

High-end private bank—Immediately clear the check. Reimburse any additional cost results from the failed transaction. Senior management probably would have to pay a visit to the client to apologize for the service failure. At the same time, a high value complementary gift would be necessary, for example front -row concert tickets. The economic cost incurred is much higher however, given the amount of business the customer gives to the bank, it is a relatively small amount. At the same time, given the prestige of a high-end private bank, a personalized recovery is likely to be expected by the customer.

Nevertheless, in all three cases, it is important that the service recovery must come across as genuine, we can also analyze the situation along the three dimensions of fairness proposed by Tax and Brown namely: procedural, interactional and outcome justice.

4. Design a highly effective service guarantee for a service with high-perceived risk. Explain (a) why and how your guarantee would reduce perceived risk of potential customers, and (b) why current customers would appreciate being offered this guarantee although they are already a customer of that firm and therefore are likely to perceive lower levels of risk.

Students are free to choose which industry they prefer. The key is for students to look at things from the eyes of the consumer when designing their service guarantees. The teaching note for the case, The Accellion Service Guarantee provides a good framework for handling this question, especially the answers provided to questions 1 and 2, and the integrated model on the impacts of a well-designed service guarantee on consumers.

.

Instructor may ask students to identify all problems that can be caused by jaycustomers, and how they should be resolved.

5. How generous should compensation be? Review the following incident and comment. Then evaluate the available options, comment on each, select the one you recommend, and defend your decision.

“The shrimp cocktail was half frozen. The waitress apologized, and didn’t charge me for any of my dinner,” was the response of a very satisfied customer about the service recovery he received. Consider the following range of service recovery policies a restaurant chain could set and try to establish the costs for each policy: Option 1: Smile and apologize, defrost the prawn cocktail, then return it, and smile and apologize again. There are no direct costs to this recovery strategy beyond the time needed for the additional work step.

Option 2: Smile and apologize, replace the prawn cocktail with a new one, and smile and apologize again.

Option 3: Smile, apologize, replace the prawn cocktail, plus offer a free coffee or dessert.

Option 4: Smile, apologize, replace the prawn cocktail, plus waive the bill of $80 for the entire dinner.

Option 5: Smile, apologize, replace the prawn cocktail, waive the bill for the entire dinner, plus offer a free bottle of champagne.

Option 6: Smile, apologize, waive the bill for the entire dinner, offer a free bottle of champagne, plus give a voucher valid for another dinner (to be redeemed within three months).

The discussion should center on key variables that drive the level of compensation offered, and are likely to include: 1) The positioning of the restaurant (for a lower-end pizza chain, Options 2 or 3 would probably be appropriate, but a fine-dining place would need to consider Options 4 or 5).

2) The importance of the customer to the business (e.g., a regular customer may expect to receive preferential treatment, plus the restaurant has more to lose should the customer not be satisfied with a “too economical” recovery, or a recovery that may even be perceived as stingy).

3) The degree of dissatisfaction and damage/inconvenience incurred to the customer. The degree of customer dissatisfaction and the .

damage and/or inconvenience caused to the customer would have some impact on which option to chose. For example, if the customer entertains an important client, and the failure would be seen as more serious, a higher-level recovery option would be appropriate than for customers engaged in a more casual evening out.

The rule-of-thumb for recovery policies should be that customers should be compensated with ‘well-dosed generosity.’ On the one hand, the firm cannot be perceived as stingy and calculating, and on the other hand, it should not be seen as overcompensating.

Overcompensation does not only fail to increase satisfaction much further beyond a recovery perceived as fair, it also may give the wrong incentives to the wrong customers (jaycustomers?) to complain too much.

6. Identify the possible behavior of jaycustomers for a service of your choice. How can the service process be designed to minimize or control the behavior of jaycustomers?

Instructor may ask students to plan a service blueprint and identify all problems that can be caused by jaycustomers, and how they should be resolved at each stage of the service delivery process.

.

CHAPTER 14 IMPROVING SERVICE QUALITY AND PRODUCTIVITY This chapter introduces students to service quality, including its definition, diagnosing quality shortfalls using the gap model, key tools, and strategies to close quality gaps. Productivity is introduced as closely related to quality, and it is emphasized that in today’s competitive markets, firms need to be focused on simultaneously trying to improve both quality and productivity— not one at the expense of the other. Various productivity improvement strategies are discussed, including total quality management, ISO 9000 Certification, Malcolm- Baldrige Model, and Six Sigma applied to service operations.

LEARNING OBJECTIVES By the end of this chapter, students should be able to  (LO1) Explain the relationships between service quality, productivity, and profitability.  (LO2) Be familiar with the different perspectives of service quality.  (LO3) Demonstrate how to use the Gaps Model for diagnosing and addressing service quality problems.  (LO4) Differentiate between hard and soft measures of service quality.  (LO5) Explain the common objectives of effective customer feedback systems.  (LO6) Describe key customer feedback collection tools.  (LO7) Be familiar with hard measures of service quality and control charts.  (LO8) Select suitable tools to analyze service problems.  (LO9) Understand return on quality and determine the optimal level of reliability.  (LO10) Define and measure service productivity. .

 (LO11) Understand the difference between productivity, efficiency, and effectiveness.  (LO12) Recommend the key methods to improve service productivity.  (LO13) Know how productivity improvements impact quality and value.  (LO14) Understand how to integrate all the tools to improve the quality and productivity of customer service processes.  (LO15) Explain how TQM, ISO 9000, Six Sigma, and the Malcolm Baldrige and EFQM approaches relate to managing and improving service quality and productivity.

CHAPTER OUTLINE (LO1) Explain how quality and productivity relate to each other in a service context Service managers need to focus on both productivity and quality from the customer’s point of view to ensure long-term financial success.

Service quality is the extent to which a service meets or exceeds customer expectations.

Productivity measures how efficiently a service firm can turn inputs into outputs. Productivity and quality were historically seen as issues for operations managers, so companies focused on making internal process improvements that were not necessarily linked to customer service priorities. Continuing efforts to understand and improve quality reinforces the idea that quality is customer defined.

(LO2) Be familiar with the different perspectives of service quality There are different definitions of service quality. Common perspectives include the manufacturing-based approach, which is concerned with manufacturing practices and engineering. In this book, we define service quality from the user’s perspective as a high standard of performance that consistently meets or exceeds customer expectations.

(LO3) Demonstrate how to use the gaps model for diagnosing and addressing service quality problems The Gaps model (Figure. 14.4) is a diagnostic tool relates quality .

standards to customer expectations. The Gaps model of service quality identifies gaps where a discrepancy may occur between the service provider’s performance and the customer’s expectations.

The final goal in improving service quality is to reduce or eliminate all gaps, including lack of management understanding of what customers expect, failure to translate managers’ perceptions of customer expectations into service delivery quality standards, a perceived difference between specified delivery standards, and the service provider’s actual performance, a difference between what a company promises through its advertising and the actual service quality that is perceived at delivery, the difference between what is actually delivered and what customer feel they have received. The final gap is the difference between what the customer perceives and his/her original expectations.

(LO4) Differentiate between hard and soft measures of service quality Customer defined standards and measures of service quality can be grouped into “soft” and “hard” measures. Organizations known for excellent service make use of both soft and hard measures to improve service quality.

Soft measures include transactional surveys, total market surveys, mystery shopping, analysis of feedback such as complaints and compliments, focus group interviews, and service reviews.

• Hard measures typically refer to operational processes or outcomes and include data such as uptime, delivery cost, failure rates, and service response times.

•

The SERVQUAL Scale is a survey research instrument based on the premise that customers can evaluate a firm’s service quality by comparing their service perceptions with their prior expectations. In its basic form, the scale contains 21 perception items and 21 expectation items, reflecting five dimensions of service quality.

(LO5) Explain the common objectives of effective feedback systems

customer

It is critical for companies to learn from customers and change according to shifting customer needs and perceptions. An effective customer feedback system enables a firm to • Assess and benchmark its service quality and performance • Initiate customer driven learning and improvements • Create a customer-orientated service culture

Together, these allow the company to understand where it stands against the best in the market, how it is perceived by its customers, and help improve its service offering to satisfy (if not delight) its .

customers.

(LO6) Describe key customer feedback collection tools The collection of customer feedback collection tools includes: • Total market surveys • Annual surveys • Transactional surveys • Service feedback cards • Mystery shopping • Unsolicited customer feedback • Focus group discussion • Service reviews

Choosing the relevant feedback tools and collecting customer feedback is meaningless if the company cannot disseminate the information to the relevant parties to take action. Hence, it is necessary to use service performance reports to provide information for service management and team learning.

Service Insights 14.1 This is an insightful sharing of how customer feedback can backfire and affect customer satisfaction with a service if they are used as quality control inspectors.

(LO7) Be familiar with hard measures of service quality and control charts Hard measures typically refer to operational processes or outcomes and include data such as uptime, delivery cost, failure rates, and service response times.

Service Insights 14.2 This article highlights FedEx’s commitment to service excellence. The company believes that service quality can be mathematically measured and developed the Service Quality Indicator (SQI), which is a 12-item measure of satisfaction and service quality from a customers’ viewpoint.

With the SQI, FedEx was able to quantify the service outcome and the satisfaction level received by customers. It was able to pin-point failure points and address them immediately.

(LO8) Select suitable tools to analyze service problems The tools include Fishbone Diagram - Cause and Effect Chart, Pareto Analysis and Blueprinting. .

(LO9) Appreciate improvements

the

financial

implications

of

quality

Return on quality. It is possible to determine whether there is a relationship between service quality and revenues.

Students should be made aware that not all investments in service quality will lead to positive results and satisfied customers. In some cases, even firms that are recognized for their service quality efforts have run into financial difficulties.

To overcome this problem, firms must analyze the costs involved before implementing the service quality initiatives. The bottom line is to ask if the firm can attain the desired results from the efforts put in.

Service Insights 14.3 This shows how the relationship between product quality and financial performance can be determined in 1,135 franchised Holiday Inn hotels in the United States and Canada.

Indicators of product quality came from the franchisor’s quality assurance reports, while the hotel chain provided revenue per available room at each hotel.

(LO10) Define and measure service productivity Productivity measures the amount of output produced relative to the amount of inputs used. Measurement of productivity is more difficult in people-processing services, and information-based services, compared to possession-processing services that tend to be more like manufacturing organizations.

(LO11) Understand the difference efficiency, and effectiveness

between

productivity,

Productivity refers to the output that one can get from a certain amount of inputs. Efficiency is the measure of how well you do things and effectiveness can be defined as the degree to which an organization meets its goals. Classical methods in measuring productivity often focus on outputs rather than outcomes, stressing efficiency but neglecting effectiveness. The focus of productivity can be shifted from its traditional focus on volume of output to one emphasizing value of output. If the same volume can be sold at higher prices without a comparable increase in input costs, then the transformation of inputs into outputs will be more productive. Under these circumstances, the productivity goal shifts from efficiency to effectiveness. The former is operations and finance oriented. The latter is marketing and customer oriented. Because higher quality service creates more value for customers, the effectiveness approach to .

productivity is closely allied to service quality.

(LO12) Recommend the key methods to improve service productivity Organizations that are more effective in consistently delivering customer desired outcomes would be able to command higher prices.

Three customer driven strategies of improving productivity are: •

Changing the timing of customer demand: Managers can make better use of their productive assets and provide better service by shifting demand away from the peak periods. To do this, they may need to target new market segments with different needs and schedules.

•

Encourage Use of Lower-Cost Service Delivery Channels and Self Service. Shifting transactions to more cost-effective service delivery channels, such as the Internet, chatbots, apps, and SSTs improves productivity.

Asking the customers to use third parties: Specialist intermediaries, enjoying economies of scale and scope, can perform the task cheaper than the core service provider thus it makes sense to outsource delivery of supplementary service elements to intermediary organizations to improve service productivity.

•

Service Insights 14.4 Martin Health System hospital in Florida has developed and implemented “equipment supermarkets” that stock necessary equipment in nursing units thus reducing waste of labour and equipment.

(LO13) Know how productivity improvements impact quality and value When companies make productivity improvements, they need to examine the impact on customer experience as a result of changes in front-line and back-stage that impact customers. Front-line changes may require customers to adopt and accept new patterns of behaviour in their dealings with the organisation. It is important to consider how customers may respond to these productivity changes. Back-stage changes also have a ripple effect and extend to the front stage, where they affect customer experiences.

(LO14) Understand how to integrate all the tools to improve the quality and productivity of customer service processes Table 14.4 provides an integrated 9-step approach to customer service .

process improvement with specific objectives of each step and their corresponding potential tools that can be applied.

(LO15) Understand how TQM, ISO 9000, Malcolm-Baldrige Approach and Six Sigma relate to managing and improving service quality and productivity TQM and Six Sigma are established quality and productivity initiatives with their respective set of tools and methods for managing and improving service quality and productivity. Some of these tools are also now increasingly used in companies that may not have embraced the entire TQM or Six Sigma concept. The Fishbone diagram, Pareto Analysis, and control charts are examples of tools that originated from TQM but have found their way to common use among companies interested in improving service quality. The DMAIC model, a Six Sigma improvement model, is also commonly used for analyzing and improving business processes.

The Malcolm-Baldrige Awards and the ISO 9000 certification comprises requirements, standards, guidelines, definitions, and related standards that provide an independent assessment and certification of whether companies are practicing best practices in quality management and are a benchmark of quality achievements.

Companies, in managing and improving quality and productivity, should consider the approach that is best aligned with the overall business strategy and adopt a mixture of tools from the above systemic approaches depending on their own needs and desired level of sophistication. For example, TQM tools can be used at any level of sophistication by any service firm, although the Six Sigma initiative requires much more commitment and investments.

TEACHING SUGGESTIONS Students should understand that service providers cannot address productivity without also addressing quality and customer satisfaction (and thus the operations and marketing functions must be closely linked). Human resource issues may also be important in those services where customer contact personnel are in a position to contribute to customer satisfaction.

Customer expectations. Students should be able to describe that service-based definitions of quality are often related to customer satisfaction as: Satisfaction equals Perceived service less Expected service. Service quality is usually defined as the extent to which a service meets or exceeds customer expectations. Customers will judge quality according to their perceived levels of satisfaction as they accumulate experience with the service over time. Students need to know what customers’ expectations are and how these are formed. .

Typically, there is a zone of tolerance between the level of service that customers would prefer and what they will accept before becoming dissatisfied.

Understanding the various definitions of service quality. Students should be able to distinguish between service -based and manufacturing-based definitions of quality (see review question 1).

Application question 1 specifically addresses service quality dimensions, while review questions 1, 2, 3, and 4 also address quality issues. You can invite students to suggest additional questions about specific quality dimensions that they might have for other types of services.

Service quality gaps. To illustrate the GAPs model, you can ask students to provide examples of service situations where they have experienced any one of the seven quality gaps and to offer suggestions about what could have prevented the gaps from occurring. Review question 2 addresses the gaps issue, as does application exercises 2 and 3.

Application of quality tools to service problems. Getting to the root cause of service problems is a task that students invariably find interesting. The cause and effect “fishbone” chart (see Figure 14. 14 for a completed example) works well as a small group exercise. You can suggest some common service problems (or get students to suggest problems that they have encountered and select one or more of these) and then ask students to identify possible causes, grouping them within the eight categories in the chart. Review question 6 also provides a good foundation to this issue. Students should also be able to distinguish between the soft and hard measures of service quality and appreciate how they are both complementary in providing a complete picture of service quality (see review question 3).

Understanding and measuring productivity. Students should understand that productivity measures the amount of output produced by an organization relative to the amount of inputs and that improvements can come from either reducing the inputs without a corresponding reduction in outputs or by increasing outputs without requiring more inputs (or a combination). They should recognize that measuring productivity in service firms is more difficult than in manufacturing firms because of the intangibility and variability of the service inputs and outputs (see review question 5).

What really matters is the value placed on the outputs by a customer.

An aircraft configured to transport 300 economy-class passengers is not necessarily more productive than one configured to carry 100 business-class passengers—what matters is that: the percentage of seats filled and the fares charged. Ask students to suggest productivity measures for other service industries and to indicate what impact a lower service quality has on productivity. Review questions 7 and 8 address productivity issues, as does application exercise 4. .

Productivity improvement issues for service firms. Review questions 6 and 7 provide a good foundation for these issues. Because technology is an increasingly common way of increasing productivity in service firms, you can ask students for examples of situations where they felt technological innovations: (a) enhanced both productivity and quality; or (b) increased productivity but diminished quality. Students should also understand the generic strategies used for improving productivity and give emphasis to the customer driven strategies of productivity improvements.

QUESTIONS AND EXERCISES Review Questions 1. Explain the relationship between productivity, and profitability.

service

quality,

Service productivity is concerned with how efficiently inputs are transformed into outputs and, thus, with the operational and human elements of creating a service. Low productivity relative to competing service providers means that a firm will have higher costs and thus find it difficult to compete on price and still remain competitive.

Service quality is concerned with customer evaluations and perceptions of an array of service features relating to both the delivery process and the outcome of using the service. Services that are perceived as being of lower quality than competing alternatives in the same price range are less likely to attract repeat purchases from loyal customers.

Service quality is affected by productivity. Generally, when services have high productivity, they may involve higher quality as employees receive more training. High service quality allows the firm to use it in marketing to differentiate itself from competitors.

2. Identify the gaps that can occur in service quality and the steps that service marketers can take to close them •

Gap 1, the Knowledge Gap relates to a lack of management understanding of what customers expect.

•

Gap 2, the Standards Gap is a failure to translate managers’ perceptions of customer expectations into the quality standards established for service delivery.

•

Gap 3, the Delivery Gap is the difference between specified delivery standards and the firm’s actual performance.

•

Gap 4, the Communications Gap is the difference between what the company communicates and what is actually delivered to the .

customer.

•

Gap 5, the Perceptions Gap is the difference between what the company has actually delivered and what the customer perceives s/he has received (note this perception may be wrong due to difficulty in evaluating the service).

•

Gap 6, the Service Gap is the difference between what the customer perceives and his/her original expectations.

Table 14.1 provides generic prescriptions for closing key service gaps.

3. Why are both “soft” and “hard” measures of service quality needed?

Both measures measure significantly different areas of the key activities that have an impact on customers and excellent service companies makes use of both soft and hard measures to improve service quality. Soft measures of service quality (e.g., SERVQUAL) provide direction, guidance and feedback to employees on ways to achieve customer satisfaction and can be quantified by measuring customer perception and beliefs. This is then further complemented by hard measures that measure operational processes and outcomes. It is only when both measures are taken into consideration that a complete picture of service quality, from both the operational and the customer or marketing viewpoint is attained.

4. What are the main objectives of an effective feedback system?

customer

It is critical for companies to learn from customers and change according to shifting customer needs and perceptions. An effective customer feedback system enables a firm to • Assess and benchmark its service quality and performance • Initiate customer driven learning and improvements • Create a customer-orientated service culture

Together, these allow the company to understand where it stands against the best in the market, how it is perceived by its customers, and help improve its service offering to satisfy (if not delight) its customers.

5. What are the key customer feedback collection tools? What are the strengths and weaknesses of each of these tools?

The collection of customer feedback collection tools includes: • Total market surveys • Annual surveys • Transactional surveys • Service feedback cards

.

• Mystery shopping • Unsolicited customer feedback • Focus group discussion • Service reviews

Students can refer to Table 14.3 for the strengths and weaknesses of each of these tools.

6. What are the main tools that service firms can use to analyze and address service quality problems?

Tools used to analyze and address service quality problems include using the Fishbone Diagram (Cause and Effect Chart), Pareto Analysis, and Blueprinting.

7. Why is productivity more difficult to measure in service than manufacturing firms?

Manufacturing deals with tangible elements created and assembled in an environment designed for productivity and normally excluding customers. Manufacturing procedures are usually simpler to control, and the inputs and outputs more readily measured. It is relatively easy to standardize a manufactured product. By contrast, most services deal with intangible processes, the output is more likely to be customized, and many operational procedures take place in real time in the presence of customers with diverse needs and expectations.

Service factories for people-processing services must be designed with customer satisfaction as well as productivity in mind. In such a context, it’s more difficult to measure service inputs and outputs, harder to control the performance of employees who may be working without direct supervision, more difficult to define and measure the output of employees who work on multiple tasks rather than specializing on a single activity, and hard to control and measure the performance of customers who are actively involved in the production and delivery process.

The services that are perhaps easiest to measure on productivity are those that (1) are low contact in nature so that most processes take place backstage, (2) engage in what is termed quasi-manufacturing (e.g., food service, repair, and maintenance), so that t here are significant physical inputs and outputs, or (3) where customers are “batched” (i.e., served simultaneously, as in a bus or a class) and their behavior tightly controlled (airlines are a good case in point).

8. How can you integrate all the tools in a nine-step approach to improve the quality and productivity of customer service processes?

Table 14.4 provides an integrated 9-step approach to customer service process improvement with specific objectives of each step and their corresponding .

potential tools that can be applied.

9. How do concepts like TQM, ISO 9000, the Malcolm-Baldrige model, and Six Sigma (see the appendix to this chapter) relate to managing and improving productivity and service quality?

TQM and Six Sigma are established quality and productivity initiatives with their respective set of tools and methods for managing and improving service quality and productivity. Some of these tools are also now increasingly used in companies that may not have embraced the entire TQM or Six Sigma concept. The Fishbone diagram, Pareto Analysis, and control charts are examples of tools that originated from TQM but have found their way to common use among companies interested in improving service quality. The DMAIC model, a Six Sigma improvement model, is also commonly used for analyzing and improving business processes.

The Malcolm-Baldrige Awards and the ISO 9000 certification comprises requirements, standards, guidelines, definitions, and related standards that provide an independent assessment and certification of whether companies are practicing best practices in quality management and are a benchmark of quality achievements.

Companies, in managing and improving quality and productivity, should consider the approach that is best aligned with the overall business strategy and adopt a mixture of tools from the above systemic approaches depending on their own needs and desired level of sophistication. For example, TQM tools can be used at any level of sophistication by any service firm, although the Six Sigma initiative requires much more commitment and investments.

APPLICATION EXERCISES 1. Consider your own recent experiences as a service consumer.

On which dimensions of service quality have you most often experienced a large gap between your expectations and your perceptions of the service performance? What do you think the underlying causes might be? What should management do to improve quality?

Be prepared for students to offer a wide variety of services and to cover all six of the gaps. The greatest emphasis, however, is likely to be on Gaps 6. Be prepared for students to use their experiences at your university—including aspects such as quality of courses and teaching, library services, administrative services, food services, and sports as examples.

2. Collect a few customer feedback forms and tools (e.g., .

customer feedback cards, questionnaires and online forms) and explain how the information gathered with those tools can be used to achieve the three main objectives of effective customer service.

This application exercise can be in the form of a take home assignment.

The purpose is to highlight to students how each of us has differing definitions of service quality and although this service offering may be acceptable to you, it may be in fact totally unacceptable to another student. This can also reinforce the point that the soft measures (customer perceptions and beliefs) of measuring service quality provide crucial inputs to the company interested in improving service quality.

Instructors can also ask students to comment on: How similar (and different) are the questions from various feedback forms? What do you think the companies are looking out for? Are they asking the right questions? Are the designs of feedback forms (inclusive of questions asked) effective?

3. What key measures could be used for monitoring service quality, productivity, and profitability for a large pizza restaurant chain? Specifically, what measures would you recommend for such a firm taking administration costs into consideration? Who should receive what type of feedback on the result and why? On which measures would you base a part of the salary scheme of branch-level staff and why?

This exercise can be in the form of an assignment. The purpose is to highlight that both front-stage and back improvements can have an impact on service quality and the customer experience. Students might select specific objectives of quality service improvement from GAP analysis of a particular service firm but whichever objectives are considered, it is important for them to conclude the recommendations for admin costs measures. These can include hard operational measures or soft customer feedback that can indicate a need for reducing service employees with automated machines, or in some cases out-sourcing to become more cost-effective. Related employees must receive the result of these measures to be able to make recommendations and improvements. The salary schemes can be measured against the employee targets set sometimes based on tiering of the service. Employees handling important clients may be measured against more rigorous scales and hence their salaries would be correspondingly higher.

4. In what ways can you, as a consumer, help to improve productivity for at least two service organizations that you patronize? What special characteristics of each service make some of these actions possible?

In responding to this exercise, students should cite three strategies .

that are widely used to improve service productivity, based on the fact that in services, customers are often involved in the production process: •

Changing the timing of customer demand in order to improve asset utilization (because of lack of stocks to buffer variations in demand). Hence, marketing efforts seek to encourage customers to use the service during periods of low demand, when capacity is underutilized, rather than demanding service at peak times when the service is at full capacity.

•

Encourage Use of Lower-Cost Service Delivery Channels and Self Service. Shifting transactions to more cost-effective service delivery channels, such as the Internet, chatbots, apps, and SSTs improves productivity.

•

Asking customers to use third parties. Outsourcing certain tasks (especially supplementary services) to specialist provide rs may help to achieve greater productivity than performing the task internally.

Sometimes, outsourcing is not readily apparent (as when a reservation service answers in the name of the sponsoring company). In other instances, customers may have to be asked to change their behavior to take advantage of the third-party supplier.

5. Do a literature search and identify the critical factors for a successful implementation of ISO 9000, the Malcolm- Baldrige Model, and Six Sigma in service firms.

This can take the form of a research exercise administered over the weekend to encourage students to be more aware of these initiatives.

Students can be encouraged in class to discuss the barriers (perhaps an emphasis could be given to the human tendency to resist change) involved in implementing such initiatives beyond the factors given in the literature.

.

CHAPTER 15 ORGANIZING FOR CHANGE MANAGEMENT AND SERVICE LEADERSHIP A long-term perspective of service excellence is used as an approach to realize the philosophy of customer centricity and creating value for customers while remaining cost-effective. A model for becoming a breakthrough service organization is presented to demonstrate how the links between customer satisfaction, service performance in key functions of marketing, operations and HR, and strategic options to enhance cost effectiveness and providing service excellence all integrate to lead to three distinct pathways towards cost-effective service excellence (CESE). Emphasis is given to creating a culture where leadership and employees reinforce the path toward process deployment using systems and technologies for excellence in operations in order to provide customers with a single, highly standardized, and excellent service offering.

LEARNING OBJECTIVES By the end of this chapter, students should be able to  (LO1) Know the long-term impact of customer-centricity on profitability and shareholder value.  (LO2) Know the relationship between relative customer satisfaction and share-of-wallet and be familiar with the Wallet Allocation Rule.  (LO3) Know the characteristics of world-class service organizations and be familiar with the four levels of performance.  (LO4) Understand what is required for transforming a service firm from a loser to a service leader  (LO5) Be familiar with the three strategic pathways that allow organizations to achieve cost-effective service excellence (CESE) .

 (LO6) Know the dual-culture strategy of CESE and its implementation challenges

 (LO7) Be familiar with the operations management approach for CESE

 (LO8) Appreciate the focused service factory strategy that allows a relatively easy way of implementing CESE

 (LO9) Understand business model considerations related to the pathways toward CESE

CHAPTER OUTLINE (LO1) Know the long-term impact of customer-centricity on profitability and shareholder value.

There is convincing evidence of strategic links between the level of customer satisfaction and a firm’s service offering and overall firm performance. Various concepts presented in this book, including the Cycle of Success, Service Talent Cycle, Wheel of Loyalty, and the GAPS model, provide customer-centricity, resulting in high customer satisfaction that is financially viable.

Service Insight 15.1 Claes Fornell, et al. researched two stock portfolios of firms that performed well on the ASCI Index to assess whether customer satisfaction levels are linked to the stock price.

Findings suggested that ACSI-based portfolios outperformed the market but the share price adjusted slowly over the long term as more “hard” facts materialized resulting from higher customer satisfaction.

(LO2) Know the relationship between relative customer satisfaction and share-of-wallet and be familiar with the Wallet Allocation Rule. .

Firms with high and increasing overall customer satisfaction scores outperform their lesser peers. Higher satisfaction generates suitable consumer behavior, resulting in higher share-of-wallet to directly impact a firm’s revenue and market share. The Wallet Allocation Rule (WAR) is used to compute the share-of-wallet for each customer. According to WAR, Service Insight 15.2: Keiningham, Aksoy, Buoye et al. conducted a study to develop the Wallet Allocation Rule. The relationship between brand’s rank and share-of-wallet can be predicted by two things 1.

Relative rank of the brand in the category used by the customer 2. The number of brands in the category used by a customer. The study shows that despite high satisfaction scores, two customers may have very different share-of-wallet due to the importance given to a brand. customers’ share-of-wallet is not driven by a satisfaction score itself but by the brand’s rank among all those a customer uses.

(LO3) Know the characteristics of world-class service organizations and be familiar with the four levels of performance.

Service leadership is not based on outstanding performance with a single dimension. We need to evaluate the organization within each of the three functional areas of marketing, operations, and human resource.

Performance in each of these functional areas lead to an organization performing as one of the four levels: loser, non-entity, professional, and leader. Table 15.2 describes a typical organization across the functions and levels.

(LO4) Understand what is required for transforming a service firm from a loser to a service leader.

Companies that move up the ladder of excellence make conscious efforts to improve and coordinate their marketing, operations, IT, and HRM functions. They have human leaders at all levels of the organization to take the service firm in the right direction. These companies either follow a cost focus or a service excellence focus and either way they generate happy customers with good quality standard service. It is important to note that both these strategies require different systems, structures and cultures; therefore, pursuing both at the same time is likely to be a daunting task.

(LO5) Be familiar with the three strategic pathways that allow organizations to achieve cost-effective service excellence (CESE) The three strategic pathways organizations have taken to achieve costeffective service excellence (CESE) are the dual-culture strategy, the operations management approach, and the focused service factory strategy. Figure 15.5 provides an overview of these in more detail. Table 15.4 gives examples of how some organizations have achieved CESE. .

(LO6) Know the dual-culture strategy of CESE and its implementation challenges.

This strategy focuses on creating ambidextrous organizations by focusing simultaneously on pursuit of both service excellence and productivity. This approach allows service to be flexible and customized. Leadership ambidexterity is where leaders internalize a “both/and” rather than “either/or” logic and demand both customer service excellence and costeffectiveness by putting systems to energize, role-model, and reinforce ambidextrous behaviors of the employees. Contextual ambidexterity governs employees thinking and decision making about when to focus on service excellence and when to emphasize cost-effectiveness. A dualculture strategy is difficult to implement and execute as it can strain employee relations. Organizations need a “rallying cry” to get employee buy-in. This cry can be a charitable cause, best customer value, or employees working for members.

(LO7) Be familiar with the operations management approach for CESE This strategy deploys a combination of tools that are used to reduce process variability so that systems and technologies can increasingly deliver CESE. Key tools include 1. buffering and industrializing the back office; 2. modularizing service through reduced customer choice; and 3. deploying SSTs, service robots and AI. Figure 15.7 shows how such strategies reduce process variability and, thus, potential conflicts between productivity and service excellence.

(LO8) Appreciate the focused service factory strategy that allows a relatively easy way of implementing CESE. This strategy tailors a single solution to the exact needs of a specific customer segment. Simplicity, repetition, homogeneity and experience in a focused factory generate competence that allows a company to outproduce, undersell, and quickly gain competitive advantage. Figure 15.9 shows how firms can achieve CESE using this strategy.

(LO9) Understand business model considerations related to the pathways toward CESE A dual-culture approach requires that the senior management have a convincing narrative as to why a cost focus is necessary. In operations management and focused service factory approaches, the systems and technologies hardwire productivity and cost-effectiveness into the business model.

TEACHING SUGGESTIONS As befits the last chapter in the book, Chapter 15 provides an opportunity to integrate some of the insights that have been obtained .

earlier in relation to the links between marketing, operations, and human resources. The notion of creating an organization that is a leader in its field requires human leaders to establish a vision.

Integrating marketing, operations, and human resources. Building on what has been learned in earlier chapters, students should recognize that these three functions are intimately involved in service creation and delivery. The focus on these three functions, however, does not mean that other functions are unimportant. For instance, the finance department needs to find the funds to finance new service development, although accounting provides valued documentation of costs (useful for pricing) and tracks sales transactions and payments.

Students should also note that many supplementary service tasks are, in fact, performed by individuals working in other departments that have responsibility for (or influence over) customer contact and service quality. You can get students to discuss the many different job positions involved in delivering supplementary services to customers.

Customer Satisfaction and Corporate Performance Students must appreciate by now that creating value for customers should be the longterm strategy. Discussion of Service Insights 15.1 would help the students build an appreciation of value creation. Moreover, there is enough evidence that customer satisfaction is associated with ROI and creating more customer value can lead to firms creating more value for their owners.

Case 17, on KidZania, can help students understand the best practices in services marketing in a more comprehensive manner.

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QUESTIONS AND EXERCISES Review Questions 1. Is there evidence that improving customer satisfaction leads to improved financial returns for shareholders?

Yes, there is convincing evidence of strategic links between customer satisfaction and firm’s overall performance. One such example is of firms with high ACSI scores showing cumulative returns of 518% over a 15-year period.

2. How is customer satisfaction linked to a customer’s share-ofwallet?

Many firms have been able to successfully link customer satisfaction to share-of-wallet. It is important to note that it is the relative satisfaction that determines when a customer spends money and not the absolute satisfaction. Relative satisfaction is when a customer is more satisfied with your offer than with those of competing firms.

3. How are the four levels of service performance defined? Based on your own service experiences, provide an example of a company for each category.

Service Losers: Performance along all functions is poor and customers only patronize them because there may be no other alternative available.

Students might be able to think of some monopolies or even outdated government services that test customers’ patience.

Service non-entities: These companies follow the philosophy “adequate is good enough.” Examples can be of several “me-too” players in the service segment that operate for only a share of the market with minimal performance.

Service Professionals: These companies have a clear strategy and positioning. Encourage students to provide examples of companies they found to be different from the rest either due to their offering or delivery systems.

Service Leaders: These are the breakthrough organizations like Starbucks, Amazon, and Google that set benchmarks for excellence across all functions.

4. Describe the low-cost strategy and service-excellence strategy.

Explain why is it difficult to combine both.

Low-cost strategy focuses on providing standardized quality and value-formoney, whereas service-excellence strategy focuses on providing high quality, customized services. It is difficult to combine both as they require different systems, goals, and performance standards. .

5. What are the three strategic pathways organizations can take to achieve cost-effective service excellence (CESE)?

The three pathways for CESE are the dual-culture strategy, operations management approach, and focused service factory strategy.

6. Describe the ambidextrous organizational approaches used in dual-culture strategy. Explain why they are difficult to implement.

A dual-culture strategy requires leadership ambidexterity using a “both/and” logic, focus and role modelling, reinforced by communication, training, and reward systems and contextual dexterity that guides individual employee decision making. This strategy is difficult to implement because employee buy-in can be difficult and requires a credible “rallying cry.”

7. Explain the three operation management tools of 1. buffering an industrializing back-office ad shifting activities from the front office to the back office; 2. modularizing service in the front office; and 3. deployment of self-service technologies (SSTs), robotics, and AI. Operations management tools used to reduce process variability are 1. Buffering and industrializing the back office and shifting activities from expensive front office to the industrialized back office 2. Modularizing service through reduced customer choice, interaction flexibility and contact.

3. This allows deployment of SST, robotics, and AI in the front office.

8. Describe the focused factory strategy and explain why it is relatively easy to implement.

This strategy tailors a single solution to meet the exact needs of a specific customer segment. It is relatively easy to implement due to high standardization.

APPLICATION EXERCISES 1. Think about a service industry where you use more than one firm (examples might include ride sharing, fast-food restaurants, and grocery retailers). Evaluate the firms you use based upon how well they satisfy your needs and then estimate the percentage of your spending with each of these firms. Now, think about what .

causes you to use each of these different firms to supply your needs instead of simply using only one firm for that service category. Identify what distinguishes each firm from the others you also use in the category and how these differentiators drive your share of wallet. Then make recommendations for the firms with a lower share-of-wallet on how they could capture a higher share from you.

This exercise is useful not only in understanding share-of-wallet but also how firms can increase their relative share. Students in groups can take up different industries where they describe consumer service from a variety of firms. They must be able to provide company profiles of how well each satisfies them along specific differentiating features of each service offering in price, quality, technologies, etc. as well as the percentage of spending with each. Recommendations can range from creating relative differentiation, selling complementary products, and engaging customers using SSTs, AI, or Internet technologies to improving ranking by creating brand awareness, offering better quality, etc.

2. Select a company you know well, and obtain additional information from sources such as marketing literature reviews, websites, company publications, and blogposts. Evaluate the company on as many dimensions of service performance as you can, identifying where you believe it fits on the service performance spectrum shown in Table 15.1.

Students should be able to discuss low-cost strategies, dual-culture, operations management, or focused-service factories in analysing their chosen company.

3. Identify a large organization you believe follows the dual-culture strategy. Examine published materials on how it implemented this strategy and map your findings against this chapter. What additional insights did you gain?

This exercise can be combined with exercise 2. Analysis and insights from that exercise can be used and discussed here.

4. Explore a service operation in detail and assess whether and how the three operations management tools of (1) buffering and industrializing the back office and shifting activities from the front office to the back office; (2) modularizing service in the front office; and (3) deployment of SSTs, robotics, and AI can be implemented.

Companies like Amazon can be studied here to understand their extensive .

back-office functions and use of AI. 5. Find two organizations that follow the focused service factory strategy, one each that offers people-processing services (e.g., a specialized clinic) and information-processing services (e.g., a fintech). Analyze where exactly these firms have costadvantages over their full-service competitors (e.g., a general hospital and bank in our two examples).

Students should discuss how a focused service factory strategy offers a single solution to a specific customer segment. In providing a standardized solution, companies reduce their cost or are able to enjoy a higher shareof-wallet.

6. Based on all you’ve learned throughout this book, what do you believe are the key drivers of success for service organizations?

Try to develop an integrative causal model that explains the important drivers of success for a service organization.

The discussion for this exercise should include the integrative casual model including all key functions of organizational climate/culture, HRM, leadership, and marketing to produce superior employee or interdepartmental harmony, which in turn produces customer satisfaction and loyalty by exceeding expectations and ensuring service excellence.

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