Chapter 8

Service Recovery

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Reliability is Critical in Service but

In all service contexts, service failure is inevitable Service failure: when service performance falls below a customers expectations to cause customer dissatisfaction. Service recovery: actions taken by a firm in response to service failure.

Customer Complaining Behavior

Only 1-5% complain to management or company headquarters 45% complain to a frontline employee 50% of those who encounter a problem, do not complain

Unhappy Customers Repurchase Intentions

Dissatisfied Consumers Behavior

The Retail Customer Dissatisfaction Study 2006 by the Verde Group found:
48% of respondents reported avoiding a store because of someone elses negative experience for those who encountered problems, 33% said they would definitely not or probably not return

The exponential power of storytelling:

as people tell the story, the negativity is embellished and grows

What Complainants Got:

A study at Arizona State University found that: 56% of complainants felt they got

NOTHING
(i.e., no satisfactory resolution of the complaint)

Customer Complaint Actions Following Service Failure

Service Recovery Paradox 1/2

A good recovery can turn angry, frustrated customers into loyal ones. ..can, in fact, create more goodwill than if things had gone smoothly in the first place. (Hart et al.) HOWEVER:
only a small percent of customers complain service recovery must be SUPERLATIVE
only with responsiveness, redress, and empathy/courtesy only with tangible rewards

even though service recovery can improve satisfaction, it has not been found to increase purchase intentions or perceptions of the brand service recovery is expensive

Service Recovery Paradox 2/2

The service recovery paradox is more likely to occur when:
the failure is not considered by the customer to be severe the customer has not experienced prior failures with the firm the cause of the failure is viewed as unstable by the customer the customer perceives that the company had little control over the cause of the failure

Conditions must be just right in order for the recovery paradox to be present!

Why Customers Switch Service Providers?

- High/Unfair/Deceptive Pricing - Inconvenience (of location, appointment, excessive wait) - Core service failure (service mistakes, billing errors, catastrophe) - Service encounter failure - Poor response to service failure - Competition (customer discovers better alternatives) - Ethical problems (cheat, hard sell, unsafe) - Involuntary switching (customer moved, provider closed)

Service Recovery Strategies

Eight Most Common Remedies Customers Seek with Serious Problems

1. Have the product repaired or service fixed 2. Be reimbursed for the hassle of having experienced a problem 3. Receive a free product or service in the future 4. Explanation by the firm as to what happened 5. Assurance that the problem will not be repeated 6. A thank you for the customers business 7. An apology from the firm 8. An opportunity for the customer to vent his or her frustrations to the firm

Service Guarantees
guarantee = an assurance of the fulfillment of a condition (Websters Dictionary) in a business context, it is a pledge or assurance that a product offered by a firm will perform as promised and, if not, then some form of reparation will be undertaken by the firm for tangible products, a guarantee is often done in the form of a warranty

services are often not guaranteed

cannot return the service service experience is intangible (so what do you guarantee?)

Characteristics of an Effective Service Guarantee

Unconditional
the guarantee should make its promise unconditionally no strings attached

Meaningful
the firm should guarantee elements of the service that are important to the customer the payout should cover fully the customers dissatisfaction

Easy to Understand and Communicate

customers need to understand what to expect employees need to understand what to do

Easy to Invoke and Collect

the firm should eliminate hoops or red tape in the way of accessing or collecting on the guarantee

Benefits of Service Guarantees

Force the company to focus on its customers. Set clear standards for the organization. Generate immediate and relevant feedback from customers. When invoked, they provide an instant opportunity to recover, thus satisfying the customer and helping retain loyalty. Information generated through the guarantees can be tracked and integrated into continuous improvement efforts. Employee morale and loyalty can be enhanced as a result of having a service guarantees in place. Service guarantees reduce customers sense of risk and build confidence in the organization. Force company to understand why it failed Build marketing muscle

Reasons companies might NOT want to offer a service guarantee:

existing service quality is poor guarantee does not fit the companys image too many uncontrollable external variables fears of cheating or abuse by customers costs of the guarantee outweigh the benefits customers perceive little risk in the service customers perceive little variability in service quality among competitors

Effective Service Guarantees

work better for companies who are already customer-focused can be BIG deals they put the company at risk in the eyes of the customer customers should be involved in the design of service guarantees the guarantee should be so stunning that it comes as a surprise a WOW!! factor its the icing on the cake, not the cake

Part 4

ALIGNING SERVICE DESIGN AND STANDARDS

Key Factors Leading to Provider Gap 2

(Service Design and Standards Gap)

Chapter

Service Innovation and Design

Challenges of Service Innovation and Design New Service Development Processes Types of Service Innovations Stages in Service Innovation and Development Service Blueprinting High-Performance Service Innovations
McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Risks of Relying on Words Alone to Describe Services

Oversimplification Incompleteness Subjectivity Biased Interpretation

Types of Service Innovations

major or radical innovations start-up businesses new services for the currently served market service line extensions service improvements style changes

New Service Development Process

- Business strategy development or review
- New service strategy development - Idea generation -Concept development & evaluation - Business analysis - Service development & testing - Market testing - Commercialization

New Service Strategy Matrix for Identifying Growth Opportunities (Fig. 9-2)
Markets
Offerings Existing Services New Services Current Customers Share Building Service Development New Customers Mkt. Development Diversification

Service Blueprinting

Service Blueprint Components

Customer Actions line of interaction Visible Contact Employee Actions line of visibility Invisible Contact Employee Actions line of internal interaction Support Processes

Building a Service Blueprint

Application of Service Blueprints

New Service Development
concept development market testing

Supporting a Zero Defects Culture

managing reliability identifying empowerment issues

Service Recovery Strategies

identifying service problems conducting root cause analysis modifying processes

Uses of Blueprints
Service Marketers
creating realistic customer expectations:
service system design promotion

Human Resources Management

empowering the human element:
job descriptions selection criteria appraisal systems

Operations Management
rendering the service as promised:
managing fail points training systems quality control

System Technology
providing necessary tools:
system specifications personal preference databases

Benefits of Service Blueprinting

Provides a platform for innovation. Recognizes roles and interdependencies among functions, people, and organizations. Facilitates both strategic and tactical innovations. Transfers and stores innovation and service knowledge. Designs moments of truth from the customers point of view. Suggests critical points for measurement and feedback in the service process. Clarifies competitive positioning. Provides understanding of the ideal customer experience.

Common Issues in Blueprinting

(Exhibit 9.4)

Clearly defining the process to be blueprinted Clearly defining the customer or customer segment that is the focus of the blueprint Who should draw the blueprint? Should the actual or desired service process be blueprinted? Should exceptions/recovery processes be incorporated? What is the appropriate level of detail? Whether to include time & cost on the blueprint

Tangible Cues or Indicators of Quality

Exterior and Interior Design Presentation of Food/Drinks Appearance of Staff Cleanliness of Tables, Utensils Cleanliness of Restrooms Location of Restaurant Appearance of Surrounding Customers

Possibility of Standardization
Hostess Greeting Pre-Prepared Sauces (Mild, Medium and Hot) Time Standards Food and Drink Quality Standards Bill Standards

Potential Fail Points and Fixability

Bar
train to make drinks; create ample seating space for wait area overflow

Food
revise food presentation; create quality control checks to ensure order is correct before delivering to customer

Staff
training; set number of times to check-in on customers; behavioral and attitude guidelines; dress code

Billing
standards for when to bring bill, how to deliver, when to pick-up, how quickly to process transaction; ensure one fortune cookie per customer

Cleanliness
standards for amount of time it takes to clear and clean tables; regular restroom checks

Customer-Defined Service Standards

Chapter

10

Factors Necessary for Appropriate Service Standards

Types of Customer-Defined Service Standards Development of Customer-Defined Service Standards
McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Service Standards
Standards are based on the most important customer expectations and reflect the customers view of these expectations.

CustomerDefined Standards CompanyDefined Standards

SOURCES Customer Expectations Customer Process Blueprint Customer Experience Observations SOURCES Productivity Implications Cost Implications Company Process Blueprint Company View of Quality

Hard vs. Soft Standard

HARD STANDARDS AND MEASURES
Things that can be counted, timed, or observed through audits (time, numbers of events)

SOFT STANDARDS AND MEASURES

Opinion-based measures that cannot be observed and must be collected by talking to customers (perceptions, beliefs)

What Customers Expect: Getting to Actionable Steps

Process for Setting Customer-Defined Standards

Hard (Mostly) Service Standards at Ford

Appointment available within one day of customers requested service day Write-up begins within four minutes Service needs are courteously identified, accurately recorded on repair order and verified with customer Service status provided within one minute of inquiry Vehicle serviced right on first visit Vehicle ready at agreed-upon time Thorough explanation given of work done, coverage and charges

Soft Standards at Toyota in Japan (1 of 2)

Standards for salespeople patterned after samurai behaviors:
assume the samurai warriors waiting position by leaning five to ten degrees forward when a customer is looking at a car stand with left hand over right, fingers together and thumbs interlocked, as the samurais did to show they were not about to draw their swords display the Lexus Face, a closedmouth smile intended to put customers at ease

Soft Standards at Toyota in Japan

(2 of 2)

Standards for salespeople patterned after samurai behaviors:

when serving coffee or tea, kneel on the floor with both feet together and both knees on the ground bow more deeply to a customer who has purchased a car than a casual window shopper stand about two arms lengths from customers when they are looking at a car and come in closer when closing a deal point with all five fingers to a car doors handle, right hand followed by left, then gracefully open the door with both hands

Physical Evidence and the Servicescape

Chapter

11

Physical Evidence Types of Servicescapes Strategic Roles of the Servicescape Framework for Understanding Servicescape Effects on Behavior Guidelines for Physical Evidence Strategy

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Elements of Physical Evidence

Facility exterior: design, signage, parking, landscape Facility interior: design, equipment, layout,
atmospherics, ...

Other tangibles: business cards, stationery, billing

statements, reports, web pages,

Roles of the Servicescape

Package
conveys expectations influences perceptions

Facilitator
facilitates the flow of the service delivery process
provides information (how am I to act?) facilitates the ordering process (how does this work?) facilitates service delivery

Socializer
facilitates interaction between:
customers and employees customers and fellow customers

Differentiator
sets provider apart from competition in the mind of the consumer

Guidelines for Physical Evidence Strategy

Recognize the strategic impact of physical evidence. Blueprint the physical evidence of service. Clarify strategic roles of the servicescape. Assess and identify physical evidence opportunities. Be prepared to update and modernize the evidence.

Part 5

DELIVERING AND PERFORMING SERVICE

Key Causes of Provider Gap 3

Employees Roles in Service Delivery

Chapter

12

Service Culture The Critical Importance of Service Employees Boundary-Spanning Roles Strategies for Delivering Service Quality Through People Customer-Oriented Service Delivery

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Service Culture
A culture where an appreciation for good service exists, and where giving good service to internal as well as ultimate, external customers, is considered a natural way of life and one of the most important norms by everyone in the organization. - Christian Grnroos (1990)

The Critical Importance of Service Employees

Every encounter counts Employees are the service. Every employee can make a difference They are the organization in the customers eyes. They are the brand. They are marketers. Through their actions, all employees shape the brand
the services marketing mix (people) the service-profit chain the services triangle

Their importance is evident in:

The Services Marketing Triangle

Aligning the Triangle

Organizations that seek to provide consistently high levels of service excellence will continuously work to align the three sides of the triangle. Aligning the sides of the triangle is an ongoing process.

Making Promises
Understanding customer needs Managing expectations Traditional marketing communications Sales and promotion Advertising Internet and web site communication

Keeping Promises
Service delivery
Reliability, responsiveness, empathy, assurance, tangibles, recovery, flexibility

Face-to-face, telephone & online interactions The Customer Experience Customer interactions with sub-contractors or business partners The moment of truth

Enabling Promise Keeping

Hiring the right people Training and developing people to deliver service Employee empowerment Support systems Appropriate technology and equipment Rewards and incentives

Ways to Use the Services Marketing Triangle

Overall Strategic Assessment Specific Service Implementation

How is the service organization doing on all three sides of the triangle? Where are the weaknesses? What are the strengths?

What is being promoted and by whom? How will it be delivered and by whom? Are the supporting systems in place to deliver the promised service?

Service Employees
Who are they?
boundary spanners

What are these jobs like?

emotional labor many sources of potential conflict
person/role organization/client interclient

quality/productivity tradeoffs

Boundary Spanners Interact with Both Internal and External Constituents

Human Resource Strategies for Delivering Service Quality through People

How Employee Satisfaction Drives Productivity and Customer Satisfaction at Wegmans

The grocery chain paid over $54 million for college scholarships for 17,500+ employees over the past 20 years.
Wegmans did not hesitate to send cheese manager Terri Zodarecky on a ten-day sojourn to cheese makers in Europe. The firm gives employees flexibility to deliver great customer satisfaction.

How can this be justified?

How does this affect performance?

Wegmans labor costs are 15-17% of sales, compared with 12% for industry. But annual turnover is just 6% (19% for similar grocery chains). 20% of employees have 10+ years of service. This in an industry where turnover costs can exceed annual profits by more than 40%. Wegmans operating margins are 7.5%, double what the big grocers earn. Sales per square foot are 50% higher than industry average.

Empowerment
Benefits:
quicker responses to customer needs during service delivery quicker responses to dissatisfied customers during service recovery employees feel better about their jobs and themselves employees tend to interact with warmth/enthusiasm empowered employees are a great source of ideas great word-of-mouth advertising from customers

Drawbacks:
potentially greater dollar investment in selection and training higher labor costs potentially slower or inconsistent service delivery may violate customers perceptions of fair play employees may give away the store or make bad decisions

Traditional Organizational Chart

Manager

Supervisor

Supervisor

Front-line Employee

Front-line Employee

Front-line Employee

Front-line Employee

Front-line Employee

Front-line Employee

Front-line Employee

Front-line Employee

Customers

Customer-Focused Organizational Chart

Customers Roles in Service Delivery

Chapter

13

The Importance of Customers in Service Cocreation and Delivery Customers Roles Self-Service TechnologiesThe Ultimate in Customer Participation Strategies for Enhancing Customer Participation
McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

How Customers Widen the Service Performance Gap

Lack of understanding of their roles Not being willing or able to perform their roles

No rewards for good performance

Interfering with other customers Incompatible market segments

Importance of Other (Fellow) Customers in Service Delivery

Other customers can detract from satisfaction:
disruptive behaviors overly demanding behaviors excessive crowding incompatible needs

Other customers can enhance satisfaction:

mere presence socialization/friendships roles: assistants, teachers, supporters, mentors

Customer Roles in Service Delivery

Productive Resources

Contributors to Service Quality and Satisfaction

Competitors

Customers as Productive Resources

customers can be thought of as partial employees
contributing effort, time, or other resources to the production process

customer inputs can affect organizations productivity key issue:

should customers roles be expanded? reduced?

Customers as Contributors to Service Quality and Satisfaction

Customers can contribute to:
their own satisfaction with the service
by performing their role effectively by working with the service provider

the quality of the service they receive

by asking questions by taking responsibility for their own satisfaction by complaining when there is a service failure

Customers as Competitors
customers may compete with the service provider internal exchange vs. external exchange internal/external decision often based on:
expertise capacity resources capacity time capacity economic rewards psychic rewards trust control

Strategies for Enhancing customer Participation

Define customers jobs
helping oneself helping others promoting the company

Recruit, educate, and reward customers

recruit the right customers educate and train customers to perform effectively reward customers for their contributions avoid negative outcomes of inappropriate customer participation

Manage the customer mix

Chapter Delivering Service Through 14 Intermediaries & Electronic Channels

Service Distribution Direct or Company-Owned Channels Franchising Agents and Brokers Electronic Channels Common Issues Involving Intermediaries Strategies for Effective Service Delivery Through Intermediaries
Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

Service Provider Participants

Service principal (originator)
creates the service concept
(like a manufacturer)

Service deliverer (intermediary)

entity that interacts with the customer in the execution of the service
(like a distributor/wholesaler)

Services Intermediaries
Franchisees
service outlets licensed by a principal to deliver a unique service concept it has created
e.g., Jiffy Lube, Blockbuster, Holiday Inns, McDonalds

Agents and Brokers

representatives who distribute and sell the services of one or more service suppliers
e.g., travel agents, independent insurance agents

Electronic Channels
all forms of service provision through electronic means
e.g., ATMs, university video courses, Tax Prep software

Benefits and Challenges for Franchisors of Service

Benefits Leveraged business format for greater expansion & revenues Consistency in outlets Knowledge of local markets Shared financial risk & more working capital Challenges Difficult to maintain & motivate franchisees Highly publicized disputes & conflicts Intermediaries control customer relationship

Benefits and Challenges for Franchisees of Service

Benefits An established business format International, national, or regional brand marketing Minimized risk of starting a business Poorly capitalized or managed franchisor Challenges Encroachment of other outlets into franchised territories Disappointing profits & revenues Lack of perceived control over operations High fees

Benefits and Challenges in Distributing Services through Agents and Brokers

Benefits Reduced selling & distribution costs Intermediarys possession of skills & knowledge Wide representation Knowledge of local markets Customer choice

Challenges Loss of control over pricing Representation of multiple service principals

Benefits and Challenges in Electronic Distribution of Services

Benefits Consistent delivery of standardized services Customer convenience Wide distribution Customer choice & ability to customize Quick customer feedback Challenges Price competition Inability to customize Lack of consistence due to customer involvement Changes in customer behavior Security concerns Competition from widening geographics

Common Issues Involving Intermediaries

conflict over objectives and performance difficulty controlling quality and consistency across outlets tension between empowerment and control channel ambiguity

Strategies for Effective Service Delivery Through Intermediaries

Control Strategies:
Measurement Review

Empowerment Strategies:
Help the intermediary develop customeroriented service processes Provide needed support systems Develop intermediaries to deliver service quality Change to a cooperative management structure

Partnering Strategies:
Alignment of goals Consultation and cooperation

Chapter

15

Managing Demand and Capacity

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Causes of Failure to Deliver Service

Inventory and demand dont match Capacity is often fixed Service characteristics: perishability,
simultaneous production and consumption

Demand often cant be controlled or predicted Result: Lost business or wasted capacity Cant ever be regained or resold

Results of Mismatch
Demand is either above or below capacity Excess demand turn customers away Demand above optimal capacity resources are stretched in the short term Excess capacity - resources underutilized, often sends the wrong message

Variations in Demand Relative to Capacity

Source: C. Lovelock, Getting the Most Out of Your Productive Capacity, in Product Plus (Boston: McGraw Hill, 1994), chap. 16, p. 241.

Understanding Capacity Constraints and Demand Patterns

Capacity Constraints
Time (accounting, medical,
consulting)

Demand Patterns
Predictable cycles Random demand fluctuations Demand patterns by market segment

Labor (law firm, post office) Equipment (telecom,

utilities, delivery service)

Facilities (hotels, hospitals,

schools)

Optimal versus maximum use of capacity

Demand versus Supply

Source: C. H. Lovelock, Classifying Services to Gain Strategic Marketing Insights, Journal of Marketing 47, (Summer 1983): 17.

Strategies for Shifting Demand to Match Capacity

Demand Too High

Shift Demand

Demand Too Low

Use signage to communicate busy days and times. Offer incentives to customers for usage during non-peak times. Take care of loyal or regular customers first. Advertise peak usage times and benefits of nonpeak use. Charge full price -- no discounts.

Use advertising to increase business from current market segments. Modify service offering to appeal to new market segments. Offer discounts or price reductions. Modify hours of operation. Bring the service to the customer.

More Strategies for Adjusting Capacity to Match Demand

Challenges and Risks in Using Yield Management

Yield Management: Maximizing profit from available capacity by
manipulating pricing to gain business at different times, and from differing market segments. Yield = Actual Revenue (capacity used x average price)/Potential Revenue (total capacity x maximum price)

Revenue Management: Maximizing profits from the sale of all goods

and services offered by the service firm Problems: Customer alienation Employee morale problems Incompatible incentive and reward systems Lack of employee training Inappropriate organization of the yield management function

Waiting Line Strategies

Employ operational logic
modify operations adjust queuing system

Establish a reservation process Differentiate waiting customers

importance of the customer urgency of the job duration of the service transaction payment of a premium price

Make waiting fun, or at least tolerable

The Psychology of Waiting Lines

Unoccupied time feels longer than occupied time. Preprocess waits feel longer than in-process waits. Anxiety makes waits seem longer. Uncertain waits seem longer than known, finite waits. Unexplained waits seem longer than explained waits. Unfair waits feel longer than equitable waits. The more valuable the service, the longer the customer will wait. Solo waits feel longer than group waits.

Part 6

MANAGING SERVICE PROMISES

Pricing of Services

Chapter

17

Ways in which Service Prices are Different for Consumers Approaches to Pricing Services
Pricing Strategies that Link to the Four Value Definitions

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Some Issues in Service Prices

Customers often lack reference prices for service Service variability limits knowledge Providers are unwilling to estimate prices Individual customer needs vary Collection of price information by customers is difficult Prices are not visible

The Role of Non-monetary Price

Time costs Search costs Convenience costs Psychological costs

Three Basic Marketing Price Structures and Challenges for Services

Four Customer Definitions of Value

Pricing Strategies When the Customer Defines Value as Low Price

Pricing Strategies When the Customer Defines Value as Everything Wanted in a Service

Pricing Strategies When the Customer Defines Value as Quality for the Price Paid

Pricing Strategies When the Customer Defines Value as All that Is Received for All that Is Given

Bid Pricing
Competition-based pricing where one bidder has little or no knowledge of other bidders price. An expected profit model is used:
Bid Price Cost Profit (P) p of success Expected Profit (P*p)

$1,000 $1,100 $1,200 $1,300 $1,400 $1,500

$700 $700 $700 $700 $700 $700

$300 $400 $500 $600 $700 $800

.9 .8 .65 .55 .4 .3

$270 $320 $325 $330 $280 $240

MKT 356 Services Marketing

End of Slides, Winter 2010