Chapter 1
Introduction to
Services Marketing
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1- 1
How Important is the Service Sector in
Our Economy?
 In most countries, services add more economic value than
agriculture, raw materials and manufacturing combined
 In developed economies, employment is dominated by
service jobs and most new job growth comes from
services
 Jobs range from high-paid professionals and technicians
to minimum-wage positions
 Service organizations can be any size—from huge global
corporations to local small businesses
 Most activities by government agencies and nonprofit
organizations involve services
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Services dominate the United States Economy:
GDP by Industry, 2001 (Fig. 1.1)
Agriculture, Forestry,
Mining, Construction 8%
Finance, Insurance,
Real Estate
20%
Manufacturing 14%
Government
(mostly services)
13%
Wholesale and
Retail Trade
16%
Other Services 11%
SERVICES
Business Health
Services
6%
5%
Transport, Utilities,
Communications
8%
Source: Bureau of Economic Analysis, November 2002
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1- 3
Changing Structure of Employment
as Economic Development Evolves (Fig. 1.2)
Agriculture
Services
Industry
Time, per Capita Income
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
Source: IMF, 1997
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Some Service Industries Profiled by NAICS but
Not Identified by SIC Codes
 Casino Hotels
 HMO Medical Centers
 Continuing Care Retirement
Communities
 Industrial Design Services
 Diagnostic Imaging Centers
 Investment Banking and
Securities Dealing
 Diet and Weight Reducing
Centers
 Management Consulting
Services
 Environmental Consulting
 Satellite Telecommunications
 Gold Courses and Country
Clubs
 Telemarketing Bureaus
 Hazardous Waste Collection
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
 Temporary Help Services
Services Marketing 5/E
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Internal Services
 Service elements within an organization that facilitate
creation of--or add value to--its final output
 Includes:
 accounting and payroll administration
 recruitment and training
 legal services
 transportation
 catering and food services
 cleaning and landscaping
 Increasingly, these services are being outsourced
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Major Trends in Service Sector (Fig. 1.3)



Government Policies (e.g., regulations, trade
agreements)
Social Changes (e.g., affluence, lack of time, desire for
experiences)
Business Trends








Manufacturers offer service
Growth of chains and franchising
Pressures to improve productivity and quality
More strategic alliances
Marketing emphasis by nonprofits
Innovative hiring practices
Advances in IT (e.g., speed, digitization, wireless,
Internet)
Internationalization (travel, transnational companies)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Some Impacts of Technological Change
 Radically alter ways in which service firms do business:
 with customers (new services, more convenience)
 behind the scenes (reengineering, new value chains)
 Create relational databases about customer needs and
behavior, mine databanks for insights
 Leverage employee capabilities and enhance mobility
 Centralize customer service—faster and more responsive
 Develop national/global delivery systems
 Create new, Internet-based business models
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Marketing Relevant
Differences Between
Goods and Services
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Defining the Essence of a Service
 An act or performance offered by one party to another
 An economic activity that does not result in ownership
 A process that creates benefits by facilitating a desired
change in:
 customers themselves
 physical possessions
 intangible assets
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 10
Distinguishing Characteristics of Services
(Table 1.1)
 Customers do not obtain ownership of services
 Service products are ephemeral and cannot be inventoried
 Intangible elements dominate value creation
 Greater involvement of customers in production process
 Other people may form part of product experience
 Greater variability in operational inputs and outputs
 Many services are difficult for customers to evaluate
 Time factor is more important--speed may be key
 Delivery systems include electronic and physical channels
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Marketing Implications - 1
 No ownership
 Customers obtain temporary rentals, hiring of personnel, or access
to facilities and systems
 Pricing often based on time
 Customer choice criteria may differ for renting vs. purchase--may
include convenience, quality of personnel
 Can’t own people (no slavery!) but can hire expertise and labor
 Services cannot be inventoried after production
 Service performances are ephemeral—transitory, perishable
Exception: some information-based output can be recorded
in electronic/printed form and re-used many times
 Balancing demand and supply may be vital marketing strategy
 Key to profits: target right segments at right times at right price
 Need to determine whether benefits are perishable or durable
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Marketing Implications - 2
 Customers may be involved in production process
 Customer involvement includes self-service and cooperation with
service personnel
 Think of customers in these settings as “partial employees”
 Customer behavior and competence can help or hinder productivity,
so marketers need to educate/train customers
 Changing the delivery process may affect role played by customers
 Design service facilities, equipment, and systems with customers in
mind: user-friendly, convenient locations/schedules
 Intangible elements dominate value creation
 Understand value added by labor and expertise of personnel
 Effective HR management is critical to achieve service quality
 Make highly intangible services more “concrete” by creating and
communicating physical images or metaphors and tangible clues
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Value Added by Tangible vs Intangible
Elements in Goods and Services (Fig. 1.4)
Hi
Salt
Soft drinks
CD Player
Golf clubs
New car
Tailored clothing
Furniture rental
Lo
Fast food restaurant
Plumbing repair
Office cleaning
Health club
Airline flight
Retail banking
Insurance
Weather forecast
Intangible Elements
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
Hi
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Marketing Implications - 3
 Other people are often part of the service product
 Achieve competitive edge through perceived quality of employees
 Ensure job specs and standards for frontline service personnel reflect
both marketing and operational criteria
 Recognize that appearance and behavior of other customers can
influence service experience positively or negatively
 Avoid inappropriate mix of customer segments at same time
 Manage customer behavior (the customer is not always right!)
 Greater variability in operational inputs and outputs
 Must work hard to control quality and achieve consistency
 Seek to improve productivity through standardization, and by training
both employees and customers
 Need to have effective service recovery policies in place because it is
more difficult to shield customers from service failures
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 15
Marketing Implications - 4
 Often difficult for customers to evaluate services
 Educate customers to help them make good choices, avoid risk
 Tell customers what to expect, what to look for
 Create trusted brand with reputation for considerate, ethical behavior
 Encourage positive word-of-mouth from satisfied customers
 Time factor assumes great importance
 Offer convenience of extended service hours up to 24/7
 Understand customers’ time constraints and priorities
 Minimize waiting time
 Look for ways to compete on speed
 Distribution channels take different forms
 Tangible activities must be delivered through physical channels
 Use electronic channels to deliver intangible, information-based
elements instantly and expand geographic reach
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Important Differences
Exist among Services
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Four Categories of Services
Employing Different Underlying Processes (Fig. 1.5)
What is the
Nature of the
Service Act?
TANGIBLE
ACTS
INTANGIBLE
ACTS
Who or What is the Direct Recipient of the Service?
DIRECTED AT PEOPLE
DIRECTED AT POSSESSIONS
People Processing
Possession Processing
e.g., airlines, hospitals,
haircutting, restaurants
hotels, fitness centers
e.g., freight, repair,
cleaning, landscaping,
retailing, recycling
Mental Stimulus
Processing
e.g., broadcasting, consulting,
education, psychotherapy
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
Information Processing
(directed at intangible assets)
e.g., accounting, banking,
insurance, legal, research
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Implications of Service Processes
(1) Seeking Efficiency May Lower Satisfaction
Processes determine how services are created/delivered—
process change may affect customer satisfaction
 Imposing new processes on customers, especially
replacing people by machines, may cause dissatisfaction
 New processes that improve efficiency by cutting costs
may hurt service quality
 Best new processes deliver benefits desired by customers
 Faster
 Simpler
 More conveniently
 Customers may need to be educated about new
procedures and how to use them
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 19
Implications of Service Processes:
(2) Designing the Service Factory
People-processing services
require customers to visit the
“service factory,” so:
 Think of facility as a “stage” for service
performance
 Design process around customer
 Choose convenient location
 Create pleasing appearance, avoid
unwanted noises, smells
 Consider customer needs--info,
parking, food, toilets, etc.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 20
Implications of Service Processes:
(3) Evaluating Alternative Delivery Channels
For possession-processing, mental-stimulus processing, or
information processing services, alternatives include:
1. Customers come to the service factory
2. Customers come to a retail office
3. Service employees visit customer’s home or workplace
4. Business is conducted at arm’s length through
- physical channels (e.g., mail, courier service)
- electronic channels (e.g., phone, fax, email, Web site)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Implications of Service Processes:
(4) Balancing Demand and Capacity
When capacity to serve is
limited and demand varies
widely, problems arise because
service output can’t be stored:
1. If demand is high and exceeds
supply, business may be lost
2. If demand is low, productive
capacity is wasted
Potential solutions:
- Manage demand
- Manage capacity
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 22
Implications of Service Processes:
(5) Applying Information Technology
All services can benefit from IT,
but mental-stimulus processing
and information-processing
services have the most to gain:
 Remote delivery of informationbased services “anywhere,
anytime”
 New service features through
websites, email, and internet
(e.g., information, reservations)
 More opportunities for self-service
 New types of services
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 23
Implications of Service Processes:
(6) Including People as Part of the Product
Involvement in service
delivery often entails
contact with other people
 Managers should be
concerned about employees’
appearance, social skills,
technical skills
 Other customers may enhance
or detract from service
experience--need to manage
customer behavior
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 24
The Services
Marketing Mix
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Elements of The Services Marketing Mix:
“7Ps” vs. the Traditional “4Ps”
Rethinking the original 4Ps
 Product elements
 Place and time
 Promotion and education
 Price and other user outlays
Adding Three New Elements
 Physical environment
 Process
 People
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 26
The 7Ps:
(1) Product Elements
All Aspects of Service Performance that Create Value
 Core product features—both tangible and intangible
elements
 Bundle of supplementary service elements
 Performance levels relative to competition
 Benefits delivered to customers (customers don’t buy a
hotel room, they buy a good night’s sleep)
 Guarantees
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 27
The 7Ps:
(2) Place and Time
Delivery Decisions: Where, When, and How
 Geographic locations served
 Service schedules
 Physical channels
 Electronic channels
 Customer control and convenience
 Channel partners/intermediaries
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 28
The 7Ps:
(3) Promotion and Education
Informing, Educating, Persuading, and Reminding Customers
 Marketing communication tools
 media elements (print, broadcast, outdoor, retail, Internet, etc.)
 personal selling, customer service
 sales promotion
 publicity/PR
 Imagery and recognition
 branding
 corporate design
 Content
 information, advice
 persuasive messages
 customer education/training
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 29
The 7Ps:
(4) Price and Other User Outlays
Marketers Must Recognize that Customer Outlays Involve
More than the Price Paid to Seller
Traditional Pricing Tasks
 Selling price, discounts, premiums
 Margins for intermediaries (if any)
 Credit terms
Identify and Minimize Other Costs Incurred by Users
 Additional monetary costs associated with service usage (e.g., travel to



service location, parking, phone, babysitting,etc.)
Time expenditures, especially waiting
Unwanted mental and physical effort
Negative sensory experiences
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 30
The 7Ps:
(5) Physical Environment
Designing the Servicescape and providing tangible
evidence of service performances
 Create and maintaining physical appearances
 buildings/landscaping
 interior design/furnishings
 vehicles/equipment
 staff grooming/clothing
 sounds and smells
 other tangibles
 Select tangible metaphors for use in marketing
communications
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 31
7Ps:
(6) Process
Method and Sequence in Service Creation and Delivery
 Design of activity flows
 Number and sequence of actions for customers
 Providers of value chain components
 Nature of customer involvement
 Role of contact personnel
 Role of technology, degree of automation
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 32
The 7Ps:
(7) People
Managing the Human Side of the Enterprise
 The right customer-contact employees performing tasks well
 job design
 recruiting/selection
 training
 motivation
 evaluation/rewards
 empowerment/teamwork
 The right
customers for the firm’s mission
 fit well with product/processes/corporate goals
 appreciate benefits and value offered
 possess (or can be educated to have) needed skills (co-production)
 firm is able to manage customer behavior
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 33
Managing the 7Ps Requires Collaboration between
Marketing, Operations, and HR Functions (Fig. 1.7)
Operations
Management
Marketing
Management
Customers
Human Resources
Management
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 34
Chapter 2
Consumer Behavior in
Service Encounters
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 35
Where Does the Customer Fit in a
Service Organization? (Fig. 2.1)
 Consumers rarely involved in manufacture of goods but
often participate in service creation and delivery
 Challenge for service marketers is to understand how
customers interact with service operations
 Flowcharting clarifies how customer involvement in service
encounters varies with type of process - see Fig. 2-1:
 People processing (e.g., motel stay): customer is physically involved
throughout entire process
 Possession processing (e.g., DVD repair): involvement may be limited to
drop off of physical item/description of problem and subsequent pick up
 Mental stimulus processing (e.g., weather forecast): involvement is
mental, not physical; here customer simply receives output and acts on it
 Information processing (e.g., health insurance): involvement is mental specify information upfront and later receive documentation of coverage
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 36
High-Contact and Low-Contact Services
High Contact Services
 Customers visit service facility and remain throughout
service delivery
 Active contact between customers and service personnel
 Includes most people-processing services
Low Contact Services
 Little or no physical contact with service personnel
 Contact usually at arm’s length through electronic or
physical distribution channels
 New technologies (e.g. Web) help reduce contact levels
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 37
Levels of Customer Contact with Service
Organizations (Fig. 2.2)
Emphasizes encounters
with service personnel
High
N ursing Home
HairCut
4- Star Hotel
Management Consulting
Good Restaurant
Telephone Banking
Airline Travel (Econ.)
Retail Banking
Car Repair
Motel
Insura nce
Dry Cleaning
Fast Food
Movie Theater
Cable TV
Subway
• Internet Banking
Mail Based Repairs
Emphasizes encounters
with equipment
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Internet-based
Services
Services Marketing 5/E
Low
1 - 38
Managing Service Encounters--1
 Service encounter: A period of time during which customers
interact directly with a service
 Moments of truth: Defining points in service delivery where
customers interact with employees or equipment
 Critical incidents: specific encounters that result in
especially satisfying/dissatisfying outcomes for either
customers or service employees
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 39
Managing Service Encounters--2
 Service success often rests on performance of junior
contact personnel
 Must train, coach, role model desired behavior
 Thoughtless or badly behaved customers can cause
problems for service personnel (and other customers)
 Must educate customers, clarify what is expected, manage
behavior
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 40
The Purchase Process for Services
(Adapted from Fig. 2-3)
Prepurchase Stage
 Awareness of need
 Information search
 Evaluation of alternative service suppliers
Service Encounter Stage
 Request service from chosen supplier
 Service delivery
Postpurchase Stage
 Evaluation of service performance
 Future intentions
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 41
Perceived Risks in
Purchasing and Using Services (Table 2.1)

Functional – unsatisfactory performance outcomes

Financial – monetary loss, unexpected extra costs

Temporal – wasted time, delays lead to problems

Physical – personal injury, damage to possessions

Psychological – fears and negative emotions

Social – how others may think and react

Sensory – unwanted impacts to any of five senses
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 42
Factors that Influence
Customer Expectations of Services (Fig. 2.4)
Personal Needs
Desired Service
Beliefs about
What Is Possible
Explicit & Implicit
Service Promises
Word-of-Mouth
Past Experience
ZONE
OF
TOLERANCE
Perceived Service
Alterations
Adequate Service
Predicted Service
Situational Factors
Source: Adapted from Zeithaml, Parasuraman & Berry
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 43
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: range within which customers are
willing to accept variations in service delivery
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Intangible Attributes, Variability, and Quality
Control Problems Make Services Hard to Evaluate
 Search attributes – Tangible characteristics that allow
customers to evaluate a product before purchase
 Experience attributes – Characteristics that can be
experienced when actually using the service
 Credence attributes – Characteristics that are difficult to
evaluate confidently even after consumption
 Goods tend to be higher in search attributes, services tend
to be higher in experience and credence attributes
 Credence attributes force customers to trust that desired
benefits have been delivered
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 45
How Product Attributes Affect
Ease of Evaluation) (Fig. 2.5)
High in search
attributes
Complex surgery
Legal services
Computer repair
Entertainment
Most Services
Haircut
Lawn fertilizer
Restaurant meals
Foods
Motor vehicle
Chair
Easy
to evaluate
Clothing
Most Goods
Difficult
to evaluate
High in experience High in credence
attributes
attributes
Source: Adapted from Zeithaml
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 46
Customer Satisfaction is Central to the
Marketing Concept
 Satisfaction defined as attitude-like judgment following a
service purchase or series of service interactions
 Customers have expectations prior to consumption, observe
service performance, compare it to expectations
 Satisfaction judgments are based on this comparison
 Positive disconfirmation if better than expected
 Confirmation if same as expected
 Negative disconfirmation if worse than expected
 Satisfaction reflects perceived service quality, price/quality
tradeoffs, personal and situational factors
 Research shows links between customer satisfaction and a
firm’s financial performance
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 47
Customer Delight:
Going Beyond Satisfaction
 Research shows that delight is a function of 3 components
 Unexpectedly high levels of performance
 Arousal (e.g., surprise, excitement)
 Positive affect (e.g., pleasure, joy, or happiness)
 Is it possible for customers to be delighted by very
mundane services?
 Progressive Insurance has found ways to positively surprise
customers with customer-friendly innovations and
extraordinary customer service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 48
A Service Business is a System Comprising
Three Overlapping Subsystems
Service Operations (front stage and backstage)
 Where inputs are processed and service elements created.
 Includes facilities, equipment, and personnel
Service Delivery (front stage)
 Where “final assembly” of service elements takes place
and service is delivered to customers
 Includes customer interactions with operations and other
customers
Service Marketing (front stage)
 Includes service delivery (as above) and all other contacts
between service firm and customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 49
Service Marketing System:
(1) High Contact Service--e.g., Hotel (Fig. 2.7)
Service Marketing System
Service Delivery System
Other
Customers
Service Operations System
Interior & Exterior
Facilities
Technical
Core
Equipment
The
Customer
Service People
Backstage
(invisible)
Front Stage
(visible)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Other
Customers
Services Marketing 5/E
Other Contact Points
Advertising
Sales Calls
Market Research
Surveys
Billing / Statements
Miscellaneous Mail,
Phone Calls, Faxes, etc.
Random Exposure to
Facilities / Vehicles
Chance Encounters
with Service Personnel
Word of Mouth
1 - 50
Service Marketing System:
(2) Low Contact Service--e.g., Credit Card (Fig. 2.8)
Service Marketing System
Service Delivery System
Service Operations System
Other Contact Points
Advertising
Mail
Technical
Core
Self Service
Equipment
The
Customer
Phone, Fax,
Web site etc.
Backstage
(invisible)
Market Research
Surveys
Random Exposures
Facilities, Personnel
Word of Mouth
Front Stage
(visible)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 51
Service as Theater
“ 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
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 52
The Dramaturgy of Service Delivery
 Service dramas unfold on a “stage”--settings may change as
performance unfolds
 Many service dramas are tightly scripted, others improvised
 Front-stage personnel are like members of a cast
 Like actors, employees have roles, may wear special
costumes, speak required lines, behave in specific ways
 Support comes from a backstage production team
 Customers are the audience—depending on type of
performance, may be passive or active
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 53
Role and Script Theories
 Role:
A set of behavior patterns learned through
experience and communication
 Role congruence: In service encounters, employees and
customers must act out defined roles for good outcomes
 Script: A sequence of behavior to be followed by employees
and customers during service delivery
 Some scripts (e.g. teeth cleaning) are routinized, others flexible
 Technology change may require a revised script
 Managers should reexamine existing scripts to find ways to improve
delivery, increase productivity, enhance experiences
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 54
Chapter 3
Positioning Services in
Competitive Markets
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 55
Search for Competitive Advantage in Services
Requires Differentiation and Focus
 Intensifying competition in service sector threatens firms
with no distinctive competence and undifferentiated
offerings
 Slowing market growth in mature service industries means
that only way for a firm to grow is to take share from
competitors
 Rather than attempting to compete in an entire market, firm
must focus efforts on those customers it can serve best
 Must decide how many service offerings with what
distinctive (and desired) characteristics
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 56
Standing Apart from the Competition
A business must set itself apart from its competition.
To be successful it must identify and promote itself
as the best provider of attributes that are
important to target customers
GEORGE S. DAY
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 57
Basic Focus Strategies for Services (Fig. 3.1)
BREADTH OF SERVICE OFFERINGS
Narrow
Many
NUMBER
OF MARKETS
SERVED
Few
Wide
Service
Focused
Unfocused
(Everything
for everyone)
Fully Focused
(Service and
market focused)
Market
Focused
Source: Robert Johnston
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 58
Four Principles of Positioning Strategy
1. Must establish position for firm or product in minds of
customers
2. Position should be distinctive, providing one simple,
consistent message
3. Position must set firm/product apart from competitors
4. Firm cannot be all things to all people--must focus
Jack Trout
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 59
Uses of Positioning in
Marketing Management
(Table 3.1)
 Understand relationships between products and markets
 compare to competition on specific attributes
 evaluate product’s ability to meet consumer needs/expectations
 predict demand at specific prices/performance levels
 Identify market opportunities
 introduce new products
 redesign existing products
 eliminate non-performing products
 Make marketing mix decisions, respond to competition
 distribution/service delivery
 pricing
 communication
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 60
Possible Dimensions for Developing
Positioning Strategies
 Product attributes
 Price/quality relationships
 Reference to competitors (usually shortcomings)
 Usage occasions
 User characteristics
 Product class
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 61
Developing a
Market Positioning Strategy (Fig. 3.3)
MARKET
ANALYSIS
- Size
- Composition
- Location
- Trends
Define, Analyze
Market Segments
Select
Target Segments
To Serve
INTERNAL
ANALYSIS
- Resources
- Reputation
- Constraints
- Values
Articulate
Desired Position
in Market
Marketing
Action
Plan
Select Benefits
to Emphasize
to Customers
COMPETITIVE
ANALYSIS
- Strengths
- Weaknesses
- Current
Positioning
Analyze
Possibilities for
Differentiation
Source: Adapted from Michael R. Pearce
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 62
Positioning of Hotels in Belleville:
Price vs. Service Level (Fig. 3.4)
Expensive
Grand
Regency
PALACE
Shangri-La
High
Service
Sheraton
Atlantic
Moderate
Service
Italia
Castle
Alexander IV
Airport Plaza
Less Expensive
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 63
Positioning of Hotels in Belleville:
Location vs. Physical Luxury (Fig. 3.5)
High Luxury
Regency
Grand
Shangri-La
Sheraton
PALACE
Financial
District
Shopping District
and Convention Centre
Inner
Suburbs
Italia
Castle
Alexander IV
Atlantic
Airport Plaza
Moderate Luxury
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 64
Positioning after New Hotel Construction:
Price vs. Service Level (Fig. 3.6)
Mandarin
New Grand
Heritage
Marriott
Continental
Expensive
Action?
Regency
High
Service
PALACE
Shangri-La
No action?
Moderate
Service
Atlantic
Sheraton
Italia
Less Expensive
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
Castle
Alexander IV
Airport Plaza
1 - 65
Positioning after New Hotel Construction:
Location vs. Physical Luxury (Fig. 3.7)
High Luxury
Mandarin
New Grand
Heritage
Marriott
Sheraton
Shangri-La
Continental
Action?
Regency
PALACE
Financial
District
No action?
Inner
Suburbs
Shopping District
and Convention Centre
Castle
Italia
Alexander IV
Atlantic
Airport Plaza
Moderate Luxury
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 66
Positioning Maps Help Managers to
Visualize Strategy
 Positioning maps display relative performance of competing
firms on key attributes
 Research provides inputs to development of positioning maps
 Challenge is to ensure that
 attributes employed in maps are important to target segments
 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 the
light of new developments in the future
 Simple graphic representations are often easier for managers to
grasp than tables of data or paragraphs of prose
 Charts and maps can facilitate a “visual awakening” to threats
and opportunities and suggest alternative strategic directions
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 67
Chapter 4
Creating the
Service Product
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 68
Key Steps in Service Planning:
Matching Opportunities to Resources
 Must relate marketing opportunities to firm’s resources
(physical, financial, technological, human)
 Identify, evaluate firm’s marketing assets
 Customer portfolio/lifetime value (customer equity)
 Market knowledge
 Marketing implementation skill
 Product line
 Competitive positioning strategies
 Brand reputation (brand equity)
 Identify, evaluate firm’s operating assets
 Physical facilities, equipment
 Technology and systems (especially IT)
 Human resources (numbers, skills, productivity)
 Leverage through alliances and partnerships
 Potential for customer self service
 Cost structure
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 69
Service Design Involves Matching Marketing
Concept with Operations Concept (Fig. 4.1)
Corporate Objectives
and Resources
Marketing Assets
Operating Assets
(Customer Base, Mkt. Knowledge,
Implementation Skills, Brand Reput.)
(Facilities/Equipment, IT Systems,
People, Op. Skills, Cost Structure)
Service Marketing Concept
Service Operations Concept
•Benefits to customer from core/
supplementary elements, style,
service level, accessibility
•Nature of processes
•Geographic scope of ops
•Scheduling
•Facilities design/layout
•HR (numbers, skills)
•Leverage (partners, self-service)
•Task allocation: front/backstage
staff; customers as co-producers
•User costs/outlays incurred
•Price/other monetary costs
•Time
•Mental and physical effort
•Neg. sensory experiences
Service Delivery
Process
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 70
Understanding the
Components of the
Augmented Service Product
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 71
Shostack’s Molecular Model of a Total Market
Entity - Passenger Airline Service (Fig. 4-2)
Distribution
Price
Vehicle
Service
frequency
Transport
Pre- and
post-flight
service
In-flight
service
Food
and
drink
KEY
Tangible elements
Intangible elements
Marketing Positioning
(Weighted toward evidence)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
Source: Shostack
1 - 72
Core Products and Supplementary Services
 Most firms offer customers a package of benefits:
 core product (a good or a service)
 supplementary services that add value to the core
 In mature industries, core products often become
commodities
 Supplementary services help to differentiate core products
and create competitive advantage by:
 facilitating use of the core service
 enhancing the value and appeal of the core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 73
Core and Supplementary Product Design:
What Do We Offer and How Do We Create and Deliver It?
Supplementary
services offered
and how created
and delivered
Delivery Concept
For Core Product
Scheduling
Process
Core
Service
Level
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Customer
Role
Services Marketing 5/E
1 - 74
What Should Be the Core and Supplementary
Elements of Our Service Product?
 How is our core product defined and what supplementary
elements currently augment this core?
 What product benefits create the most value for customers?
 Is our service package differentiated from the competition in
ways that are meaningful to target customers?
 What are current levels of service on the core product and
each of the supplementary elements?
 Can we charge more for higher service levels on key
attributes (e.g., faster response, better physical amenities,
easier access, more staff, superior caliber personnel)?
 Alternatively, should we cut service levels and charge less?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 75
Core and Supplementary Services in a Luxury Hotel
(Offering Guests Much More than a Cheap Motel!)
Reservation
Cashier
Valet
Parking
Business
Center
Reception
A Bed for the
Night in an
Elegant Private
Room with a
Bathroom
Room
Service
Wake-up
Call
Telephone
Baggage
Service
Cocktail
Bar
Entertainment/
Sports / Exercise
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Restaurant
Services Marketing 5/E
1 - 76
What Happens, When, and in What Sequence?
The Time Dimension in the Augmented Service Product
Reservation
Parking
Get car
Check in
USE ROOM
Check out
Phone
USE GUESTROOM OVERNIGHT
Porter
Meal
Pre
Visit
Pay TV
Room service
Time Frame of an Overnight Hotel Stay
(real-time service use)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 77
The Flower of Service:
Categorizing Supplementary Services (Fig. 4-5)
Information
Payment
Billing
Consultation
Core
Exceptions
KEY:
Facilitating elements
Enhancing elements
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Order-Taking
Hospitality
Safekeeping
Services Marketing 5/E
1 - 78
Facilitating Services - Information
(Table 4.1)
Core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Customers often require
information about how to
obtain and use a product or
service. They may also
need reminders and
documentation
Services Marketing 5/E
1 - 79
Facilitating Services - Order-Taking
(Table 4.2)
Core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Many goods and services
must be ordered or reserved
in advance. Customers need
to know what is available and
may want to secure
commitment to delivery
Services Marketing 5/E
1 - 80
Facilitating Services - Billing
(Table 4.3)
Core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
“How much do I owe you?”
Customers deserve clear,
accurate and intelligible
bills and statements
Services Marketing 5/E
1 - 81
Facilitating Services - Payment
(Table 4.4)
Core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Customers may pay faster
and more cheerfully if you
make transactions simple
and convenient for them
Services Marketing 5/E
1 - 82
Enhancing Services - Consultation
(Table 4.5)
Core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Value can be added to
goods and services by
offering advice and
consultation tailored to
each customer’s
needs and situation
Services Marketing 5/E
1 - 83
Enhancing Services - Hospitality
(Table 4.6)
Core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Customers who invest time
and effort in visiting a
business and using its
services deserve to be
treated as welcome guests
(after all, marketing invited
them there!)
Services Marketing 5/E
1 - 84
Enhancing Services - Safekeeping
(Table 4.7)
Core
Customers prefer not to
worry about looking after
the personal possessions
that they bring with them
to a service site.
They may also want delivery
and after-sales services for
goods that they purchase
or rent
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 85
Enhancing Services - Exceptions
(Table 4.8)
Core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Customers appreciate some
flexibility in a business
when they make special
requests. They expect it
when not everything goes
according to plan
Services Marketing 5/E
1 - 86
Branding
Service Products
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 87
Service Branding:
Clarifying Distinctive Service Offerings
 Marriott Hotel Brands
 British Airways Brands
 Marriott Hotels
Intercontinental
 First
 Club World
 World Traveller Plus
 World Traveller
 Marriott Resorts
 Courtyard by Marriott
 Fairfield Inns
 Residence Inns
European
 Club Europe
 Euro-Traveller
 SpringHill Suites
 TownePlace Suites
 Marriott Vacation Clubs
International
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
UK Domestic
 Shuttle
Services Marketing 5/E
1 - 88
Branding a High-Tech, B2B Product Line:
A Family of Brands at Sun Microsystems
 Corporate umbrella brand
 Sun Microsystems
 Product line brand (system support services)
 Sun Spectrum Support
 Sub-brands (4 levels of support service programs)
»
»
»
»
Platinum
Gold
Silver
Bronze
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 89
Sun Spectrum Support:
Sub-branding Highlights Four Service Levels
Sub-branding clarifies service levels offered at different fees
 Platinum: “Mission Critical”
On-site service 24/7, two-hour response;
telephone support 24/7, onsite parts replacement;
additional services available
 Gold: “Business Critical”
Onsite service Mon-Fri 8am-8pm, four-hour response;
telephone support 24/7; onsite parts replacement
 Silver: “Basic Support”
Onsite service Mon-Fri 8am-5pm, four-hour response;
telephone support Mon-Fri 8am-8pm; onsite parts replacement
 Bronze: “Self Support”
Phone support Mon-Fri 8am-5pm; parts replacement by courier
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 90
New Service
Development
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 91
New Service Development:
A Hierarchy of New Service Categories
 Major service innovations--new core products for previously
undefined markets
 Major process innovations--using new processes to
deliver existing products and offer extra benefits
 Product line extensions--additions to current product lines
 Process line extensions--alternative delivery procedures
 Supplementary service innovations--adding new or
improved facilitating or enhancing elements
 Style changes--visible changes in service design or scripts
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 92
New Service Development:
Physical Goods as Source of Service Ideas
 Customers can rent goods—use and return for a fee—
instead of purchasing them
 Customers can hire personnel to operate their own or
rented equipment
 Any new durable product may create need for after-sales
services (possession processing)
 Shipping
 Installation
 Problem-solving and consulting advice
 Cleaning
 Maintenance
 Repair
 Upgrading
 Disposal
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 93
Creating Services as Substitutes for
Owning and/or Using Goods (Fig. 4-7)
Own a Physical Good
Perform the
Work Oneself
Hire Someone
to Do the Work
Rent the Use
of a Physical Good
• Drive own car
• Rent car and drive it
• Type on own word processor
• Rent word processor and type
• Hire chauffeur to drive car
•• Hire a taxi or limousine
• Hire typist to use word processor
•• Send work to secretarial service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 94
Service Development through Delivery Options:
Alternative Meal Service Formats (Fig. 4-8)
Fast-Food
Restaurant
(Eat In)
See sign
Park and
enter
Order meal,
and pay
Pick up
meal
Find table
and eat
Drive away,
eat later
Drive-In
Restaurant
(Take Out)
See sign
Stop car at
order point
Order via
microphone
Get meal at
pickup, pay
Home
Delivery
Telephone
Restaurant
Order food,
give address
Driver rings
doorbell
Pay driver,
take food
Eat
Home
Catering
Arrange to
meet caterer
Plan meal,
pay deposit
Food and
staff arrive
Meal is
prepared
and served
Eat
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
Clear table
and leave
Staff cleans
up; pay
1 - 95
Elements of a Hotel Offering:
Trading off Room Price vs. Features/Services
 External building design
and features
 Room features
 Food-related services
 Lounge facilities
 Services (e.g., reception)
 Leisure facilities
 Security—people/systems
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 96
Success Factors in New Service Development
 Market synergy
 Good fit between new product and firm’s image/resources
 Advantage vs. competition in meeting customers’ needs
 Strong support from firm during/after launch
 Firm understands customer purchase decision behavior
 Organizational factors
 Strong interfunctional cooperation and coordination
 Internal marketing to educate staff on new product and its
competition
 Employees understand importance of new services to firm
 Market research factors
 Scientific studies conducted early in development process
 Product concept well defined before undertaking field studies
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 97
Chapter 5
Designing the
Communications Mix
for Services
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 98
Advertising Implications for
Overcoming Intangibility (Fig. 5-1)
Problem

Generality
- objective claims
- subjective claims



Advertising Strategy
Document physical system capacity
Cite past performance statistics
Present actual service delivery incident
Nonsearchability
Present customer testimonials
Cite independently audited performance
Abstractness
Display typical customers benefiting
Impalpability
Documentary of step-by-step process,
Case history of what firm did for customer
Narration of customer’s subjective experience
Source: Mittal and Baker
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 99
Other Communications Challenges
in Services Marketing
 Facilitate customer involvement in production
 prepare customers for service experience and demonstrate roles
 teach customers about new technologies, new features
 Help customers to evaluate service offerings
 provide tangible or statistical clues to service performance
 highlight quality of equipment and facilities
 emphasize employee qualifications, experience, professionalism
 Simulate or dampen demand to match capacity
 provide information about timing of peak, off-peak periods
 offer promotions to stimulate off-peak demand
 Promote contribution of service personnel
 help customers understand service encounter
 highlight expertise and commitment of backstage personnel
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 100
Setting Clear Objectives: Checklist for
Marketing Communications Planning (“5 Ws”)
 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?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 101
Common Educational and Promotional
Objectives in Service Settings (Table 5-2)
 Create memorable images of specific companies and
their brands
 Build awareness/interest for unfamiliar service/brand
 Build preference by communicating brand strengths and
benefits
 Compare service with competitors’ offerings and counter
their claims
 Reposition service relative to competition
 Stimulate demand in off-peak and discourage during peak
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 102
Educational and Promotional Objectives (cont.)
 Encourage trial by offering promotional incentives
 Reduce uncertainty/perceived risk by providing useful info
and advice
 Provide reassurance (e.g., promote service guarantees)
 Familiarize customers with service processes before use
 Teach customers how to use a service to best advantage
 Recognize and reward valued customers and employees
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 103
Marketing Communications Mix for Services
(Fig. 10.4)
Personal
Communications
Advertising
Sales Promotion
Publicity &
Public Relations
Instructional
Materials
Sampling
Press
releases/kits
Web sites
Coupons
Press
conferences
Manuals
Corporate
Design
Selling
Broadcast
Customer
service
Print
Training
Internet
Sign-up
rebates
Special
events
Brochures
Vehicles
Telemarketing
Outdoor
Gifts
Sponsorship
Videoaudiocassettes
Equipment
Direct mail
Prize
promotions
Trade Shows,
Exhibitions
Software
CD-ROM
Stationery
Media-initiated
coverage
Voice mail
Uniforms
Word-of-mouth
Word
mouth
(other of
customers)
*
Signage
Interior decor
Key: * Denotes communications originating from outside the organization
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 104
Originating Sources of Messages Received by a
Target Audience (Fig. 5-5)
Messages originating
within the organization
Front-line staff
Service outlets
Advertising
Sales promotions
Direct marketing
Personal selling
Public relations
A
U
D
I
E
N
C
E
Word of mouth
Messages originating
outside the organization
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Media editorial
Services Marketing 5/E
1 - 105
What is Brand Equity and Why Does It Matter?
(From Berry, “Cultivating Brand Equity”)
Definition: A set of assets and liabilities linked to a brand’s
name and symbol that adds to (or subtracts from) the
perceived value of the product
Insights
 Brand equity can be positive or negative
 Positive brand equity creates marketing advantage for
firm plus value for customer
 Perceived value generates preference and loyalty
 Management of brand equity involves investment to
create and enhance assets, remove liabilities
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 106
A Service Branding Model:
How Communications + Experience Create Brand Equity
Marketer-controlled communications
Firm’s Presented Brand
(Sales, Advertising, PR)
Awareness of
Firm’s Brand
Uncontrolled brand communications
Firm’s
Brand Equity
What Media, Intermediaries,
Word-of-Mouth Say re: Firm
Customer’s Experience
with Firm
Meaning Attached
To Firm’s Brand
Source: Adapted from L. L. Berry ( Fig. 1)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 107
Marketing Communication and the Internet (1)
 International in Scope
 Accessible from almost anywhere in the world
 Simplest form of international market entry
 Internet Applications
 Promote consumer awareness and interest
 Provide information and consultation
 Facilitate 2-way communications through e-mail and chat rooms
 Stimulate product trial
 Enable customers to place orders
 Measure effectiveness of specific advertising/promotional
campaigns
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 108
Marketing Communications and the Internet (2)
 Web Site design considerations
 Memorable address that is actively promoted
 Relevant, up-to-date content (text, graphics, photos)
 Contain information that target users will perceive as
useful/interesting
 Easy navigation
 Fast download
 Internet advertising
 Banners and buttons on portals and other websites seek to draw
online traffic to own site
 Limits to effectiveness—exposure (“eyeballs”) may not lead to
increases in awareness/preference/sales
 Hence, advertising contracts may tie fees to marketing relevant
behavior (e.g., giving personal info or making purchase)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 109
Chapter 6
Pricing and Revenue
Management
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 110
What Makes Service Pricing Strategy Different
(and Difficult)?
 No ownership of services--hard for firms to calculate
financial costs of creating an intangible performance
 Variability of inputs and outputs--how can firms define a
“unit of service” and establish basis for pricing?
 Many services hard for customers to evaluate--what
are they getting in return for their money?
 Importance of time factor--same service may have more
value to customers when delivered faster
 Delivery through physical or electronic channels--may
create differences in perceived value
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 111
Objectives of Pricing Strategies
 Revenue and profit objectives
 Seek profit
 Cover costs
 Patronage and user base-related objectives
 Build demand
 Build a user base
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 112
The Pricing Tripod (Fig. 6.1)
Pricing Strategy
Competition
Costs
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Value to customer
Services Marketing 5/E
1 - 113
Three Main Approaches to Pricing
 Cost-Based Pricing
 Set prices relative to financial costs
(problem: defining costs)
 Competition-Based Pricing
 Monitor competitors’ pricing strategy
(especially if service lacks differentiation)
 Who is the price leader? (one firm sets the pace)
 Value-Based
 Relate price to value perceived by customer
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 114
Activity-Based Costing: Relating Activities to
the Resources They Consume
 Managers need to see costs as an integral part of a firm’s
effort to create value for customers
 When looking at prices, customers care about value to
themselves, not what production costs the firm
 Traditional cost accounting emphasizes expense
categories, with arbitrary allocation of overheads
 ABC management systems examine activities needed to
create and deliver service (do they add value?)
 Must link resource expenses to:
 variety of products produced
 complexity of products
 demands made by individual customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 115
Net Value = (Benefits – Outlays)
(Fig. 6.3)
Effort Time
e
Perceived
Outlays
Perceived
Benefits
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Enhancing Gross Value
 Pricing Strategies to Reduce Uncertainty
 service guarantees
 benefit-driven (pricing that aspect of service that creates value)
 flat rate (quoting a fixed price in advance)
 Relationship Pricing
 non-price incentives
 discounts for volume purchases
 discounts for purchasing multiple services
 Low-cost Leadership
 Convince customers not to equate price with quality
 Must keep economic costs low to ensure profitability at low price
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 117
Paying for Service:
The Customer’s Perspective
Customer “expenditures” on service comprise both
financial and non-financial outlays
 Financial costs:
 price of purchasing service
 expenses associated with search, purchase activity, usage
 Time expenditures
 Physical effort (e.g., fatigue, discomfort)
 Psychological burdens (mental effort, negative feelings)
 Negative sensory burdens (unpleasant sensations affecting any
of the five senses)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 118
Determining the Total Costs of a Service
to the Consumer (Fig. 6.4)
Price
Search Costs
Related Monetary
Costs
Time Costs
Purchase and
Use Costs
Operating Costs
Incidental
Expenses
Physical Costs
Psychological
Costs
Sensory Costs
After Costs
Necessary
follow-up
Problem
solving
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 119
Trading off Monetary and Non- Monetary Costs
(Fig. 6.5)
Which clinic would you patronize if you needed a chest
x-ray (assuming all three clinics offer good quality) ?
Clinic A
Clinic B
 Price $45
 Located 1 hour away
by car or transit
 Next available
appointment is in 3
weeks
 Hours: Monday –
Friday, 9am – 5pm
 Estimated wait at
clinic is about 2
hours
 Price $85
 Located 15 min
away by car or
transit
 Next available
appointment is in 1
week
 Hours: Monday –
Friday, 8am – 10pm
 Estimated wait at
clinic is about 30 45 minutes
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
Clinic C
 Price $125
 Located next to
your office or
college
 Next appointment
is in 1 day
 Hours: Mo –Sat,
8am – 10pm
 By appointment estimated wait at
clinic is about 0 to
15 minutes
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Increasing Net Value by Reducing
Non-financial Costs of Service
 Reduce time costs of service at each stage
 Minimize unwanted psychological costs of service
 Eliminate unwanted physical costs of service
 Decrease unpleasant sensory costs of service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Revenue Management: Maximizing Revenue
from Available Capacity at a Given Time
 Based on price customization - charging different customers
(value segments) different prices for same product
 Useful in dynamic markets where demand can be divided
into different price buckets according to price sensitivity
 Requires rate fences to prevent customers in one value
segment from purchasing more cheaply than willing to pay
 RM uses mathematical models to examine historical data
and real time information to determine
 what prices to charge within each price bucket
 how many service units) to allocate to each bucket
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 122
The Strategic Levers of
Revenue (Yield) Management
Price
Duration
Fixed
Predictable
Variable
Quadrant 1:
Quadrant 2:
Movies
Stadiums/Arenas
Function Space
Hotel Rooms
Airline Seats
Rental Cars
Cruise Lines
Unpredictable
Quadrant 3:
Quadrant 4:
Restaurants
Golf Courses
Continuing Care
Hospitals
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 123
Dealing with Common Customer Conflicts
Arising from Revenue Management
Customer conflict can arise from:
Marketing tools to reduce
customer conflicts:
 Perceived Unfairness & Perceived
Financial Risk Associated with
Multi-Tier Pricing and Selective
Inventory Availability
 Unfulfilled Inventory Commitment




Fenced Pricing
Bundling
Categorising
High Published Price
 Well designed Customer Recovery
Programme for Oversale
 Unfulfilled Demand of Regular
Customers
 Unfulfilled Price Expectation of
Group Customers
 Change in the Nature of the
Service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
 Preferred Availability Policies
 Offer Lower Displacement Cost
Alternatives
 Physical Segregation & Perceptible
Extra Service
 Set Optimal Capacity Utilisation Level
Services Marketing 5/E
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Price Elasticity (Fig. 6.6)
Price per
unit of
service
Di
De
De
Di
Quantity of Units Demanded
De : Demand is price elastic. Small changes in price lead to big changes in demand.
Di : Demand for service is price inelastic. Big changes have little impact on demand.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 125
Key Categories of Rate Fences
Rate Fences
(Table 6.2)
Examples
Physical (Product-related) Fences
Basic Product
Amenities
Service Level
Class of travel (Business/Economy class)
Size and furnishing of a hotel room
Seat location in a theatre
Free breakfast at a hotel, airport pick up etc.
Free golf cart at a golf course
Priority wait listing
Increase in baggage allowances
Dedicated service hotlines
Dedicated account management team
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 126
Key Categories of Rate Fences
(Table 6.2 cont’d)
Non Physical Fences
Transaction Characteristics
Time of booking or
reservation
Location of booking or
reservation
Flexibility of ticket
usage
 Requirements for advance purchase
 Must pay full fare two weeks before departure
 Passengers booking air tickets for an
identical route in different countries are
charged different prices
 Fees/penalties for canceling or changing a
reservation (up to loss of entire ticket price)
 Non refundable reservation fees
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 127
Key Categories of Rate Fences
(Table 6.2 cont’d)
Non Physical Fences (cont’d)
Consumption Characteristics
Time or duration of
use
 Early bird special in restaurant before 6pm
 Must stay over on Sat for airline, hotel
 Must stay at least five days
Location of
consumption
 Price depends on departure location, esp in
international travel
 Prices vary by location (between cities, city
centre versus edges of city)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 128
Key Categories of Rate Fences
(Table 6.2 cont’d)
Non Physical Fences (cont’d)
Buyer Characteristics
Frequency or volume
of consumption
Group membership
Size of customer
group
 Member of certain loyalty-tier with the firm get
priority pricing, discounts or loyalty benefits
 Child, student, senior citizen discounts
 Affiliation with certain groups (e.g. Alumni)
 Group discounts based on size of group
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 129
Relating Price Buckets and Fences to the
Demand Curve (Fig. 6.7)
Price per
Seat
First Class
Full Fare Economy (No Restrictions)
One-Week Advance Purchase
One-Week Advance Purchase, Saturday Night Stayover
3-Week Advance Purchase, Saturday Night Stayover
3-Week Adv. Prchs, Sat. Night Stay., $100 for Changes
3-Wk Adv. Prchs, Sat. Night Stay, No changes/refunds
Late Sales through Consolidators/
Internet, no refunds
Capacity
of 1st-class
Cabin
Capacity
of Aircraft
No. of Seats Demanded
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 130
Ethical Concerns in Pricing
 Customers are vulnerable when service is hard to evaluate
or they don’t observe work
 Many services have complex pricing schedules
 hard to understand
 difficult to calculate full costs in advance of service
 Unfairness and misrepresentation in price promotions
 misleading advertising
 hidden charges
 Too many rules and regulations
 customers feel constrained, exploited
 customers unfairly penalized when plans change
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 131
Pricing Issues:
Putting Strategy into Practice (Table 6.3)
 How much to charge?
 What basis for pricing?
 Who should collect
payment?
 Where should payment be
made?
 When should payment be
made?
 How should payment be
made?
 How to communicate prices?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 132
Consumption follows the Timing of Payments
Frequency of
Health Club Visits
Annual Payment Plan
Quarterly Payment Plan
Frequency of
Health Club Visits
(Research Insight 6.1)
Semiannual Payment Plan
Monthly Payment Plan
Time Line
Time Line
Source: John Gourville and Dilip Soman, “Pricing and the Psychology of Consumption,”
Harvard Business Review, September 2002, 90-96.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 133
Chapter 7(5)
Distributing Services
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 134
Applying the Flow Model of Distribution to
Services
Distribution embraced three interrelated elements
 Information and promotion flow
 Negotiation flow
 Product flow
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 135
Information and Physical Processes of the
Augmented Service Product (Fig. 7.1)
Information
Processes
Payment
Information
Consultation
OrderTaking
Core
Billing
Exceptions
Hospitality
Safekeeping
Physical
Processes
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 136
Using Websites for Service Delivery
Information
Read brochure/FAQ; get schedules/
directions; check prices
Consultation
Payment
Conduct e-mail dialog
Use expert systems
Pay by bank card
Direct debit
Billing
Order-Taking
Receive bill
Make auction bid
Check account status
Core
Exceptions
Make/confirm reservations
Submit applications
Order goods, check status
Hospitality
Make special requests
Resolve problems
Record preferences
Safekeeping
Track package movements
Check repair status
CORE: Use Web to deliver information-based core services
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 137
Options for Service Delivery
There are 3 types of interactions between customers and
service firms
 Customer goes to the service provider (or intermediary)
 Service provider goes to the customer
 Interaction at arm’s length (via the Internet, telephone, fax,
mail, etc.)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 138
Method of Service Delivery (Table 7.1)
Availability of Service Outlets
Nature of Interaction Single Site
Multiple Sites
between Customer
and Service
Organization
Customer goes to service
organization
Service organization goes
to customer
Customer and service
organization transact at
arm’s length
Theater
Barbershop
House painting
Mobile car wash
Credit card company
Local TV station
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
Bus service
Fast-food chain
Mail delivery
Auto club road service
Broadcast network
Telephone company
1 - 139
Place vs. Cyberspace
 Required for people processing
services
suppliers meet in a physical
 Offers live experiences, social
environment
interaction, e.g., food services
 More emphasis on eye-catching
servicescape, entertainment
 Place - customers and
 Cyberspace - customers
and suppliers do business
electronically in virtual
environment created by
phone/internet linkages
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
 Ideal for info-based services
 Saves time
 Facilitates information gathering
 May use express logistics service
to deliver physical core products
Services Marketing 5/E
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“24/7” - Factors Encouraging
Extended Operating Hours (Mgt Memo 7.1)
Economic pressure from
consumers
Changes in legislation
Economic incentives to
improve asset utilization
Availability of employees to
work nights, weekends
Automated self-service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 141
Technology Revolutionizes Service Delivery:
Some Examples
 Smart mobile telephones to link users to Internet
 Voice recognition software
 Automated kiosks for self-service (e.g. bank ATMs)
 Web sites
 provide information
 take orders and accept payment
 deliver information-based services
 Smart cards that can act as “electronic wallets”
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 142
E-Commerce:
Factors that Attract Customers to Virtual Stores
 Convenience (24-hour availability, save time, effort)
 Ease of obtaining information on-line and searching for
desired items
 Better prices than in bricks-and-mortar stores
 Broad selection
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 143
Splitting Responsibilities for Delivering
Supplementary Services (Fig. 7.2)
As created by
originating firm
Core
As enhanced
by distributor
+
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
As experienced
by customer
=
Services Marketing 5/E
Core
1 - 144
Franchising
Franchising is a fast growth strategy, when




Resources are limited
Long-term commitment of store managers is crucial
Local knowledge is important
Fast growth is necessary to pre-empt competition
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 145
Service Process and Market Entry
 People Processing Services
 Export the service concept
 Import customers
 Transport customers to new locations
 Possession Processing Services
 Most require an ongoing local presence, whether it is the
customers dropping off items or personnel visiting customer sites
 Information Based Services
 Export the service to a local service factory
 Import customers
 Export the information via telecommunications and transform it
locally
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 146
Barriers to International Trade in Services
 Operating successfully in international markets remains
difficult for certain services despite efforts of the WTO and
control relaxations
 Barriers include
 Refusal by immigration offices to issue work permits
 Heavy taxes on foreign firms
 Domestic preference policies
 Legal restrictions
 Lack of broadly-agreed accounting standards
 Cultural differences (esp. for entertainment industry)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 147
Forces for Internationalization
Market drivers
Competition drivers
Technology drivers
Cost drivers
Government drivers
Impact will vary by service
type (people, possessions,
information)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 148
Modes of Internationalization
 Export information-based services
 transmit via electronic channels
 store in physical media, ship as merchandise
 Use third parties to market/deliver service concept
 licensing agents
 brokers
 franchising
 alliance partners
 minority joint ventures
 Control service enterprise abroad
 direct investment in new business
 buyout of existing business
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 149
Impact of Globalization Drivers on Different
Service Categories (Table 7.2)
Globalization
Drivers
People
Processing
Possession
Processing
Information
Based
Competition
Simultaneity of
production and
consumption limits
leverage of foreign
competitive advantage,
but management
systems can be
globalized
Technology drives
globalization of
competitors with
technical edge.
Highly vulnerable to
global dominance by
competitors with
monopoly or
competitive
advantage in
information.
Market
People differ
economically and
culturally, so needs for
service and ability to
pay may vary.
Level of economic
developments
impacts demand for
services to
individually owned
goods
Demand for many
services is derived to
a significant degree
from economic and
educational levels.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 150
Impact of Globalization Drivers on Different
Service Categories (Table 7.2, cont’d)
Globalization People
Drivers
Processing
Use of IT for delivery of
Technology
supplementary services
may be a function of
ownership and familiarity
with technology.
Possession
Processing
Information
Based
Need for technologybased service delivery
systems depends on
possessions requiring
service and the cost
trade-offs in labor
substitution
Ability to deliver
core services
through remote
terminals may be a
function of
investment in
computerization etc.
Cost
Variable labor rates may
impact on pricing in
labor-sensitive services.
Variable labor rates
may favor low-cost
locations.
Major cost elements
can be centralized &
minor cost elements
localized.
Government
Social policies (e.g.,
health) vary widely and
may affect labor cost
etc.
Policies may
decrease/increase
cost &
encourage/discourage
certain activities
Policies may impact
demand and supply
and distort pricing
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 151
Chapter 8
Designing and Managing
Service Processes
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 152
Developing a Blueprint – Some Basic Advice
 Identify key activities in creating and
delivering the service
 Distinguish between front stage (what
customers experience) and back stage
 Chart activities in sequence
 Show how interactions between customers
and employees are supported by backstage
activities and systems
 Establish service standards for each step
 Identify potential fail points
 Focus initially on “big picture” (later, can drill
down for more detail in specific areas)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 153
Service Blueprinting: Key Components
1. Define standards for frontstage activities
2. Specify physical evidence
3. Identify principal customer actions
4. ------------line of interaction (customers and front stage personnel)-------5. Front stage actions by customer-contact personnel
6. ------------line of visibility (between front stage and backstage)-------------7. Backstage actions by customer contact personnel
8. Support processes involving other service personnel
9. Support processes involving IT
Where appropriate, show fail points and risk of excessive waits
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 154
Simplified Example: Blueprinting a Hotel Visit
(extract only)
Hotel exterior, lobby,
employees, key
Stage
Physical
Evidence
Front
Line of
Interaction
Make
Customer reservation
Actions
Employee
Actions
Face-to-face
Phone
Contact
Backstage
Line of
Visibility
Arrive,
valet park
Check-in
at reception
Doorman
greets, valet
takes car
Receptionist
verifies, gives
key to room
Elevator, corridor,
room, bellhop
Go to
room
Rep.
records,
confirms
Make up
Room
Valet
Parks Car
Enter
data
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Register
guest data
Services Marketing 5/E
1 - 155
Improving Reliability of Processes
by Failure Proofing
 Analysis of reasons for failure often reveals opportunities
for failure proofing to reduce/eliminate risk of errors
 Errors include:
 treatment errors—human failures during contact with customers
 tangible errors—failures in physical elements of service
 Fail-safe procedures include measures to prevent omission
of tasks or performance of tasks
 incorrectly
 in wrong order
 too slowly
 not needed or specified
 Need fail-safe methods for both employees and customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 156
Process Redesign: Principal Approaches
(Table 8-1)
 Eliminating non-value-adding steps
 Shifting to self-service
 Delivering direct service
 Bundling services
 Redesigning physical aspects of service processes
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 157
Customers as Co-Producers:
Levels of Participation in Service Production
 Low – Employees and systems do all the work
 Medium – Customer inputs required to assist provider
 Provide needed information, instructions
 Make personal effort
 May share physical possessions
 High – Customer works actively with provider to
co-produce the service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 158
Self Service Technologies (SSTs)
 Self-service is ultimate form of customer involvement in
service production
 Customers undertake specific activities using facilities or systems
provided by service supplier
 Customer’s time and effort replace those of employees
 Concept is not new—self-serve supermarkets date from
1930s, ATMs and self-serve gas pumps from 1970s
 Today, customers face wide array of SSTs to deliver
information-based services, both core and supplementary
 Many companies seek to divert customers from employee
contact to Internet-based self-service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 159
Service Firms as Teachers:
Well-trained Customers Perform Better
 Firms must teach customers roles
as co-producers of service
 Customers need to know how to
achieve best results
 Education can be provided through:







Brochures
Advertising
Posted instructions
Machine-based instructions
Websites, including FAQs
Service providers
Fellow customers
 Employees must be well-trained to
help advise, assist customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 160
Managing Customers as Partial Employees
to Increase Productivity and Quality
1. Analyze customers’ present roles in the business and
compare to management’s ideal
2. Determine if customers know how to perform and have
necessary skills
3. Motivate customers by ensuring that will be rewarded for
performing well
4. Regularly appraise customers’ performance; if
unsatisfactory, consider changing roles or termination
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 161
The Problem of Customer Misbehavior –
Identifying and Managing “Jaycustomers”
What is a jaycustomer?
A customer who behaves in a thoughtless or abusive
fashion, causing problems for the firm itself, employees,
other customers
Why do jaycustomers matter?



Can disrupt processes
Affect service quality
May spoil experience of other customers
What should a firm do about them?





Try to avoid attracting potential jaycustomers
Institute preventive measures
Control abusive behavior quickly
Take legal action against abusers
BUT firm must act in ways that don’t alienate other
customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 162
Six Types of “Jaycustomer”
 Thief – seeks to avoid paying for service
 Rule breaker – ignores rules of social behavior and/or procedures for
safe, efficient use of service
 Belligerent – angrily abuses service personnel (and sometimes other
customers) physically and/or emotionally
 Family Feuders – fight with other customers in their party
 Vandal – deliberately damages physical facilities, furnishings, and
equipment
 Deadbeat – fails to pay bills on time
Can you think of others?
How should firms deal with each of these problems?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 163
Chapter 9
Balancing Demand
and Capacity
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Relating Demand to Capacity:
Four Key Concepts
 Excess demand: too much demand relative to capacity at a
given time
 Excess capacity: too much capacity relative to demand at a
given time
 Maximum capacity: upper limit to a firm’s ability to meet
demand at a given time
 Optimum capacity: point beyond which service quality
declines as more customers are serviced
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 165
Variations in Demand Relative to Capacity
(Fig. 9-1)
VOLUME DEMANDED
Demand exceeds capacity
(business is lost)
CAPACITY UTILIZED
Demand exceeds
optimum capacity
(quality declines)
Maximum Available
Capacity
Optimum Capacity
(Demand and Supply
Well Balanced
Excess capacity
(wasted resources)
Low Utilization
(May Send Bad Signals)
TIME CYCLE 1
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
TIME CYCLE 2
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Defining Productive Capacity
in Services
 Physical facilities to contain customers
 Physical facilities to store or process goods
 Physical equipment to process people, possessions, or
information
 Labor used for physical or mental work
 Public/private infrastructure—e.g., highways, airports,
electricity
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 167
Alternative Capacity Management Strategies
 Level capacity (fixed level at all times)
 Stretch and shrink
 offer inferior extra capacity at peaks (e.g. bus/metro standees)
 vary seated space per customer (e.g. elbow room, leg room)
 extend/cut hours of service
 Chase demand (adjust capacity to match demand)
 schedule downtime in low demand periods
 use part-time employees
 rent or share extra facilities and equipment
 cross-train employees
 Flexible Capacity (vary mix by segment)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Predictable Demand Patterns and
Their Underlying Causes (Table 9-1)
Predictable Cycles
of Demand Levels
 day
 week
 month
 year
 other
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Underlying Causes of
Cyclical Variations
 employment
 billing or tax
payments/refunds
 pay days
 school hours/holidays
 seasonal climate changes
 public/religious holidays
 natural cycles
(e.g. coastal tides)
Services Marketing 5/E
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Causes of Seemingly Random Changes in
Demand Levels
 Weather
 Health problems
 Accidents, Fires, Crime
 Natural disasters
Question: which of these
events can be predicted?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Alternative Demand Management Strategies
(Table 9-2)
 Take no action
 let customers sort it out
 Reduce demand
 higher prices
 communication promoting alternative times
 Increase demand
 lower prices
 communication, including promotional incentives
 vary product features to increase desirability
 more convenient delivery times and places
 Inventory demand by reservation system
 Inventory demand by formalized queueing
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Hotel Room Demand Curves by Segment
and by Season (Fig. 9-2)
Price per
Room Night
Bl
Bh
Bh = business travelers in high season
Th
Bl = business travelers in low season
Tl
Th = tourist in high season
Tl = tourist in low season
Bl
Bh
Th
Tl
Quantity of Rooms Demanded at Each Price
by Travelers in Each Segment in Each Season
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
Note: hypothetical example
1 - 172
Avoiding Burdensome Waits for Customers
 Add extra capacity so that demand can be met at most
times (problem: may add too many costs)
 Rethink design of queuing system to give priority to certain
customers or transactions
 Redesign processes to shorten transaction time
 Manage customer behavior and perceptions of wait
 Install a reservations system
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Alternative Queuing Configurations (Fig. 9-4)
Single line, single server, single stage
Single line, single servers at sequential stages
Parallel lines to multiple servers
Designated lines to designated servers
Single line to multiple servers (“snake”)
“Take a number” (single or multiple servers)
28
Services Marketing 5/E
24
26
27
32
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21
20
25
30
31
29
23
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Tailoring Queuing Systems to Market Segments:
Criteria for Allocation to Designated Lines
 Urgency of job
 emergencies vs. non-emergencies
 Duration of service transaction
 number of items to transact
 complexity of task
 Payment of premium price
 First class vs. economy
 Importance of customer
 frequent users/loyal customers vs. others
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 175
Ten Propositions on the Psychology of Waiting
Lines (Table 9-3)
1. Unoccupied time feels longer
2. Preprocess/postprocess waiting feel longer than inprocess
3. Anxiety makes waiting seem longer
4. Uncertain waiting is longer than known, finite waiting
5. Unexplained waiting seems longer
6. Unfair waiting is longer than equitable waiting
7. People will wait longer for more valuable services
8. Waiting alone feels longer than in groups
9. Physically uncomfortable waiting feels longer
10. Waiting seems longer to new or occasional users
Sources: Maister; Davis & Heineke; Jones & Peppiatt
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Benefits of Effective Reservations Systems
 Controls and smoothes demand
 Pre-sells service
 Informs and educates customers in advance of arrival
 Customers avoid waiting in line for service (if service times
are honored)
 Data capture helps organizations prepare financial
projections
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Characteristics of Well-designed
Reservations Systems
 Fast and user friendly for customers and staff
 Can answer customer questions
 Offers options for self service (e.g. Web)
 Accommodates preferences (e.g., room with view)
 Deflects demand from unavailable first choices to
alternative times and locations
 Includes strategies for no-shows and overbooking
 requiring deposits to discourage no-shows
 canceling unpaid bookings after designated time
 compensating victims of over-booking
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 178
Setting Capacity Allocation Sales Targets for a
Hotel by Segment and Time Period (Fig. 9-5)
Capacity (% rooms)
100%
Week 7
Week 36
(Low Season)
(High Season)
Out of commission for renovation
Executive service guests
Executive service
guests
Transient guests
50%
Weekend
package
Transient guests
W/E
package
Groups and conventions
Groups (no conventions)
Airline contracts
Nights: M
Tu
W
Th
Airline contracts
F
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
S
Sn
M
Time
Services Marketing 5/E
Tu
W
Th
F
S
Sn
1 - 179
Information Needed for Demand and
Capacity Management Strategies
 Historical data on demand level and composition, noting
responses to marketing variables
 Demand forecasts by segment under specified conditions
 Fixed and variable cost data, profitability of incremental
sales
 Site-by-site demand variations
 Customer attitudes towards queuing
 Customer evaluations of quality at different levels of
capacity utilization
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Chapter 10
Planning the
Service Environment
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
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The Purpose of Service Environments
The service environment influences buyer behaviour in 3 ways



Message-creating Medium: symbolic cues to communicate the
distinctive nature and quality of the service experience.
Attention-creating Medium: to make the servicescape stand out
from other competing establishments, and to attract customers
from target segments.
Effect-creating Medium: colors, textures, sounds, scents and
spatial design to enhance the desired service experience,
and/or to heighten an appetite for certain goods, services or
experiences
Helps the firm to create a distinctive image & positioning that
is unique.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Comparison of Hotel Lobbies
(Figure 10.1)
The servicescape is part of the value proposition!
Orbit Hotel and Hostel, Los Angeles
Four Seasons Hotel, New York
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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The Mehrabian-Russell Stimulus-Response
Model (Figure 10.2)
Environmental
Stimuli &
Cognitive
Processes
Dimensions of
Affect:
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Pleasure and
Arousal
Services Marketing 5/E
Response
Behaviors:
Approach/
Avoidance &
Cognitive
Processes
1 - 184
The Mehrabian-Russell Stimulus-Response
Model
 Simple and fundamental model of how people respond to
environments
 Peoples’ conscious and unconscious perceptions and
interpretation of the environment influence how they feel in
that environment
 Feelings, rather than perceptions or thoughts drive
behavior
 Typical outcome variable is ‘approach’ or ‘avoidance’ of an
environment, but other possible outcomes can be added to
the model as well
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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The Russell Model of Affect
Arousing
Distressing
Exciting
Unpleasant
Pleasant
Relaxing
Boring
Sleepy
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 186
The Russell Model of Affect
 Emotional responses to environments can be described
along two main dimensions, pleasure and arousal.
 Pleasure is subjective depending on how much the
individual likes or dislikes the environment
 Arousal quality of an environment is dependent on its
“information load”, i.e., its degree of

Novelty (unexpected, surprising, new, familiar) and

Complexity (number of elements, extent of motion or change)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 187
Drivers of Affect
 Affect can be caused by perceptions and cognitive
processes of any degree of complexity.
 Simple Cognitive Processes, Perception of Stimuli
 tangible cues (of service quality)
 consumer satisfaction
 Complex Cognitive Processes
 affective charged schemata processing
 attribution processes
The more complex a cognitive process becomes, the more
powerful its potential impact on affect.However, most service
encounters are routine. Simple processes can determine affect.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
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Behavioral Consequence of Affect
 Basically, pleasant environments result in approach,
and
unpleasant environments result in avoidance
 Arousal acts as an amplifier of the basic effect of pleasure
on behavior
 If the environment is pleasant, increasing arousal can lead
to excitement and stronger positive consumer response. If
the environment is unpleasant, increasing arousal level will
move consumers into the Distressing region
 Feelings during the service encounter is also an important
driver of customer loyalty
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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An Integrated Framework – Bitner’s
ServiceScape Model (Figure 10.4)
Environmental
Dimensions
Ambient
Conditions
Space/
Function
Signs,
Symbols &
Artefacts
Moderators
Holistic
Environment
Internal Responses
Cognitive
Emotional
Psychological
Employee
Response
Moderator
Employee
Responses
Perceived
ServiceScape
Customer
Response
Moderator
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Customer
Responses
Cognitive
Emotional
Psychological
Services Marketing 5/E
Behaviour
Approach
or
Avoid
Social Interaction
Between
Customers &
Employees
Approach
or
Avoid
1 - 190
An Integrated Framework – Bitner’s
ServiceScape Model(con’t)
 Identifies the main dimensions in a service environment
and views them holistically
 Customer and employee responses classified under,
cognitive, emotional and psychological which would in turn
lead to overt behavior towards the environment
 Key to effective design is how well each individual
dimension fits together with everything else
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Dimensions of the Service Environment
Service environments are complex and have many design
elements. The main dimensions in the servicescape model
includes:
 Ambient Conditions
 Music (e.g, fast tempo and high volume increase arousal
levels)
 Scent (strong impact on mood, affect and evaluative
responses, purchase intention and in-store behavior)
 Color (e.g, warm colors associated with elated mood states
and arousal but also increase anxiety, cool colors reduce
arousal but can elicit peacefulness and calm)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Dimensions of the Service Environment (con’t)
 Spatial Layout and Functionality
 Layout refers to size and shape of furnishings and the ways it
is arranged
 Functionality is the ability of those items to facilitate
performance
 Signs, Symbols and Artifact
 Explicit or implicit signals to communicate the firm’s image,
help consumers find their way and to convey the rules of
behavior
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 193
Impact of Music on Restaurant Diners
(Table 10-2)
Restaurant
Patron
Behavior
Fast-beat
Slow-beat
Difference between
Music
Music
Slow and Fast-beat
Environment Environment Environments
Absolute
Difference
%
Difference
Consumer time
spent at table
45min
56min
+11min
+24%
Spending on
food
$55.12
$55.81
+$0.69
+1%
Spending on
beverages
$21.62
$30.47
+$8.85
+41%
Total spending
$76.74
$86.28
+$9.54
+12%
Estimated
gross margin
$48.62
$55.82
+$7.20
+15%
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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The Effects of Scents on the Perceptions of
Store Environments (Table 10-3)
Evaluation
Unscented
Scented
Environment Environment
Mean Ratings Mean Ratings
Difference
Store Evaluation
Negative/positive
4.65
5.24
+0.59
Outdated/modern
3.76
4.72
+0.96
Unattractive/attracti
ve
Drab/colorful
4.12
4.98
+0.86
3.63
4.72
+1.09
Boring/Stimulating
3.75
4.40
+0.65
Store Environment
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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The Effects of Scents on the Perceptions of
Store Environments (Table 10-3)
Evaluation
Unscented
Environment
Mean Ratings
Scented
Environment
Mean Ratings
Difference
Outdated/up- to-date
style
4.71
5.43
+0.72
Inadequate/adequate
3.80
4.65
+0.85
Low/high quality
4.81
5.48
+0.67
Low/high price
5.20
4.93
-0.27
Merchandise
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Aromatherapy: The Effects of Fragrance on
People (Table 10-4)
Fragrance
Aromath Aromather
erapy
apy Class
Tradition Potential Psychological
al Use
Impact on People
Orange
Citrus
Calming and relaxing
effect esp. for nervous
people
Lavender
Herbaceo Calming,
us
balancing,
soothing
Jasmine
Floral
Soothing
agent,
astringen
t
Muscle
relaxant,
soothing
agent
Emollient
soothing
agent
Skin
cleanser
Increase attention level
and boosts energy
Peppermint Minty
Calming
Uplifting,
balancing
Energizing,
stimulating
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
Relaxing and calming,
helps create a homey and
comfortable feel
Helps makes people feel
refreshed, joyful,
comfortable
1 - 197
Common Associations and Human Responses
to Colors (Table 10-5)
Color
Degree of Nature Common Association and
Warmth
Symbol Human Responses to Color
Red
Warm
Earth
High energy and passion; can
excite, stimulate, and increase
arousal and blood pressures
Orange
Warmest
Sunset
Emotions, expressions, and
warmth
Green
Cool
Grass
and
Trees
Nurturing, healing and
unconditional love
Blue
Coolest
Sky and Relaxation, serenity and loyalty
Ocean
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Selection of Environmental Design Elements
 There is a multitude of research on the perception and
impact of environmental stimuli on behaviour, including:
 People density, crowding
 Lighting
 Sound/noise
 Scents and odours
 Queues
 No standard formula to designing the perfect combination of
these elements.
 Design from the customer’s perspective
 Design with a holistic view!
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Tools to Guide in Servicescape Design
 Keen Observation of Customers’ Behavior and Responses
to the service environment by management, supervisors,
branch managers, and frontline staff
 Feedback and Ideas from Frontline Staff and Customers
using a broad array of research tools ranging from
suggestion boxes to focus groups and surveys.
 Field Experiments can be used to manipulate specific
dimensions in an environment and the effects observed.
 Blueprinting or Service Mapping - extended to include the
physical evidence in the environment.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 200
Chapter 11
Managing People
for Service Advantage
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 201
Frontline Service Personnel: Source of
Customer Loyalty and Competitive Advantage
 Frontline is an important source of differentiation and
competitive advantage. It is:
 a core part of the product
 the service firm
 the brand
 Frontline also drives customer loyalty, with employees
playing key role in anticipating customer needs,
customizing service delivery and building personalized
relationships
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 202
Boundary Spanning Roles
 Boundary spanners link the inside of the organization to the
outside world
 Multiplicity of roles often results in service staff having to
pursue both operational and marketing goals
 Consider management expectations of restaurant servers:
 deliver a highly satisfying dining experience to their customers
 be fast and efficient at executing operational task of serving
customers
 do selling and cross selling, e.g. “We have some nice desserts to
follow your main course”
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Role Stress in the Frontline
3 main causes of role stress:
 Person vs. Role: Conflicts between what jobs require and
employee’s own personality and beliefs
 Organization vs. Customer: Dilemma whether to follow
company rules or to satisfy customer demands
 Customer vs. Customer: Conflicts between customers that
demand service staff intervention
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Emotional Labor
 “The act of expressing socially desired emotions during
service transactions” (Hochschild, The Managed Heart)
 Three approaches used by employees
 surface acting
 deep acting
 spontaneous response
 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
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 205
The Cycles of Failure, Mediocrity and Success
Too many managers make short-sighted assumptions about
financial implications of:
 Low pay
 Low investment (recruitment, training)
 High turnover human resource strategies
Often costs of short-sighted policies are ignored:
 Costs of constant recruiting, hiring & training
 Lower productivity & lower sales of new workers
 Costs of disruptions to a service while a job remains unfilled
 Loss of departing person’s knowledge of business and customers
 Cost of dissatisfied customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 206
Cycle of Failure (Fig. 11.1)
Customer
turnover
Failure to develop
customer loyalty
Repeat emphasis on
attracting new customers
Low profit
margins
High employee turnover;
poor service quality
Use of technology Emphasis on
to control quality rules rather
than service
Payment of
low wages
No continuity in
relationship for
Employee dissatisfaction;
customer
poor service attitude
Customer
dissatisfaction
Employees
become bored
Narrow design of
jobs to accommodate
low skill level
Minimization of
selection effort
Minimization
of training
Employees can’t
respond to customer
problems
Source: Schlesinger and Heskett
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 207
Routinized
Intermittent
‘Normality’ of Service Sabotage Behaviors
Service Sabotage (Fig. 11-A)
‘Openness’ of Service Sabotage Behaviors
Covert
Overt
Customary-Private Service
Sabotage
Customer-Public Service
Sabotage
e.g. Waiters serving smaller
servings, bad beer or sour wine
e.g. Talking to guests like
young kids and putting them
down
Sporadic-Private Service
Sabotage
Sporadic-Public Service
Sabotage
e.g. Chef occasionally
purposefully slowing down
orders
e.g. Waiters spilling soup onto
laps, gravy onto sleeves, or hot
plates into someone’s hands
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Cycle of Mediocrity (Fig. 11.2)
Customers trade
horror stories
Other suppliers (if any)
seen as equally poor
Employee
dissatisfaction
(but can’t easily quit)
Employees spend
working life
in environment
of mediocrity
Narrow design
of jobs
No incentive for
cooperative relationship
to obtain better service
Complaints met by
indifference or
hostility
Jobs are boring and
repetitive; employees
unresponsive
Emphasis
on rules
vs. pleasing
customers
Training emphasizes
Success =
learning rules
not making
mistakes
Service not focused
on customers’ needs
Good wages/benefits
high job
security
E
Promotion
and pay
increases based Initiative is
on longevity, discouraged
lack of mistakes
Resentment at inflexibility and
lack of employee initiative;
complaints to employees
Customer dissatisfaction
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Cycle of Success (Fig. 11.3)
Low
customer
turnover
Customer
loyalty
Higher
profit
margins
Lowered turnover,
high service quality
Continuity in
relationship with
customer Employee satisfaction,
positive service attitude
High customer
satisfaction
Repeat emphasis on
customer loyalty and
retention
Extensive
training
Broadened
job designs
Train, empower frontline
personnel to control quality
Above average
wages
Intensified
selection effort
Source: Heskett and Schlesinger
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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How to Manage People for Service Advantage?
Staff performance is a function of both ability and motivation.
How can we get able service employees who are motivated to
productively deliver service excellence?
1. Hire the right people
2. Enable your people
3. Motivate and energize your people
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
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Hire the Right People
“The old saying ‘People are your most
important asset’ is wrong.
The RIGHT people are your most
most important asset.”
Jim Collins
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
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Recruitment
 The right people are a firm’s most important asset: take a
focused, marketing-like approach to recruitment
 Clarify what must be hired versus what can be taught
 Clarify nature of the working environment, corporate values
and style, in addition to job specs
 Ensure candidates have/can obtain needed qualifications
 Evaluate candidate’s fit with firm’s culture and values
 Fit personalities, styles, energies to the appropriate jobs
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
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Select And Hire the Right People:
(1) Be the Preferred Employer
Create a large pool: “Compete for Talent Market Share”
 What determines a firm’s applicant pool?
 Positive
 Quality
 The
image in the community as place to work
of its services
firm’s perceived status
 There is no perfect employee
 Different
jobs are best filled by people with different skills, styles or
personalities
 Hire
candidates that fit firm’s core values and culture
 Focus
on recruiting naturally warm personalities
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Select and Hire the Right People:
(2) How to Identify the Best Candidates
 Observe Behavior
 Hire
based on observed behavior, not words you hear
 Best
predictor of future behavior is past behavior
 Consider
group hiring sessions where candidates given group tasks
 Personality Testing
 Willingness
to treat co-workers and customers with courtesy,
consideration and tact
 Perceptiveness
 Ability
regarding customer needs
to communicate accurately and pleasantly
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Select and Hire the Right People:
(3) How to Identify the Best Candidates
 Employ Multiple, Structured Interviews

Use structured interviews built around job requirements

Use more than one interviewer to reduce similar to me effects
 Give Applicants a Realistic Preview of the Job

Chance to have “hands-on” with the job

Assess how the candidates respond to job realities

Allow candidates to self select themselves out of the job
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
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Train Service Employees
 The Organizational Culture, Purpose and Strategy
 Promote core values, get emotional commitment to strategy
 Get managers to teach “why”, “what” and “how” of job.
 Interpersonal and Technical Skills
 Both are necessary but neither is sufficient for optimal job
performance
 Product/Service Knowledge
 Staff’s product knowledge is a key aspect of service quality
 Staff need to be able to explain product features and to position
products correctly
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Factors Favoring Employee Empowerment
 Firm’s strategy is based on competitive differentiation and on
personalized, customized service
 Emphasis on long-term relationships vs. one-time transactions
 Use of complex and non-routine technologies
 Environment is unpredictable, contains surprises
 Managers are comfortable letting employees work independently
for benefit of firm and customers
 Employees seek to deepen skills, like working with others, and
are good at group processes
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Control vs. Involvement Model of Management
Control concentrates 4 key features at top of organization;
Involvement pushes them down:




Information about operating results and measures of
competitive performance
Rewards based on organizational performance (e.g. profit
sharing, stock ownership)
Knowledge/skills enabling employees to understand and
contribute to organizational performance
Power to influence work procedures and organizational
direction (e.g. quality circles, self-managing teams)
Source: Bowen and Lawler
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 219
Levels of Employee Involvement
 Suggestion involvement

Employee recommendation
 Job involvement
Jobs redesigned
 Employees retrained
 Supervisors facilitate

 High involvement
Information is shared
 Employees skilled in teamwork,
problem solving etc.
 Participate in decisions
 Profit sharing and stock ownership

Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 220
Motivate and Energize the Frontline
Use the full range of available rewards effectively,
including:



Job content
Feedback and recognition
Goal accomplishment
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 221
The Inverted Organizational Pyramid
(Fig. 11.5)
Customer Base
Top
Mgmt
Frontline Staff
Middle
Mgmt
Legend:
Frontline
Staff
Middle Mgmt
& Top Mgmt
Support Frontline
Traditional
Organizational Pyramid
Inverted Pyramid with a
Customer & Frontline Focus
= Service encounters, or ‘Moments of Truth.’
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 222
The Wheel of Successful HR in Service Firms
(Fig. 11.6)
Leadership that:
1. Hire the
Right People
Focuses the entire organization
on supporting the frontline
Fosters a strong
service culture with
passion for service
and productivity
Drives values that
inspire, energize
and guide service
providers
3. Motivate &
Energize Your People
Utilize the full
range of rewards
Be the preferred
employer & compete
for talent market share
Service Excellence
& Productivity
Intensify the
selection
process
2. Enable Your People
Empower Frontline
Build high performance service
delivery teams
Extensive Training
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 223
Chapter 12
Managing Relationships
and Building Loyalty
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 224
Four Stages of Brand Loyalty in a Consumer
 Cognitive loyalty – perception from brand attribute
information that one brand is preferable to its alternatives
 Affective loyalty – developing a liking for the brand based
on cumulatively satisfying usage occasions
 Conative loyalty – commitment to rebuying the same brand
 Action loyalty – exhibiting consistent repurchase behavior
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 225
Loyalty is Important to Profitability :
Index of Customer Profits over Time (Fig. 12.1)
(Year 1=100)
350 –
300
250
200
150
100
50
0
Year 1
Credit card
Year 2
Industrial laundry
Year 3
Year 4
Industrial distribution
Year 5
Auto servicing
Based on data from Reichheld and Sasser
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 226
What Makes Loyal Customers More Profitable?
 Tend to spend more as relationship develops
 customer’s balances may grow
 may consolidate purchases to one supplier
 Cost less to serve
 less need for information and assistance
 make fewer mistakes
 Recommend new customers to firm (act as unpaid sales
people)
 Trust leads to willingness to pay regular prices vs. shopping
for discounts
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 227
Analyzing Why Customers Are More Profitable
over Time (Fig. 12.2)
Profit from price
premium
Profit from references
Profit from reduced
op. costs
Profit from increased
usage
Base Profit
1
2
3
4
5
6
7
Year
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Source: Reichheld and Sasser
Services Marketing 5/E
1 - 228
Measuring Customer Equity:
Calculating Life Time Value of Each Customer
 Value at Acquisition
 revenues (application fee + initial purchase)
 Less costs (marketing +credit check + account set up)
 Annual Value (project for each year of relationship)
 revenues (annual fee + sales + service fees + value of referrals)
 Less costs (account management + cost of sales + write-offs)
 Net Present Value
 Determine anticipated customer relationship lifetime
 Select appropriate discount figure
 Sum anticipated annual values (future profits) at chosen discount
rate
 Customer Equity is total sum of NPVs of all current customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 229
Customer-Firm Relationship
Today’s marketers seek to develop long-term relationships
with customers. Relationship marketing includes:
 Database Marketing: Involves the use of technology by
delivering differentiated service levels to consumers and
subsequently tracking the relationship.
 Interaction Marketing: Usually in B2B context where people and
the social process also add mutually beneficial value.
 Network Marketing: Common in B2B context where companies
commit resources to develop positions in a network of
relationships with the stakeholders and relevant agencies.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Types of Relationships with Customers
(Table 12.1)
Type of Relationship--Firm and Customer
Nature of
Service Delivery
Continuous
Discrete transactions
“Membership”
Cable TV
Insurance
College enrollment
Subscriber phone
Theater subscription
Warranty repair
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
No formal relationship
Radio station
Police
Lighthouse
Pay phone
Movie theater
Public transport
1 - 231
Basic Segmentation Issues:
Building an Appropriate Customer Portfolio
 Target customers whose needs match firm’s capabilities
 Focus on value of prospective customers within each
segment, not just numbers
 Avoid targeting customers who might abuse:
 our employees, facilities
 other customers
 Create a mix of segments to reduce risks of volatility during
swings of economic cycles
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 232
Service-Relevant Segmentation Variables
 Timing of service use (e.g., by hour, day, season)
 Level of skill and experience as co-producer/selfserver
 Preferred language in face-to-face contact
 Access to electronic delivery systems (e.g., Internet)
 Attitudes toward use of new service technologies
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 233
Identifying and Selecting Target Segments
(Mgt Memo 12.2)
User characteristics




demographics
psychographics
geographic location
benefits sought
User behavior





Slide ©2004 by Christopher Lovelock and Jochen Wirtz
when, where, how services used
quantity/value of purchases
frequency of use
profitability of relationship
sensitivity to marketing variables
Services Marketing 5/E
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Portfolio of Professional Assignments
(Fig. 12.4)
Major, State-of-the-art challenges for the firm’s
principals that give the firm high visibility
Demanding client assignments offering a
learning experience for the firm’s most
experienced associates
“Pacesetters”
Significant Projects
Routine client projects shared
among principals and associates
“Bread and Butter” Projects
Analytical Work on Project Data
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
Entry-level tasks for new
associates or for research
assistants & paraprofessionals
1 - 235
The Customer Pyramid
(Fig. 12.5)
Good Relationship
Customers
Which segment sees high value in
our offer, spends more with us over
time, costs less to maintain, and
spreads positive word-of-mouth?
Platinum
Gold
Which segment costs us in time,
effort and money, yet does not
provide the return we want?
Which segment is difficult to do
business with?
Iron
Lead
Poor Relationship
Customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 236
How Customers See Relational Benefits in
Service Industries (Research Insights 12.1)
 Confidence benefits
 less risk of something going wrong, less anxiety
 ability to trust provider
 know what to expect
 get firm’s best service level
 Social benefits
 mutual recognition, known by name
 friendship, enjoyment of social aspects
 Special treatment benefits
 better prices, discounts, special deals unavailable to others
 extra services
 higher priority with waits, faster service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 237
The Customer Satisfaction-Loyalty Relationship
(Fig. 12.6)
Apostle
100
Loyalty (Retention)
Zone of Affection
80
Near Apostle
60
40
Zone of Indifference
Zone of Defection
20
Terrorist 0
1
Very
dissatisfied
2
3
4
Neither
satisfied
Dissatisfied
Satisfied
nor dissatisfied
5
Very
Satisfied
Satisfaction
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 238
The Wheel of Loyalty (Fig. 12.7)
3. Reduce
Churn Drivers
Conduct churn diagnostic
Address key churn drivers
Enabled through:
 Frontline staff
 Account
managers
 Membership
programs
 CRM
Systems
Implement complaint
handling & service
recovery
Increase switching
costs
Build higher
level bonds
1. Build a
Foundation
for Loyalty
Segment the market
Be selective in acquisition
Use effective tiering
of service.
Customer
Loyalty
2. Create Loyalty
Bonds
Deliver quality
service.
Deepen the
relationship
Give loyalty
rewards
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 239
Rewarding Value of Use, Not Just Frequency at
British Airways (Best Practice in Action 12.2)
 Dedicated reservations
 Reservations assurance
 Priority waitlist and standby
 Advance notification of delays
exceeding 4 hours
 Upgraded check-in
 Preferred boarding
 Special services assistance
 Bonus air miles
 Upgrade for two
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 240
Drivers of Service Switching (Fig. 12.9)
Service Failure / Recovery
Value Proposition
Core Service Failure
Pricing
• Service Mistakes
• Billing Errors
• Service Catastrophe
• High Price
• Price Increases
• Unfair Pricing
• Deceptive Pricing
Service Encounter Failures
Service
Switching
• Uncaring
• Impolite
• Unresponsive
• Unknowledgeable
Response to Service Failure
• Negative Response
• No Response
• Reluctant Response
Inconvenience
• Location/Hours
• Wait for Appointment
• Wait for Service
Competition
• Found Better Service
Others
Involuntary Switching
Ethical Problems
• Customer Moved
• Provider Closed
• Unsafe
• Cheat
• Hard Sell • Conflict of Interest
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 241
Common CRM Applications (Mgt Memo 12.2)
 Signifies the whole process by which relationships with
customers are built and maintained.
 CRM as an enabler, offering a “unified customer interface”
and allow firms to better understand and segment the
customers etc. Applications include:
 Data collection
 Data analysis
 Sales force automation
 Marketing automation
 Call center automation
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 242
Customer Relationship Strategies with CRM
Systems: Key Questions
 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 the 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 resource can we allocate to CRM right now?
 If we believe in CRM, why have we not taken steps in that
direction before? What can we do today to develop customer
relationship without spending on technology?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 243
Chapter 13
Customer Feedback and
Service Recovery
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 244
American Customer Satisfaction Index:
Selected Industry Scores, 2002
Score
100
(Max = 100)
90
85
80
79
80
79
74
71
71
70
76
66
70
65
62
60
50
40
30
20
10
% Change 0 3.7%
2002 vs 2001
1.3% 0.0% 1.3% 2.8% 0.0% 0.0% 8.2% 2.9% -2.6%
4.8% 3.3%
Industry:
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 245
Key Questions for Managers to Ask about
Customer Complaining Behavior
 Why do customers complain?
 What proportion of unhappy customers complain?
 Why don’t unhappy customers complain?
 Who is most likely to complain?
 Where do customers complain?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 246
Courses of Action Open to a Dissatisfied
Customer (Figure 13.1)
Complain to the
service firm
Take some form
of public action
Service Encounter
is Dissatisfactory
Take some form
of private action
Take no action
Complain to a
third party
Take legal action
to seek redress
Defect (switch
provider)
Negative word-ofmouth
Any one or a combination of
these responses is possible
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 247
Dimensions of Perceived Fairness in Service
Recovery Process (Figure 13.2)
Complaint Handling & Service
Recovery Process
Justice Dimensions of the Service Recovery Process
Procedural
Justice
Interactive
Justice
Outcome
Justice
Customer Satisfaction with the
Service Recovery
Source: Tax and Brown
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 248
Proportion of Unhappy Customers Who Buy
Again Depending on the Complaint Process
100
90
80
70
60
50
40
30
20
10
0
95%
82%
70%
54%
46%
37%
19%
9%
Customer did not
complain
Complaint was
not resolved
Problem cost > $100
Complaint
was resolved
Complaint was
resolved quickly
Problem cost $1 - 5
Source: TARP study
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 249
Impact of Effective Service Recovery
on Retention
No
Problem
84%
Problem,
but effectively
resolved
92%
Problem
Unresolved
46%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90% 100%
Customer Retention
Source: IBM-Rochester study
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 250
Components of an Effective Service Recovery
System (Figure 13.3)
Do
Dothe
theJob
JobRight
Rightthe
the
First
Time
First Time
+
Effective
EffectiveComplaint
Complaint
Handling
Handling
Identify
IdentifyService
Service
Complaints
Complaints
=
Increased
IncreasedSatisfaction
Satisfaction
and
Loyalty
and Loyalty

Conduct
ConductResearch
Research

Monitor
MonitorComplaints
Complaints

Develop
Develop“Complaints
“Complaints
as
Opportunity”
as Opportunity”
Culture
Culture
Resolve
ResolveComplaints
Complaints
Effectively
Effectively

Develop
DevelopEffective
Effective
System
and
System andTraining
Traininginin
Complaints
Handling
Complaints Handling
Learn
Learnfrom
fromthe
the
Recovery
Experience
Recovery Experience

Conduct
ConductRoot
RootCause
Cause
Analysis
Analysis
Close the Loop via Feedback
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 251
Strategies to Reduce Customer Complaint
Barriers (Table 13.1)
Complaint Barriers for
Dissatisfied Customers
Strategies to Reduce These Barriers
Inconvenience
 Difficult to find the right complaint
procedure.
 Effort, e.g., writing a letter.
Make feedback easy and convenient by:
 Printing Customer Service Hotline
numbers, e-mail and postal addresses on
all customer communications materials.
Doubtful Pay Off
 Uncertain whether any action, and
what action will be taken by the
firm to address the issue the
customer is unhappy with.
Reassure customers that their feedback will
be taken seriously and will pay off by:
 Having service recovery procedures in
place, and communicating this to
customers.
 Featuring service improvements that
resulted from customer feedback.
Unpleasantness
 Complaining customers fear that
they may be treated rudely,
 may have to hassle, or
 may feel embarrassed to complain.
Make providing feedback a positive
experience:
 Thank customers for their feedback.
 Train the frontline not to hassle and make
customers feel comfortable.
 Allow for anonymous feedback.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 252
How to Enable Effective Service Recovery
 Be proactive—on the spot, before customers
complain
 Plan recovery procedures
 Teach recovery skills to relevant personnel
 Empower personnel to use judgment and skills to
develop recovery solutions
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 253
Guidelines for Effective
Problem Resolution (Management Memo 13.1)
 Act fast
 Give benefit of doubt
 Admit mistakes but don’t
be defensive
 Clarify steps to solve
problem
 Understand problem from
customer’s viewpoint
 Keep customers informed
of progress
 Don’t argue
 Consider compensation
 Acknowledge customer’s
feelings
 Persevere to regain
goodwill
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 254
Service Guarantees Help Promote and Achieve
Service Loyalty
Force firms to focus on what
customers want
Set clear standards
Highlights cost of service
failures
Require systems to get &
act on, customer feedback
Reduce risks of purchase
and build loyalty
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 255
Types of Service Guarantees
 Single attribute-specific guarantee – one key service
attribute is covered
 Multiattribute-specific guarantee – a few important service
attributes are covered
 Full-satisfaction guarantee – all service aspects covered
with no exceptions
 Combined guarantee – like the full-satisfaction, adding
explicit minimum performance standards on important
attributes
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 256
The Hampton Inn 100% Satisfaction Guarantee
(Figure 13.4)
 What are the benefits of
such a guarantee?
 Are there any downsides?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 257
Key Objectives of Effective Customer Feedback
Systems
 Assessment and benchmarking of service quality
and performance
 Customer-driven learning and improvements
 Creating a customer-oriented service culture
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 258
Building a Customer Feedback System
 Total market surveys
 Post-transaction surveys
 Ongoing customer surveys
 Customer advisory panels
 Employee surveys/panels
 Focus groups
 Mystery shopping
 Complaint analysis
 Capture of service
operating data
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 259
Strengths and Weakness of Key Customer Feedback
Collection Tools (Table 13.3)
Selection of a cocktail of effective customer feedback
collection tools.
Multi-level Measurement
Collection Tools
Service
Process
Satisfaction Satisfaction
Specific
Feedback
Actionable
Represen Potential
-tative, for Service
Reliable Recovery
First
Hand
Learning
Cost
Effective
Total Market Survey (inclu.
competitors)
Annual Survey on overall
satisfaction
Transactional Survey
(process specific)
Service Feedback Cards
(process specific)
Mystery Shopping
(service testers)
Unsolicited Feedback Recd
(Online feedback system)
Focus Group Discussions
Service Reviews
Meets Requirements:
Fully
Moderate
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Little/Not at all
Services Marketing 5/E
1 - 260
Entry Points for Unsolicited Feedback
 Employees serving customers face-to-face or by phone
 Intermediaries acting for original supplier
 Managers contacted by customers at head/regional office
 Complaint cards mailed or placed in special box
 Complaints passed to company by third-party recipients
 consumer advocates
 trade organizations
 legislative agencies
 other customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 261
Chapter 14
Improving Service Quality
and Productivity
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 262
Importance of Productivity and Quality for
Service Marketers
Productivity
 Helps to keep costs down
 lower prices to develop market, compete better
 increase margins to permit larger marketing budgets
 raise profits to invest in service innovation
 May impact service experience (must avoid negatives)
 May require customer involvement, cooperation
Quality
 Gain competitive advantage, maintain loyalty
 Increase value (may permit higher margins)
 Improve profits
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 263
Perspectives on Service Quality
Transcendental: Quality = excellence. Recognized only through
experience
Product-Based: Quality is precise and measurable
User-Based:
Quality lies in the eyes of the beholder
ManufacturingBased:
Quality is conformance to the firm’s developed
specifications
Value-Based:
Quality is a trade-off between price and value
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 264
Dimensions of Service Quality
 Tangibles
 Reliability
 Responsiveness
 Assurance




competence,
courtesy
credibility
security
 Empathy
 access
 communication
 understanding of customer
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 265
Seven Service Quality Gaps (Fig. 14.1)
CUSTOMER
Customer needs
and expectations
1. Knowledge Gap
Management definition
of these needs
MANAGEMENT
2. Standards Gap
Translation into
design/delivery specs
3. Delivery Gap
Execution of
design/delivery specs
4. I.C.Gap
Advertising and
sales promises
5. Perceptions Gap
Customer interpretation
of communications
Customer perceptions
of product execution
7.
6. Interpretation Gap
Service Gap
Customer experience
relative to expectations
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 266
Prescriptions for Closing Service Quality Gaps
(Table 14.3)
 Knowledge: Learn what customers expect--conduct
research, dialogue, feedback
 Standards: Specify SQ standards that reflect expectations
 Delivery: Ensure service performance matches specs-consider roles of employees, equipment, customers
 Internal communications: Ensure performance levels match
marketing promises
 Perceptions:
Educate customers to see reality of service
delivery
 Interpretation: Pretest communications to make sure
message is clear and unambiguous.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 267
Hard and Soft Measures of Service Quality
 Hard measures refer to standards and measures that can
be counted, timed or measured through audits
 typically operational processes or outcomes
 e.g. how many trains arrived late?
 Soft measures refer to standards and measures that cannot
easily be observed and must be collected by talking to
customers, employees or others
 e.g. SERVQUAL, surveys, and customer advisory panels.
 Control charts are useful for displaying performance over
time against specific quality standards.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 268
Hard Measures of Service Quality
 Control charts to monitor
a single variable
 Service quality indexes
 Root cause analysis
(fishbone charts)
 Pareto analysis
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 269
Composition e of FedEx’s
Service Quality Index (SQI) (Table 14.4)
Failure Type
Weighting
X
Factor
Late Delivery – Right Day
Late Delivery – Wrong Day
Tracing request unanswered
Complaints reopened
Missing proofs of delivery
Invoice adjustments
Missed pickups
Lost packages
Damaged packages
Aircraft Delays (minutes)
Overcharged (packages missing label)
Abandoned calls
No of
Daily
=
Incidents
Points
1
5
1
5
1
1
10
10
10
5
5
1
Total Failure Points (SQI) =
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
XXX,XXX
1 - 270
Control Chart: Percent of Flights
Leaving within 15 Minutes of Schedule (Fig. 14.2)
100%
90%
80%
70%
60%
J
F
M
A
M
J
J
A
S
O
N
D
Month
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
1 - 271
Tools to Address Service Quality Problems
 Fishbone diagrams: A cause-and-effect diagram to identify
potential causes of problems.
 Pareto charts: Separating the trivial from the important.
Often, a majority of problems is caused by a minority of
causes i.e. the 80/20 rule.
 Blueprinting: A visualization of service delivery. It allows
one to identify fail points in both the frontstage and
backstage.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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Cause and Effect Chart for
Airline Departure Delays (Fig. 14.3)
Facilities,
Equipment
Arrive late
Oversized bags
Customers
Customers
Frontstage
Front-Stage
Personnel
Personnel
Procedure
Procedures
Delayed check-in
Gate agents
Aircraft late to
procedure
gate
cannot process
Mechanical fast enough
Acceptance of late
Failures
passengers
Late/unavailable
Late pushback
airline crew
Delayed
Departures
Late food
service
Other Causes
Weather
Air traffic
Late cabin
cleaners
Late baggage
Weight and balance
sheet late
Late fuel
Materials,
Materials,
Supplies
Supplies
Poor announcement of
departures
Backstage
Personnel
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Analysis of Causes of
Flight Departure Delays
15.3%
23.1%
15.4%
(Fig. 14.4)
All stations, excluding
Chicago-Midway Hub
11.7%
23.1%
23.1%
33.3%
33.3%
53.3%
15%
Washington Natl.
Late passengers
Waiting for pushback
Waiting for fueling
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
19%
9.5%
8.7%
11.3%
Newark
4.9
%
Late weight and balance sheet
Late cabin cleaning / supplies
Other
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Return on Quality (ROQ)
 ROQ approach is based on four assumptions:
 Quality is an investment
 Quality efforts must be financially accountable
 It’s possible to spend too much on quality
 Not all quality expenditures are equally valid
 Implication: Quality improvement efforts may benefit
from
being related to productivity improvement programs
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When Does Improving Service Reliability
Become Uneconomical? (Fig. 14.5)
Satisfy Target
Customers Through
Service Recovery
Service Reliability
100%
Optimal Point of
Reliability: Cost of
Failure = Service
Recovery
A
B
Satisfy Target
Customers Through
Service Delivery as
Planned
D
C
Investment
Small Cost,
Large Improvement
Large Cost,
Small Improvement
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
Assumption: Customers are equally (or even
more) satisfied with the service recovery provided
than with a service that is delivered as planned.
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Productivity in a Service Context
 Productivity measures amount of output produced relative
to the amount of inputs.
 Improvement in productivity means an improvement in the
ratio of outputs to inputs.
 Intangible nature of many service elements makes it hard
to measure the productivity of service firms, especially for
information based services.
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Efficiency, Effectiveness, and Productivity
 Efficiency: comparison to a standard--usually time-based
(e.g., how long employee takes to perform specific task)
 Problem: focus on inputs rather than outcomes
 May ignore variations in quality or value of service
 Effectiveness: degree to which firm is meeting its goals
 Cannot divorce productivity from quality/customer satisfaction
 Productivity: financial valuation of outputs to inputs
 Consistent delivery of outcomes desired by customers should
command higher prices
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Measuring Service Productivity
 Traditional measures of service output tend to ignore
variations in quality or value of service
 That is, they focus on outputs rather than outcomes, and stress
efficiency but not effectiveness.
 Firms that are more effective in consistently delivering
outcomes desired by customers can command higher
prices. Furthermore, loyal customers are more profitable.
 Measures with customers as denominator include:
 profitability by customer
 capital employed per customer
 shareholder equity per customer
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Questions to Ask When Developing Strategies
to Improve Service Productivity
 How to transform inputs into outputs efficiently?
 Will improving productivity hurt quality?
 Will improving quality hurt productivity?
 Are employees or technology the key to productivity?
 Can customers contribute to higher productivity?
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Operations-driven vs. Customer-driven Actions
to Improve Service Productivity
Operations-driven strategies Customer-driven strategies
Control costs, reduce waste Change timing of customer
demand
Set productive capacity to
match average demand
Involve customers more in
Automate labor tasks
production
Upgrade equipment and
systems
Ask customers to use third
parties
Train employees
Leverage less-skilled
employees through expert
systems
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Backstage and Frontstage Productivity Changes:
Implications for Customers
 Backstage improvements can ripple to the front stage and
affect customers
 e.g., new printing peripherals may affect appearance of bank
statements.
 Front-stage productivity enhancements are especially
visible in high contact services.
 Some may just require passive acceptance by customers
 Others require customers to change their scripts and behavior.
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Overcoming Customers’ Reluctance to Accept
Changes in Environment and Behavior
 Develop customer trust
 Understand customers’ habits and expectations
 Pretest new procedures and equipment
 Publicize the benefits
 Teach customers to use innovations and promote trial
 Monitor performance, continue to seek improvements
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Six Sigma Methodology to Improve and
Redesign Customer Service Processes
Process Improvement Process Design/Redesign
Define
Measure
Analyze
Improve
Control
 Identify the problem
 Define requirements
 Set goals
 Validate problem/process
 Refine problem/goal
 Measure key steps/inputs
 Develop causal hypothesis
 Identify root causes
 Validate hypothesis
 Develop ideas to measure
root causes
 Test solutions
 Measure results
 Establish measures to
maintain performance
 Correct problems if needed
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
 Identify specific or broad problems
 Define goal/change vision
 Clarify scope & customer requirements
 Measure performance to requirements
 Gather process efficiency data
 Identify best practices
 Assess process design
 Refine requirements
 Design new process
 Implement new process, structures and
systems
 Establish measures & reviews to
maintain performance
 Correct problems if needed
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Chapter 15
Organizing for Service
Leadership
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Customer-Led versus Market-Oriented
Philosophies of Management
 Firms may lose market leader position if listen too closely to
current customers
 Service leadership requires curiosity, risk taking
 Customer-led businesses focus on understanding expressed
desires of customers in currently served markets
 Market-oriented businesses commit to understand current/
latent customer desires plus competitors’ plans, capabilities
 Scan market more broadly, have longer-term focus
 Work closely with lead users (windows to future vs. anchors to
past)
 Combine traditional research with experimentation, observation
 Conclusion: Pursue customer satisfaction, but set limits on
being led by customers, especially during rapid change
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The Service Profit Chain (Fig. 15.1)
Internal
External
Service
concept
Operating strategy and
service delivery system
Target Market
Loyalty
CUSTOMERS
EMPLOYEES
Satisfaction
Productivity
& Output
Quality
Service
Value
Revenue
Growth
Satisfaction
Loyalty
Profitability
Capability
Service
Quality
• Workplace design
• Job design
• Selection and development
• Rewards and recognition
• Information and communication
• Tools for serving customers
Quality and productivity
improvements yield
higher service quality
and lower costs
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
• Lifetime value
• Retention
• Repeat business
• Referral
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Causal Links in the Service Profit Chain (Table 15.1)
 Customer loyalty drives profitability and growth
 Customer satisfaction drives customer loyalty
 Value drives customer satisfaction
 Employee productivity and retention drive value
 Employee loyalty drives productivity
 Employee satisfaction drives loyalty and productivity
 Internal quality drives employee satisfaction
 Top management leadership underlies chain’s success
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Integrating Three Functional Imperatives
(recap from Chapter 1)
Marketing
Imperative
Human Resources
Imperative
Customers
Operations
Imperative
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Defining Three Functional Imperatives
 Marketing Imperative
 Target “right” customers and build relationships
 Offer solutions that meet their needs
 Define quality package with competitive advantage
 Operations Imperative
 Create, deliver specified service to target customers
 Adhere to consistent quality standards
 Achieve high productivity to ensure acceptable costs
 Human Resource Imperative
 Recruit and retain the best employees for each job
 Train and motivate them to work well together
 Achieve both productivity and customer satisfaction
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Reducing Intra-Organizational Tension
 Transfers and cross training
 Cross functional taskforces
 New tasks and new people
 Process management teams
 Gain-sharing programs
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The Search for Synergy:
A Top Management Perspective
What do we want?
What do our employees,
intermediaries, and
other partners want?
What do our
customers want?
What can we do?
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From Losers to Leaders:
Moving Up the Service Performance Ladder
Service Leaders
 Crème de la crème of their respective industries
 Names synonymous with outstanding service, customer delight
Service Professionals
 Clear positioning strategy
 Sustained reputation for meeting customer expectations
 Service Non-entities
 Traditional operations mindset
 Rudimentary marketing, often emphasizing price discounts
 Service Losers
 Only survive because of lack of viable alternatives in marketplace
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Achieving Service Leadership by Focusing on
Role of Each Functional Area
 Marketing: move from tactical to innovative and
strategic
 Operations: move from reactive/cost oriented to
focused, innovative, well coordinated with
marketing and HR
 Human Resources: move from tight control of lowcost workers to quality of employees as strategic
advantage
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Leadership for Change Management Involves
Eight Stages
 Create sense of urgency to develop impetus for change
 Put together strong team to direct process
 Create appropriate vision of where organization must go
 Communicate new vision broadly
 Empower employees to act on vision
 Produce sufficient short term results to create credibility
 Build momentum to tackle tougher problems
 Anchor new behaviors in the organizational culture
Source: John Kotter
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Leadership Qualities Needed in Service
Organizations
 Vision, charisma, persistence, high expectations,
expertise, empathy, persuasiveness, integrity
 Ability to visualize quality of service as foundation for
competing
 Believe in people who work for the firm, make good
communications a priority
 Possess a natural enthusiasm for the business, teach it to
others, pass on nuances, secrets, crafts of operating
 Cultivate leadership qualities of others in organization
 Use values to navigate firms through difficult times
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Transformational Leadership May Require
Changing Corporate Culture
 Corporate Culture:
 Shared
 Shared
 Shared
 Shared
 Shared
perceptions regarding what is important
values about what is right and wrong
understanding about what works and what doesn’t
beliefs about why these things are important
styles of working and relating to others
 Climate for Service--Tangible working environment atop
underlying culture. Influential factors include:
 Shared perceptions concerning practices, procedures and types of
behaviors that get rewarded
 Clarity about mission and values, level of commitment to common
purpose
 Flexibility: freedom to innovate, sense of responsibility, standards
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