Instructional Material - Transportation Service Marketing

Polytechnic University of the Philippines
College of Tourism, Hospitality, and Transportation Management

Department of Tourism and Transportation Management
Bachelor of Science in Transportation Management
INSTRUCTIONAL MATERIAL FOR

TRMA 40013 – TRANSPORTATION SERVICE MARKETING
Compiled by:
Mr. Rock Bryan B. Matias, DBA, CBMP
Faculty
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Table of Contents
Page
Title Page 1
Table of Contents 2
Course Overview 3
Introduction to the Course content, Classroom Policies, 4

Week 1
activities, and requirements
Introduction to Service Economy & Consumer Behavior in a 4
Week 2 Service Context
Activity, Assessment and Assignment 18
Positioning Services in Competitive Markets 21
Week 3
Developing Service Products: Core and Supplementary 27
Week 4 Elements
Distributing Services Through Physical and Electronic 37
Week 5 Channels
Setting Prices and Implementing Revenue Management 45
Week 6
Promoting Services and Educating Customers 53
Week 7
Designing and Managing Service Processes 61
Week 8
Week 9 Midterm Examination 69
Balancing Demand and Productive Capacity 73
Week 10
Crafting the Service Environment 79
Week 11
Managing People for Service Advantage 86
Week 12
Managing Customer Relationship and Building Loyalty 93
Week 13
Complaint Handling and Service Recovery 103
Week 14
Improving Service Quality and Productivity 110
Week 15
Striving for Service Leadership 117
Week 16
Week 17 Final Examination / Presentation of Marketing Plan 120
References 121
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Transportation Service Marketing
Overview of the Course
This course provides understanding on how the service economy works particularly in the
transportation sector. It tackles about the basic principles and extended version of the marketing
mix strategies and how people and technology augment to the overall service quality provided
by the transportation sector.
Course Outcomes
At the end of the course, the learner should be able to:
1. Explain the concept of service economy, service products and understand the consumers
and markets in the service context as applied to transport agencies, institutions, and/or
sectors.
2. Apply the concept of 4Ps of marketing to services particularly in development of service
products and services, distribution of such service products and services in physical and
electronic channels, development of service pricing and revenue management policies, and
service marketing communications as relate to transport service sectors.
3. Design service processes, and balancing demand and capacity as applied to transport
agencies, institutions, and/or sectors.
4. Create service environment in relation to customer service experience and behaviors as
well as service environment dimensions in the transport agencies, institutions, and/or
sectors.
5. Apply people management, service culture, climate and leadership in the service context as
applied to transport agencies, institutions, and/or sectors.
6. Develop customer relationship strategies, complaint handling and service recovery as
applied to transport agencies, institutions, and/or sectors.
7. Describe different tools in relation service quality and improvement measures as applied to
transport agencies, institutions, and/or sectors.
8. Analyze different cases in the service economy particularly in the transport agencies,
institutions, and/or sectors.
9. Develop simple Marketing Plan for a selected transport agency, institutions, and/or sectors.
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Week 1: Introduction to the Course Content, Classroom Policies, Activities, and
Requirements
Discussion Learning Outcomes
In this week module, we will be discussing The learner should be able to:
the following: 1. Demonstrate enthusiasm and appreciation
1. Course content to the course.
2. Classroom Policies 2. Convey expectations to the course.
3. Classroom Activities and 3. Agree to course requirements as set by the
Requirements instructor/professor
Week 2: Introduction to Service Economy & Consumer Behavior in a Service Context

the following: 1. Explain services and its importance.
A. Introduction to Service Economy 2. Identify marketing challenges in the
1. What are Services and Importance of Service Economy
Service 3. Distinguish different marketing mix
2. Marketing Challenges Posed by Services strategies used in Service Economy
3. Introduction to 4Ps of Marketing and the 4. Explain the interrelation of marketing with
Extended Marketing Mix as required to other functional areas of management.
Service 5. Summarize the different stages of service
4. Integration of Marketing with Other consumption.
Management Function.
B. Consumer Behavior in a Service

Context
1. Customer Decision Making: The Three-
Stage Model of Service Consumption
 Pre-purchase Stage
 Service Encounter Stage
 Post-encounter Stage
A. Why there’s a need to study services?

Understand how services contribute to a country’s economy.
Services Dominate the Global Economy

The size of the service sector is increasing in almost all countries around the world. As an
economy develops, the relative share of employment between agriculture, industry (including
manufacturing and mining), and services changes dramatically.
 Services account for more than 60% of GDP worldwide
 Almost all economies have a substantial service sector
 Most new employment is provided by services
 Strongest growth area for marketing
 Understanding services offers you a personal competitive advantage
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Contribution of Service Industries to GDP Globally
 Most new jobs are generated by services

 Fastest growth expected in knowledge-based industries
 Significant training and educational qualifications required, but employees will be
more highly compensated
 Will service jobs be lost to lower-cost countries? Yes, some service jobs can be
exported
The size of the service sector is increasing in almost all countries around the world. As an
economy develops, the relative share of employment between agriculture, industry (including
manufacturing and mining), and services changes dramatically1. Even in emerging economies,
the service output is growing rapidly and often represents at least half of the Gross Domestic
Product (GDP).
The figure above shows how the evolution to a service-dominated economy is likely to take
place over time as the per capita income rises. In developed economies, knowledge-based
services — defined as having intensive users of high technology or relatively skilled workforces
— have been the most dynamic component.
Powerful forces are transforming service markets
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Government policies, social changes, business trends, advances in IT, internationalization
Forces that reshape:
Demand
Supply
The competitive landscape
Customers’ choices, power, and decision making
A key driver of successful economies is their ecosystem of advanced, competitive, and

innovative business services. You may ask, “Why would business services improve the
productivity of a manufacturing firm and an economy as a whole?” Consider the following
example: a large manufacturing firm runs its own canteen with 100 workers, who in the national
statistics are classified as “manufacturing employees” producing “manufacturing output” (their
output is captured in the added value created by their employer, i.e., the manufacturing firm).
However, how good is a manufacturing firm in buying food ingredients, cooking, designing and
running kitchen processes, supervising chefs, and controlling quality and costs in a canteen?
The general answer is that the firm would probably not be capable of producing fantastic food.
As the operations that take place in the canteen are low volume and of little importance to the
overall business, they will justify neither greater management attention, nor significant
investments in
process improvements and R&D.
Many manufacturing firms have recognized this problem and outsourced their canteen
operations, most likely via a tendering process with a renewal period of every few years. The
winning bidder is likely to be a firm that specializes in running canteens and kitchens across
many sites or branches. That company makes “operating canteens” its core competency. As
such, the operation is managed with an emphasis on the quality of the services and food
provided, and the efficiency of its cost structure. Branches can be benchmarked internally, and
the overall operation has economies of scale, and is way down the learning curve.
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It also makes sense for the firm to invest in process improvements and R&D as the benefits can
be reaped across multiple sites. What used to be a neglected support activity within a
manufacturing firm has become a management focus and core competency of an independent
service provider. The same logic applies to almost all non-core activities, assets, goods, and
services a company can source more cost effectively from third-party providers.
What are Services?

Thus far, our discussion of services has focused on different types of service industries and
their development. But now it’s time to ask the question: What exactly is a service?
The Historical View

Attempts to describe and define services go back more than two centuries. In the late
eighteenth and early nineteenth centuries, classical economists focused on the creation and
possession of wealth. They contended that goods (initially referred to as “commodities”) were
objects of value over which ownership rights could be established and exchanged. Ownership
implied tangible possession of an object that had been acquired through purchase, barter, or gift
from the producer or a previous owner, and was legally identifiable as the property of the current
owner.
Adam Smith’s famous book The Wealth of Nations, published in Great Britain in 1776,
distinguished between the outputs of what he termed “productive” and “unproductive” labor. The
former, he stated, produced goods that could be stored after production and subsequently
exchanged for money or other items of value. Unproductive labor, however “honorable, useful,
or necessary,” created services that perished at the time of production and therefore didn’t
contribute to wealth. Building on this theme, the French economist Jean-Baptiste Say argued
that production and consumption were inseparable in services, coining the term “immaterial
products” to describe them.
Today, we know that production and consumption are indeed separable for many services (think
of dry cleaning, lawn mowing, and weather forecasting) and that not all service performances
are perishable (consider video recordings of concert performances and sports events). Very
significantly, many services are designed to create durable value for their recipients (your own
education being a case in point). But the distinction between ownership and non-ownership,
which we will discuss in the next section, remains a valid one, emphasized by several leading
service marketing scholars.
Benefits without ownership

We can identify five broad categories within the non-ownership framework that focus on (1) use
of labor, skills, and expertise, (2–4) various degrees of use of goods and facilities (exclusive,
defined, or shared), and (5) access and use of networks and systems:
1. Labor, skills, and expertise rentals. Here, other people are hired to perform work that
customers either cannot or choose not to do themselves. Some of these include:
• Car repair
• Medical check-up
• Management consulting
2. Rented goods services. These services allow customers to obtain the exclusive temporary
right to use a physical object that they prefer not to own. Examples include:
• Boats
• Fancy dress costumes
• Construction and excavation equipment
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3. Defined space and facility rentals. This is when customers obtain the use of a certain
portion of a larger facility such as a building, vehicle, or area. They usually share this facility with
other customers. Examples of this kind of rental include:
• A seat in an aircraft
• A suite in an office building
• A storage container in a warehouse
4. Access to shared facilities. Customers rent the right to share the use of the facility. The
facilities may be a combination of indoors, outdoors, and virtual. Examples include:
• Theme parks
• Golf clubs
• Toll roads
5. Access and use of networks and systems. Customers rent the right to participate in a
specified network. Service providers offer a variety of terms for access and use, depending on
customer needs. Examples include:
• Telecommunications
• Utilities and banking
• Social online networks and games (e.g., League of Legends)
The difference between ownership and non-ownership affects the nature of marketing tasks and
strategy. For example, the criteria for a customer’s choice of service differ when something is
being rented instead of owned. For a rental car to be used on vacation in Hawaii, for example,
customers may focus on the ease of making reservations, the rental location and hours, the
attitudes and performance of service personnel, the cleanliness and maintenance of vehicles,
etc. If the customers are looking to own a car, then they are more likely to consider price, brand
image, ease of maintenance, running costs, design, color, upholstery, etc.
Defining Service
Based on the non-ownership perspective of services, we offer the following comprehensive
definition of services:
 Services are economic activities performed by one party to another. Often time-based,
these performances bring about desired results to recipients, objects, or other assets.
 In exchange for money, time, and effort, service customers expect value from access to
labor, skills, expertise, goods, facilities, networks, and systems. However, they do not
normally take ownership of the physical elements involved.
Service Products versus Customer Service and After-Sales Service

A firm’s market offerings are divided into core product elements and supplementary service
elements
Need to distinguish between:
 Marketing of services – when service is the core product
 Marketing through service – when good service increases the value of a core physical
good
Manufacturing firms are reformulating and enhancing existing added-value services to market
them as stand-alone core products.
FOUR BROAD CATEGORIES OF SERVICES — A PROCESS PERSPECTIVE

Differences exist amongst services depending on what is being processed. Classification of
services into:
 People processing
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 Possession processing
 Mental stimulus processing
 Information processing
People Processing
Customers must:
 physically enter the service factory
 cooperate actively with the service operation
Managers should think about process and output from the customer’s perspective
 to identify benefits created and non-financial costs: Time, mental and physical effort
Possession Processing
 Involvement is limited
 Less physical involvement
 Production and consumption are separable
Mental Stimulus Processing

 Ethical standards required:
o Customers might be manipulated
 Physical presence of recipients not required
 Core content of services is information-based
o Can be ‘inventoried’
Information Processing
 Most intangible form of service
 May be transformed:
o Into enduring forms of service output
 Line between information processing and mental stimulus processing may be unclear
Marketing Challenges Posed by Service

 Marketing management tasks in the service sector differ from those in the manufacturing
sector.
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 Eight common differences between services and goods but they do not apply equally to
all services
 What are marketing implications of these differences?
Difference, Implications, and Marketing-Related Tasks
Extended Marketing Mix for Services

Marketing can be viewed as:
 A strategic and competitive thrust pursued by top management
 A set of functional activities performed by line managers
 A customer-driven orientation for the entire organization
Marketing is only function to bring operating revenues into a business; all other functions are
cost centers. The “7 Ps” of services marketing are needed to create viable strategies for
meeting customer needs profitably
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Traditional Marketing Mix
Product Elements
Service products lie at the heart of a firm’s marketing strategy. If a product is poorly designed, it
won’t create meaningful value for customers, even if the rest of the 7 Ps are well executed.
Place and Time

Service distribution may take place through physical or electronic channels (or both), depending
on the nature of the service.
Price and Other User Outlays

Like product value, payment is very important in allowing a value exchange to take place. For
firms, the pricing strategy affects how much income is generated. Pricing strategy is often highly
dynamic, with price levels adjusted over time according to factors like customer segment, time
and place of delivery, level of demand, and available capacity.
Promotion and Education

Few marketing programs can succeed without effective communications. This component plays
three vital roles: providing needed information and advice, persuading target customers to buy
the service product, and encouraging them to take action at specific times. In services
marketing, much communication is educational in nature, especially for new customers.
The Extended Service Marketing Mix for Managing the Customer Interface
Process
Smart managers know that where services are concerned, how a firm does things is as
important as what it does. Therefore, creating and delivering product elements requires design
and implementation of effective processes. Badly designed service processes lead to slow,
bureaucratic, and ineffective service delivery, wasted time, and a disappointing experience for
customers. Poor service process design also makes it difficult for frontline employees to do their
jobs well, resulting in low productivity and employee dissatisfaction.
Physical Environment
If your job is in a service business that requires customers to enter the service factory, you’ll
also have to spend time thinking about the design of the physical environment or servicescape.
The appearance of buildings, landscaping, vehicles, interior furnishings, equipment, staff
members’ uniforms, signs, printed materials, and other visible cues provide tangible evidence of
a firm’s service quality.
People
Despite advances in technology, many services will always need direct interaction between
customers and service employees. You must have noticed many times how the difference
between one service supplier and another lies in the attitude and skills of their employees.
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Service firms need to work closely with their human resources (HR) departments and devote
special care in selecting, training, and motivating their service employees.
MARKETING MUST BE INTEGRATED WITH OTHER MANAGEMENT FUNCTIONS
Operations is the primary line function in a service business, responsible for managing service
delivery through equipment, facilities, systems, and many tasks performed by customer-contact
employees. In most service organizations, you can also expect to see operations managers
actively involved in product and process design, many aspects of the physical environment, and
implementation of productivity and quality improvement programs.
HR is often seen as a staff function, responsible for job definition, recruitment, training, reward
systems, and quality of work life — all of which are, of course, central to the people element. But
in a well-managed service business, HR managers view these activities from a strategic
perspective. They understand that the quality and commitment of the front line have become a
major source of competitive advantage. Service organizations cannot afford to have HR
specialists who do not understand customers. When employees understand and support the
goals of their organization, have the skills and training needed to succeed in their jobs, and
recognize the importance of creating and maintaining customer satisfaction, both marketing and
operations activities are easier to manage and are more likely to be successful.
IT is a key function as service processes are information-heavy — at almost every customer

touch point, real-time information is needed (from customer data to prices and available
capacity). Operations, HR, and marketing are critically dependent on IT to manage their
functions and create value for the organization’s customers.
B. Consumer Behavior in a Services Context
Customer Decision Making: The Three Stage Model of Service Consumption
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Pre-purchase Stage
 Customers seek solutions to aroused needs
 Evaluating a service may be difficult
 Uncertainty about outcomes Increases perceived risk
 What risk reduction strategies can service suppliers develop?
 Understanding customers’ service expectations
 Components of customer expectations
 Making a service purchase decision
Need Arousal
 Decision to buy or use a service is triggered by need arousal
 Triggers of need:
o Unconscious minds (e.g., personal identity and aspirations)
o Physical conditions (e.g., hunger )
o External sources (e.g., a service firm’s marketing activities)
 Consumers are then motivated to find a solution for their need
Information Search
 Need arousal leads to attempts to find a solution
 Evoked set – a set of products and brands that a consumer considers during the
decision-making process – that is derived from past experiences or external sources
 Alternatives then need to be evaluated before a final decision is made
Evaluating Alternatives – Service Attributes

 Search attributes help customers evaluate a product before purchase
o E.g., type of food, location, type of restaurant and price
 Experience attributes cannot be evaluated before purchase
o The consumer will not know how much s/he will enjoy the food, the service, and
the atmosphere until the actual experience
 Credence attributes are those that customers find impossible to evaluate confidently
even after purchase and consumption
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o E.g., hygiene conditions of the kitchen and the healthiness of the cooking
ingredients
How Product Attributes Affect Ease of Evaluation
Perceived Risks of Purchasing and Using Services

 Functional – unsatisfactory performance outcomes
 Financial – monetary loss, unexpected extra costs
 Temporal – wasted time, delays leading to problems
 Physical – personal injury, damage to possessions
 Psychological – fears and negative emotions
 Social – how others may think and react
 Sensory – unwanted impact on any of five senses
How Might Consumers Handle Perceived Risk?

 Seek information from respected personal sources
 Compare service offerings and search for independent reviews and ratings via the
Internet
 Relying on a firm with good reputation
 Looking for guarantees and warranties
 Visiting service facilities or going for trials before purchase and examining tangible cues
or other physical evidence
 Asking knowledgeable employees about competing services
Strategic Responses to Managing Customer Perceptions of Risk

 Free trial (for services with high experience attributes)
 Advertise (helps to visualize)
 Display credentials
 Use evidence management (e.g., furnishing, equipment etc.)
 Offer guarantees
 Encourage visit to service facilities
 Give customers online access about order status
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Understanding Customers’ Service Expectations
 Customers evaluate service quality by comparing what they expect against what they
perceive
o Situational and personal factors also considered
 Expectations of good service vary from one business to another, and differently
positioned service providers in same industry
 Expectations change over time
Factors Influencing Customer Expectations of Service
Components of Customer Expectations
Desired Service Level - wished-for level of service quality that customer believes can and
should be delivered
Adequate Service Level - minimum acceptable level of service
Predicted Service Level - service level that customer believes firm will actually deliver
Zone of Tolerance - Acceptable range of variations in service delivery
Purchase Decision
 Purchase Decision: Possible alternatives are compared and evaluated, whereby the best
option is selected
o Simple if perceived risks are low and alternatives are clear
o Complex when trade-offs increase
 Trade-offs are often involved
 After making a decision, the consumer moves into the service encounter stage
Service Encounter Stage

 Service encounters range from high- to low-contact
 Understanding the servuction system
 Theater as a metaphor for service delivery: An integrative perspective
o Service facilities
o Personnel
o Role and script theories
 Service encounter – a period of time during which a customer interacts directly with the
service provider
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 Might be brief or extend over a period of time (e.g., a phone call or visit to the hospital)
Models and frameworks:
1. “Moments of Truth” – importance of managing touchpoints
2. High/low contact model – extent and nature of contact points
3. Servuction model – variations of interactions
4. Theater metaphor – “staging” service performances
Moments of Truth
“[W]e could say that the perceived quality is realized at the moment of truth, when the service
provider and the service customer confront one another in the arena. At that moment they are
very much on their own… It is the skill, the motivation, and the tools employed by the firm’s
representative and the expectations and behavior of the client which together will create the
service delivery process.” – Richard Normann
Service Encounters Range from High-Contact to Low-Contact
Distinctions between High-Contact and Low-Contact Services

 High-Contact Services
o Customers visit service facility and remain throughout service delivery
o Active contact
o Includes most people-processing services
 Low-Contact Services
o Little or no physical contact
o Contact usually at arm’s length through electronic or physical distribution
channels
o Facilitated by new technologies
The Servuction System

 Servuction System: visible front stage and invisible backstage
 Service Operations
o Technical core where inputs are processed and service elements created
o Contact people
o Inanimate environment
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 Service Delivery
o Where “final assembly” of service elements takes place and service is delivered
o Includes customer interactions with operations and other customers
Theater as a Metaphor for Service Delivery

“All the world’s a stage and all the men and women merely players. They have their exits and
their entrances and each man in his time plays many parts.” - William Shakespeare As You Like
It
Theatrical Metaphor: an Integrative Perspective

Good metaphor as service delivery is a series of events that customers experience as a
performance
Service facilities - Stage on which drama unfolds. This may change from one act to another
Personnel - Front stage personnel are like members of a cast. Backstage personnel are
support production team
Roles - Like actors, employees have roles to play and behave in specific ways
Scripts - Specifies the sequences of behavior for customers and employees
Implications of Customer Participation in Service Delivery

 Greater need for information/training
o Help customers to perform well, get desired results
 Customers should be given a realistic service preview in advance of service delivery
o This allows them to have a clear idea of their expected role and their script in this
whole experience
o Manages expectations and emotions
Post-Encounter Stage
 Evaluation of service performance
 Future intentions
Customer Satisfaction with Service Experience

 Satisfaction: attitude-like judgment following a service purchase or series of service
interactions
o Whereby customers have expectations prior to consumption, observe service
performance, compare it to expectations
 Satisfaction judgments are based on this comparison
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o Positive disconfirmation (better)
o Confirmation (same)
o Negative disconfirmation (worse)
Customer Delight: Going Beyond Satisfaction

 Research shows that delight is a function of three components
o Unexpectedly high levels of performance
o Arousal (e.g., surprise, excitement)
o Positive affect (e.g., pleasure, joy, or happiness)
 Strategic links exist between customer satisfaction and corporate performance
o By creating more value for customers (increased satisfaction), the firm creates
more value for the owners
Week 2 Activity
Direction: Answer the following questions
1. What are the main reasons for the growing share of the service sector in all major
economies of the world?
2. Is it possible for an economy to be almost entirely based on services? Is it a sign of
weakness when a national economy manufactures few of the goods that it consumes?
3. “A service is rented rather than owned.” Explain what this statement means, and use
examples to support your explanation.
4. Describe the four broad “processing” categories of services, and provide examples for
each.
5. What are the five powerful forces transforming the service landscape, and what impact
do they have on the service economy?
Week 2 Assessment
Direction: Read the questions carefully and encircle the best answer.
1. It is a type of service processing where services are being directed to people’s body.
What is this?
A. Mental stimulus processing
B. People processing
C. Possession processing
D. Information processing
2. Akie has a business, he went to an accounting firm to get Guray’s service as retainer.
What type of service processing is this?
3. A process of service where physical presence of an individual is not required. What is
this?
4. Mark goes on a long drive and he eventually emptied his gasoline tank. He went to the
nearest gasoline station to refuel. What type of service process is this?
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5. It is an economic activity perform by one party to another. It is usually intangible in
nature.
A. Product
B. Service
C. Both A and B
D. None of the above
6. It is a stage of customer decision making where customer seek solutions to arousal
needs.
A. Service Encounter Stage
B. Post-encounter Stage
C. Pre-purchase stage
7. One of the perceived risks in purchasing and using services which pertains to fears and
negative emotions.
A. Functional
B. Psychological
C. Temporal
D. Physical
8. One of the perceived risks in purchasing and using services which pertains to wasted
time, delays leading to problems
A. Functional
B. Psychological
C. Temporal
D. Physical
9. One of the perceived risks in purchasing and using services which pertains to unwanted
impact on any of five senses
A. Financial
B. Physical
C. Social
D. Sensory
10. One of the perceived risks in purchasing and using services which pertains to personal
injury, damage to possessions
A. Financial
B. Physical
C. Social
D. Sensory
Week 2 Assignment
Select three services: one high in search attributes, one high in experience attributes, and one
high in credence attributes. Specify what product characteristics make them easy or difficult for
consumers to evaluate, and suggest specific strategies that marketers can adopt in each case
to facilitate evaluation and reduce perceived risk.
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Week 3: Positioning Services in Competitive Markets
the following: 1. Differentiate focus strategies in service and
Positioning Services in Competitive classify different ways to segment the market.
Markets 2. Apply different positioning strategies to a
1. Focus Strategies in Service particular transport sectors.
2. Market Segmentation 3. Analyze different competitive advantage in
3. Service Attributes and Levels the service sector.
4. Developing an effective Positioning
Strategies
5. Using Positioning Maps to Analyze
Competitive Strategy
6. Changing Competitive Positioning
Positioning Services in Competitive Markets
Focused Strategies for Services
Considerations for using Focused Strategies

Fully focused: Limited range of services to narrow and specific market
 Opportunities
o Developing recognized expertise in a well-defined niche may provide protection
against would-be competitors
o Allows firms to charge premium prices
 Risks
o Market is too small to generate needed volume
o Demand may be displaced by generic competition from alternative products
o Purchasers in chosen segment may be susceptible to economic downturn
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Market focused
o Narrow market segment with wide range of services
o Need to make sure firms have operational capability to do and deliver each of the
different services selected
o Need to understand customer purchasing practices and preferences
Service focused
o Narrow range of services to fairly broad market
o As new segments are added, firm needs to develop knowledge and skills in
serving each segment
Unfocused
 Broad markets with wide range of services
 Many service providers fall into this category
 Danger – becoming a “jack of all trades and master of none”
Market Segmentation
o Firms vary widely in their abilities to serve different types of customers
o A market segment is composed of a group of buyers sharing common characteristics,
needs, purchasing behavior, and consumption patterns
o Target segments should be selected with reference to
o Firm’s ability to match or exceed competing offerings directed at the same
segment
o Not just profit potential
Service Attributes and Levels
Developing Right Service Concept for a Specific Segment

 Use research to identify and prioritize which attributes of a given service are important to
specific market segments
 Individuals may set different priorities according to:
o Purpose of using the service
o Who makes decision
o Timing of use
o Whether service is used alone or with a group
o Composition of that group
Important vs. Determinant Attributes

 Consumers usually choose between alternative service offerings based on perceived
differences between them
 Attributes that distinguish competing services from one another are not necessarily the
most important ones
 Determinant attributes determine buyers’ choices between competing alternatives
o service characteristics that are important to purchasers
o customers see significant differences between competing alternatives on these
attributes
Establishing Service Levels
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 Make decisions on service levels – level of performance firm plans to offer on each
attribute
o Easily quantified attributes are easier to understand – e.g., vehicle speed,
physical dimensions
o Qualitative attributes subject to individual interpretation – e.g., physical comfort,
noise levels
 Can often segment customers according to willingness to trade off price versus service
level:
o Price-insensitive customers willing to pay relatively high price for high levels of
service
o Price-sensitive customers look for inexpensive service with relatively low
performance
Positioning Distinguishes a Brand from its Competitors
Four Principles of Positioning Strategy

 Must establish position for firm or product in minds of customers
 Position should be distinctive, providing one simple, consistent message
 Position must set firm/product apart from competitors
 A company cannot be all things to all people – must focus its efforts
Principles of Positioning
Avoid trap of investing too heavily in points of differences that are easily copied!
 What does our firm stand for in the minds of current and potential customers?
 What customers do we serve now, and which ones would we like to target?
 What is value proposition for our current service products, and market segments?
 How does each of our service products differ from competitors’?
 How well do target customers perceive our service products as meeting their needs?
 What changes must we make to strengthen our competitive position?
Developing an Effective Positioning Strategy

 Positioning links market analysis and competitive analysis to internal corporate analysis
 Market Analysis
o Focus on overall level and trend of demand and geographic locations of demand
o Look into size and potential of different market segments
o Understand customer needs and preferences and how they perceive the
competition
 Internal Corporate Analysis
o Identify organization’s resources, limitations, goals, and values
o Select limited number of target segments to serve
 Competitor Analysis
o Understand competitors’ strengths and weaknesses
o Anticipate responses to potential positioning strategies
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Market, Internal, and Competitive Analyses
Anticipating Competitive Response

 Competitors might pursue same market position
o Independently do same positioning analysis and arrive at similar conclusions
o Threatened by new strategy, take steps to reposition own service
o New entrant plays “follow the leader”
 Conduct internal corporate analysis for challengers and analyze possible effects of
alternative moves
o Impact of price cut on demand, market share, and profits
o Responses of different segments to changes in service attributes
Using Positioning Maps to Analyze Competitive Strategy

 Great tool to visualize competitive positioning and map developments of time
 Useful way to represent consumer perceptions of alternative products graphically
 Typically confined to two attributes, but 3-D models can be used to portray positions on
three attributes simultaneously
 Information about a product can be obtained from market data, derived from ratings by
representative consumers, or both
Positioning Maps Help Managers to Visualize Strategy

 Research provides input to development of positioning maps – challenge is to ensure
that
o Attributes employed in maps are important to target segments
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o Performance of individual firms on each attribute accurately reflects perceptions
of customers in target segments
 Predictions can be made of how positions may change in light of future developments
 Charts and maps can facilitate “visual awakening” to threats and opportunities, suggest
alternative strategic directions
Changing Competitive Positioning
Repositioning
 Firm may have to make significant change in existing position
o Revising service characteristics; redefining target market segments; abandoning
certain products; withdrawing from certain market segments
 Improving negative brand perceptions may require extensive redesign of core product
 Repositioning introduces new dimensions into positioning equation that other firms
cannot immediately match
Week 3 Activity
1. What are the elements of a customer-driven services marketing strategy?
2. In segmentation, what are the most common bases to use? Provide examples for each
of these bases.
3. How are service levels of determinant attributes related to positioning services?
4. How can positioning maps help managers better understand and respond to competitive
dynamics?
5. Describe what is meant by positioning strategy and how do the market, customer,
internal, and competitive analyses relate to positioning strategy?
Week 3 Assessment
1. One of the focused strategies that pertains to limited range of services to narrow and
specific market.
A. Market Focused
B. Unfocused
C. Fully Focused
D. None of the Above
2. A focused strategies where as new segments are added, firm needs to develop
knowledge and skills in serving each segment
A. Market Focused
B. Unfocused
C. Fully Focused
D. Service Focused
3. Need to make sure firms have operational capability to do and deliver each of the
different services selected.
A. Market Focused
B. Unfocused
C. Fully Focused
D. Service Focused
4. Broad markets with wide range of services
A. Market Focused
B. Unfocused
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C. Fully Focused
D. Service Focused
5. It is composed of a group of buyers sharing common characteristics, needs, purchasing
behavior, and consumption patterns.
A. Market Positioning
B. Market Segment
C. Market Division
D. Marketing
6. It determines buyers’ choices between competing alternatives
A. Important Attribute
B. Determinant Attribute
C. Service Level
D. Alternative
7. It looks into size and potential of different market segments.
A. Internal Corporate Analysis
B. Market Analysis
C. Competitors Analysis
8. It anticipates responses to potential positioning strategies.
B. Market Analysis
9. Identify organization’s resources, limitations, goals, and values
B. Market Analysis
10. One of the reasons for this is Improving negative brand perceptions may require
extensive redesign of core product
A. Positioning
B. Rebranding
C. Repositioning
D. Branding
Week 3 Assignment
Travel agencies are losing business to passengers booking their flights directly on airline
websites. Identify possible focus options open to travel agencies wishing to develop new lines of
business that would make up for the loss of airline ticket sales.
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Week 4: Developing Service Products: Core and Supplementary Elements
the following: 1. Identify the components of service
Developing Service Products: Core and products.
Supplementary Elements 2. Distinguish facilitating and enhancing
1. Planning and Creating Services elements of supplementary services.
2. The Flower of Service 3. Compare Service Products, Product Lines,
3. Branding Service Products and and Brands
Experiences 4. Identify different hierarchy of new service
4. New Service Development categories.
Planning and Creating Service Products
Service Products
 A service product comprises of all elements of service performance, both tangible and
intangible, that create value for customers.
 Service products consist of:
o Core Product  central component that supplies the principal, problem-solving
benefits customers seek
o Supplementary Services  augments the core product, facilitating its use and
enhancing its value and appeal
o Delivery Processes  used to deliver both the core product and each of the
supplementary services
Designing Service Concept

 Service concept design must address the following issues:
o How the different service components are delivered to the customer
o The nature of the customer’s role in those processes
o How long delivery lasts
o The recommended level and style of service to be offered
Documenting Delivery Sequence Over Time

 Must address sequence in which customers will use each core and supplementary
service
 Determine approximate length of time required for each step
 Information should reflect good understanding of customers, especially their:
o needs
o habits
o expectations
Integration of Core Product, Supplementary Elements, and Delivery Process

The integration of the core product, supplementary services, and delivery processes is captured
in Figure above, which illustrates the components of the service offering for an overnight stay at
a luxury hotel. The core product — overnight rental of a bedroom — dimensioned by service
level, scheduling (how long the room may be used before another payment becomes due), the
nature of the process (in this instance, people processing), and the role of customers (in terms
of what they are expected to do themselves and what the hotel will do for them, such as making
the bed, supplying bathroom towels, and cleaning the room).
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Temporal Dimension to Augmented Product
The Flower of Service

 There are two types of supplementary services
o Facilitating: either needed for service delivery, or help in the use of the core
product
o Enhancing: add extra value for the customer
 In a well-managed service organization, the petals and core are fresh and well-formed
 Market positioning strategy helps to determine which supplementary services should be
included
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Facilitating Services – Information
Information. To obtain full value from any good or service, customers need relevant
information. Information includes the following:
• Direction to service site
• Schedules/service hours
• Price information
• Terms and conditions of sale/service
• Advice on how to get the most value from a service
• Warnings and advice on how to avoid problems
• Confirmation of reservations
• Receipts and tickets
• Notification of changes
• Summaries of account activities
New customers are especially information-hungry. Companies should make sure the
information they provide is both timely and accurate. If not, it is likely to cause customers
inconvenience, make them feel irritated and perceive a lack of control. Traditional ways of
providing information include using company websites, mobile apps, front-line employees,
signs, printed notices, and brochures. Information can also be provided through videos or
software-driven tutorials, touch-screen video displays on tablets and self-service machines.
Many business logistics companies offer shippers the opportunity to track the movements of
their packages — each of which has been assigned a unique identification number. For
example, Amazon.com provides its customers with a reference number that allows tracking of
the goods so that customers know when to expect them.
Facilitating Services – Order-Taking

Applications
• Memberships in clubs/programs
• Subscription services (e.g., utilities)
• Prerequisite based services (e.g., financial credit, college enrollment)
Order Entry
• On-site order fulfillment
• Mail/telephone/e-mail/web order
Reservations and Check-in
• Seats/tables/rooms
• Vehicles or equipment rental
• Professional appointments
Order entry can be received through a variety of sources such as through sales personnel,
phone and email, or online (Figure 4.8). The process of order-taking should be polite, fast, and
accurate so that customers do not waste time and endure unnecessary mental or physical
effort.
Reservations (including appointments and check-in) represent a special type of ordertaking that
entitles customers to a specified unit of service. These can be an airline seat, a restaurant table,
a hotel room, time with a qualified professional, or admission to a facility such as a theater or
sports arena with designated seating.
Technology can be used to make order-taking and reservations easier and faster for both
customers and suppliers. For example, airlines now make use of ticketless systems, based on
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email and mobile apps. Customers receive a confirmation number when they make the
reservation and need only show identification (or the ticket as shown on a mobile app) at the
airport to claim their seats and receive a boarding pass.
Facilitating Services – Billing

Billing is common to almost all services (unless the service is provided freeof- charge).
Inaccurate, illegible, or incomplete bills risk disappointing customers who may, up to that point,
have been quite satisfied with their experience. If customers are already dissatisfied, the billing
mistake may make them even angrier. Billing should also be timely, because it encourages
people to make faster payment.
• Periodic statements of account activity
• Invoices for individual transactions
• Verbal statements of amount due
• Self-billing (computed by customer)
• Machine display of amount due
Facilitating Services – Payment

In most cases, a bill requires the customer to take action on payment (and such action may be
very slow in coming!). Exceptions include bank statements and other direct debit payment
services, which shows the charges to be deducted from a customer’s account.
Self-Service
• Insert card, cash or token into machine
• Electronic funds transfer
• Mail a check
• Enter credit card number online
Direct to Payee or Intermediary
• Cash handling or change giving
• Check handling
• Credit/charge/debit card handling
• Coupon redemption
Automatic Deduction from Financial Deposits
• Automated systems (e.g., machine-readable tickets that operate entry gate)
• Human systems (e.g., toll collectors)
Self-service payment systems, for instance, require insertion of coins, banknotes, tokens, or
cards in machines. Equipment breakdowns will destroy the whole purpose of such a system, so
good maintenance and rapid-response troubleshooting are essential. Most payment still takes
the form of cash or credit cards. Other alternatives include vouchers, coupons, or prepaid
tickets, and other electronic means such as PayPal, which offers a fuss-free and secure way to
make payments especially since more shopping is done online.
Enhancing Supplementary Services
Enhancing Services – Consultation

Now we move on to enhancing supplementary services, led by consultation. In contrast to
information, which suggests a simple response to customers’ questions (or printed information
that anticipates their needs), consultation involves a dialog to probe for customer requirements
and then develop a tailored solution.
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• Customized advice
• Personal counseling
• Tutoring/training in product use
• Management or technical consulting
Enhancing Services – Hospitality

Hospitality-related services should ideally reflect pleasure at meeting new customers and
greeting old ones when they return. Well-managed businesses try, at least in small ways, to
ensure that their employees treat customers as guests. Courtesy and consideration for
customers’ needs apply to both face-to-face encounters and telephone interactions. Hospitality
elements include:
• Greeting
• Food and beverages
• Toilets and washrooms
• Waiting facilities and amenities
– Lounges, waiting areas, seating
– Weather protection
– Magazines, entertainment, newspapers
• Transport
Enhancing Services – Safekeeping

When customers are visiting a service site, they often want assistance with their personal
possessions. In fact, some customers may not visit at all unless certain safekeeping services
are provided (such as safe and convenient parking for their cars). Safekeeping includes caring
for:
• Child care, pet care
• Parking for vehicles, valet parking
• Coat rooms
• Baggage handling
• Storage space
• Safe deposit boxes
• Security personnel
Enhancing Services – Exceptions

Exceptions involve supplementary services that fall outside the routine of normal service
delivery. Astute businesses anticipate such exceptions and develop contingency plans and
guidelines in advance. That way, employees will not appear helpless and unprepared when
customers ask for special assistance.
Special Requests in Advance of Service Delivery

• Children’s needs
• Dietary requirements
• Medical or disability needs
• Religious observances
Handling Special Communications
• Complaints
• Compliments
• Suggestions
Problem Solving
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• Warranties and guarantees
• Resolving difficulties that arise from using the product
• Resolving difficulties caused by accidents, service failures
• Assisting customers who have suffered an accident or a medical emergency
Restitution
• Refunds and compensation
• Free repair of defective goods
Managerial Implications
 Core products do not have to have supplementary elements
 Nature of product helps determine supplementary services offered to enhance value
 People-processing and high contact services have more supplementary services
 Different levels of service can add extra supplementary services for each upgrade in
service level
 Low-cost, no-frills basis firms needs fewer supplementary elements
Branding Service Products and Experiences
Service Products, Product Lines, and Brands

 Service Product: A defined and consistent “bundle of output”
o Supported by supplementary services (assembly of elements that are built
around the core product)
o Differentiated by bundle of output
 Product Line: Most service organizations offer a line of products rather than just a single
product.
 There are three broad alternatives for product lines:
o Single brand to cover all products and services
o A separate, stand-alone brand for each offering
o Some combination of these two extremes
Spectrum of Branding Alternatives
Branding can be employed at both the corporate and product levels by almost any service
business. In a well-managed firm, the corporate brand is not only easily recognized but also has
meaning for customers, representing a particular way of doing business. Applying distinctive
brand names to individual products enables the firm to communicate the distinctive experiences
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and benefits associated with a specific service concept to the target market. In short, it helps
marketers to establish a mental picture of the service in customers’ minds and to clarify the
nature of the value proposition.
Branding Strategies for Services

Branded House. The term branded house is used to describe a company, such as the Virgin
Group, that applies its brand name to multiple offerings in often unrelated fields. Virgin’s core
business areas are travel, entertainment, and lifestyle, but it also offers financial services,
healthcare, media, and telecommunications services. The danger of such a branding strategy is
that the brand gets overstretched and weakened.
Sub-brands. Next on the spectrum are sub-brands, for which the corporate or the master brand
is the main reference point, but the product itself has a distinctive name too. Examples are the
Singapore Airlines Raffles Class, denoting the company’s business class, and the Singapore
Airlines Suits, its “beyond first class” service on the A380.
Endorsed Brands. For endorsed brands, the product brand dominates but the corporate name
is still featured. Many hotel companies use this approach. They offer a family of subbrands
and/or endorsed brands. For instance, Intercontinental Hotel Group in itself is well known.
However, its product brands are dominant. They include the Intercontinental Hotels & Resorts,
the Crowne Plaza Hotels & Resorts, Hotel Indigo, Holiday Inn, Holiday Inn Club Vacations,
Holiday Inn Resort, Holiday Inn Express, Staybridge Suites, Candlewood Suites, Even Hotels,
and Hualuxe, and its loyalty program IHG Rewards Club.
House of Brands. At the far end of the spectrum is the house of brands strategy. A good
service example is Yum! Brands, Inc. Yum! Brands has nearly 43,000 restaurants in more than
130 countries and territories, with revenues of more than $13 billion in 2015. While many may
not have heard of Yum! Brands, people certainly are familiar with their restaurant brands —
KFC, Pizza Hut and Taco Bell — the global leaders of the chicken, pizza and Mexican-style
food categories.
Offering a Branded Experience

Branding can be employed at corporate and product levels
 Corporate brand:
o Easily recognized,
o Holds meaning to customers,
o Stands for a particular way of doing business
 Product brand:
o Helps firm communicate distinctive experiences and benefits associated with a
specific service concept
BUILDING BRAND EQUITY

To build a strong brand, we need to understand what contributes to brand equity. Brand equity
is the value premium that comes with a brand. It is what customers are willing to pay for the
service, beyond what they are willing to pay for a similar service that has no brand. Below
shows the following six key components:
1. Company’s presented brand — mainly through advertising, service facilities and personnel.
2. External brand communications — from word of mouth and publicity. These are outside of the
firm’s control.
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3. Customer experience with the company — what the customer has gone through when they
patronized the company.
4. Brand awareness — the ability to recognize and recall a brand when provided with a cue.
5. Brand meaning — what comes to the customer’s mind when a brand is mentioned.
6. Brand equity — the degree of marketing advantage that a brand has over its competitors.
New Service Development

A Hierarchy of New Service Categories
1. Major Service Innovations: New core products for previously undefined markets
2. Major Process Innovations: Using new processes to deliver existing products with added
benefits
3. Product Line Extensions: Addition to current product lines
4. Process-line Extensions: Alternative delivery procedures
5. Supplementary Service Innovations: Additions of new or improved facilitating or
enhancing elements
6. Service Improvements: Modest changes in the performance of current products
7. Style Changes: Visible changes in service design or scripts
Reengineering Service Processes

 Service processes affect customers and also cost, speed, and productivity
 Reengineering – analyzing and redesigning processes to achieve faster and better
performance
 Examination of processes can lead to creation of alternative delivery methods:
o Add or eliminate supplementary services
o Re-sequence delivery of service elements
o Offer self-service options
Physical Goods as a Source of New Service Ideas

 Goods and services may become competitive substitutes if they offer the same key
benefits
 Provides an alternative to owning the physical good that can attain the desired outcome
 Any new good may create need for after-sales services now and be a source of future
revenue stream
Creating Services as Substitutes for Physical Good
Achieving Success in Developing New Services

 Services are not immune to high failure rates that plague new manufactured products
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 In developing new services:
o core product is often of secondary importance, many innovations are in
supplementary services or service delivery
o ability to maintain quality of the total service offering is key
o accompanying marketing support activities are vital
o Market knowledge is of utmost importance
Success Factors in New Service Development

 Market synergy
o Good fit between new product and firm’s image
o Advantage in meeting customers’ needs
o Strong support from firm during and after launch
o Understands customer purchase decision behavior
 Organizational factors
o Strong inter-functional cooperation and coordination
o Internal marketing to educate staff on new product and its importance
Success Factors in New Service Development

 Market research factors
o Scientific studies conducted early in development process
o Product concept well defined before undertaking field studies
Week 4 Activity
1. Explain what is meant by core product and supplementary services.
2. How is branding used in services marketing? What is the distinction between a corporate
brand such as FedEx and the names of its various chains?
3. What is meant by using brands to tier service products?
4. What are the approaches firms can take to create new services?
5. Why do new services often fail? What factors are associated with successful
development of new services?
Week 4 Assessment
1. It comprises of all elements of service performance, both tangible and intangible, that
create value for customers.
A. Service Product
B. Core Product
C. Supplementary Product
D. Delivery Processes
2. Augments the core product, facilitating its use and enhancing its value and appeal
A. Service Product
B. Core Product
3. Central component that supplies the principal, problem-solving benefits customers seek
A. Service product
B. Core Product
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4. It is used to deliver both the core product and each of the supplementary services
A. Service Product
B. Core Product
5. It is either needed for service delivery, or help in the use of the core product.
A. Facilitating goods
B. Enhancing goods
C. A and B
6. It is added extra value for the customer.
A. Facilitating goods
B. Enhancing goods
C. A and B
7. The term branded house is used to describe a company.
A. Branded house
B. Sub-brands
C. Endorsed brands
D. House of Brands
8. The product brand dominates but the corporate name is still featured. Many hotel
companies use this approach.
A. Branded house
B. Sub-brands
C. Endorsed brands
D. House of Brands
9. It is a branding strategy for which the corporate or the master brand is the main
reference point, but the product itself has a distinctive name too.
A. Branded house
B. Sub-brands
C. Endorsed brands
D. House of Brands
10. It is the degree of marketing advantage that a brand has over its competitors.
A. Branded equity
B. Brand awareness
C. Brand Meaning
Week 4 Assignment
Select a specific transportation service product you are familiar with and identify its 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.
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Week 5: Distributing Services Through Physical and Electronic Channels
the following: 1. Discuss distribution in the service context
Distributing Services Through Physical 2. Differentiate the three interrelated
and Electronic Channels elements of distribution.
1. Distribution in the Services Context and 3. Identify different options, place, and time
Option for Service Delivery. for service delivery.
2. Place, time decision, and service delivery 4. Recognize the role of technology and
in the Cyberspace. intermediary in-service delivery.
3. The Role of Intermediaries 5. Differentiate service delivery in the
4. The Challenge of Distribution in Large domestic and international markets.
Domestic Markets.
5. Distributing Services Internationally
Distributing Services Through Physical and Electronic Channels

Distribution in a Services Context
 In a services context, we often don’t move physical products
 Experiences, performances, and solutions are not being physically shipped and stored
 More and more informational transactions are conducted through electronic and not
physical channels
Applying the Flow Model of Distribution to Services
• Information and promotion flow — distribution of information and promotion materials
relating to the service offer. The objective is to get the customer interested in buying the service.
• Negotiation flow — reaching an agreement on the service features and configuration, and the
terms of the offer, so that a purchase contract can be closed. The objective is often to sell the
right to use a service (e.g., sell a reservation or a ticket).
• Product flow— many services, especially those involving people processing or possession
processing, require physical facilities for delivery. Here, distribution strategy requires
development of a network of local sites. For information processing services, such as Internet
banking and distance learning, the product flow can be via electronic channels, employing one
or more centralized sites.
Distinguishing between Distribution of Supplementary and Core Services
 Most core services require physical locations
 Many supplementary services are informational; can be distributed widely and cost-
effectively via other means
o Telephone
o Internet
Information and Physical Processes of Augmented Service Products

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Using Websites for Service Delivery
Options for Service Delivery

 Customers visit service site
o Convenience of service factory locations and operational schedules important
when customer has to be physically present
 Service providers go to customers
o Unavoidable when object of service is immovable
o More expensive and time-consuming for service provider
 Service transaction is conducted remotely
o Achieved with help of logistics and telecommunications
Six Options for Service Delivery
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Channel Preferences Vary Among Customers
 For complex and high-perceived risk services, people tend to rely on personal channels
 Individuals with greater confidence and knowledge about a service/channel tend to use
impersonal and self-service channels
 Customers with social motives tend to use personal channels
 Convenience is a key driver of channel choice
Place and Time Decisions

 Cost, productivity, and access to labor are key determinants to locating a service facility
 Location constraints
o Operational requirement (e.g., airports)
o Geographic factor (e.g., ski resorts)
o Need for economies of scale (e.g., hospitals)
 Ministores
o Creating many small service factories to maximize geographic coverage
o Separating front and back stages of operation
o Purchasing space from another provider in complementary field
 Locating in Multipurpose Facilities
o Proximity to where customers live or work
 Service Stations
 Service Perspectives 5.2
Time of Service Delivery

 Traditionally, schedules were restricted
o Service availability limited to daytime, 40-50 hours a week
 Today
o For flexible, responsive service operations: 24/7 service, 24 hours a day, 7 days
a week, all around the world
Delivering Services in Cyberspace

 Technological Innovations
- Development of “smart” mobile telephones and PDAs, and presence of Wi-Fi
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- Voice-recognition technology
- Websites
- Smart cards
 Store detailed information about customer
 Act as electronic purse containing digital money
 Electronic channels can be offered together with physical channels, or replace physical
channels
E-Commerce: Move to Cyberspace

 What are the factors that encourage you to use virtual stores?
o Convenience
o Ease of search
o Broader selection
o Potential for better prices
o 24-hour service with prompt delivery
 Recent developments: websites, customer management (CRM) systems, and mobile

telephony
 Integrating mobile devices into the service delivery infrastructure can be used as means
to:
o Access services
o Alert customers to opportunities/problems
o Update information in real time
Role of Intermediaries
Challenges for original supplier

 Act as guardian of overall process
 Ensure that each element offered by intermediaries fits overall service concept
Franchising
 Franchisor provides training, equipment, and support marketing activities.
 Franchisees invest time and finance, and follow copy and media guidelines of franchisor.
 Advantages:
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o Expand delivery of effective service concept without a high level of monetary
investment
o Franchisees are motivated to ensure good customer service and high-quality
service operations
 Disadvantages of franchising
o Loss of control over delivery system and how customers experience actual
service
o Effective quality control is difficult
o Conflict between franchisees may arise especially as they gain experience
 Alternative: license another supplier to act on the original supplier’s behalf to deliver core
product
o Trucking companies
o Banks selling insurance products
Challenge of Distribution in Large Domestic Markets

 Distributing services (i.e., physical logistics) faces challenges due to:
o Distances involved
o Multiple time zones
o Multiculturalism
o Differences in laws and tax rates
Distributing Services Internationally

Factors Favoring Adoption of Transnational Strategies
 Transnational strategy involves integration of strategy formulation and its implementation
across all countries in which company elects to do business
 Market Drivers
o Common customer needs across countries
o Corporate customers seek to standardize and simplify suppliers used in different
countries – ad agencies, logistics suppliers, Big 4 accounting firms
 Government Drivers
o Favorable trade policies, compatible technical standards, common marketing
regulations
 Competition Drivers
o Competitors from overseas; interdependence of countries
o Firms may be obliged to follow competitors into new markets to protect own
positions elsewhere
 Technology Drivers
o Advances in information technology – miniaturization and mobility of equipment,
digitization of voice
 Cost Drivers
o Economies of scale
o Lower operating costs
How Service Processes Affect International Market Entry

 People processing services require direct contact with customers
 Export service concept
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o Acting alone or in partnership with local suppliers e.g., chain restaurants, hotels,
car rental firms
 Import customers
o Inviting customers from overseas to firm’s home country e.g., hospitals catering
to “medical tourism”
 Transport customers to new locations
o Passenger transportation (air, sea, rail, road)
 Possession processing involves services to customer’s physical possessions
o Repair and maintenance, freight transport
 Information-based services include mental processing services and information
processing services
o Export the service to a local service factory
o Hollywood film shown around the world
o Import customers
o Export the information via telecommunications and transform it locally
 Data can be downloaded via CDs or DVDs
Impact of Globalization Drivers on Various Service Categories
Barriers to International Trade in Services

 Passage of free-trade legislation is important facilitator of transnational operations
o Notable developments: NAFTA, Latin American economic blocs, EU
 Despite efforts of WTO and GATT, barriers still exist:
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o Restrictions on international airline operating rights
o Heavy taxation
o Legal restrictions
o Lack of broadly agreed upon accounting standards
o Cultural issues
Week 5 Activity
1. What is meant by “distributing services?” How can an experience or something
intangible be distributed?
2. 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 it?
3. Why should service marketers be concerned with new developments in mobile
communications?
4. What marketing and management challenges are raised by the use of intermediaries in
a service setting?
5. What are the key drivers for the increasing globalization of services?
Week Assessment
1. The objective is often to sell the right to use a service.
A. Information and promotion flow
B. Negotiation flow
C. Product flow
2. For information processing services, such as Internet banking and distance learning, the
product flow can be via electronic channels, employing one or more centralized sites.
B. Negotiation flow
C. Product flow
3. The objective is to get the customer interested in buying the service.
B. Negotiation flow
C. Product flow
4. Common customer needs across countries
A. Market Drivers
B. Government Drivers
C. Competitors Drivers
D. Technology Drivers
5. Common customer needs across countries
A. Market Drivers
6. Lower operating costs is the objective of this driver.
A. Technology Drivers
B. Cost Drivers
C. Government Drivers
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D. Market Drivers
7. Firms may be obliged to follow competitors into new markets to protect own positions
elsewhere
A. Market Drivers
8. People Processing requires indirect contact with customers
A. True
B. False
9. Advances in information technology – miniaturization and mobility of equipment,
digitization of voice
A. True
B. False
10. Convenience is one of the factors why businesses move to cyberspace
A. True
B. False
Week 5 Assignment
An entrepreneur is thinking of setting up a new service business in transportation. 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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Week 6: Setting Prices and Implementing Revenue Management
the following: 1. Explain why service pricing strategy
Setting Prices and Implementing Revenue different and difficult.
Management 2. Identify objectives and types of pricing
1. Effective Pricing in Financial Success strategies in services.
2. The Tripod Pricing Strategy 3. Analyze the mechanism of Revenue
3. Revenue Management Management.
4. Ethical Concerns in Service Pricing 4. Revue ethical issues in service pricing.
5. Service Pricing Practice 5. Identify Pricing Issues and Evaluate pricing
practices.
Dynamic Pricing Is Here to Stay

Service firms are often faced with the problem of maximizing revenue and capacity, and one
way to solve that is through dynamic pricing.1 But just what is dynamic pricing? Have you been
on a plane chatting with your neighbor and discovered that you both paid very different prices
for the same air ticket in the same class of seats? That’s dynamic pricing at work.
Dynamic pricing is a pricing strategy that varies the prices for different customers at different
times, based on demand conditions. It is commonly used in the airline industry, but has also
gained popularity in other industries.
Effective Pricing is Central to Financial Success

 Harder to calculate financial costs of creating a service process or performance than a
manufactured good
 Variability of inputs and outputs:
o How can firms define a “unit of service” and establish basis for pricing?
 Importance of time factor – same service may have more value to customers when
delivered faster
 Customers find service pricing difficult to understand, risky, and sometimes even
unethical
Objectives for Pricing of Services

Any pricing strategy must be based on a clear understanding of a company’s pricing objectives.
The most common high-level pricing objectives are summarized in table below:
Revenue and Profit Objectives
Gain Profit
• Make the largest possible long-term contribution or profit.
• Achieve a specific target level, but do not seek to maximize profits.
• Maximize revenue from a fixed capacity by varying prices and target segments over time.
This is done typically using revenue management systems.
Cover Costs
• Cover fully allocated costs, including corporate overhead.
• Cover costs of providing one particular service, excluding overhead.
• Cover incremental costs of selling one extra unit or to serve one extra customer.
Patronage and User Base-Related Objectives
Build Demand
• Maximize demand (when capacity is not a restriction), provided a certain minimum level of
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revenue is achieved (e.g., many non-profit organizations are focused on encouraging usage
rather than revenue, but they still have to cover costs).
• Achieve full capacity utilization, especially when high capacity utilization adds to the value
created for all customers (e.g., a “full house” adds excitement to a theater play or basketball
game).
Develop a User Base
• Encourage trial and adoption of a service. This is especially important for new services with
high infrastructure costs, and for membership-type services that generate a large amount of
revenues from their continued usage after adoption (e.g., cell phone service subscriptions, or
life insurance plans).
• Build market share and/or a large user base, especially if there are large economies of scale
that can lead to a competitive cost advantage (e.g., if development or fixed costs are high), or
network effects where additional users enhance the value of the service to the existing user
base (e.g., Facebook and LinkedIn).
Strategy-Related Objectives
• Help and support the firm’s overall positioning and differentiation strategy (e.g., as a price
leader, or portrait a premium image with premium pricing).
• Promote a “We-will-not-be-undersold” positioning, whereby a firm promises the best
possible service at the best possible price. That is, the firm wants to communicate that the
offered quality of service products cannot be bought at a lower cost elsewhere.
Support Competitive Strategy
• Discourage existing competitors to expand capacity.
• Discourage potential new competitors to enter the market.
Pricing Strategy as Represented by the Pricing Tripod

Once the pricing objectives are understood, we can focus on pricing strategy. The foundations
of pricing strategy can be described as a tripod, with costs to the provider, competitors’ pricing,
and value to the customer as the three legs. In many service industries, pricing used to be
viewed from a financial and accounting standpoint, and therefore cost-plus pricing was used.
Today, however, most service firms have a good understanding of value-based and competitive
pricing. In the pricing tripod, the costs a firm needs to recover usually sets a minimum price, or
price floor, for a specific service offering, and the customer’s perceived value of the offering sets
a maximum price, or price ceiling.
 Cost-Based Pricing
o Set prices relative to financial costs
o Activity-Based Costing
o Pricing implications of cost analysis
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 Value-Based Pricing
o Relate price to value perceived by customer
 Competition-Based Pricing
o Monitor competitors’ pricing strategy
o Dependent on the price leader
Cost-Based Pricing: Traditional vs. Activity-Based Costing

 Traditional costing approach
o Emphasizes expense categories (arbitrary overheads allocation)
o May result in reducing value generated for customers
 ABC management systems
o Link resource expenses to variety and complexity of goods/services produced
o Yields accurate cost information
 BUT, customers care about value to themselves, not what service production costs the
firm
Value-Based Pricing: Understanding Net Value

 Net Value = Perceived Benefits to Customer (Gross Value) minus All Perceived Outlays
(Money, Time, Mental/Physical Effort)
 Consumer surplus: difference between price paid and amount customer would have
been willing to pay in absence of other options
 Competing services are then evaluated via comparison of net value
Value-Based Pricing: Strategies for Enhancing Net Value

 Enhance gross value – benefits delivered
o Add benefits to core product
o Enhance supplementary service
o Manage perceptions of benefits delivered
 Reduce costs incurred by
o Reducing monetary costs of acquisition and usage
o Cutting amount of time required to evaluate, buy, use service
o Lowering effort associated with purchase and use
Defining Total User Cost
A firm can create competitive advantage by minimizing those non-monetary and related
monetary costs, and thereby increase consumer value. Possible approaches include:
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• Working with operations experts to reduce the time required to complete service purchase,
delivery and consumption; become “easy-to-do-business-with”.
• Minimizing unwanted psychological costs of service at each stage by eliminating or
redesigning unpleasant or inconvenient procedures, educating customers on what to expect,
and retraining staff to be friendlier and more helpful.
• Eliminating or minimizing unwanted physical effort, notably during search and delivery
processes. Improve signage and “road mapping” in facilities and on webpages can help
customers to find their way and prevent them from getting lost and frustrated.
• Decreasing unpleasant sensory costs of service by creating more attractive visual
environments, reducing noise, installing more comfortable furniture and equipment, and
curtailing offensive smells.
• Suggesting ways in which customers can reduce associated monetary costs, including
discounts with partner suppliers (e.g., parking) or offering mail or online delivery of activities that
previously required a personal visit.
Competition-Based Pricing
 Price competition increases due to:
o Increasing competition
o Increase in substituting offers
o Wider distribution of competitor
o Increasing surplus capacity in the industry
 However, under these circumstances, price competition can decrease:
o High non-price-related costs of using alternatives
o Personal relationships matter
o Switching costs are high
o Time and location specificity reduces choice
o Managers should examine all related financial and non-monetary costs
Revenue Management: What it is and How it works

Many service businesses now focus on strategies to maximize the revenue (or contribution) that
can be obtained from available capacity at any given point in time. Revenue management is
important in value creation as it ensures better capacity utilization and reserves capacity for
higher-paying segments. It’s a sophisticated approach to managing supply and demand under
varying degrees of constraint.
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Maximizing Revenue from Available Capacity at a Given Time
 Most effective in the following conditions:
o High fixed cost structure
o Relatively fixed capacity
o Perishable inventory
o Variable and uncertain demand
o Varying customer price sensitivity
 Revenue management (RM) is price customization
o Charge different value segments different prices for same product based on price
sensitivity
 RM uses mathematical models to examine historical data and real time information to
determine
o What prices to charge within each price bucket
o How many service units to allocate to each bucket
 Rate fences deter customers willing to pay more from trading down to lower prices
(minimize consumer surplus)
Price Elasticity
Key Categories of Rate Fences: Physical (Product-Related) Fences
Product-Related Fences
Rate Fences Examples
Basic  Class of travel (Business/Economy class)
Product  Size and furnishing of a hotel room
 Seat location in a theater
Amenities  Free breakfast at a hotel, airport pick up, etc.
 Free golf cart at a golf course
Service Level  Priority wait listing
 Increase in baggage allowances
 Dedicated service hotlines
 Dedicated account management team
Transaction Characteristics
Time of  Requirements for advance purchase
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booking or  Must pay full fare two weeks before departure
reservation
Location of  Passengers booking air tickets for an identical route in different
booking or countries are charged different prices
reservation
Flexibility of  Fees/penalties for canceling or changing a reservation (up to loss of
ticket usage entire ticket price)
 Non-refundable reservation fees
Consumption Characteristics
Rate Fences Example
Time or  Early bird special in restaurant before 6pm

duration of  Must stay over on Sat for airline, hotel
use  Must stay at least five days
Location of  Price depends on departure location, especially in international
consumption travel
 Prices vary by location (between cities, city centre vs. edges of city)
Buyer Characteristics
Frequency  Member of certain loyalty tier with the firm get priority pricing,
or volume of discounts or loyalty benefits
consumption
Group  Child, student, senior citizen discounts
membership  Affiliation with certain groups (e.g., Alumni)
Size of  Group discounts based on size of group
customer
group
Relating Price Buckets and Fences to Demand Curve

In summary, based on a detailed understanding of customer needs, preferences, and
willingness to pay, product and revenue managers can design effective products comprising the
core service, physical product features (physical fences), and nonphysical product features
(non-physical fences). In addition, a good understanding of the demand curve is needed so that
“buckets” of inventory can be assigned to the various products and price categories. An
example from the airline industry is shown in Figure below and an interview with a senior
executive with a career in revenue management is featured in Service Insights 6.2.
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Ethical Concerns in Service Pricing
 Many services have complex pricing schedules
o hard to understand
o difficult to calculate full costs in advance of service
 Unfairness and misrepresentation in price promotions
o misleading advertising
o hidden charges
 Too many rules and regulations
o customers feel constrained, exploited
o customers unfairly penalized when plans change
Designing Fairness into Revenue Management

 Design clear, logical, and fair price schedules and fences
 Use high published prices and present fences as opportunities for discounts
 Communicate consumer benefits of revenue management
 Use bundling to “hide” discounts
 Take care of loyal customers
 Use service recovery to compensate for overbooking
Putting Service Pricing into Practice

1. How much to charge?
 Pricing tripod provides a useful starting point
 A specific figure must be set for the price
 Need to consider the pros and cons, and ethical issues
2. What basis for pricing?
 Pricing tripod provides a useful starting point
 A specific figure must be set for the price
 Need to consider the pros and cons, and ethical issues
3. Who should collect payment?
 Service provider or specialist intermediaries
 Direct or non-direct channels
4. Where should payment be made?
 Conveniently located intermediaries
 Mail/bank transfer
5. When should payment be made?
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 In advance
 Once service delivery has been completed
6. How should payment be made?
 Cash
 Token
 Stored value card
 Electronic fund transfer
 Charge Card (Debit/Credit)
 Vouchers
7. How to communicate prices?
 Relate the price to that of competing products
 Ensure price is accurate and intelligible
Week 6 Activity
1. Why is the pricing of services more difficult as compared to the pricing of goods?
2. What is the role of nonmonetary costs in a business model, and how do they relate to
the consumer’s value perceptions?
3. What is revenue management, how does it work, and what type of service operations
benefit most from good revenue management systems and why?
4. Explain the difference between physical and non-physical rate fences using suitable
examples.
5. 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?
Week 6 Assessment
Direction: Write True if the statement is correct, and False if the statement is incorrect.
______________ 1. One of the objectives under gain profit is to achieve a specific target level,
but do not seek to maximize profits.
______________ 2. Make the largest possible long-term contribution or profit. Is under cover
costs.
______________ 3. This is especially important for new services with high infrastructure costs,
and for membership-type services that generate a large amount of revenues from their
continued usage after adoption is under develop a user base.
______________ 4. Value based pricing normally set prices relative to financial costs.
______________ 5. ABC costing dependent on the price leader.
______________ 6. Revenue management is important in value creation as it ensures better
capacity utilization and reserves capacity for higher-paying segments.
______________ 7. Pricing tripod provides a useful starting point.
______________ 8. Unfairness and misrepresentation in price promotions is not an ethical
concern in pricing.
______________ 9. Location consumption entails price depends on departure location,
especially in international travel.
______________ 10. RM does not use mathematical models to examine historical data and real
time information to determine.
Week 6 Assignment
How might revenue management be applied to Bus company?
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Week 7: Promoting Services and Educating Customers
the following: 1. Explain the role and challenges of
Promoting Services and Educating Marketing Communications in services
Customers 2. Develop Marketing Communications
1. Role of Marketing Communications Planning
2. Challenges of Services Communications 3. Differentiate Marketing Communication Mix
3. Marketing Communications Planning 4. Create Marketing Design and
4. The Marketing Communications Mix Advertisement
5. Role of Corporate Design 5. Apply Marketing Communications by
6. Integrating Marketing Communications integrating marketing communications mix.
Role of Marketing Communications

Communication is the most visible or audible — and some would say intrusive — form of
marketing activities, but its value is limited unless it is used intelligently in conjunction with other
marketing efforts. An old marketing axiom says that the fastest way to kill a poor product is to
advertise it heavily. By the same token, an otherwise well-researched and well-planned
marketing strategy is likely to fail if prospects don’t learn of a service firm’s existence, what it
has to offer, the value proposition of each of its products, and how to use them to their best
advantage. Customers might be more easily lured away by competitive offerings, and there
would be no proactive management and control of the firm’s identity. Marketing
communications, in one form or another, is essential to a company’s success.
 Position and differentiate service

 Help customer evaluate offerings and highlight differences that matter
 Promote contribution of personnel and backstage operations
 Add value through communication content
 Facilitate customer involvement in production
 Stimulate or dampen demand to match capacity
Help Customers to Evaluate Service Offerings

 Customers may have difficulty distinguishing one firm from another
o Provide tangible clues related to service performance
 Some performance attributes lend themselves better to advertising than others
o e.g., Airlines
 Firm’s expertise is hidden in low-contact services
o Need to illustrate equipment, procedures, employee activities that take place
backstage
Promote Contributions of Service Personnel
 Frontline personnel are central to service delivery in high-contact services
o Make the service more tangible and personalized
 Show customers work performed behind the scenes to ensure good delivery
o To enhance trust, highlight expertise and commitment of employees
o Advertisements must be realistic
o Messages help set customers’ expectations
o Service personnel should be informed about the content of new advertising
campaigns or brochures before launch
Facilitate Customer Involvement in Production
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 Customers are actively involved in service production; they need training to perform well
 Show service delivery in action
 Television and videos engage viewer
o e.g., Dentists showing patients videos of surgical procedures before surgery
 Streaming videos on web and podcasts are new channels to reach active customers
Stimulate or Dampen Demand to Match Capacity

 Live service performances are time-specific and can’t be stored for resale at a later date
o Advertising and sales promotions can change timing of customer use
 Examples of demand management strategies:
o Reducing usage during peak demand periods
o Stimulating demand during off-peak period
Challenges of Services Communications

Overcoming Problems of Intangibility
Intangibility creates 4 problems:
 Generality
- Items that comprise a class of objects, persons, or events
 Abstractness
- No one-to-one correspondence with physical objects
 Non-searchability
- Cannot be searched or inspected before purchase
 Mental impalpability
- Customers find it hard to grasp benefits of complex, multidimensional new
offerings
 To overcome intangibility
o Use tangible cues in advertising
o Use metaphors
 Tangible metaphors help to communicate benefits of service offerings, e.g.,
o Allstate – “You’re in good hands”
o Prudential Insurance – uses Rock of Gibraltar as symbol of corporate strength
 Metaphors communicate value propositions more dramatically and emphasize key
points of difference
Advertising Strategies for Overcoming Intangibility
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Marketing Communications Planning
Checklist: The “5 Ws” Model
 Who is our target audience?
 What do we need to communicate and achieve?
 How should we communicate this?
 Where should we communicate this?
 When do communications need to take place?
Target Audience: 3 Broad Categories

 Prospects
o Employ traditional communication mix because prospects are not known in
advance
 Users
o More cost effective channels utilized
 Employees
o Secondary audience for communication campaigns
o Shape behavior
o Part of internal marketing campaign using company-specific channels
Educational and Promotional Objectives in Service Settings

 Create memorable images of specific companies and their brands
 Build awareness and interest for unfamiliar service
 Compare service favorably with competitors’ offerings
 Build preference by communicating strengths and benefits
 Reposition service relative to competition
 Reduce uncertainty or perceived risk by providing useful info and advice
 Who is our target audience?
 What do we need to communicate and achieve?
 How should we communicate this?
 Where should we communicate this?
 When do communications need to take place?
The Marketing Communications Mix
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After understanding our target audience, our specific communications objectives and message
strategy, we now need to select a mix of cost-effective communication channels. Most service
marketers have access to numerous forms of communication, referred to collectively as the
service marketing communications mix. Different communication elements have distinctive
capabilities relative to the types of messages they can convey and the market segments most
likely to be exposed to them, and the mix needs to be optimized to achieve the best possible
results for a given budget.
Sources of Messages Received by Target Audience

Unlike most goods marketers, service firms typically control the point-of-sale and the service
delivery channels, which offer service firms particularly powerful and cost-effective
communications opportunities. Specifically, messages can be transmitted through service
outlets, frontline employees, and self-service delivery points and location-enabled apps.
Service Outlets. Both planned and unintended messages reach customers through the
medium of the service delivery environment itself. Impersonal messages can be distributed in
the form of banners, posters, signage, brochures, video screens, and audio.
Frontline Employees. Employees in frontline positions may serve customers face-toface, by

telephone, or via email. Communication from frontline staff takes the form of the core service
and a variety of supplementary services, including providing information, giving advice, taking
reservations, receiving payments, and solving problems. New customers, in particular, often rely
on customer service personnel for help in learning to use a service effectively and to solve
problems.
Self-Service Delivery Points. ATMs, vending machines, websites, and service apps are all
examples of self-service delivery points. Promoting self-service delivery requires clear signage,
step-by-step instructions (perhaps through diagrams or animated videos) on how to operate the
equipment, and user-friendly design. Self-service delivery points can often be used effectively in
communications with current and potential customers, and to cross-sell services and promote
new services. Similarly, location-enabled apps can guide customers through complex
servicescapes such as cruise ships, airports, hospitals, and shopping malls, while also selling to
and informing customers.
Traditional Marketing Channels
Channel Aim Challenges

Advertising: Done via media Build awareness, inform, Needs to be unique as less
channels persuade, and remind than half of all ads generate a
positive ROI
Public relations: Efforts to Builds reputation and Form relationships with its
stimulate positive interest credibility to secure an image employees, customers, and
through third parties conducive to conduct the community
business
Direct Marketing such as Send personalized messages Advance in on-demand
mail, e-mail & text messages to highly targeted micro- technologies (e.g., spam
segments; use permission filters, cookie busters, pop-up
marketing where customers blockers) empower
“raise their hands” and agree consumers to decide how
to learn more about a and when they prefer to be
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company and its products reached, and by whom
Sales Promotion: Generate attention and Motivating customers to use
Communication attached to speed up introduction and a service sooner, in greater
an incentive that is specific to acceptance of new services volume, or more frequently
a period of time, price, or especially during periods
customer group when demand would be weak
Personal Selling: Common in Educate customers and Relationship marketing
b2b and infrequently promote preferences for
strategies based on account
purchased services particular brand or product management programs incur
high staffing costs;
telemarketing is a lower cost
alternative
Trade Shows Stimulate extensive media Opportunity to learn about
coverage with many latest offerings from wide
prospective buyers array of suppliers
Internet Marketing Offers Powerful Opportunities

 Supplement traditional marketing channels at a reasonable cost
 Part of an integrated, well-designed communications strategy
 Can market through the company’s own website or through online advertising
Website Design Considerations

 Used for a variety of communication tasks
o Promoting consumer awareness and interest
o Providing information and consultation
o Facilitating 2-way communication
o Stimulating product trial
o Enabling customers to place orders
 Design should address attributes that affect website “stickiness”
o High in quality content
o Ease of use
o Quick to download
o Frequency of update
 Memorable Web address helps attract visitors to the site
Effective Advertising on Internet: Banner Advertising

 Banner Advertising: Placing advertising banners and buttons on portals such as Yahoo
and other firms’ websites to draw online traffic to own site
o Easy for advertisers to measure how many visits to its own website are
generated by click-throughs
o Limitations
 Obtaining many exposures does not necessarily lead to increase in
awareness, preference, or sales
 Fraudulent click-throughs designed to boost apparent effectiveness
Effective Advertising on Internet: Search Engine Advertising

 Search Engine Advertising (Reverse broadcast network): search engines let advertisers
know exactly what consumer wants through their keyword search
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o Target relevant messages directly to desired consumers
o Advertising options:
 Pay for targeted placement of ads to relevant keyword searches
 Sponsor a short text message with a click-through link
 Buy top rankings in the display of search results
 E.g., Google – The New Online Marketing Powerhouse via Adsense and Adwords
Messages Transmitted through Service Delivery Channels

 Service outlets
o Messages reach customers through the service delivery environment
o Servicescape: Physical design
 Front-line employees
o Shape customer’s perceptions
o Delivers supplementary services
o Cross-selling of additional services
 Self-service delivery points
o ATM, vending machines and websites
o Require clear signage and instructions on how to use the service
 Customer training
o Familiarize customers with service product and teach them how to use it to their
best advantage
Messages Originating from Outside the Organization

 Word of Mouth (WOM)
o Recommendations from other customers viewed as more credible
 Strategies to stimulate positive WOM:
o Creating exciting promotions that get people talking about firm’s great service
o Offering promotions that encourage customers to persuade others
o Developing referral incentive schemes
o Referencing other purchasers and knowledgeable individuals
o Presenting and publicizing testimonials
Messages Originating from Outside the Organization

 Blogs – A new type of online WOM
 Twitter
 Media Coverage
o Compares, contrasts service offerings from competing organizations
o Advice on “best buys”
Ethical Issues in Communication

 Poor internal communications between operations and marketing personnel concerning
level of service performance
 Deliberately exaggerated promises to secure sales
 Deceptive promotions
 Unwanted intrusion by aggressive marketers into people’s personal lives
Role of Corporate Design
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 Many service firms employ a unified and distinctive visual appearance for all tangible
elements
o e.g., Logos, uniforms, physical facilities
 Provide a recognizable theme linking all the firm’s operations use of physical evidence
o e.g., BP’s bright green and yellow service stations
 Use of trademarked symbol as primary logo, with name secondary
o McDonald’s “Golden Arches”
 International companies need to select designs carefully to avoid conveying a culturally
inappropriate message
 Easily recognizable corporate symbols important for international marketers in markets
where:
o Local language is not written in Roman Script
o Significant portion of population is illiterate
FedEx: Use of Company Name In Corporate Design

 Created “FedEx Family of companies” consisting of subbrands for different services;
carried its positive FedEx Express image to other, often low cost services.
o FedEx Express
o FedEx Ground
o FedEx Home Delivery
o FedEx Freight
o FedEx Custom Critical
o FedEx Supply Chain Services
o FedEx Kinko’s
 Each subbrand has different color scheme for second word to create differentiation for
subbrands, e.g.,
o Express is red/orange
o Ground is green
Developing an Integrated Marketing Communications Strategy

 IMC ties together and reinforces all communications to deliver a strong brand identity
 Communications in different media should form part of a single, overall message about
the service firm
Week 7 Activity
1. What are the 5 Ws along which the Integrated Service Communications Model is
structured?
2. 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 objectives
you list.
3. What can you learn from the Service Marketing Communications Funnel?
4. Why is WOM important for the marketing of services? How can a service firm that is the
quality leader in its industry induce and manage word-of-mouth?
5. What are the potential ways to implement IMC?
Week 7 Assessment
Direction: Write True if the statement is correct, and False if the statement is incorrect.
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_______________ 1. Frontline personnel are central to service delivery in high-contact
services.
_______________ 2. Customers may have difficulty distinguishing one firm from another.
_______________ 3. Communication is the most invisible or audible — and some would say
intrusive — form of marketing activities, but its value is limited unless it is used intelligently in
conjunction with other marketing efforts.
_______________ 4. Abstractness pertains to Items that comprise a class of objects, persons,
or events.
_______________ 5. Mental impalpability means customers find it hard to grasp benefits of
complex, multidimensional new offerings.
_______________ 6. Generality means no one-to-one correspondence with physical objects.
_______________ 7. Unlike most goods marketers, service firms typically control the point-of-
sale and the service delivery channels, which offer service firms particularly powerful and cost-
effective communications opportunities.
_______________ 8. Advertising efforts to stimulate positive interest through third parties.
_______________ 9. Public Relation send personalized messages to highly targeted micro-
segments; use permission marketing where customers “raise their hands” and agree to learn
more about a company and its products.
_______________ 10. Trade shows stimulate extensive media coverage with many prospective
buyers.
Week 7 Assignment
Identify one advertisement (or other means of communications) aimed mainly at managing
consumer behavior in the (a) choice, (b) service encounter, and (c) postconsumption stage.
Explain how they try to achieve their objectives and discuss how effective they may be.
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Week 8: Designing and Managing Service Processes
the following: 1. Design customer service processes in
Designing and Managing Service transport sector through flowcharting.
Processes 2. Develop blueprint in creating and
1. Flowcharting Customer Service Processes delivering service processes in transport
2. Blueprinting Services to Create Value sector.
Experiences and Productive Operations 3. Design new service processes for existing
3. Service Process Redesign transport service.
4. The Customer as Co-Producer 4. Identify the role of customer in the service
5. Self-Service Technologies process
5. Assess the emergence of technology in
service process delivery.
What is Service Process?

From the customer’s perspective, services are experiences. From the organization’s
perspective, services are processes that have to be designed and managed to create the
desired customer experience. This makes processes the architecture of services. Processes
describe the method and sequence in which service operating systems work, specify how they
link together to create the value proposition promised to the customers. Badly designed
processes are likely to annoy customers because they often result in slow, frustrating, and poor-
quality service delivery. Similarly, poor processes make it difficult for frontline employees to do
their jobs well, thus resulting in low productivity, and increasing the risk of service failures. In
this chapter, we discuss how we can design and improve service processes so that they deliver
the promised value proposition.
Designing and Documenting Service Processes
Flowcharting
The first step in designing or analyzing any process is documenting or describing it.
Flowcharting and blueprinting are two key tools used for documenting and redesigning existing
service processes and for designing new ones. How do we distinguish between flowcharting
and blueprinting in a service context? A flowchart describes an existing process, often in a fairly
simple form. Specifically, flowcharting is a technique for displaying the nature and sequence of
the different steps involved when a customer “flows” through the service process. It is an easy
way to quickly understand the total customer service experience. By flowcharting the sequence
of encounters customers have with a service organization, we can gain valuable insights into
the nature of an existing service.
Blueprinting
Blueprinting is a more complex form of flowcharting and specifies in detail how a service
process is constructed, including what is visible to the customer and all that goes on in the back-
office. It’s no easy task to create a service, especially one that must be delivered in real time
with customers present in the service factory. To design services that are both satisfying for
customers and operationally efficient, marketers and operations specialists need to work
together, and a blueprint can provide a common perspective and language for the various
departments involved.
Flowcharting Service Delivery Helps to Clarify Product Elements
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 Technique for displaying the nature and sequence of the different steps in delivery
service to customers
 Offers way to understand total customer service experience
 Shows how nature of customer involvement with service organizations varies by type of
service:
o People processing
o Possession processing
o Mental Stimulus processing
o Information processing
Flowcharts for People and Possession Processing Services
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Blueprinting Services to Create Valued Experiences and Productive Operations
 Developing a Blueprint
o Identify key activities in creating and delivering service
o Define “big picture” before “drilling down” to obtain a higher level of detail
 Advantages of Blueprinting
o Distinguish between “frontstage” and “backstage”
o Clarify interactions and support by backstage activities and systems
o Identify potential fail points; take preventive measures; prepare contingency
o Pinpoint stages where customers commonly have to wait
Key Components of a Service Blueprint

 Objectives:
o Identify fail points & risks of excessive waits
o Set service standards
o Fail-proof process
1. Define standards for frontstage activities
2. Specify physical evidence
3. Identify principal customer actions
4. Line of interaction
5. Frontstage actions by frontline personnel
6. Line of visibility
7. Backstage actions by customer contact personnel
8. Support processes involving other personnel
9. Support processes involving IT
Blueprinting the Restaurant Experience: Act 1
Blueprinting the Restaurant Experience: A Three-Act Performance

 Act 1: Prologue and Introductory Scenes
 Act 2: Delivery of Core Product
o Cocktails, seating, order food and wine, wine service
o Potential fail points: Menu information complete? Menu intelligible? Everything on
the menu actually available?
o Mistakes in transmitting information a common cause of quality failure
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o Customers may not only evaluate quality of food and drink, but how promptly it is
served or serving staff attitudes
 Act 3: The Drama Concludes
o Remaining actions should move quickly and smoothly, with no surprises at the
end
o Customer expectations: accurate, intelligible and prompt bill, payment handled
politely, guest are thanked for their patronage
Improving Reliability of Processes Through Fail-Proofing

 Identify fail points
 Analysis of reasons for failure reveals opportunities for failure-proofing to
reduce/eliminate future errors
 Need fail-safe methods for both employees and customers
Setting Service Standards and Targets

 Service providers set standards for each step sufficiently high to satisfy and even delight
customers
o Include time parameters, script and prescriptions for appropriate style and
demeanor
o Must be expressed in ways that permit objective measurement
 Performance targets – specific process and team performance targets for which staff are
responsible for
 Evaluated based on distinction between standards and targets
 First impression is important
o Affects customer’s evaluations of quality during later stages of service delivery as
customer perceptions of service experiences tend to be cumulative
 For low-contact service, a single failure committed front stage is relatively more serious
than in a high-contact service
Setting Standards and Targets for Customer Service Processes
Redesigning Service Processes

 Revitalizes process that has become outdated
 Changes in external environment make existing practices obsolete and require redesign
of underlying processes
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 Rusting occurs internally
o Natural deterioration of internal processes; creeping bureaucracy; evolution of
spurious, unofficial standards
o Symptoms:
 Extensive information exchange
 Data that is not useful
 High ratio of checking control activities to value-adding activities
 Redesign aims to achieve these performance measures:
o Reduced number of service failures
o Reduced cycle time from customer initiation of a service process to its
completion
o Enhanced productivity
o Increased customer satisfaction
Process Redesign: Approaches and Potential Benefits

 Eliminating non-value-adding steps
o Streamline front-end and back-end processes of services
o Improve productivity and customer satisfaction
 Shifting to self-service
o Increase in productivity and service quality
o Lower costs and perhaps prices
o Enhance technology reputation
o Differentiates company
 Delivering direct service
o Improve convenience for customers
o Productivity can be improved by eliminating expensive retail locations
o Increase customer base
 Bundling services
o Involves grouping multiple services into one offer, focusing on a well-defined
customer group
o A better fit to the needs of target segment
o Increase productivity with customized service
o Increase per capita service use
 Redesigning physical aspects of service process
o Focus on tangible elements of service process (facilities and equipment)
o Increase convenience
o Enhance satisfaction and productivity of frontline staff
o Cultivate interest in customers
The Customer as Co-Producer

Levels of Customer Participation
 High – Customer works actively with provider to co-produce the service
o Service cannot be created without customer’s active participation
o Customer can jeopardize quality of service outcome
 Medium – Customer inputs required to assist provider
o Provide needed information and instructions
o Make some personal effort; share physical possessions
 Low – Employees and systems do all the work
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o Involves standardized work
Customers as Partial Employees

 Customers can influence productivity and quality of service processes and outputs
 Customers not only bring expectations and needs but also need to have relevant service
production competencies
 For the relationship to last, both parties need to cooperate with each other
Managing Customers
 Recruitment and Selection
o Recruit customers that possess the competency to perform the necessary tasks
 Job Analysis
o Are customers aware of their roles and equipped with the required skills?
 Education and Training
o Information required for them to perform their roles via instructions or video
demonstration
 Motivate
o Ensure that they will be rewarded for good performance
 Appraise
o For sub-par performances, improve customer training or change the role or
process
 Ending
o Last resort: if customer is non-compliant consider termination of the relationship
Self-Service Technologies
 SSTs are the ultimate form of customer involvement where customers undertake specific
activities using facilities or systems provided by service supplier
o Customer’s time and effort replace those of employees
 Information-based services lend selves particularly well to SSTs
o Used in both supplementary services and delivery of core product
 Many companies and government organizations seek to divert customers from
employee contact to Internet-based self-service
 Advantages:
o Time and Cost savings
o Flexibility
o Convenience of location
o Greater control over service delivery
o High perceived level of customization
 Disadvantages:
o Anxiety and stress experienced by customers who are uncomfortable with using
them
o Some see service encounters as social experiences and prefer to deal with
people
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What Aspects of SSTs Please Or Annoy Customers?
People love SSTs when… People hate SSTs when…
• SST machines are conveniently • SSTs fail – system is down, PIN
located and accessible 24/7– often as numbers not accepted, etc.
close as the nearest computer! • Customers themselves mess up –
• Obtaining detailed information and forgetting passwords; failing to
completing transactions can be done provide information as requested;
faster than through face-to-face or simply hitting wrong buttons
telephone contact
Key weakness: Few firms incorporate service recovery systems such that customers are still
forced to make telephone calls or personal visits
Putting SSTs to Test by Asking a Few Simple Questions

 Does the SST work reliably?
o Firms must ensure that SSTs are dependable and user-friendly
 Is the SST better than interpersonal alternatives?
o Customers will stick to conventional methods if SST doesn’t create benefits for
them
 If it fails, what systems are in place to recover?
o Always provide systems, structures, and technologies that will enable prompt
service recovery when things fail
Managing Customer’s Reluctance to Change

 Increasing customer’s participation level in a service can be difficult
 Marketing communications to be used to:
o Prepare customer for change
o Explain the rationale and benefits
o What customers need to do differently in the future
Week 8 Activity
1. How does blueprinting help us to better understand the service process from the
perspective of the key actors (i.e., customers and the employees from different service
departments and functional areas) in a serviced process?
2. How can consumer perceptions and emotions be considered in the design of service
processes?
3. What are the four key objectives of service process redesign?
4. Explain what factors make customers like and dislike self-service technologies (SSTs).
5. 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?
Week 8 Assessment
Direction: Write True if the statement is correct, and false if the statement is false.
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_______________ 1. Flowcharting is a technique for displaying the nature and sequence of the
different steps involved when a customer “flows” through the service process.
_______________ 2. Blueprinting is a more complex form of flowcharting and specifies in detail
how a service process is constructed, including what is visible to the customer and all that goes
on in the back-office.
_______________ 3. Service providers set standards for each step sufficiently high to satisfy
and even delight customers.
_______________ 4. Redesign aims to reduced number of service failures.
_______________ 5. One of the potential benefits of redesigning is streamline front-end and
back-end processes of services through eliminating non-value-adding steps.
_______________ 6. Customer works actively with provider to co-produce the service in a
medium level of customer participation.
_______________ 7. Customer inputs required to assist provider in low level of participation.
_______________ 8. Employees and systems do all the work in medium level of participation.
_______________ 9. SSTs are the ultimate form of customer involvement where customers do
not undertake specific activities using facilities or systems provided by service supplier.
_______________ 10. Few firms incorporate service recovery systems such that customers are
still forced to make telephone calls or personal visits is a key strength of SSTs.
Week 8 Assignment
Prepare a blueprint for a travel agency. On completion, consider (a) the tangible cues or
indicators of quality from the customers perspective, considering the line of visibility; (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 and what service recovery procedures could be introduced; and (e)
the potential measures of process performance.
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Week 9: Midterm Examination
Part 1: Multiple Choices Question (20 items)
Direction: Write the letter of your answer in the given space before the number.
________ 1. One of the factors that stimulate the transformation of the service economy in
terms of rules that protects customers, employees, and the environment.
a. Social Changes
b. Government Policies
c. Globalization
d. Business Trends
________ 2. According to _______ services are immaterial; consumption cannot be separated
from production.
a. Say
b. Smith
c. Ricardo
d. Kooper
________ 3. In this transformational factor of the service economy, one should identify the rising
consumer ownership of high tech equipment.
a. Business trends
b. Advances in IT
c. Globalization
d. Social Changes
________ 4. One of the categories of service pertains to the identification of benefits created
and non-financial costs such as time, mental and physical effort.
a. Mental stimulus processing
b. Possession processing
c. Information processing
d. People processing
________ 5. It is the type of service processing that requires high ethical standards.
a. Information processing
b. Possession processing
c. Mental stimulus processing
d. People processing
________ 6. It is a set of products and brands that a consumer considers during the decision-
making process – that is derived from past experiences or external sources.
a. Evoked set
b. Aroused set
c. Stimulated set
d. Roused set
________ 7. One of the perceived risks of using and purchasing services that deals with the
loss of monetary value of the customer
a. Temporal
b. Functional
c. Financial
d. Psychological
________ 8. It is part of the pre-purchase state wherein possible alternatives are compared and
evaluated, whereby the best option is selected and trade-offs are often involved.
a. Alternative evaluation
b. Need arousal
c. Purchase decision
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d. Information search
________ 9. A system of service production and delivery that pertains to the visibility of the front
stage and invisibility of the backstage.
a. Service operation
b. Service delivery
c. Servuction system
d. Moment of truth
________ 10. Part of service encounters stage wherein it considers the importance of
effectively managing touch points.
a. High/law contact service model
b. Moment of truth
c. Servuction model
d. Theater metaphor
_________ 11. Type of focus strategies in service that has a limited range of services to narrow
and specific market.
a. Unfocused
b. Fully focused
c. Market focused
d. Service focused
_________ 12. It is composed of a group of buyers sharing common characteristics, needs,
purchasing behaviour, and consumption patterns.
a. Market segment
b. Market division
c. Market section
d. Market unit
_________ 13. It focuses on overall level and trend of demand and geographic location of
demand.
a. Market segmentation
b. Market analysis
c. Internal analysis
d. Competitors analysis
_________ 14. It deals with revising service characteristics; redefining target market segments;
abandoning certain products; withdrawing from certain market segments
a. Market positioning
b. Re-engineering
c. Repositioning
d. Redesigning
_________ 15. It determinant attributes are often the ones most important to customers.
a. Credence attributes
b. Experience attributes
c. Search attributes
d. Service attributes
_________ 16. It is the central component that supplies the principal, problem-solving benefits
customers seek.
a. Supplementary services
b. Core products
c. Delivery processes
d. Service product lines
_________ 17. One of the types of supplementary services that is either needed for service
delivery, or help in the use of the core products.
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a. Enhancing elements
b. Facilitating elements
c. Delivery elements
d. Core elements
_________ 18. It is defined and consistent with bundle of output that supported by
supplementary services.
a. Service Product
b. Product Line
c. Delivery Process
d. Product Brand
_________ 19. One of the Hierarchy of New Service Categories that deals with the usage of
new processes to deliver existing products with added benefits.
a. Product line extensions
b. Major process innovations
c. Process-line extensions
d. Major Service Innovations
_________ 20. One of the success factors in new service development is by understanding
customer purchase decision behaviour as well as strong support from firm during and after
launch. This pertains to what?
a. Organizational factors
b. Market research
c. Market synergy
d. Reengineering
Part 2: Modified True or False (20 items)

Direction: Write the word TUMPAK if the statement is true; if the statement is FALSE underline
the word or phrases that makes the statement incorrect then write the correct word/phrases at
the space provided before the number.
________________ 1. The overall contribution of service economy in the world’s GDP is 64%
which is three times higher than the manufacturing industry.
________________ 2. Transportation and storage are part of the service economy of the
Philippines wherein it is under the services that facilitates exchange.
________________ 3. Globalization provides faster and more powerful software as well as
digitization of text, audios, and graphics.
________________ 4. Involvement of the customer is limited in the mental stimulus processing
type of service.
________________ 5. Information processing is the most tangible form of service.
________________ 6. Decision to buy or use a service is triggered by need arousal.
________________ 7. Search attributes help customers evaluate a product before purchase.
________________ 8. Restaurant meals are high in experience attributes.
________________ 9. Temporal deals with wastage of time, delays that lead to problems.
________________ 10. Customers evaluate service quality by comparing what they expect
against what they perceive.
________________ 11. One of the risks of unfocused is that market is too small to generate
needed volume.
________________ 12. The danger of having a service focused strategy is that companies tend
to have a jack of all trades and master of none.
________________ 13. Customers usually choose between alternatives service offerings
based on price differences between them.
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________________ 14. Price-insensitive customers willing to pay relatively low price for high
level of service.
________________ 15. Position should be common, providing one simple, consistent message.
________________ 16. Supplementary services are used to augment the delivery processes,
facilitating its use and enhancing its value and appeal.
________________ 17. Information should reflect good understanding of customer, especially
their needs, habits, and expectations.
________________ 18. Most service organization offers bundle of output rather than just a
single product.
________________ 19. Corporate brand helps firm communicate distinctive experiences and
benefits associated with a specific service concept.
________________ 20. Repositioning analyses and redesigning processes to achieve faster
and better performance.
Part 3: Enumeration (30 items)
1 – 5 Five broad categories within non-ownership framework.

6 – 10 Give at least 5 perceived risks of purchasing and using services.
11 – 16 Give at least 5 Strategic Responses to Managing Customer Perceptions of Risk.
17 – 20 Focused Strategies for Services
21 – 23 Positioning Links
24 – 30 Hierarchy of New Service Categories
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the following: 1. Identify the role of demand in managing
Balancing Demand and Productive capacity and service productivity
Capacity 2. Analyze demand patterns from different
1. The Role of Demand in Service market segment
Productivity 3. Differentiate various systems in managing
2. Managing Service Capacity inventory demand.
3. Analyze and Manage Patterns of Demand 4. Compare various customer perception of
4. Inventory Demand through Waiting Lines, waiting time system.
Queuing and Reservation Systems. 5. Explain the primary purpose of service
5. Customer Perceptions of Waiting Time environment in transportation industry
Fluctuations in Demand Threaten Profitability

Many services with limited capacity face wide swings in demand. This is a problem because
service capacity usually cannot be kept aside for sale at a later date. The effective use of
expensive productive capacity is one of the secrets of success in such businesses. The goal
should be to utilize staff, labor, equipment, and facilities as productively as possible. By working
with managers in operations and human resources, service marketers may be able to develop
strategies to bring demand and capacity into balance, in ways that create benefits for customers
as well as to improve profitability for the business.
Defining Productive Capacity?

 Productive capacity can take several forms in services
o Physical facilities designed to contain customers
o Physical facilities designed for storing or processing goods
o Physical equipment used to process people, possessions, or information
o Labor
o Infrastructure
 Financial success in capacity-constrained business is a function of management’s ability
to use productive capacity as efficiently and profitably as possible.
From Excess Demand to Excess Capacity

 Excess demand
o Too much demand relative to maximum capacity
 Demand exceeds optimum capacity
o Service quality is perceived to have deteriorated
 Optimum capacity
o Staff is not overworked and customers receive good service
 Excess capacity
o Too much capacity relative to demand
Variations in Demand Relative to Capacity

Sometimes optimum and maximum capacities are one and the same. At a live theater
performance or sports event, a full house looks grand and is exciting for the performers or the
players and the audience. It creates a more satisfying experience for all. With most other
services however, you probably feel that you get better service if the facility is not operating at
full capacity. The quality of restaurant service for instance, often deteriorates when every table
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is occupied, because the staff is rushed and there is a greater likelihood of errors or delays. If
you are traveling alone in an aircraft with high density seating, you tend to feel more comfortable
if the seat next to you is empty. When repair and maintenance shops are fully scheduled, delays
may result if there is no slack in the system to allow for unexpected problems in completing
particular jobs.
Addressing Problem of Fluctuating Demand

Two basic approaches of which most firms use a mix of:
 Adjust level of capacity to meet demand
o Need to understand productive capacity and how it varies on an incremental
basis
 Manage level of demand
o Use marketing strategies to smooth out peaks, fill in valleys
o Inventorying demand until capacity becomes available
Managing Capacity
 Enables more people to be served at same level of capacity
 Stretch and shrink:
o Offer inferior extra capacity at peaks (e.g., bus/train standees)
o Use facilities for longer/shorter periods
o Reduce amount of time spent in process by minimizing slack time
 Adjusting capacity to match demand
o Rest during low demand
o Cross-train employees
o Use part-time employees
o Customers perform self-service
o Ask customers to share
o Create flexible capacity
o Rent/share facilities and equipment
Analyze Patterns of Demand

Demand Varies by Market Segment
 Understand why customers from specific market segments select this service
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 Keep good records of transactions to analyze demand patterns
o Sophisticated software can help to track customer consumption patterns
 Record weather conditions and other special factors that might influence demand
Predictable Demand Patterns and Their Underlying Causes
Causes of Seemingly Random Changes in Demand Levels

Question: Which of these events can be predicted?
1. Weather
2. Health problems
3. Accidents, Fires, Crime
4. Natural disasters
Managing Demand
 Take no action
o Let demand find its own levels
 Interventionist approach
o Reduce demand in peak periods
o Increase demand when there is excess capacity
 Inventorying demand until capacity becomes available
o Formal wait and queuing system
o Reservation system
Marketing Mix Elements to Shape Demand Patterns

 Use price and other nonmonetary costs to manage demand
 Change product elements
 Modify place and time of delivery
o No change
o Vary times when service is available
o Offer service to customers at a new location
 Promotion and Education
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Hotel Room Demand Curves by Segment and Season
Inventory Demand Through Waiting Lines and Queuing Systems

 An average person may spend up to 30 minutes/day waiting in line—equivalent to over
one week per year!
 Nobody likes to wait
 It's boring, time-wasting, and sometimes physically uncomfortable
Why Do Waiting Lines Occur?

 Because number of arrivals at a facility exceeds capacity
of system to process them at a specific point in the
process
 Queues are basically a symptom of unresolved capacity
management problems
 Not all queues take form of a physical waiting line in a
single location
o Queues may be physical but geographically
dispersed
o Some are virtual (e.g., phone)
Managing Waiting Lines
 Rethink design of queuing system
 Install a reservations system
 Tailoring the queuing system to different market segments
 Manage customer behavior and perceptions of wait
 Redesign processes to shorten transaction time
Queuing Systems can be Tailored to Market Segments

 Urgency of job
o Emergencies vs. non-emergencies
 Duration of service transaction
o Number of items to transact
o Complexity of task
 Payment of premium price
 Importance of customer
o Frequent users/high volume purchasers vs. others
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Customer Perceptions of Waiting Time
Feels longer than
Unoccupied time Occupied time

Solo waits Group waits
Physically uncomfortable Comfortable waits
waits
Pre- and post-process waits In-process waits
Unexplained waits Explained waits
Unfamiliar waits Known, finite waits
Unfair waits Fair waits
Anxious waits Calm waits
Monotonous waits Valued waits
Inventory Demand Through Reservations System
Benefits of Reservation
 Saves customers from having to wait in line
 Helps to control and manage the demand (e.g., leave time for emergency jobs)
 Pre-sells the service and can be used to prepare and educate the customer for the
service encounter
 Data captured helps organizations to understand their demand patterns and to plan their
operations and staffing levels
Characteristics of Well-Designed Reservations System

 Fast and user-friendly for customers and staff
 Responsive to customer queries and needs
 Offers options for self service (e.g., through an online reservations system)
 Accommodates preferences (e.g., room with a view)
 Deflects demand from unavailable first choices to alternative times and locations
Reservations Strategies Should Focus on Yield

 Yield analysis helps managers recognize opportunity cost of allocating capacity to one
customer/segment when another segment might yield a higher rate later
 Decisions need to be based on good information
o Detailed records of past usage
o Current market intelligence and good marketing sense
o Realistic estimate of the chances of obtaining higher rated business
 When firms overbook to increase yield,
o Victims of overbooking should be compensated to preserve the relationship
Creating Alternative Use for Otherwise Wasted Capacity

 Use capacity for service differentiation
 Reward your best customers and build loyalty
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 Customer and channel development
 Reward employees
 Barter free capacity
Information Needed for Demand and Capacity Management Strategies

 Historical data on demand level and composition, marketing variables
 Demand forecasts by segment under specified conditions
 Segment-by-segment data
 Fixed and variable cost data, profitability of incremental sales
 Meaningful location-by-location demand variations
 Customer attitudes towards queuing
 Customer opinions of quality at different levels of capacity utilization
Week 10 Activity
1. What is the difference between ideal capacity and maximum capacity? Provide
examples of a situation where (a) the two might be the same and (b) the two are
different.
2. What actions can firms take to adjust capacity to be more closely matched to demand?
3. How can marketing mix elements be used to reshape demand patterns?
4. How can firms make waiting more pleasant for their customers?
5. What are the benefits of having an effective reservation system?
Week 10 Assessment
Direction: Write True if the statement is correct, and false if the statement is incorrect.
_____________ 1. Excess demand pertains too much demand relative to maximum capacity.
_____________ 2. Excess demand means too much demand relative to maximum capacity.
_____________ 3. The effective use of expensive productive capacity is one of the secrets of
success in such businesses.
_____________ 4. Use marketing strategies to smooth out peaks, fill in valleys is one way of
managing demand.
_____________ 5. Interventionist approach normally reduces demand in peak periods.
_____________ 6. Queues are basically a symptom of unresolved capacity management
problems.
_____________ 7. Reservation helps to control and manage the demand.
_____________ 8. One of the characteristics of good reservation system is responsive to
customer queries and needs.
_____________ 9. Yield analysis helps managers recognize opportunity cost of allocating
capacity to one customer/segment when another segment might yield a higher rate later.
_____________ 10. Historical data on demand level and composition, marketing variables are
needed for capacity management strategies.
Week 10 Assignment
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 the case of the good example) their reservation systems?
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Week 11: Crafting the Service Environment
the following: 1. Explain the primary purpose of service
Crafting the Service Environment environment in transportation industry
1. Purpose of Service Environment 2. Compare various customer responses
2. Customer Response to Service model.
Environment 3. Identify the major dimension of service
3. Dimensions of the Service Environment environment in relation to transport sector.
Service Environments — An Important Element of the Service Marketing Mix

The physical service environment that customers experience plays a key role in shaping the
service experience and enhancing (or undermining) customer satisfaction, especially in high-
contact people-processing services. Disney theme parks are often cited as vivid examples of
service environments that make customers feel comfortable and highly satisfied and leave a
long-lasting impression. In fact, organizations such as hospitals, hotels, restaurants, and offices
of professional service firms have come to recognize that the service environment is an
important element of their services marketing mix and overall value proposition.
What is the purpose of service environments?

Let’s start with examining why many service firms take so much trouble to shape the
environment in which their customers and service personnel will interact. For the museum and
many service firms, there are four main purposes of servicescapes: (1) shape customers’
experiences and behaviors; (2) signal quality and position, differentiate and strengthen the
brand; (3) be a core component of the value proposition; and (4) facilitate the service encounter
and enhance both service quality and productivity. We discuss each of these four purposes in
the following sections.
Shape customers’ experience and their behaviors

 Message-creating medium
o symbolic cues to communicate the distinctive nature and quality of the service
experience
 Attention-creating medium
o make servicescape stand out from competition and attract customers from target
segments
 Effect-creating medium
o use colors, textures, sounds, scents, and spatial design to enhance desired
service experience
Servicescape as Part of Value Proposition

 Physical surroundings help shape appropriate feelings and reactions in customers and
employees
o e.g., Disneyland, Denmark’s Legoland
 Servicescapes form a core part of the value proposition
o Las Vegas: repositioned itself to a somewhat more wholesome fun resort,
visually striking entertainment center
o Florida-based Muvico: builds extravagant movie theatres and offers plush
amenities. “What sets you apart is how you package it.” (Muvico’s CEO, Hamid
Hashemi)
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The power of servicescapes is being discovered
Understanding Consumer Reponses to Service Environments
The Mehrabian-Russell Stimulus-Response Model

displays a simple yet fundamental model of how people respond to environments. The model
holds that the conscious and unconscious perception and interpretation of the environment
influences how people feel in that setting8. People’s feelings in turn drive their responses to that
environment. Feelings are central to the model, which posits that feelings, rather than
perceptions or thoughts, drive behavior. Similar environments can lead to very different feelings
and subsequent responses.
Insights from Mehrabian-Russell Stimulus-Response Model

It is a simple yet fundamental model of how people respond to environments that illustrates:
 The environment, its conscious and unconscious perceptions, and interpretation
influence how people feel in that environment
 Feelings, rather than perceptions/thoughts drive behavior
 Typical outcome variable is ‘approach’ or ‘avoidance’ of an environment, but other
possible outcomes can be added to model
The Russell Model of Affect

Given that affect or feelings are central to how people respond to an environment, we need to
understand those feelings better. For this, Russell’s Model of Affect is widely used. It suggests
that emotional responses to environments can be described along the two main dimensions of
pleasure and arousal. Pleasure is a direct, subjective response to the environment, depending
on how much an individual likes or dislikes the environment. Arousal refers to how stimulated
the individual feels, ranging from deep sleep (lowest level of internal activity) to highest levels of
adrenaline in the bloodstream, for example, when bungeejumping (highest level of internal
activity). The arousal quality of an environment is much less subjective than its pleasure quality.
Arousal quality depends largely on the information rate or load of an environment. For example,
environments are stimulating (i.e., have a high information rate) when they are complex, include
motion or change, and have novel and surprising elements. A relaxing environment with a low
information rate has the opposite characteristics.
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Insights from Russell’s Model of Affect
 Emotional responses to environments can be described along two main dimensions:
o Pleasure: subjective, depending on how much individual likes or dislikes
environment
o Arousal: how stimulated individual feels, depends largely on information rate or
load of an environment
 Separates cognitive emotions from emotional dimensions
 Advantage: simple, direct approach to customers’ feelings
o Firms can set targets for affective states
Drivers of Affect
 Caused by perceptions and cognitive processes of any degree of complexity
 Determines how people feel in a service setting
 If higher levels of cognitive processes are triggered, the interpretation of this process
determines people’s feelings
 The more complex a cognitive process becomes, the more powerful its potential impact
on affect
Behavioral Consequence of Affect

 Pleasant environments result in approach, whereas unpleasant ones result in avoidance
 Arousal amplifies the basic effect of pleasure on behavior
o If environment is pleasant, increasing arousal can generate excitement, leading
to a stronger positive consumer response
o If environment is unpleasant, increasing arousal level will move customers into
the “distressed” region
 Feelings during service encounters are an important driver of customer loyalty
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An Integrative Framework: The Servicescape Model
 Identifies the main dimensions in a service environment and views them holistically
 Internal customer and employee responses can be categorized into cognitive, emotional,
and psychological responses, which lead to overt behavioral responses towards the
environment
 Key to effective design is how well each individual dimension fits together with
everything else
Dimensions of the Service Environment
 Ambient Conditions
o Characteristics of environment pertaining to our five senses
 Spatial Layout and Functionality
o Spatial layout:
 floorplan
 size and shape of furnishings
o Functionality: ability of those items to facilitate performance
 Signs, Symbols, and Artifacts
o Explicit or implicit signals to:
 help consumers find their way
Ambient Conditions
 Ambient conditions are perceived both separately and holistically, and include:
o Lighting and color schemes
o Size and shape perceptions
o Sounds such as noise and music
o Temperature
o Scents
 Clever design of these conditions can elicit desired behavioral responses among
consumers
Music
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 In service settings, music can have powerful effect on perceptions and behaviors, even if
played at barely audible levels
 Structural characteristics of music―such as tempo, volume, and harmony―are
perceived holistically
o Fast tempo music and high volume music increase arousal levels
o People tend to adjust their pace, either voluntarily or involuntarily, to match
tempo of music
 Careful selection of music can deter wrong type of customers
Scent
 An ambient smell is one that pervades an environment
o May or may not be consciously perceived by customers
o Not related to any particular product
 Scents have distinct characteristics and can be used to solicit emotional, physiological,
and behavioral responses
 In service settings, research has shown that scents can have significant effect on
customer perceptions, attitudes, and behaviors
Aromatherapy: Effects of Selected Fragrances on People
Color
 Colors can be defined into three dimensions:
o Hue is the pigment of the color
o Value is the degree of lightness or darkness of the color
o Chroma refers to hue-intensity, saturation, or brilliance
 People are generally drawn to warm color environments
o Warm colors encourage fast decision making and are good for low-involvement
decisions or impulse buys
o Cool colors are preferred for high-involvement decisions
Common Associations and Human Responses to Colors
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Signs, Symbols, and Artifacts
 Communicates the firm’s image and helps customers find their way
o First time customers will automatically try to draw meaning from the signs,
symbols, and artifacts
 Challenge is to guide customer through the delivery process
o Unclear signals from a servicescape can result in anxiety and uncertainty about
how to proceed and obtain the desired service
Putting It All Together

Selection of Environmental Design Elements
 Consumers perceive service environments holistically
o No dimension of design can be optimized in isolation, because everything
depends on everything else
o Holistic characteristic of environments makes designing service environment an
art
Tools to Guide Servicescape Design

 Keen observation of customers’ behavior and responses
 Feedback and ideas from frontline staff and customers
 Photo audit – Mystery Shopper to take photographs of service experience
 Field experiments can be used to manipulate specific dimensions in an environment and
the effects observed
 Blueprinting or service mapping – extended to include physical evidence in the
environment
Week 11 Activity
1. Describe how the Mehrabian–Russell Stimulus– Response Model and Russell’s Model
of Affect explain consumer responses to a service environment.
2. Why can it happen that different customers and service staff respond vastly different to
the same service environment?
3. Explain the dimensions of ambient conditions and how each can influence customer
responses to the service environment.
4. What are the implications of the fact that environments are perceived holistically?
5. What tools are available for aiding our understanding of customer responses, and for
guiding the design and improvement of service environments?
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Week 11 Assessment
Direction: Write True if the statement is correct, and false if the statement is incorrect.
____________1. symbolic cues to communicate the distinctive nature and quality of the service
experience. TRUE
____________ 2. Physical surroundings cannot help shape appropriate feelings and reactions
in customers and employees. FALSE
____________ 3. Feelings are central to the Mehrabian-Russell Stimulus-Response model,
which posits that feelings, rather than perceptions or thoughts, drive behavior. TRUE
____________ 4. Russell’s Model suggests that emotional responses to environments can be
described along the two main dimensions of pleasure and arousal. TRUE
____________ 5. Feelings during service encounters are an important driver of customer
loyalty. TRUE
____________ 6. Ambient Conditions characteristics of environment pertaining to our five
senses. TRUE
____________ 7. Functionality means ability of those items to facilitate performance. TRUE
____________ 8. Colors have distinct characteristics and can be used to solicit emotional,
physiological, and behavioral responses. FALSE
____________ 9. People are generally drawn to warm scent environments. FALSE
____________ 10. Field experiments can be used to manipulate specific dimensions in an
environment and the effects observed.
Week 11 Assignment
Select a bad and a good waiting experience and contrast the two situations with respect to the
service environment and other people waiting.
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Week 12: Managing People for Service Advantage
the following: 1. Explain the importance of service
Managing People for Service Advantage employees in the Transport Sector
1. Importance of Service Employees 2. Identify various factors affecting the
2. Factors Contributing to the Difficulty of difficulty of service employees
Frontline Work 3. Differentiate failure, mediocrity, and
3. Cycle of Failure, Mediocrity, and Success success cycles
4. Human Resources Management 4. Explain the service talent cycle and human
5. Service Leadership and Culture resources management process
Service Employees Are Crucially Important

Service Personnel: Source of Customer Loyalty & Competitive Advantage
 Customer’s perspective: encounter with service staff is most important aspect of a
service
 Firm’s perspective: frontline is an important source of differentiation and competitive
advantage
 Frontline is an important driver of customer loyalty
o anticipating customer needs
o customizing service delivery
o building personalized relationships
Frontline in Low-Contact Services

 Many routine transactions are now conducted without involving frontline staff, e.g.,
o ATMs (Automated Teller Machines)
o IVR (Interactive Voice Response) systems
o Websites for reservations/ordering, payment, etc.
 However, frontline employees remain crucially important
 “Moments of truths” drive customer’s perception of the service firm
Factors Contributing to the Difficulty of Frontline Work

Boundary Spanning Roles
 Boundary spanners link the organization to outside world
 Multiplicity of roles often results in service staff having to pursue both operational and
marketing goals
 Consider management expectations of service staff:
o delight customers
o be fast and efficient in executing operational tasks
o do selling, cross selling, and up-selling
o enforce pricing schedules and rate integrity
Role Stress in Frontline Employees

 Organization vs. Client: Dilemma whether to follow company rules or to satisfy customer
demands
o This conflict is especially acute in organizations that are not customer- oriented
 Person vs. Role: Conflicts between what jobs require and employee’s own personality
and beliefs
o Organizations must instill ‘professionalism’ in frontline staff
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 Client vs. Client: Conflicts between customers that demand service staff intervention
Emotional Labor
 “The act of expressing socially desired emotions during service transactions”
(Hochschild, The Managed Heart)
 Performing emotional labor in response to society’s or management’s display rules can
be stressful
 Good HR practice emphasizes selective recruitment, training, counseling, strategies to
alleviate stress
Cycles of Failure, Mediocrity, and Success
Cycle of Failure
 The employee cycle of failure
o Narrow job design for low skill levels
o Emphasis on rules rather than service
o Use of technology to control quality
o Bored employees who lack ability to respond to customer problems
o Customers are dissatisfied with poor service attitude
o Low service quality
o High employee turnover
 The customer cycle of failure
o Repeated emphasis on attracting new customers
o Customers dissatisfied with employee performance
o Customers always served by new faces
o Fast customer turnover
o Ongoing search for new customers to maintain sales volume
 Costs of short-sighted policies are ignored:
o Constant expense of recruiting, hiring, and training
o Lower productivity of inexperienced new workers
o Higher costs of winning new customers to replace those lost—more need for
advertising and promotional discounts
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o Loss of revenue stream from dissatisfied customers who turn to alternatives
o Loss of potential customers who are turned off by negative word-of-mouth
Service Sabotage
Cycle of Mediocrity
 Most commonly found in large, bureaucratic organizations that are frustrating to deal
with
 Service delivery is oriented towards
o Standardized service
o Operational efficiencies
o Promotions with long service
o Rule-based training
o Narrow and repetitive jobs
o Successful performance measured by absence of mistakes
 Little incentive for customers to cooperate with organizations to achieve better service
 Complaints are often made to already unhappy employees
 Customers often stay because of lack of choice
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Cycle of Success
 Longer-term view of financial performance; firm seeks to prosper by investing in people

 Attractive pay and benefits attract better job applicants
 More focused recruitment, intensive training, and higher wages make it more likely that
employees are:
o Happier in their work
o Provide higher quality, customer-pleasing service
 Broadened job descriptions with empowerment practices enable frontline staff to control
quality, facilitate service recovery
 Regular customers more likely to remain loyal because they:
o Appreciate continuity in service relationships
o Have higher satisfaction due to higher quality
Human Resources Management – How to Get it Right?
Be the Preferred Employer

 Create a large pool: “Compete for Talent Market Share”
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 Select the right people:
o Different jobs are best filled by people with different skills, styles, or personalities
o Hire candidates that fit firm’s core values and culture
o Focus on recruiting naturally warm personalities for customer-contact jobs
Tools to Identify Best Candidates
 Employ multiple, structured interviews
o Use structured interviews built around job requirements
o Use more than one interviewer to reduce “similar to me” biases
 Observe behavior
o Hire based on observed behavior, not words you hear
o Best predictor of future behavior is past behavior
o Consider group hiring sessions where candidates are given group tasks
 Conduct personality tests
o Willingness to treat co-workers and customers with courtesy, consideration, and
tact
o Perceptiveness regarding customer needs
o Ability to communicate accurately and pleasantly
 Give applicants a realistic preview of the job
o Chance for candidates to “try on the job”
o Assess how candidates respond to job realities
o Allow candidates to self select themselves out of the job
o Manage new employees’ expectation of job
Train Service Employees

Service employees need to learn:
 Organizational culture, purpose, and strategy
o Promote core values, get emotional commitment to strategy
o Get managers to teach “why,” “what,” and “how” of job
 Interpersonal and technical skills
 Product/service knowledge
o Staff’s product knowledge is a key aspect of service quality
o Staff must explain product features and position products correctly
Is Empowerment Always Appropriate?

 Empowerment is most appropriate when:
o Firm’s business strategy is based on personalized, customized service, and
competitive differentiation
o Emphasis on extended relationships rather than short-term transactions
o Use of complex and non-routine technologies
o Service failures are non-routine
o Business environment is unpredictable
o Managers are comfortable letting employees work independently for benefit of
firm and customers
o Employees seek to deepen skills and have good interpersonal and group
process skills
Control vs. Involvement

 Empowerment systematically redistributes the following:
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o Information about operating results and measures of competitive performance
o Knowledge/skills that enable employees to understand and contribute to
organizational performance
o Power to influence work procedures and organizational direction (e.g., quality
circles, self-managing teams)
o Rewards based on organizational performance (e.g., bonuses, profit sharing,
stock ownership)
 The Control model concentrates these elements at the top of the organization whereas
the Involvement model pushes these features throughout the organization
Levels of Employee Involvement

 Suggestion involvement
o Employee makes recommendation through formalized program
 Job involvement
o Employees retrained, supervisors reoriented to facilitate performance
 High involvement
o Information is shared for participation in management decisions
o Employees skilled in teamwork, problem solving, etc.
o Profit sharing and stock ownership
Build High-Performance Service Delivery Teams

 The Power of Teamwork in Services
o Facilitate communication among team members and knowledge sharing
o Higher performance targets
o Pressure to perform is high
 Creating Successful Service Delivery Teams
o Emphasis on cooperation, listening, coaching, and encouraging one another
o Understand how to air differences, tell hard truths, ask tough questions
o Management needs to set up a structure to steer teams toward success
Motivate and Energize the Frontline

 Use full range of available rewards effectively, including:
 Job content
o People are motivated knowing they are doing a good job
 Feedback and recognition
o People derive a sense of identity and belonging to an organization from feedback
and recognition
 Goal accomplishment
o Specific, difficult but attainable, and accepted goals are strong motivators
Role of Labor Unions

 Challenge is to work jointly with unions, reduce conflicts, and create a service climate
 Labor unions and service excellence are sometimes seen
as incompatible, yet many of the world’s most successful service businesses are highly
unionized (e.g., Southwest Airlines)
 Management consultation and negotiation with union representatives are essential if
employees are to accept new ideas
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Service Leadership and Culture
 Charismatic/transformational leadership:
o Change frontline personnel’s values and goals to be consistent with the firm
o Motivate staff to perform at their best
 Service culture can be defined as:
o Shared perceptions of what is important
o Shared values and beliefs of why they are important
 A strong service culture focuses the entire organization on the frontline,
with the top management informed and actively involved
The Inverted Organizational Pyramid
Internal Marketing
 Necessary in large service businesses that operate in widely dispersed sites
 Effective internal marketing helps to:
o Ensure efficient and satisfactory service delivery
o Achieve harmonious and productive working relationships
o Build employee trust, respect, and loyalty
Week 12 Activity & Assessment

1. Why are service personnel so important for service firms?
2. There is a trend of service delivery moving from high-contact to low-contact. Are service
employees still important in low-contact services? Explain.
3. What is emotional labor? Explain the ways in which it may cause stress for employees in
specific jobs. Illustrate with suitable examples.
4. 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?
5. Describe the key components of the Service Talent Cycle.
Week 12 Assignment
An airline runs a recruiting advertisement for cabin crew that shows a picture of a young 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 you
think would be (a) attracted to apply for the job by that ad, and (b) discouraged from applying.
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Week 13: Managing Customer Relationship & Building Loyalty
the following: 1. Analyze customers’ generate profit
Managing Customer Relationship & overtime
Building Loyalty 2. Examine customer-firm relationship model
1. Customer Loyalty 3. Explain the concept of wheel of loyalty and
2. Understanding Customer-Firm construct the foundation and strategy of
Relationship loyalty
3. The Wheel of Loyalty 4. Apply the Customer Relationship
4. Building and Foundation for Loyalty Management Model to Transport Sector.
5. Strategies for Building Loyalty Bonds
6. Customer Relationship Management
The search for customer loyalty

Targeting, acquiring, and retaining the “right” customers is at the core of many successful
service firms. In this module, we emphasize the importance of focusing on desirable, loyal
customers within the chosen segments, and then taking the pains to build and maintain their
loyalty through well-conceived relationship marketing strategies. The objective is to build
relationships and to develop loyal customers who will contribute to a growing volume of
business with the firm in future.
Why Is Customer Loyalty So Important to a Firm’s Profitability?

“Few companies think of customers as annuities,” says Frederick Reichheld, author of The
Loyalty Effect, and a major researcher in this field.2 And yet, that is what a loyal customer can
mean to a firm — a consistent source of revenue over a period of many years. How much then
is a loyal customer worth in terms of profits? In a classic study, Reichheld and Sasser analyzed
the profit per customer in different service businesses, as categorized by the number of years
that a customer had been with the firm. They found that the longer customers remained with a
firm in each of these industries, the more profitable they became.
 Customers become more profitable the longer they remain with a firm:
 Increased purchases and/or account balances
o Customers/families purchase in greater quantities as they grow
 Reduced operating costs
o Fewer demands from suppliers and operating mistakes as customer becomes
experienced
 Referrals to other customers
o Positive word-of-mouth saves firm from investing money in sales and advertising
 Price premiums
o Long-term customers willing to pay regular price
o Willing to pay higher price during peak periods
Assessing the Value of a Loyal Customer

Must not assume that loyal customers are always more profitable than those making one-time
transactions
 Costs
o Not all types of services incur heavy promotional expenditures to attract a new
customer
o Walk-in traffic more important at times
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 Revenue
o Large customers may expect price discounts in return for loyalty
o Revenues don’t necessarily increase with time for all types of customers
 Profit impact of a customer varies according to stage of service in product life cycle
o e.g., referrals and negative word-of-mouth have a higher impact in early stages
 Tasks:
o determine costs and revenues for customers from different market segments at
different points in their customer lifecycles
o predict future profitability
Measuring Customer Equity: Lifetime Value of Each Customer

 Acquisition revenues less costs
o Revenues (application fee + initial purchase)
o Costs (marketing + credit check + account set up)
 Projected annual revenues and costs
o Revenues (annual fee + sales + service fees + value of referrals)
o Costs (account management + cost of sales + write-offs)
 Value of referrals
o Percentage of customers influenced by other customers
o Other marketing activities that drew the firm to an individual’s attention
 Net Present Value
o Sum anticipated annual values (future profits)
o Suitably discounted each year into the future
Gap Between Actual and Potential Customer Value

 What is current purchasing behavior of customers in each target segment?
 What would be impact on sales and profits if they:
o buy all services offered by the firm,
o use these to the exclusion of any purchases from competitors,
o pay full price?
 How long, on average, do customers remain with firm?
 What impact would it have if they remained customers for life?
Why are Customers Loyal?

 Customers stay loyal when we create value for them
 Value can be created for customers through:
o Confidence benefits
 Confidence in correct performance
 Ability to trust the provider
 Lower anxiety when purchasing
 Knowing what to expect and receive
o Social benefits
 Mutual recognition and friendship
o Special treatment
 Better price
 Discounts not available to most customers
 Extra services
 Higher priority when there is a wait
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Understanding the Customer-Firm Relationship
Transactional Marketing
 One transaction or a series of transactions does not necessarily constitute a relationship
 Requires mutual recognition and knowledge between the parties
Relationship Marketing
 Marketing that creates extended relationships with customers
 Database Marketing:
o Includes market transaction and information exchange
o Technology is used to
 Identify and build database of current and potential customers
 Deliver differentiated messages based on customers’ characteristics
 Track each relationship to monitor cost of acquiring that customer and
lifetime value of resulting purchases
 Interaction Marketing:
o Face-to-face interaction between customers and supplier’s representatives
o Value is added by people and social processes
o Increasing use of technologies make maintaining relationships with customers a
challenge
 e.g., self service technology, interactive website, call centers
 Network Marketing:
o Common in B2B context
o Companies commit resources to develop positions in a network
Relationships with Customers

Type of Relationship Between the Service Organization and its Customers
Nature of Service Delivery Membership Relationship No Formal Relationship
Continuous • Cable TV • Radio Station

• Insurance Policy • Police
• College enrollment • Lighthouse
Discrete Transactions • Subscriber phone • Pay Phone

• Theater subscription • Movie Theatre
• Warranty repair • Public Transport
The Wheel of Loyalty

Building customer loyalty is difficult. Just try and think of all the service firms you are loyal to.
Most people cannot think of more than perhaps a handful of firms they truly like (i.e., give a high
share-of-heart) and to whom they are committed to going back (i.e., give a high share-of-wallet).
This shows that although firms put enormous amounts of money and effort into loyalty
initiatives, they often are not successful in building true customer loyalty.
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Building a Foundation for Loyalty
 Target the right customer
o How do customer needs relate to operations elements?
o How can service personnel meet expectations of different customers?
o Can company match or exceed competing services that are directed at same
types of customers?
 Focus on number of customers served and value of each customer
o Some customers more profitable than others in the short term
o Others may have room for long-term growth
 “Right customers” are not always high spenders
o Can be a large group of people that no other supplier is serving well
Effective Tiering of Service the Customer Pyramid
The Customer Satisfaction Loyalty Relationship

The foundation for building true loyalty lies in customer satisfaction. Highly satisfied or even
delighted customers are more likely to consolidate their buying with one supplier, spread
positive word-of-mouth, and become loyal apostles of a firm. In contrast, dissatisfaction drives
customers away and is a key factor in switching behavior.
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The satisfaction–loyalty relationship can be divided into three main zones: defection,
indifference, and affection. The zone of defection occurs at low satisfaction levels. Customers
will switch if switching costs are high or there are no viable or convenient alternatives. Extremely
dissatisfied customers can turn into “terrorists” providing an abundance of negative word-of-
mouth for the service provider.28 The zone of indifference is found at moderate satisfaction
levels. Here, customers are willing to switch if they find a better alternative. Finally, the zone of
affection is located at very high satisfaction levels, where customers have such high attitudinal
loyalty that they do not look for alternative service providers. Customers who praise the firm in
public and refer others to the firm are described as “apostles”.
True loyalty is often defined as combining both behavioral and attitudinal loyalty, also referred to
as share-of-wallet and share-of-heart. Behavioral loyalty includes behaviors such as buying
again, a high share-of-wallet, providing positive word-of-mouth, and attitudinal loyalty refers to a
true liking and emotional attachment of the firm, service, and brand.
Strategies for Building Loyalty Bonds with Customers

 Deepening the relationship
o Bundling/Cross-selling services makes switching a major effort that customer is
unwilling to undertake
o Customers benefit from consolidating their purchasing of various services from
the same provider
 One-stop-shopping, potentially higher service levels
 Higher service tiers, etc.
 Reward Based Bonds: Incentives that offer rewards based on frequency of purchase,
value of purchase, or combination of both
o Financial bonds
 Discounts on purchases, loyalty program rewards (e.g., frequent flyer
miles), cash-back programs
o Non-financial rewards
 Priority to loyalty program members for waitlists and queues in call
centers; higher baggage allowances, priority upgrading
o Intangible rewards
 Special recognition and appreciation, tiered loyalty programs
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 Reward-based loyalty programs are relatively easy to copy and rarely provide a
sustained competitive advantage
 Social Bonds
o Based on personal relationships between providers and customers
o Harder to build and imitate and thus, better chance of retention in the long term
 Customization Bonds
o Customized service for loyal customers
 e.g., Starbucks
o Customers may find it hard to adjust to another service provider who cannot
customize service
 Structural Bonds
o Mostly seen in B2B settings
o Align customers' way of doing things with supplier’s own processes
 Joint investments in projects and sharing of information, processes and
equipment
 Can be seen in B2C environment too
 Airlines - SMS check-in, SMS e-mail alerts for flight arrival and departure
times
 Difficult for competition to draw customers away when they have integrated their way of
doing things with existing supplier
Strategies for Reducing Customer Defections

 Understand reasons for customer switching
 Churn Diagnostics
o Analysis of data warehouse information on churned and declining customers
o Exit interviews:
 Ask a short set of questions when customer cancels account; in-depth
interviews of former customers by third party agency
o Churn Alert Systems:
 Monitor activity in individual customer accounts to predict
impending customer switching
 Proactive detention efforts – send voucher, customer service
representative calls customer
What Drives Customers to Switch?

Many respondents decided to switch after a series of related incidents, such as a service failure
followed by an unsatisfactory service recovery. Other important factors that drive switching
include overall dissatisfaction with the current service provider and the perception that it has an
inferior performance on important attributes compared to the best alternative provider.
Progressive service firms regularly conduct what is called churn diagnostics to gain a better
understanding of why customers defect. This includes the analysis of data from churned and
declining customers, exit interviews (call center staff often have a short set of questions they
ask when a customer cancels an account), and in-depth interviews of former customers by a
third-party research agency, which typically yield a more detailed understanding of churn
drivers.
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Addressing Key Churn Drivers
 Delivery quality
 Minimize inconvenience and non-monetary costs
 Fair and transparent pricing
 Industry specific drivers
o Cellular phone industry: handset replacement a common reason for subscribers
discontinuing services – offer proactive handset replacement programs
 Reactive measures
o Save teams
 Implement Effective Complaint Handling and Service Recovery Procedures
 Increase Switching Costs
o Natural switching costs
 e.g., Changing primary bank account – many related services tied
to account
o Can be created by instituting contractual penalties for switching
 Must be careful not to be perceived as holding customers hostage
 High switching barriers and poor service quality likely to generate
negative attitudes and word of mouth
CRM: Customer Relationship Management

Objectives of CRM Systems
 Data collection
o Customer data such as contact details, demographics, purchasing history,
service preferences
 Data analysis
o Data captured is analyzed and categorized
o Used to tier customer base and tailor service delivery accordingly
 Sales force automation
o Sales leads, cross-sell and up-sell opportunities effectively identified and
processed
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o Track and facilitate entire sales cycle
 Marketing automation
o Mining of customer data enables the firm to target its market
o Goal to achieve one-to-one marketing and cost savings
o Results in increasing the ROI on its marketing expenditure
o Enables the assessment of the effectiveness of marketing campaigns through
the analysis of responses
 Call center automation
o Call center staff have customer information at their fingertips resulting in
improved service levels to customers.
o Caller ID and account numbers allow call centers to identify the customer tier the
caller belongs to, and to tailor the service accordingly.
Integrated Framework for CRM Strategy
1. Strategy development involves the assessment of business strategy, including

articulation of the company’s vision, industry trends, and competition. The business
strategy is typically the responsibility of top management. For CRM to have a positive
impact on a firm’s performance, the firm’s strategy is key. Therefore, business strategy
should guide the development of customer strategy, including the choice of target
segments, customer base tiering, the design of loyalty bonds, and churn management
as discussed in the Wheel of Loyalty.
2. Value creation translates business and customer strategies into specific value
propositions for customers and the firm. The value created for customers includes all the
benefits that are delivered through priority tiered services, loyalty rewards,
customization, and personalization. The value created for the firm includes reduced
customer acquisition and retention costs, increased share-of-wallet, and reduced
customer serving costs. Customers need to participate in CRM (e.g., through
volunteering their personal information) for them to benefit from the firm’s CRM strategy.
3. Multi-channel integration. Most service firms interact with their customers through a
multitude of channels. Thus, it has become a challenge to serve customers well across
these many potential interfaces, while offering a unified customer interface that delivers
customization and personalization. CRM’s channel integration addresses this challenge.
4. Information management. Service delivery across many channels depends on the firm’s
ability to collect customer information from all channels, integrate it with other relevant
information, and make the relevant information available to the frontline (or to the
customer in a self-service context) at the various touchpoints. The information
management process includes:
a. – The data repository that contains all the customer data.
b. IT systems including IT hardware and software.
c. Analytical tools such as data mining packages.
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d. Specific application packages such as campaign management analysis, credit
assessment, customer profiling, churn alert systems, and even customer fraud
detection and management.
e. Front-office applications that support activities that involve direct customer
contact, including sales force automation and call center management
applications.
f. Back-office applications that support internal customer-related processes,
including, logistics, procurement, and financial processing.
5. Performance assessment must address three critical questions:
a. – Is the CRM strategy creating value for its key stakeholders (i.e., customers,
employees, and shareholders)? needs to be integrated into an airline’s CRM
system
b. – Are the marketing objectives (ranging from customer acquisition, share-of-
wallet, retention to customer satisfaction) and service delivery performance
objectives (e.g., call center service standards such as call waiting time, abortion,
and firsttime resolution rates) being achieved?
c. – Is the CRM process itself performing up to expectations? Are the relevant
strategies being set, is customer and firm value being created, is the information
management process working effectively, and is integration across customer
service channels being achieved effectively? The performance assessment
process should drive the continuous improvement of the CRM strategy itself.
Common Failures in CRM Implementation

 Service firms often equate installing CRM systems with having a customer relationship
strategy
 Common reasons for failures
o Viewing CRM as a technology initiative
o Lack of customer focus
o Insufficient appreciation of customer lifetime value (CLV)
o Inadequate support from top management
o Failure to reengineer business processes
o Underestimating the challenges in date integration
Defining a CRM Strategy

 How should our value proposition change to increase customer loyalty?
 How much customization or one-to-one marketing and service delivery is appropriate
and profitable?
 What is incremental profit potential of increasing share-of-wallet with current customers?
How much does this vary by customer tier and/or segment?
 How much time and resources can we allocate to CRM right now?
 If we believe in customer relationship management, why haven’t we taken more steps in
that direction in the past?
 What can we do today to develop customer relationships without spending on
technology?
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1. Why is customer loyalty an important driver of profitability for service firms?
2. Why is targeting the “right customers” so important for successful customer relationship
management?
3. How do the various strategies described in the Wheel of Loyalty relate to one another?
4. What is tiering of services? Explain why it is used and what are its implications for firms
and their customers.
5. 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)?
Week 13 Assignment
Evaluate the strengths and weaknesses of two loyalty programs (1 airline and 1 logistics
company), each one from a different service industry. Assess how each program could be
improved further.
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the following: 1. Evaluate Customer responses to service
Complaint Handling and Service Recovery failure
1. Customer Complaining Behavior 2. Explain the concept of Service Recovery
2. Customer Responses to Effective Service System
Recovery 3. Make us of strategies in handling service
3. Principle of Effective Service Recovery complaints
Systems 4. Formulate and Differentiate various service
4. Service Guarantees guarantees that are applicable to transport
5. Discouraging Abusive and Opportunistic sector
Customer Behavior 5. Identify various types of Jaycustomers
Customer Complaining Behavior

The first law of service quality and productivity might be: Do it right the first time. However, we
can’t ignore the fact that failures continue to occur, sometimes for reasons outside of the
organization’s control. Many “moments of truth” in service encounters are vulnerable to
breakdowns. Distinctive service characteristics such as real-time performance, customer
involvement, and people as part of the product can greatly increase the chance of service
failures occurring. How well a firm handles complaints and resolves problems frequently
determines whether it builds customer loyalty or it should just watch its customers take their
business elsewhere.
Customer Response Categories to Service Failures

Chances are, you’re not always satisfied with some of the services you receive. How do you
respond to your dissatisfaction with these services? Do you complain informally to an employee,
ask to speak to the manager, or file a formal complaint? Or perhaps you just mutter darkly to
yourself, grumble to your friends and family, and choose an alternative supplier the next time
you need a similar type of service?
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If you are among those who do not complain to the firm about poor service, you are not alone.
Research around the globe has shown that most people will choose not to complain, especially
if they think it will do no good. This model suggests at least
three major courses of action:
1. Take some form of public action (including complaining to the firm or to a third party, such as
a customer advocacy group, a consumer affairs or regulatory agency, or even take the matter to
the civil or criminal courts).
2. Take some form of private action (including abandoning the supplier).
3. Take no action
Understanding Customer Responses to Service Failure

 Why do customers complain?
o Obtain compensation
o Vent their anger
o Help to improve the service
o Altruistic reasons
 What proportion of unhappy customers complain?
 Why don’t unhappy customers complain?
 Who is most likely to complain?
 Where do customers complain?
 What do customers expect once they have made a complaint?
o Procedural, interactional, and outcome justice
Three Dimensions of Perceived Fairness in Service Recovery
• Procedural justice refers to the policies and rules that any customer has to go through to
seek fairness. Customers expect the firm to take responsibility, which is the key to the start of a
fair procedure, followed by a convenient and responsive recovery process. That includes
flexibility of the system and consideration of customer inputs into the recovery process.
• Interactional justice involves the employees of the firm who provide the service recovery and
their behavior toward the customer. It is important to give an explanation for the failure and to
make an effort to resolve the problem. The recovery effort must also be seen as genuine,
honest, and polite.
• Outcome justice concerns the restitution or compensation that a customer receives as a
result of the losses and inconveniences caused by the service failure. This includes
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compensation for not only the failure, but also for the time, effort, and energy spent during the
process of service recovery.
Customer Responses to Effective Service Recovery
 Service Recovery
o Plays a crucial role in achieving customer satisfaction by testing a firm’s
commitment to satisfaction and service quality
o Impacts customer loyalty and future profitability
o Severity and “recoverability” of failure (e.g., spoiled wedding photos) may limit
firm’s ability to delight customer with recovery efforts
 Service Recovery Paradox: Customers who experience a service failure that is
satisfactorily resolved may be more likely to make future purchases than customers
without problems
o If second service failure occurs, the paradox disappears
 Best Strategy: Do it Right the First Time
Principles of Effective Service Recovery Systems

Recognizing that current customers are a valuable asset base, managers need to develop
effective procedures for service recovery following unsatisfactory experiences. Next, we discuss
three guiding principles for how to get it right: (1) make it easy for customers to give feedback,
(2) enable effective service recovery, and (3) establish appropriate compensation levels.
Components of an Effective Service Recovery
Strategies to Reduce Customer Complaint Barriers
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How to Enable Effective Service Recovery
 Methods:
o Be proactive—on the spot, before customers complain
o Plan recovery procedures
o Teach recovery skills to relevant personnel
o Empower personnel to use judgment and skills to develop recovery solutions
 Rules of Thumb for Adequate Compensation:
o What is positioning of our firm?
o How severe was the service failure?
o Who is the affected customer?
Service Guarantees
 Force firms to focus on what customers want
 Set clear standards
 Highlight cost of service failures
 Help firm identify and overcome fail points
 Reduce the risk of purchase decision and build long-term loyalty
How to Design Service Guarantees

Some guarantees are simple and unconditional. Others appear to have been written by lawyers
and contain many restrictions.
All three service guarantees — from L. L. Bean, MFA Group, and BBBK — are powerful,
unconditional, and instill trust. The other guarantee is weakened by the many conditions
attached to it. Hart argues that service guarantees should be designed to meet the following
criteria:
1. Unconditional — Whatever is promised in the guarantee must be totally
unconditional and there should not be any element of surprise for the customer.
2. Easy to understand and communicate — The customer is clearly aware of the
benefits that can be gained from the guarantee.
3. Meaningful to the customer in that the guarantee is on something important to the
customer and the compensation should be more than adequate to cover the service
failure.
4. Easy to invoke — It should be easy for the customer to invoke the guarantee.
5. Easy to collect on — If a service failure occurs, the customer should be able to
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easily collect on the guarantee without any problems.
6. Credible — The guarantee should be believable
Types of Service Guarantees

 Single attribute-specific guarantee
o Explicit minimum performance standard on one important attribute is guaranteed
(e.g., delivery by noon the next day)
 Multi-attribute-specific guarantee
o Explicit minimum performance standard on a few important attributes is
guaranteed
 Full-satisfaction guarantee
o All service aspects are guaranteed to be delivered to the full satisfaction of the
customer with no exceptions or conditions attached
 Combined guarantee
o All service aspects are guaranteed (as for full-satisfaction guarantee)
o Explicit minimum performance standards on important attributes are guaranteed
(as for multi-attribute-specific guarantee)
Is it Always Suitable to Introduce a Guarantee?

 It may not be appropriate to introduce guarantees when
 Companies have a strong reputation for service excellence
 Company does not have good quality level
 Quality cannot be controlled because of external forces
 Consumers see little financial, personal, or physiological risk associated with the
purchase
Discouraging Abusive and Opportunistic Customer Behavior

Addressing the Challenge of Jaycustomers
 Jaycustomer: A customer who behaves in a thoughtless or abusive fashion, causing
problems for the firm, its employees, and other customers
 More potential for mischief in service businesses, especially when many customers are
present
 No organization wants an ongoing relationship with an abusive customer
Seven Types of Jaycustomers

 The Cheat:
o Thinks of various ways to cheat the firm
 The Thief
o No intention of paying — sets out to steal or pay less
o Services lend themselves to clever schemes to avoid payment
 e.g., bypassing electricity meters, circumventing TV cables, riding free on
public transportation
o Firms must take preventive actions against thieves, but make allowances for
honest but absent-minded customers
 The Rulebreaker
o Rules guide customers safely through the service encounter
 Government agencies may impose rules for health and safety reasons
 Some rules protect other customers from dangerous behavior
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 e.g., ski patrollers issue warnings to reckless skiers by attaching
orange stickers on their lift tickets
o Ensure company rules are necessary, should not be too much or inflexible
 The Belligerent
o Shouts loudly, maybe mouthing insults, threats, and curses
 Service personnel are often abused even when they are not to be blamed
 Confrontations between customers and service employees can easily
escalate
o Firms should ensure employees have skills to deal with difficult situations
 Family Feuders
o People who get into arguments with other customers – often members of their
own family
 The Vandal
o Service vandalism includes pouring soft drinks into bank cash machines,
slashing bus seats, breaking hotel furniture
 Sources: bored and drunk young people, and unhappy customers who
feel mistreated by service providers take revenge
 Prevention is the best cure
 The Deadbeat
o Customers who fail to pay (as distinct from “thieves” who never intended to pay
in the first place)
 Preventive action is better than cure — e.g., insisting on prepayment;
asking for credit card number when order is taken
 Customers may have good reasons for not paying
 If the client's problems are only temporary ones, consider long-
term value of maintaining the relationship
Consequences of Dysfunctional Customer Behavior

 Employees:
o Mood or temper negatively affected
o Long-term psychological damage
o Staff morale will fall, affecting productivity
 Other Customers:
o Positive – rally to support an employee who is perceived to be abused
o Negative – Contagious bad behavior might escalate the situation
Dealing with Customer Fraud

 Treating all customers with suspicion is likely to alienate them
o TARP found only 1-2% of customer base engages in premeditated fraud— so
why treat remaining 98% of honest customers as potential crooks?
o But, records need to be kept to investigate repeat claimers
 Insights from research on guarantee cheating:
o Amount of a guarantee payout had no effect on customer cheating
o Repeat-purchase intention reduced cheating intent
o Customers are reluctant to cheat if service quality is high

1. How do customers typically respond to service failures?
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2. Why don’t more unhappy customers complain? What do customers expect the firm to do
once they have filed a complaint?
3. Why would a firm prefer its unhappy customers to come forward and complain?
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 if the paradox does hold in
a specific context?
5. How can a firm make it easy for dissatisfied customers to complain?
Week 14 Assignment
Design an 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.
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Week 15: Improving Service Quality and Productivity
the following: 1. Formulate Strategies for Service Quality
Improving Service Quality and and Productivity
Productivity 2. Explain the Gap Model of Service Quality
1. Integrating Service Quality and Productivity 3. Differentiate various measurement of
Strategies service quality.
2. The Gap Model 4.Identify the tools and importance of
3. Measuring and Improving Service Quality customer feedbacks
4. Learning from Customer Feedback 5. Evaluate the tools in addressing service
5. Hard Measures and Service Quality quality problems
6. Tools to Analyze and Address Service 6. Evaluate service quality measurement and
Quality Problems service productivity
7. Defining and Measuring Quality
8. Improving Service Productivity
Integrating Service Quality and Productivity Strategies

 Quality and productivity create value for customers and companies
 Quality focuses on the benefits created for customers; productivity addresses financial
costs incurred by firm
 Importance of productivity:
o Keep costs down to improve profits and/or reduce prices
o Enable firms to spend more on improving customer service and supplementary
services
o Secure firm’s future through increased spending on R&D
o May impact service experience
What is Service Quality?

 Transcendent:
o Quality = Excellence. Recognized only through experience
 Manufacturing-based:
o Quality is in conformance to the firm’s developed specifications
 User-based:
o Quality lies in the eyes of the beholder
 Value-based:
o Quality is a trade-off between price and value
Dimensions of Service Quality

 Tangibles
o Appearance of physical elements
 Reliability
o Dependable and accurate performance
 Responsiveness
o Promptness; helpfulness
 Assurance
o Competence, courtesy, credibility, security
 Empathy
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o Easy access, good communication, understanding of customer
The Gaps Model
Suggestions for Closing the Six Service Quality Gaps

• Gap 1: The knowledge gap is the difference between what senior management believes
customers expect and what customers actually need and expect.
• Gap 2: The policy gap is the difference between management’s understanding of customers’
expectations and the service standards they set for service delivery. We call it the policy gap
because the management has made a policy decision not to deliver what they think customers
expect. Reasons for setting standards below customer expectations are typically cost and
feasibility considerations.
• Gap 3: The delivery gap is the difference between specified service standards and the service
delivery teams’ actual performance on these standards.
• Gap 4: The communications gap is the difference between what the company communicates,
and what the customer understands and subsequently experiences. This gap is caused by two
sub gaps6. First, the internal communications gap is the difference between what the
company’s advertising and sales personnel think are the product’s features, performance, and
service quality level, and what the company is actually able to deliver. Second, the external
communications gap (also referred to as the overpromise gap) can be caused by advertising
and sales personnel being
assessed by the sales they generate. This can lead them to overpromise in order to
generate sales.
• Gap 5: The perceptions gap is the difference between what is actually delivered and what
customers feel they have received because they are unable to accurately judge service quality
accurately.
• Gap 6: The service quality gap is the difference between what customers expect to receive
and their perception of the service that is actually delivered.
In this model, Gaps 1, 5, and 6 represent external gaps between the customer and the
organization. Gaps 2, 3, and 4 are internal gaps occurring between various functions and
departments within the organization.
Measuring and Improving Service Quality

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 Soft Measures
o Not easily observed, must be collected by talking to customers, employees or
others
o Provide direction, guidance and feedback to employees on ways to achieve
customer satisfaction
o Can be quantified by measuring customer perceptions and beliefs
 e.g., SERVQUAL, surveys, and customer advisory panel
 Hard Measures
o Can be counted, timed, or measured through audits
o Typically operational processes or outcomes
o Standards often set with reference to percentage of occasions on which a
particular measure is achieved
Learning from Customer Feedback

Key Objectives of Customer Feedback Systems
 Assessment and benchmarking of service quality and performance
 Customer-driven learning and improvements
 Creating a customer-oriented service culture
Customer Feedback Collection Tools

Total Market, Annual, and Transactional Surveys. Total market surveys and annual surveys
typically measure satisfaction with all major customer service processes and products. The level
of measurement is usually high, with the objective of obtaining a global index or indicator of
overall service satisfaction for the entire firm. This could be based on indexed (e.g., using
various attribute ratings) and/or weighted data (e.g., weighted by core segments and/or
products).
Service Feedback Cards, Online and Mobile Messages. These powerful and inexpensive
tools involve providing customers the opportunity to use feedback cards, online forms, e-mail,
text messaging or apps to provide feedback, typically to a central customer feedback unit.
Mystery Shopping. Service businesses often use “mystery shoppers” to determine whether
frontline staff display desired behaviors. Banks, retailers, car rental firms, and hotels are among
the industries actively using mystery shoppers.
Unsolicited Customer Feedback. Customer complaints, compliments, and suggestions can be
transformed into a stream of information that can be used to help monitor quality, and highlight
improvements needed to the service design and delivery. Complaints and compliments are rich
sources of detailed feedback on what makes customers unhappy and what delights them.
Focus Group Discussions and Service Reviews. Both tools give specific insights on potential
service improvements and ideas. Typically, focus groups are organized by key customer
segments or user groups to drill down on the needs of these users. Service reviews are in-
depth, one-on-one interviews that are usually conducted once a year with a firm’s most valuable
customers.
Online Reviews and Discussions. User-generated content and data can increasingly provide
rich insights into quality perceptions of a firm and its competitors, and how these comparisons
vary over time at an increasingly granular attribute and temporal level. Sentiment analysis of
postings and automated text processing often allows real time insights into changes in
consumer perceptions. As one study showed, monitoring online sentiments has been shown to
be a leading indicator of offline brand tracking surveys and even stock market prices. Online
monitoring tools combined with big data analytics allow real time sensing of information,
location-based and usergenerated content will be analyzed increasingly using techniques such
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as text mining, image processing and classification, social geotagging, human annotations, and
geomapping.
Analysis, Reporting, and Dissemination of Customer Feedback

 Relevant feedback tools and collecting customer feedback should be channeled back to
the relevant parties to take action
 Three common types of performance reports:
o Monthly Service Performance Update
o Quarterly Service Performance Review
o Annual Service Performance Report
1. A monthly Service Performance Update provides process owners with timely feedback on
customer comments and operational process performance. Here, the verbatim feedback should
be passed on to the process managers who can in turn discuss them with their service delivery
teams.
2. A quarterly Service Performance Review provides process owners and branch or department
managers with trends in process performance and service quality.
3. An annual Service Performance Report gives top management a representative assessment
of the status and long-term trends relating to customer satisfaction with the firm’s services.
Hard Measures of Service Quality

 Service quality indexes
o Embrace key activities that have an impact on customers
 Control charts to monitor a single variable
o Offer a simple method of displaying performance over time against specific
quality standards
o Enable easy identification of trends
o Are only good if data on which they are based are accurate
 FedEx: One of the first service companies to understand the need for an index of service
quality that embraced all the key activities that affect customers
Tools to Analyze and Address Service Quality Problems

 Fishbone diagram
o Cause-and-effect diagram to identify potential causes of problems
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 Pareto Chart
o Separating the trivial from the important. Often, a majority of problems are
caused by a minority of causes (i.e., the 80/20 rule)
 Blueprinting
o Visualization of service delivery, identifying points where failures are most
likely to occur
o Depicts sequence of front-stage interactions experienced by customers plus
supporting backstage activities
o Used to identify potential fail points
o where failures are most likely to appear
o Shows how failures at one point can have a ripple effect
o Managers can identify points which need urgent attention
o Important first step in preventing service quality problems
Return On Quality (ROQ)

 Assess costs and benefits of quality initiatives
o ROQ approach is based on four assumptions:
 quality is an investment
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 quality efforts must be financially accountable
 it’s possible to spend too much on quality
 not all quality expenditures are equally valid
o Implication: Quality improvement efforts may benefit from being related to
productivity improvement programs
o To determine feasibility of new quality improvement efforts, determine costs and
then relate to anticipated customer response
 Determine optimal level of reliability
o Diminishing returns set in as improvements require higher investments
o Know when improving service reliability becomes uneconomical
Productivity in a Service Context

 Productivity: amount of output produced relative to amount of inputs
o Improvement in productivity means an improvement in the ratio of outputs to
inputs.
 Intangible nature of service makes it hard to measure productivity of service firms,
especially for information-based services
o Both input and output are hard to define
o Relatively simpler in possession-processing services, as compared to
information- and people-processing services
Service Efficiency, Productivity, and Effectiveness
 Efficiency: involves comparison to a standard, usually time-based (e.g., how long
employee takes to perform specific task)
o Focus on inputs rather than outcomes and may ignore variations in service
quality/value
 Productivity: involves financial valuation of outputs to inputs
o Consistent delivery of outcomes desired by customers should command higher
prices
 Effectiveness: degree to which firm meets goals
o Cannot divorce productivity from quality and customer satisfaction
Improving Service Productivity

Generic Productivity Improvement Strategies
 Typical strategies to improve service productivity:
o Careful control of costs
o Efforts to reduce wasteful use of materials or labor
o Matching productive capacity to average demand levels
o Replacing workers by automated machines or self-service technologies
o Teaching employees how to work more productively
o Broadening variety of tasks that service worker can perform
o Installing expert systems that allow paraprofessionals to take on work previously
performed by professionals
 Although improving productivity can be approached incrementally, major gains often
require redesigning entire processes
Customer-Driven Strategies to Improve Productivity

 Change timing of customer demand
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o By shifting demand away from peaks, managers can make better use of firm’s
productive assets and provide better service
 Involve customers more in production
o Get customers to self-serve
o Encourage customers to obtain information and buy from firm’s corporate
websites
 Ask customers to use third parties
o Delegate delivery of supplementary service elements to intermediary
organizations
Implications of Backstage and Front-Stage Changes for Customers

 Backstage changes may impact customers
o Keep track of proposed backstage changes, and prepare customers for them
 e.g., new printing peripherals may affect appearance of bank statements
 Front-stage productivity enhancements are especially visible in high contact services
o Some improvements only require passive acceptance, while others require
customers to change behavior
o Must consider impact on customers and address customer resistance to changes
A Note of Caution on Mere Cost Reduction Strategies

 Without new technology, firms improve service productivity by eliminating waste and
reducing labor costs
 Multitasking can reduce productivity
 Excessive pressure breeds discontent and frustration among customer contact
personnel
 It is often better to search for service process redesign opportunities that lead to
quantum leaps in improvements in productivity and service quality at the same time

1. Explain the relationships between service quality, productivity, and profitability.
2. Identify the gaps that can occur in service quality, and the steps that service marketers
can take to prevent them.
3. Why are both soft and hard measures of service quality needed?
4. What are the main objectives of an effective customer feedback system?
5. What are the key customer feedback collection tools? What are the strengths and
weaknesses of each of these tools?
Week 15 Assignment
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 steps should management take to improve quality?
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Week 16: Striving for Service Leadership
the following: 1. Explain the concept of service-profit chain
Striving for Service Leadership in transport sector
1. The Service-Profit Chain 2. Define the different functions of three-
2. Integrating Marketing, Operations, and areas of management
Human Resources 3. Differentiate four levels of service
3. Creating a Leading Service Organization performance
4. Human Leadership 4. Differentiate Leadership and Management
5. Identify leadership qualities for effective
organizational culture
The Service-Profit Chain
The philosophy of this book has been all about customer centricity and creating value for
customers as a long-term core strategy. This perspective permeates many of the key concepts
and models you have learned in this book, including the Service-Profit Chain, the Cycle of
Success, the Service Talent Cycle, the Wheel of Loyalty, and the Gaps Model. We therefore
feel it is fitting to end this book with a final piece of evidence that long-term perspective and
customer centricity will pay off financially.
Links in the Service-Profit Chain

1. Customer loyalty drives profitability and growth
2. Customer satisfaction drives customer loyalty
3. Value drives customer satisfaction
4. Quality and productivity drives value
5. Employee loyalty drives service quality and productivity
6. Employee satisfaction drives employee loyalty
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7. Internal quality drives employee satisfaction
8. Top management leadership underlies the chain’s success
Qualities Associated with Service Leaders

 Understands mutual dependency among marketing, operations, and human resource
functions of the firm
 Has a coherent vision of what it takes to succeed
 Strategies are defined and driven by a strong, effective leadership team
 Responsive to various stakeholders
 Value created through customer satisfaction
Integrating Marketing, Operations, and Human Resources

 Marketing Function
o Target “right” customers and build relationships
o Offer solutions that meet their needs
o Define quality package with competitive advantage
 Operations Function
o Create, deliver specified service to target customers
o Adhere to consistent quality standards
o Achieve high productivity to ensure acceptable costs
 Human Resource Function
o Recruit and retain the best employees for each job
o Train and motivate them to work well together
o Achieve both productivity & customer satisfaction
Reducing Interfunctional Conflict

 One challenge is to avoid creating “functional silos”
o High-value creating enterprises should be thinking in terms of activities, not
functions
 Top management needs to establish clear imperatives for each function that defines how
a specific function contributes to the overall mission
o Interfunctional transfers will provide a holistic perspective for individuals
o Establishing integrated project teams
o Having interfunctional service delivery teams
o Appointing formally designated individuals to integrate objectives
o Internal marketing and training
o Commitment of top management
Creating a Leading Service Organization

From Losers to Leaders: Four Levels of Service Performance
 Service Losers
o Bottom of the barrel
o Patronized because there is no viable alternative
o New technology introduced only under duress; uncaring workforce
 Service Nonentities
o Dominated by a traditional operations mindset
o Unsophisticated marketing strategies
o Consumers neither seek out nor avoid them
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 Service Professionals
o Clear market positioning strategy such that customers within target segment(s)
seek them out
o Proactive, investment-oriented approach to HRM
 Service Leaders
o The crème da la crème of their respective industries
o Names synonymous with outstanding service, customer delight
o Employees are empowered and committed
Four Hurdles for Moving up the Performance Ladder

 Cognitive Hurdles
o People cannot agree on causes of current problems and the need for change
 Resource Hurdles
o Firm is constrained by limited funds
 Motivation Hurdles
o Prevent rapid execution when employees are reluctant to change
 Political Hurdles
o Organized resistance forces in forms from powerful vested interests seeking to
protect their positions
Leading Change in a Service Organization Involves 8 Stages

1. Creating a sense of urgency to develop the impetus for change
2. Putting together a strong enough team to direct the process
3. Creating an appropriate vision of where the organization needs to go
4. Communicating that new vision broadly
5. Empowering employees to act on that vision
6. Producing sufficient short-term results to create credibility and counter cynicism
7. Building momentum and using that to tackle tougher change problems
8. Anchoring new behaviors in organizational culture
In Search of Human Leadership

 Love for the business
 See service quality as foundation for competing
 Recognize key role of employees
 Driven by a set of core values they pass on
 Make communication a priority
 Work with a team on decision-making
 Know when to change when necessary
 Walk the talk
Leadership, Culture, and Climate

 Leadership
o Leadership traits are needed of everyone in supervisory or managerial positions,
including those heading teams
 Organization Culture
o Represents the shared
 Perceptions/themes regarding what is important
 Values, beliefs, and assumptions
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 Shares understanding about what works and what doesn’t work
 Styles of working and relating to others
 Organizational Climate
o The tangible surface layer on top of the organization’s underlying culture that
requires radical rethinking of:
 HRM activities
 Operational procedures
 Firm’s reward and recognition policies

1. How are the four levels of service performance defined? Based on your own service
experiences, provide an example of a company for each category.
2. Is there evidence that improving customer satisfaction leads to improved financial
returns for shareholders?
Week 16 Assignment
Based on all you’ve learned from this module, what do you believe are the key drivers of
success for service organizations? Try and develop an integrative causal model that explains
the important drivers of success for a service organization.
Week 17: Final Examination

As a group you need to do a video presentation of your marketing plan of selected
transportation service company.
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References
Javier Alonso-Mora, Samitha Samaranayake, Alex Wallar, Emilio Frazzoli, and Daniela Rus
(2017). On-demand high-capacity ride-sharing via dynamic trip-vehicle assignment.
Proceedings of the National Academy of Sciences of the United State of America.
https://doi.org/10.1073/pnas.1611675114
Jochen Wirtz, Indranil Sen, and Sanjay Singh, “Customer Asset Management at DHL in Asia,” in
J. Wirtz and C. Lovelock, eds. Services Marketing in Asia —A Case Book (Singapore:
Prentice Hall, 2005), pp. 379–396.
Keller, K.L & Kotler, P. (2015). Marketing Management. Pearson Delhi India
Morton, C., Caulfield, B., Anable, J. (2016). Customer Perceptions of Quality of Service in Public
Transportation: Evidence for bus transit on Scotland. ScienceDirect Elsevier.
https://doi.org/10.1016/j.cstp.2016.03.002
Noveda, J.M., Matias, R.B., Marasigan, R. (2019). Operations Management with Total Quality
Management. House of Color Graphics and Services Inc., Philippines
R. Wayne Dean Mondy, Joseph J. Martocchio (2016). Human Resources Management Global
Edition. Pearson Delhi India.
Shilvia L. Br.SilalahiPutu W.Handayani, Qorib,Munajat (2017). Service Quality Analysis for
Online Transportation Services: Case Study of GO-JEK
Solomon, M.R. (2017). Consumer Behavior: Buying, Having, and Being. Pearson Delhi India
Wang, X., Persson, G., Huemer, L. (2016). Logistics Service Providers and Value Creation
Through Collaboration: A Case Study. Elsevier https://doi.org/10.1016/j.lrp.2014.09.004
Witz, J & Lovelock, C (2016) Sullivan Ford Auto World. World Scientific Publication Co., Inc.
USA
Witz, J & Lovelock, C (2016). Service Marketing: People, Technology, Strategy. World Scientific
Publication Co., Inc. USA
Witz, J & Lovelock, C (2016). Singapore Airlines: Managing Human Resources for Cost-
Effective Service Excellence. World Scientific Publication Co., Inc. USA
Witz, J & Lovelock, C (2016). Uber: Competing as Market Leader in the US versus Being a
Distant Second in China.
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Polytechnic University of the Philippines

College of Tourism, Hospitality, and Transportation Management

INSTRUCTIONAL MATERIAL FOR

Introduction to the Course content, Classroom Policies, 4

At the end of the course, the learner should be able to:

Week 2: Introduction to Service Economy & Consumer Behavior in a Service Context

B. Consumer Behavior in a Service

A. Why there’s a need to study services?

Services Dominate the Global Economy

 Most new jobs are generated by services

Powerful forces are transforming service markets

A key driver of successful economies is their ecosystem of advanced, competitive, and

What are Services?

The Historical View

Benefits without ownership

Service Products versus Customer Service and After-Sales Service

FOUR BROAD CATEGORIES OF SERVICES — A PROCESS PERSPECTIVE

Mental Stimulus Processing

Marketing Challenges Posed by Service

Difference, Implications, and Marketing-Related Tasks

Extended Marketing Mix for Services

Place and Time

Price and Other User Outlays

Promotion and Education

MARKETING MUST BE INTEGRATED WITH OTHER MANAGEMENT FUNCTIONS

IT is a key function as service processes are information-heavy — at almost every customer

B. Consumer Behavior in a Services Context

Customer Decision Making: The Three Stage Model of Service Consumption

Evaluating Alternatives – Service Attributes

How Product Attributes Affect Ease of Evaluation

Perceived Risks of Purchasing and Using Services

How Might Consumers Handle Perceived Risk?

Strategic Responses to Managing Customer Perceptions of Risk

Factors Influencing Customer Expectations of Service

Components of Customer Expectations

Service Encounter Stage

Service Encounters Range from High-Contact to Low-Contact

Distinctions between High-Contact and Low-Contact Services

The Servuction System

Theater as a Metaphor for Service Delivery

Theatrical Metaphor: an Integrative Perspective

Implications of Customer Participation in Service Delivery

Customer Satisfaction with Service Experience

Customer Delight: Going Beyond Satisfaction

Positioning Services in Competitive Markets

Focused Strategies for Services

Considerations for using Focused Strategies

Service Attributes and Levels

Developing Right Service Concept for a Specific Segment

Important vs. Determinant Attributes

Establishing Service Levels

Positioning Distinguishes a Brand from its Competitors

Four Principles of Positioning Strategy

Developing an Effective Positioning Strategy

Anticipating Competitive Response

Using Positioning Maps to Analyze Competitive Strategy

Positioning Maps Help Managers to Visualize Strategy

Changing Competitive Positioning

Planning and Creating Service Products

Designing Service Concept

Documenting Delivery Sequence Over Time

Integration of Core Product, Supplementary Elements, and Delivery Process

The Flower of Service