Marketing Services

SESSION-1

 Divergence Model Vs Convergence Model – Treating product and service as similar or different
 Traditional Classification
o Tangible Vs Intangible
o Production precedes consumption Vs Simultaneous production/consumption
o Standardized Vs Heterogeneous
 Service
o Definition 1: A service is essentially a product with “no mass”. Labelling something as a product or service
does not serve any purpose
o Definition 2: Is a combination of a hard asset and an operating system serving a brand concept
 Hard operating system  Non people, Soft operating system  People. Goal of the operating system is to increase
the utilization of the hard asset
 Brand Management  Product, Price, Promotion, Place
 Service Management  People, Process, Physical Evidence
 Productization is the elimination of service problems in an organization, service systems approach to solve
marketing problems
 Service System
o Concept control, menu control & branding
o Service marketing – operations interface
o Service – people interface
o Service-Technology Interface
o Business Concept Vs Business Model Relationship  Concept Is just used to drive the model
o Interlinkages
 Service Marketing Triangle (Company, Customers, Employees)
o Stakeholder Mindset  Three objective functions, no constraints
o Alternate Mindset  One objective function, two constraints
o Customer-Centricity: Customers as the objective function
 Service replication  Robust relationship replication
 Experience of one customer is a function of the behavior of other customers.

Four Checks for Service System

 Consistency Check (Ideal: 100/100)

 Contrarian Operations Test (Different from everyone else) (Ideal: 100/100)
 Strategic Slack Test (Flip and question better off vs worse off) (Ideal: 0/100)
 Linked Vs Strategic choice

The above four tests offer protection from existing competition/legacy but not from clones/new entrants. Clones in turn
bring capital to the table, battle of capital.
 SESSION-2

Create viable concepts to pull it off in the service world.

Apollo Case

External Target: Who?  Middle/High Income groups, generally local, otherwise would go abroad; Why? Tertiary Care,
Quality sensitive (medical & non-medical)

Concept: World class doctors, quick treatment, high technology, high hospitality, variation in hospitality quality, low total
cost (function of time, convenience & likelihood of success), easy access, high likelihood of success, comprehensive
treatment

Operating Strategy: Tech intensive resource allocation, acquisition by doctors/management (a balance between what the
doctors want and the management wants), allowing referring doctors to accompany patients, formal QA system (Apollo
concentrated here on non-medical quality aspects as this is something that the patient understands. Non-medical quality
as a signal for medical quality. In medical quality Apollo only controls screening & environment/capital but in non-medical
quality they cover everything, 100% from scratch. Word of mouth)

Service Delivery: High technology, high hospitality, high quality consultants, high price-low total cost, high success rate

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Internal Target: Consultants Doctors  Renowned/specialists, expats/wiling to come home, research/network sensitive,
known to the founder. Junior Doctors  Freshly-minted doctors,

Concept: Consultants Doctors  Come home, set your fees, replicate the research/clinical environment, low bureaucracy,
philanthropic/pioneer, no marketing expense. Junior Doctors  Reputation by association, work with the best
doctors/tech, professional development.

Operating Strategy: Motivation system  ‘Patriotism’ (this element has been carefully added to ensure they can pay less
then employee retention. These are the effects on the income statement. Do the fit the context and the Industry is the
key question. ‘Fun’ as in southwest case might work if it is child care and not tertiary care), flattening the organization,
reputation building, above market pay.

Model does not have any self-correcting ability against corruptibility. Concept Creep  If demand stays low one way to
solve it would be to move away from tertiary care to primary care.

VH Quality W.r.t Cost, risk of attrition, scalability an organization would ideally want to be
High Quality in the bottom portion of the pyramid e.g. Southwest. Apollo is in the top most
Medium Quality portion of the pyramid. A smart system is one that can work with dumbest of
people. To move to the bottom of the pyramid, relative contribution of firm vs the
frontline should be more. i.e. move from a “Capital matchmaking system (Apollo)” to Protocol driven system (Aravind
eye care). Width of the menu will play a role in the ability to move from one system to the other. Brand enables you to
hide your business model and the brand will help you scale. Irrespective of creep, dilution.

Decapitalizing
If the business model has one weakness of having
First Mover (Use capital to be the first mover to be successfully then high
Advantage from outside) growth rate is paramount.

High Growth Franchising

Rate
 SESSION-3

Marketing- Operations Interface

 Operations Approach: Capacity planning, capacity utilization, scheduling, minimizing waiting time
 Perceptions Approach: Control perception of time, anxiety, boredom, and anger
 An Ideal system  Utilization 100% (Operations Target), Waiting Time – 0 (Marketing Target)
 Increase the threshold of minimum viable satisfaction
 Scalability: If service time ▲, Increase server speed. If waiting time ▲, pooled capacity
 Threshold – Choose the right queue format
 Multi-stage queue should be used only when the service is partially consumable if not then this is the worst
 If waiting time is short  Overweight, rate of movement Single line over multi line
 If waiting time is long  Overweight length: queue length. Multi line preferred over single line

Offering Waiting Time Guarantee

 A Guarantee shrinks the expectation distribution, i.e. preferring certainty. Experience is amplified
 Satisfaction is much higher until the point of guarantee than normal and vice versa
 With loose expectations sensitivity to changes is low. With set expectations sensitivity to changes is high 
Shrinkage of expectation  Amplification
 Guarantee basically amplifies your operational excellence in your marketplace

Service Concept (Value Proposition): Is determined by Product Market Selection + Basis of Competition

Benihana of Tokyo Case

What is Benihana?  Entertainment, Food preparation in the presence of customers, authentic Japanese ambience,
Community/casual dining, moderate prices/times, moderate duration, multisite/consistent

Income Statement

Food Cost 30-35 38-48

Beverage 20 25-30
Rent 4.5-7 5-9
Labor 10-12 30-35
Advertizing 8-10 0.75-2

Food & Beverage: Authentic Japanese (Concept)  Operating Choice (Bill of materials for food)  Drives the income
statement. Since this is billed as a Japanese-Steakhouse they do not have a point of reference.

Rent: Productive Asset & Asset Utilization. Asset used for productive & non-productive mix. Simple Menu  Pre-
processing space  Drives the income statement and increases productive vs non-productive ratio. Communal Dining +
Food preparation in the presence of customers  Starts together and ends together  Minimizes variability  Increases
utilization

Labor: Low headcount, Intangible compensation (Chef’s Total Compensation: Since he/she is the showman the tipping
behavior changes), low attrition. Employee Value to the firm: Firms would want it to be upward sloping w.r.t time. Ensure
employees are valuable, increase productivity through repetitive niche skills so as to block out exit options.

Time Spent in the Bar: 12 minutes. (60 minutes / 5 tables). Seats ratio and cycle ratio is the same. See capacity as defined
by cycle time instead of just seating. Threshold on total expense and total time.

Revenue Streams: Primary or secondary focus has to be questioned both on the basis of ‘concept’ and ‘financials’
 SESSION-4

Brands

 Brand Vs Branded Business

 Brand as a concept: Brand concept map  Brand = Bundle of associations. Associations which customers have is not
necessarily what they use for decision making
 Brand as a model: Think of a brand as a business by itself. Analyze variable cost, risk, capacity.

Starbucks

Legs that it stands on

 Quality Coffee: Supply chain and sourcing leg Quality

Experience
Coffee
 Ambience: Design leg
 Experience: Soft ops & hard ops

Competition
Ambience
 Since all the three legs are replicable with enough capital it is important for
Starbucks to scale/grow quickly. Growth through footprint expansion
 In the pursuit of this scale the brand transformed from three legged brand to a single legged brand (Just quality
coffee) because of catering to customers with opposite requirements from what they set out to.

Growth

 Footprint expansion
 Through Product Proliferation: If you chase growth through product proliferation then the time taken to prepare
the product is great and the soft ops (one of the core legs of the brand) will suffer
 Ticket size expansion: Upselling mindset. See if you can go from Beverage  Breakfast. Share grab/ Market
Expansion.
o Service side constraints: Ensure that the Barista is not occupied for a major chunk of time
o Product side constraints:
 Utilize idle capacity/time to introduce different set of complementary projects
 Substitutes  Tea. Tazo, Teavana. Building within starbucks (one legged brand) and build it outside (three legged
brand)

SBI Kohinoor Banjara

 Product Market Selection  Does it make sense to get into the UNHI1 deposit market
 Basis of competition  Borrow reputation and trust from the SBI Brand. Build exclusivity using Kohinoor brand
 Legs
o Customer Selectivity
o Banking Expertise (Core Banking)
o Relational Experience (Front Office)
o Menu Width (Core side, Peripheral side)
o Asset (Empty asset used to recruit customers, Day 1 experience)
 Brands many a times can be built on the basis of attributes secondary to its nature.
 Scalability Vs Feasibility problem (Banjara with Asset Vs Jaipur with no asset)
 Slow brand as scalability depends on density of UNHIs
 SESSION-5

Service Marketing – Human Resource Interface

 The service profit chain (book)

 The Cycle of Failure: Employee cycle has a rub off effect on the customer cycle
 Service-Profit Chain
o Employee satisfaction  Value  Customer satisfaction  Customer loyalty  Profit & Growth

Fairfield Inn

Fairfield Concept

 Be the best in the class and not the biggest. Superior hospitality and execution
 Impress guests, have committed employees, recognize and reward excellent performance
 Anticipated occupancy rate 78%
 600 people sample for amenities
 We hire people who like to make people smile. Pay for performance system

Scorecard

What is it?

 Measurement System
 Performance Management System
 Reward (Equitable) System
 Mutual Transparency System
 Quality Monitoring System
 Internal Competition System
 Motivation System

Basis of competition: Price, location, service, asset. Price is being used as an instrument to target-in and target-out.
Marriage of the operating system to the concept. Bringing back-end employees to the fore-front.

SESSION-6

Au-Bon Pain

 What is it?
o Cost reduction system/retention system
o Appraisal/Incentives system
o Ownership transfer system
o Decentralization system
o Quality control system
o Human resource management system
 Testing the Performance Pay Model
o Test run using above average managers  Demonstration
o Test run using below average managers  Robustness
o Test run using average managers.
o Plan is to eliminate below average and average managers’ tomorrow
 What’s in it?
o Store managers have autonomy  Asset (Y), Hard Ops (N), Soft Ops (Y), Menu (N), Sales (Y), Brand (X)
o Appoint manager, chooses AM
o Incremental profit  35% manager, 15% A. Manager, 50% firm
o Base Pay
 o Share of profit held back
o Locally tied
o Contract period
 Goal: Without monitoring you I want you to put maximum efforts and bring your ingenuity to the table. The goal is to
improve bottom line. Top line driven setup would stress on sales and not give control over costs
 This model designed by the person who devised the service model. Empower/Enfranchisement
 Squeezing by revising the store lease payment and ensuring that the ultimate pay is slightly above the
poaching/retention requirement.
 Thick Rim  High expectations/flexibility to the front-line employees
 Cost, Risk, Scale
 Deskilling (Frontline). Delayer (Middle Management). Indirect Control
Hub
(Output/Input) via process/technology due to reduction in manpower.
Incentive/Motivation. Talent Quality
 “Notch-below” hiring process  Level people from one-level lower
 Brilliant people + Average people in an org  Learn what the people who
Rim
achieve excellence are doing, learn and then use this to pull up the mean of
the people in the org thus reducing variance as well. Thus moving the
organization from Thick Rim  Thin Rim. “Seeding-Socializing”
 Innovation Engine  Go for Thick Rim.
 Body Shop (Complete Discretion)  Thick Rim  Thin Rim  Rimless/Vending Machine Model (No Discretion)

SESSION-7

Marketing-Technology Interface

Everdream

 Everdream Vs Dell: Both offer hardware, software & service

 Everdream’s charge of $150 per month
o PC - $60
o Backup - $15
o Dial-up - $20
o Service - $55
 Demand sustainability – Will last only till PC reliability is low, if it is high no one will be willing to pay $55
 Demand scalability – Higher the number of PCs per customer size lower will be the willingness to pay for service
 A service business is carved out of a product business here by Everdream by switching the limiting asset. Here the
limiting asset is the call center

Economics of a call center (as a limiting asset)

Assume a 100 person call center

 Estimate capacity
 Income statement for the call center/Number of minutes available per month
 Time per month = 100*22*13*60 = 1,716,000 minutes
 Number of minutes in contract period = 30 months * 1,716,000 = 51,480,000 min
 Number of minutes consumed per customer = 586 minutes’/ contract period
 Assume running capacity of 70% (As buffer is always necessary)  87859*.7 = 61,495 customers
 Costs  Operating cost 9 million, amortized fixed cost 0.6 million, cost of PC + VAR = 50 million. Total cost = 60
million
 Annual Margin = 110 million = 60 million = 50 million
 ROI  50 million/3 million = 16.67
  Newer and newer ways of shrinking the denominator (cost of the assets) and increasing scalability
 Everything other than the initial 3 million is completely variable
 Guarantee
o Uptime
o Response time
o Problem resolution. No data loss

SBI – SMS Unhappy

 Service Recovery System Vs Failure Prevention Systems

 Fail + Recover Well >> No Failure; Service Recovery Paradox
 What matters is core service. Investment in recovery service is beneficial in the longer run.

SMS Unhappy System

 High volumes are driven by

o No Customer selectivity
o No problem sensitivity
o Increasing the likelihood to complain
 Problems two categories Systemic SBI, Idiosyncratic Branch
 Complaint management system to Preventive system (Idiosyncratic problems are going to go away)

SESSION-8

Managing Customer Satisfaction, Service Quality

 Quality & Value  Customer Satisfaction (Oliver – Mr. Satisfaction)

 Value & Customer Satisfaction  Quality (Bolton – Mr. Quality)
 Quality & Customer Satisfaction  Value (Gale – Mr. Value)
 Satisfaction, Service Quality = f [Performance-Expectation, Expectation]. Expectation is a function of itself in order
to prevent gaming the system into setting the expectations low and then exceeding it.
 Value = f [Performance-Expectation, Expectation, Price]
 One can’t play the expectations came, they will converge. Performance is where firms should concentrate

Expectation-Disconfirmation Model

The role of competition comes in the ‘Should’ expectation.

This should expectation is set by the best-in-class in that
industry. If the superior firm increases its performance, the
effect is two-fold. Its own customers will be more satisfied
and competition’s customers will be more dissatisfied.

Net Promoter Score

 NPS = Useless
 Improvement Effort/Performance  Pulls NPS and Topline.
 Improvement in NPS does not lead to Improvement in Revenues. Correlation is not causation
 Don’t be in the business of optimizing the middle. (Overall satisfaction, NPS etc.).
 Think of ROI/Re-purchase intent etc.
 SESSION-9

The Gaps Model of Service Quality

Book: Service Marketing, Valarie Zeithaml &

Mary Jo Bitner

 Gap 1  Market Research Gap

 Gap 2  Design Gap
 Gap 3  Delivery Gap
 Gap 4  Expectation setting Gap
 End goal is to close gap 5, the gap
between expected & perceived
service

This is a topline model and not a bottom line

model. Gap 5 acts only in the Customer’s
interest and not in the firm’s specific
interest. You are solving their problem and not your problem.

Takeaway: Always play the asset margin game and not the expectations-performance gap. You will face people who are
customer-centric. Don’t try to swim against that current immediately. Wait and strike.

SEVQUAL

 Reliability
 Responsiveness
 Assurance
 Empathy
 Tangibles

Professional Service Systems

What is a Professional Service?

 They are often outsourced capabilities

 The intellectual capital component of their output is often large
 The extent of co-production with client firm is large
 Output varies by client and may be difficult to judge
 The output may be difficult to control through an external loop
 The consequential effects of performance are large but guarantees may be hard to offer
 The hard asset of the firm is often immaterial and the web of relationships of the professionals are critical

Lehman Brothers

Sourcing: Bottom of the pool, Contrarian pool, no jerk policy (checking the attitudes) and then aptitude

Development: Basic training. Unbundle output to figure out what drives the quality of the output (way one talks, number
of calls, hours etc.) and then use this to train the entire firm and raise the performance level of the entire firm 
Socialization. Seeding from the outside, bringing in expertise that the firm lacked in.

Compensation: Below market compensation. “Psychic Value”. Shielding, personal rapport, fun.

Service Triangle: Talk about all the $ benefits in the boardroom. Talk about all the non $ benefits or discussions in the
pressroom.
Control System: Inputs are being controlled. Outputs  I I ranking, sales generated, accuracy of prediction

Leadership’s responsibility is system design. More robust the system design, less requirement for leadership.

Employee satisfaction doesn’t matter, customer satisfaction doesn’t matter, leadership doesn’t matter

SESSION-10

Developing Mental Models of Service Strategy

A Service System: The Scope

 Human Resource Flow: How to bring them in, how to compensate them
 Management Systems (Control Bucket)
 Measures of Performance: One set of measures tied to inputs and outputs of the human resource flow. Metrics
on Inputs and outputs enterprise wide
 Management of service capes (assets): Kohinoor SBI case
 Concept Control/Brand

Alternative Mental Models

Each of these models is comprehensive by itself. Do not mix and match as they are independent and different ways of
thinking.

(1) The Service Profit Chain

Essence: Focus on your people. People-centric model

Upside: Intuitive, helpful if the problem is really customer retention

Downside: You assume that employee satisfaction is the problem and focuses only on that. Puts on blinders to everything
else. Top line model. Other drivers of revenue. Narrow minded approach

(2) The Gaps Model of Service Quality

Essence: Only thing that matters in running the enterprise is Service Quality, high quality output (Quality centric thinking
rather than a people centric thinking)

Upside: Comprehensive, clearly identifiable gaps

Downside: Solves the customer’s problem and not the firm’s problem. It is a top-line model and not a bottom-line model.
Post-fact model

(3) Return On Quality

Essence: Continuous improvement Model/resource allocation model.

Upside: Broader, greater flexibility. Bottom-line model

Downside: Does not tell you what the end game is. No ways to identify the problem. We could get more profits by
improving something on the backend unrelated to the customer

(4) Alternative APL Models

Essence: Focus on actions and outcomes, not get mired in the middle. Think from right to left. Upside: Allows you to pick
your own elements

Upside: Bottom line, very high flexibility. Process of discovery

Downside: There are various ways to reach the goal

(5) The Hub and Rim Model

Essence: Products and services are not distinct and are interchangeable. Everyone needn’t be smart. Move from thick rim
to thin rim world. Design (product), sourcing (material), compliance (manufacturing) with a single stakeholder mindset.

Upside: Scale, scope advantages.

Reasonable Questions

 How do I scale up?

 How do I compete with more efficient players?
 How do I cater to my specifications?

Design

 Unbundle the output and set service levels for them

 Don’t try to optimize intermediate outcomes. Optimize only the end outcome

Sourcing

 Go to the bottom of the pool

 Develop them around the skills that are not valued in the market but valued in the firm
 Shrink the capability spread. Islands of excellence to pull up the rest to reduce the variation of performance

Compliance

 Compliance comes from transparency and control over factors

 Adopt indirect control mechanisms (removes the middle managers)
 Control both the inputs and the outputs
 From thick rim to thin rim, you need the right penalties and not the right incentives

You don’t necessarily need to be bad to the employees and customers. Preserve the variable cost and deliver non-$ value
to both the stakeholders. One output, two constraints.

Building Blocks

 De-skill the frontline

 De-layer the middle management
 Disincentives
 De-motivation
 Currency conversion
 Indirect Control
 Infinite span of control

Taco-Bell

Product Market Selection: Mexican Food  Fast Food.

Basis of Competition: “Mexican”. “Value” -> More food for the money

Operating System Strategy:

Income Statement: High COGS has an implication of Margin Compression. Two ways of making this viable is to either
increase the volume or lower the SGA.
Volume Increase  Demand side (Increase ad spend, Footprint expansion, FACT model, Lower price points) ; Processing
Capacity (Productive Capacity, Asset Productivity – Speed of Service Initiatives)

Lower SGA  People (Delayer, Deskilling, TACO for Back end, Control through Safety Nets)

Two ways of learning. Do it incrementally or do everything together as a pilot. Execution should be done simultaneously
if we are confident. Such a big change usually fails due to internal resistance. That was taken care by – Delayering,
Increasing compensation for survivors. Successful implementation of change management

Value-Cost leveraging is the best of both worlds. Increase value to the customers and reduce the cost to serve the
customers. In this case it was high value, high cost. Competitors could easily put pricing pressure on you and reduce the
value that you are giving your customers.