Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 1

Overview of Chapter 9
1.
Key Source of the Problem: Demand-Supply Gap*
1.
Demand side: Fluctuations in Demand
2.
Supply side: Capacity-Constrained Service Organizations
2.
Patterns and Determinant of Demand*
3.
Managing Demand Levels*
4.
Inventory Demand through Waiting Lines and
Reservations
5.
Minimize Perceptions of Waiting Time
6.
Create an Effective Reservations System
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 2

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 3

From Excess Demand to
Excess Capacity
Four conditions potentially faced by fixed-capacity services:
 Excess demand
 Too much demand relative to capacity at a given time
 Demand exceeds optimum 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
 Excess capacity
 Too much capacity relative to demand at a given time
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 4

Variations in Demand Relative to
Capacity
(Fig 9.1)
CAPACITY UTILIZED
Maximum Available
Capacity
Optimum Capacity
(Demand and Supply
Well Balanced)
VOLUME DEMANDED
Demand exceeds capacity
(business is lost)
Demand exceeds optimum capacity
(quality declines
)
Low Utilization
(May Send Bad Signals)
Excess capacity
(wasted resources)
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
TIME CYCLE 1 TIME CYCLE 2
Services Marketing 6/E Chapter 9 - 5

Addressing Problem of
Fluctuating Demand
Two basic approaches:
 Adjust level of capacity (supply) to meet demand
 Need to understand productive capacity and how it varies on an incremental basis
 Manage level of demand
 Use marketing strategies to smooth out peaks, fill in valleys
 Many firms use a mix of both approaches
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 6

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 7

Defining Productive Capacity in
Services
1.
Physical Capacity
 Physical facilities to contain customers
 Physical facilities to store or process goods
 Physical equipment to process people, possessions, or information
 Public/private infrastructure
2. Labor Capacity
 Labor used for physical or mental work
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 8

Alternative Capacity Management
Strategies
 Level capacity (fixed level at all times)
 Stretch and shrink
 Offer inferior extra capacity at peaks (e.g., bus/train standees)
 Vary seated space per customer (e.g., elbow room, leg room)
 Extend/cut hours of service
 Chase demand (adjust capacity to match demand)
 Flexible capacity (vary mix by segment)
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 9

Adjusting Capacity to Match Demand
 Schedule downtime during periods of low demand
 Rent or share extra facilities and equipment
 Ask customers to share
 Invite customers to perform self-service
 Cross-train employees*
 Use part-time employees*
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 10

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 11

Predictable Demand Patterns and
Their Underlying Causes
(Table 9.1)
Predictable Cycles of Demand Levels
 day
 week
 month
 year
 other
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)
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 12

Causes of Unpredictable Changes in
Demand Levels
 Weather
 Health problems
 Accidents, Fires,
Crime
 Natural disasters
Question: Which of these events can be predicted?
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 13

Analyzing Drivers of Demand
 Understand why customers from specific market segments select this service 
Need Qualitative Studies
 Keep good records of transactions to analyze demand patterns
 Sophisticated software can help to track customer consumption patterns
 Record weather conditions and other special factors that might influence demand
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 14

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 15

Alternative Demand Management
Strategies
(Table 9.2)
 Reduce demand
 Higher prices (Peak pricing)
 Communication promoting alternative times
 Increase demand
 Lower prices (Off peak pricing)
 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 queuing
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 16

Marketing Strategies Can
Reshape Some Demand Patterns
 Use price and other costs to manage demand
 Change product elements
 Modify place and time of delivery
 No change
 Vary times when service is available
 Offer service to customers at a new location
 Promotion and education
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 17

Hotel Room Demand Curves by
Segment and Season
(Fig 9.3)
Price per room night
T h
B l
T l
B h
B h
= business travelers in high season
B l
= business travelers in low season
T h
= tourist in high season
T l
= tourist in low season
T h
B l
B h
T l
Quantity of rooms demanded at each price by travelers in each segment in each season
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Note: hypothetical example
Services Marketing 6/E Chapter 9 - 18

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 19

Why Do Waiting Lines Occur?
 Because the number of arrivals at a facility exceeds capacity of system at a specific point in the process
 Queues are basically a symptom of unresolved capacity management problems
Not all queues take form of a physical waiting line in a single location
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 20

Alternative Queuing Configurations
(
Fig 9.5)
Single line, single server, single stage
Single line, single servers, 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
29
31
30
26
25
27
32
21
20
24
23
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 21

Saving Customers from
Burdensome Waits
 Add extra capacity so that demand can be met at most times (problem: may increase costs too much)
 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 reservation system
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 22

Criteria for Allocating Different Market
Segments to Designated Lines
 Urgency of job
 Emergencies versus non-emergencies
 Duration of service transaction
 Number of items to transact
 Complexity of task
 Payment of premium price
 First class versus economy
 Importance of customer
 Frequent users/high volume purchasers versus others
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 23

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 24

Ten Propositions on Psychology of
Waiting Lines (1) (
Table 9.3)
1.
Unoccupied time feels longer than occupied time*
2.
Pre- and post-process waits feel longer than in-process waits
3.
Anxiety makes waits seem longer
4.
Uncertain waits are longer than known, finite waits*
5.
Unexplained waits are longer than explained waits*
Sources: Maister; Davis & Heineke; Jones & Peppiatt
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 25

Ten Propositions on Psychology of
Waiting Lines (2)
(Table 9.3)
6.
Unfair waits are longer than equitable waiting
7.
People will wait longer for more valuable services
8.
Waiting alone feels longer than waiting in groups
9.
Physically uncomfortable waits feel longer*
10.
Waits seem longer to new or occasional users
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Sources: Maister; Davis & Heineke; Jones & Peppiatt
Services Marketing 6/E Chapter 9 - 26

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 27

Characteristics of Well-Designed
Reservations System
 Fast and user-friendly for customers and staff
 Answers customer questions
 Offers options for self service (e.g., the 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 © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 28

Setting Hotel Room Sales Targets by
Segment and Time Period
(Fig.9.7)
Capacity
(% rooms)
Week 7
(Low Season)
100%
Out of commission for renovation
Loyalty Program
Members
Transient guests
Weekend package
50%
Week 36
(High Season)
Loyalty Program Members
Transient guests
W/E package
Groups and conventions
Groups (no conventions)
Airline contracts
Time Nights: M Tu W Th F S Su
Slide © 2007 by Christopher Lovelock and Jochen Wirtz
Airline contracts
M Tu W Th F S Su
Services Marketing 6/E Chapter 9 - 29

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*
 Segment-by-segment data*
 Fixed and variable cost data, profitability of incremental sales*
 Meaningful location-by-location demand variations
 Customer attitudes toward queuing
 Customer opinions of quality at different levels of capacity utilization
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 30