Services Marketing

1

MS-65Marketing of Services

Indira GandhiNational Open UniversitySchool of Management Studies

Block

1MARKETING OF SERVICES: AN INTRODUCTIONUNIT 1

Marketing of Services: Conceptual Framework 5

UNIT 2

Role of Services in Economy 20

UNIT 3

International Trade in Services, The WTO, and India 37

UNIT 4

Consumer Behaviour in Services 53© ALI

© ALI

Marketing of Services:An Introduction

2

Course Revision Team (2004)

Prof. Ravi Shankar Dr. Tapan K. Panda Prof. B.B. KhannaCourse Editor IIM, Khozikode DirectorIIFT, New Delhi Calicut School of Management Studies

IGNOU, New Delhi

Prof. Madhulika Kaushik Dr. Rupa Chanda Dr. Kamal YadavaSchool of Management Studies IIM, Bangalore Course Coordinator and EditorIGNOU, New Delhi School of Management Studies

IGNOU, New DelhiProf. Rajat KathuriaIMI, New Delhi

Course Preparation Team*

Prof. L.M. Johari Dr. V. Chandrashekhar Prof. J.B. NaddaFMS, Delhi University Mahindra Days Hotels & Goa UniversityDelhi Resorts, Bangalore Goa

Prof. J.D. Singh Ms. Sudha Tewari Mr. M. VenkateswaranIMI Parivar Seva Sansthan Transportation Corporation ofNew Delhi New Delhi India, Hyderabad

Prof. P.K. Sinha Mr. Pramod Batra Prof. Rakesh KhuranaIIM EHIRC School of Management StudiesBangalore New Delhi IGNOU, New Delhi

Mr. Amrish Sehgal Ms. Rekha Shetty Prof. Madhulika KaushikBhutan Tourism Dev. Corpn. Apollo Hospitals School of Management StudiesBhutan Madras IGNOU, New Delhi

Mr. D. Ramdas Ms. Malabika Shaw Mr. Kamal YadavaManagement Consultant AIMA School of Management StudiesNew Delhi New Delhi IGNOU, New Delhi

Prof. M.L. Agarwal Mr. Saurabh KhoslaXLRI Tulika Advertising AgencyJameshedpur New Delhi

Mr. Arun Shankar Mr. Sanjeev BhikchandaniCiti Bank Sanka Information Pvt. Ltd.,New Delhi New Delhi

* The course was initially prepared by these experts and the present material is the revised version. Theprofile of the Course Preparation Team given is as it was on the date of initial print.

June, 2004 (Revision)© Indira Gandhi National Open University, 2004

ISBN-81-266-1276-2

All rights reserved. No part of this work may be reproduced in any form, by mimeograph or anyother means, without permission in writing from the Indira Gandhi National Open University.

Further information about the Indira Gandhi National Open University courses may be obtainedfrom the University’s Office at Maidan Garhi, New Delhi-110 068.

Printed and published on behalf of the Indira Gandhi National Open University, New Delhi,by Director, School of Management Studies.

Paper Used: Agro-based Environment Friendly

Cover Design by: H.D. Computers, Inderpuri, New Delhi.

Laser Composed by: ICON Printographics, B-107 Fateh Nagar, New Delhi-110 018

Printed at: Akashdeep Printers, Darya Ganj, New Delhi.

Print Production

Mr. A.S. Chhatwal, Mr. Tilak Raj Ms SumathyAsstt. Registrar (Publication), Sr. Scale, S.O. (Publication), Proof ReaderSOMS, IGNOU SOMS, IGNOU SOMS, IGNOU

© ALI

© ALI

3

BLOCK 1 MARKETING OF SERVICES :AN INTRODUCTION

The first block of the course is concerned with the conceptual frameworkregarding services marketing and also gives the role of services in nationaleconomies as well as international trade. The block consists of four units. Thefirst unit entitled ‘Marketing of Services : Conceptual Framework’ explains asto why marketing practices and applications need to be specifically evolved forservices, as they are in certain characteristics distinct from goods. The unitdeals with the concept of a service and its classifications, the differencebetween goods and services, the marketing implications of these differences andthe service marketing mix.

The second unit on ‘Role of Services in Economy’ brings about the importanceof service sector in the national economies. The unit outlines details ofinternational as well as Indian scenario. It also brings out brief details of someimportant service sectors in India. The next unit is on ‘International Trade inServices, The WTO, and India’. It outlines recent trends in international tradein services, provides an overview of GATS and India’s negotiating strategy anddomestic reforms. The last unit of the block gives details of consumerbehaviour in services.

© ALI

© ALI


4

MS-65: MARKETING OF SERVICESCourse Components

BLOCK UNIT UNIT TITLE AUDIO VIDEONOS. PROGRAMME PROGRAMME

1. MARKETING OF SERVICES:AN INTRODUCTION

1. Marketing of Services: Conceptual Framework2. Role of Services in Economy3. International Trade in Services, the WTO, and India4. Consumer Behaviour in Services

2. SERVICES MARKETING MIX

5. Product and Pricing Decisions6. Place and Promotion Decisions7. Extended Marketing Mix for Services

3. STRATEGIC ISSUES

8. Service Quality9. Managing Capacity/Demand10. Retaining Customers

4. SECTORAL APPLICATIONS–I

11. Financial Services Issues in Social Destination12. Tourism and Hospitality Services Marketing India13. Health Services Marketing of Health14. Case Study: Serving the Global Indian Services

5. SECTORAL APPLICATIONS–II

15. Educational Services16. Professional Support Services: Advertising Agencies17. Telecommunication Services18. Product Support Services19. Case Studies

1. Is the Customer Always Right?2. The Case of Dosa King.

© ALI

© ALI

5

UNIT 1 MARKETING OF SERVICES :CONCEPTUAL FRAMEWORK

Objectives

After going through this unit you should be able to:

define the concept of services,

identify the reasons for growth of the service sector,

explain the characteristics that distinguish services from products,

explain the implications of these characteristics in terms of designing amarketing strategy,

explain the ways in which services can be classified so as to developframeworks for managing them, and

identify the services marketing mix.

Structure

1.1 Introduction

1.2 The Concept of Service

1.3 Reasons for Growth of the Service Sector

1.4 Characteristics of Services

1.5 Services Classified

1.6 The Services Marketing Mix

1.7 Summary

1.8 Self Assessment Questions

1.9 Further Readings

1.10 References

1.1 INTRODUCTION

Economists have divided all industrial and economic activities into three maingroups: primary, secondary, and tertiary. Primary activities include agriculture,fishing and forestry. Secondary activities cover manufacturing and construction;tertiary activities refer to the services and distribution. In the pre-industrialisedera, primary activities were the mainstay of the economy. The IndustrialRevolution marked the beginning of increasing importance of secondaryactivities and the gradually decreasing the status of agriculture and alliedactivities. The period following World War II saw USA become the world’sfirst ‘service economy’ with more than 50 per cent of the working populationemployed in producing services and today 80 per cent of the US economy isservice-oriented. This led a New York Congressman to remark that America isbecoming a nation of people who are “serving each other hamburgers or takingin each others’ laundry”. However, the US service industry is a very technicaland sophisticated one comprising computer and software development, businessconsultancy, telecommunication, banking and insurance.

This pattern of economic development is not universally applicable to allcountries. In many African and Asian countries the agricultural sector is till thedominant one. In countries like India, we can observe the growing importanceof the manufacturing and service sectors while agriculture still continues toretain its stronghold on the economy. The manufacturing and service sectorsare growing not only in volume but also in sophistication and complexity. The

© ALI

© ALI


6

wide array of services found in the metropolitan cities in India comparefavourably with those found anywhere in the world. Deniel Bell, in his book‘The Coming of the Post-industrial Society’ called this period of dominance bythe service sector as the post-industrial society1 . According to him: “if anindustrial society is defined by the quantity of goods as marking a standard ofliving, the post-industrial society is defined by the quality of life as measured bythe services desirable and possible for everyone.”

1.2 THE CONCEPT OF SERVICE

Widespread interest in the effective management and marketing of services aswell as the inconclusive debate on how distinct is the marketing of intangibleservices from that of the tangible products, have enriched the literature byhighlighting the service characteristics as that of intangibility, immediacy,individuality, perishability, heterogeneity, ownership, inseparability of productionfrom consumption, and being experimental. In common parlance, thesecharacteristics are also referred as:

Services are performed, not produced.

Services are more people-based than technology-based.

Services supply cannot be easily changed to meet the suddenly changedmarket needs.

Service demand has greater elasticity.

Services face unique quality control issues and a larger number of problemsin customer servicing.

Service quality is an amalgam of services.

Activity 1

If we take tangibility and intangibility as the opposite ends of a continuum, canyou by looking around identify services which can be classified along thiscontinuum? Think of the services utilized by you as an individual, as a familyand as an organisation.

............................................................................................................................

............................................................................................................................

............................................................................................................................

............................................................................................................................

The term service is rather general in concept, and it includes a wide variety ofservices. There are the business and professional services such as advertising,marketing research, banking, insurance, computer-programming, legal andmedical advice. Then there are services which are provided by professionalsbut consumed for reasons not of business, rather for leisure, recreation,entertainment and fulfillment of other psychological and emotional needs suchas education, fine arts, etc.

Faced with such a broad spectrum we need to define the concept of servicefrom a marketing view-point. Kolter offers one such definition: A service isany activity or benefit that one party can offer to another that is essentiallyintangible and does not result in the ownership of anything.2 . Its productionmay or may not be tied to physical product.

W.J. Stanton views services as fulfilling certain wants and states that, “servicesare those separately identifiable, essentially intangible activities which providewant-satisfaction, and are not necessarily tied to the sale of a product or

© ALI

© ALI

7

Table 1.1: List of Selected Services

Utilities Insurance, Banking, Finance

Electricity Banks

Water Supply Share and Stock Brokers

Law Enforcing, Civil, Business, Professional and

Administrative and Defence Services Scientific Activities

Police Advertising

Army Marketing Research

Air Force Consultancy

Navy Accountancy

Judiciary Legal

Civil Administration Medical

Municipal Services Educational

(Sewage, maintenance of roads Research

parks and public buildings) Maintenance and Repairs (of

plants, machinery and equipment)

Leasing

Transport and Communication Computer Programming

Railways (Passenger and Freight) Employment Agencies

Air Transport (Passenger and Freight) Leisure, Recreation

Post and Telegraph Cinema, Theatre

Telephone and Telecommunication Clubs, Gymnasiums

Broadcasting (All India Radio) Restaurants, Hotels

Telecasting (Doordarshan) Video Game Parlors

Casinos

Distributive Trades Self-improvement Courses

Wholesale Distribution Miscellaneous

Retail Distribution Beauty Parlors

Dealers, Agents Health Clubs

Domestic Help

Drycleaning

Matrimonial Service

Source: Adapted from Donald Cowell, ‘The Marketing of Services’, Heinemann, London.

another service. To produce a service may or may not require the use oftangible goods. However, when such use is required, there is no transfer of title(permanent ownership) to these tangible goods.”3 As in the case of a product,in the case of services also your starting point for understanding the marketingdynamics is the want satisfaction of the customers. It is important to correctlyidentify the particular want(s) which your service is fulfilling, since this willprovide the clue for designing the most appropriate marketing strategy.

A restaurant provides satisfaction to its customers on the basis of type andquality of its food, its decor and environment and the behaviour of its staff andits location in a busy commercial-cum office complex. For instance, ‘ClassTouch’ was started as a restaurant serving exclusive Western and Chinesecuisine with an expensive decor, a live band, beautifully liveried waiters and ahigh-price menu. The venture was a flop right from the start. On the adviceof its marketing consultant, the restaurant changed over from serving elaborate,expensive meals to a ‘fast-food’ outlet providing quick, reasonably priced meals

Marketing of Services:Conceptual Framework

© ALI

© ALI


8

for consumption both within and outside the restaurant. Today this restaurant isa big success. It was the correct identification of the want-satisfaction whichhelped the restaurant become successful. Located in a predominantly officecomplex, the owners realised that in lunch-break, people do not visit arestaurant for relaxation or status satisfaction. They have limited time at theirdisposal and want a quick clean meal at a reasonable price, with minimum frillsand fancy. In this case, the restaurant was satisfying the basic hunger need,but was catering to a very specific class of customer (office-goers) with aspecial kind of constraint (that of time and money).

To be successful, you have to firstly, identify the basic need which is beingfulfilled by your service, and secondly, find ways and means to differentiate itfrom that of the competitors so that you can increase your number ofcustomers and also command their loyalty. In our earlier example of therestaurant it was only after the basic need had been correctly identified thatthe restaurant could adopt an appropriate marketing strategy and turn thecorner. Thus, as a marketing manager involved in the marketing of servicesyour first concern should be the identification of the customers’ needs. A clueto this can be provided by looking into the reason for the phenomenal growthof the service sector in recent times.

Activity 2

Study an organisation engaged in Marketing of Education and Training Servicesto describe:

i) The need or want that these services satisfy.

ii) The nature of services which these organisations are providing.

iii) How the services of these organisations are differentiated from those oftheir competitors?

................................................................................................................

................................................................................................................

................................................................................................................

................................................................................................................

1.3 REASONS FOR GROWTH OF THE SERVICESECTOR

Manufacturing industries grew because they produced tangible goods whichsatisfied people’s physiological needs of food, shelter and clothing. As thebasic need was fulfilled there was demand for improved satisfaction, and thisled to a proliferation of variations of the same product and a number ofcompanies involved in its manufacture. The growth of service industries canbe traced to the economic development of society and the socio-culturechanges that have accompanied it. Table 1.2 presents the reasons for growthof service industries.

Sometimes, the growth of a specific service industry is the result of acombination of several reasons. Increasing affluence coupled with the desire toutilise leisure time for leisure rather than for doing odd repair jobs in the househad led to the growing tribe of plumbers and electricians. Increasing affluencecombined with increasing complexity of life and increasing insecurity has led tothe phenomenon of credit cards and travelers cheques which have proved to bealmost perfect substitutes for money. These credit cards provide convenienceand safety. In fact, convenience is proving to be a key concept in theprovision of services.

© ALI

© ALI

9

Table 1.2: Reasons for Growth of Service Industries

Reasons Types of services required

1 Increasing affluence Greater demand for services(activities which consumers used toperform themselves) such as interiordecoration, laundry, care ofhousehold products such as carpets,care of garden etc.

2 More leisure time Greater demand for recreation andentertainment facilities, travel resorts,adult education and self-improvementcourses.

3 Higher percentage of women in Greater demand for crèches, babylabour force sitting, household domestic help

4 Greater life expectancy Greater demand for nursing homesand health care services

5 Greater Complexity of products Greater demand for skilledspecialists to provide maintenancefor complex products such as air-conditioners, cars, home computers.

6 Increasing complexity of life Greater demand for specialists inincome-tax, labour laws, legal affairs,marriage counseling, employmentservices.

7 Greater concern about ecology and Greater demand for purchased orresource scarcity leased services, car rental, travel,

resort to time sharing rather thanownership basis.

8 Increasing number of new products The computer-sparked developmentof such service industries asprogramming, repair and timesharing.

Source: Schoell, K.F. and J.T. Ivy, 1981 “Marketing : Contemporary Concepts and Practices,“Allyn and Bacon; Boston.

1.4 CHARACTERISTICS OF SERVICES

Services have a number of unique characteristics that make them so differentfrom products. Some of the most commonly accepted characteristics are:

a) Intangibility

b) Inseparability

c) Heterogeneity

d) Perishability

e) Ownership


© ALI

© ALI


10

Intangibility

When you buy a cake of soap, you can see, feel, touch, smell and use it tocheck its effectiveness in cleaning. But when you pay fees for a term incollege, you are paying for the benefit of deriving knowledge and educationwhich is delivered to you by teachers. In contrast to the soap where you canimmediately check its benefits, there is no way you can do so in case of theteachers who are providing you the benefits. Teaching is an intangible service.When you travel by an aeroplane, the benefit which you are deriving is aservice (transaction) but it has some tangible aspects such as the particularplane in which you fly (and the food and drink which is served). In this casethe service has both a tangible and intangible aspect as compared to teachingwhich has hardly any tangible aspect. Figure 1.1 presents the tangible-intangibledominant aspect on a goods-service continuum. This continuum highlights thefact that most services are in reality a combination of products and serviceshaving both tangible and intangible aspects. There are only a few truly puretangible products or pure intangible services.

TangibleDominant

IntangibleDominant

Salt Soft drinksDetergents

AutomobilesCosmetics

Fast-foodoutlets

Fast-foodoutlets Advertising

agencies AirlinesInvest-ment

management

Consulting Teaching

Source: G. Lynn Shostack, “Breaking Free From Product Marketing,” Journal of Marketing 41(April 1977): 73-80. American Marketing Association.

Figure 1.1: Goods Services Continuum

The distinguishing feature of a service is that its intangible aspect is dominant.J. Bateson has described the intangible characteristics of services which makethem distinct from products4. These intangible features are:

A service cannot be touched

Precise strandardisation is not possible

There is no ownership transfer

A service cannot be patented

Production and consumption are inseparable

There are no inventories of the service

Middlemen roles are different

The consumer is part of the production process so the delivery system mustgo to the market or the customer must come to the delivery system.

Inseparability

In most cases a service cannot be separated from the person or firm providingit. A service is provided by a person who possesses a particular skill (singer),by using equipment to handle a tangible product (dry cleaning) or by allowingaccess to or use of physical infrastructure (hotel, train). A plumber has to be

© ALI

© ALI

11

physically present to provide the service, the beautician has to be available toperform the massage. This is in direct contrast to products which can beproduced in the factory today, stocked for the next two, three or more monthsand sold when an order is procured.

Heterogeneity

The human element is very much involved in providing and rendering servicesand this makes standardisation a very difficult task to achieve. The doctor whogave you his complete attention in your last visit may behave a little differentlythe next time. The new bank clerk who cashed your cheques may not be asefficient as the previous one and you have to spend more time for the sameactivity. This is despite the fact that rules and procedures have been laid downto reduce the role of the human element and ensure maximum efficiency.Airlines, restaurants, banks, hotels have large number of standardisedprocedures. You have to reserve a room in a hotel and this is a straightforward procedure for which all the steps are clearly defined. Human contactis minimal in the computerised reservation systems, but when you go to thehotel there will be a person at the reception to hand over the key of yourroom. The way this person interacts with you will be an important factor inyour overall assessment of the service provided by the hotel. The rooms, thefood, the facilities may be all perfect, but it is the people interacting with youwho make all the difference between a favourable and unfavourable perceptionof the hotel.

Perishability

Services cannot be stored and are perishable. A car mechanic who has nocars to repair today, spare berths on a train, or unsold seats in a cinema hallrepresent a service capacity which is lost forever. Apart from the fact that aservice not fully utilised represents a total loss, the other dimension of thisperishability aspect is that most services may face a fluctuating demand. Thereis a peak demand time for buses in the morning and evening (office hours).Certain train routes are always more heavily booked than others. Thisfluctuating demand pattern aggravates the perishability characteristic of services.

Ownership

When you buy a product you become its owner-be it a pencil, book, shirt,refrigerator or car. In the case of a service, you may pay for its use but younever own it. By buying a ticket you can see the evening film show in thelocal cinema theater; by paying wages you can hire the services of a chauffeurwho will drive your car; by paying the required charges you can have amarketing research firm survey into the reasons for you product’s poor salesperformance, etc. In case of a service, the payment is not for purchase, butonly for the use or access to or for hire of items or facilities.

A service is purchased for the benefits it provides. If we closely examine thereasons why products are purchased, we find that they are bought becausethey provide certain intangible benefits and satisfactions. Detergent powderprovides the primary benefit of cleanliness, air-conditioners provide the benefitof a cool, comfortable environment, a mixer-cum-grinder provides convenience.The only difference between products and services is that in the latter, theintangible component is greater than in the former. Thus, services can betreated as a special kind of product.

From a marketing view-point, the same concepts and techniques are applicablefor both products and services. The successful marketing of both requiresmarket research, product design, product planning and development, pricing,promotion and distribution. However, for marketing services, the marketing


© ALI

© ALI


12

manager must understand the nature of the five characteristics of services andthe manner in which they impinge on the marketing strategy.

Table 1.3 describes the implications of characteristics of services and how themarketing strategy can be focused to overcome these constraints. Besides theconstraints highlighted in Table 1.3, are some other factors which have inhibitedthe active marketing of services. Professionals such as doctors and lawyershave traditionally been opposed to the idea of marketing, rather they have reliedon the word of mouth of satisfied customers for increasing their clientele.

Table: 1.3: Implication of service characteristics andways of overcoming them

Service characteristics Implications Means of overcomingcharacteristics

1 Intangibility Sampling difficult. Difficult Focus on benefits. Use brandto judge quality and value names. Personalise service.in advance. Not possible Develop reputation. Increaseto patent or have copyright tangibility (e.g. its physicalRelatively difficult to representation)promote.

2 Inseparability Requires presence of Learn to work in larger groups.performer/producer. Work faster. Train more serviceDirect sale. Limited scale performersof operations.Geographically limitedmarket

3 Heterogeneity Difficult to standardise Careful selection and training ofquality. personnel. Define behaviour

norms. Reduce role of humanelement. Mechanise andautomate maximum possibleoperations.

4 Perishability Cannot be stored. Problem Better match between supplyof demand fluctuation and demand by price reduction

in low demand season

5 Ownership Customer has access to but Stress advantages of non-not ownership of facility or ownership such as easieractivity. payment scheme.

Source: Cowell, Donald, ‘The Marketing of Services’. Heinemann, London.

The small size of many service organisations such as beauty parlours, repairshops, barber shops etc. also limits the use of marketing techniques which canbe successfully used in larger organisations and then there is the case ofservice organisations such as schools, hospitals and, universities which enjoymore demand than they can cope with. These institutions have, therefore,never felt the need for actively marketing their services.

Activity 3

Looking at inseperability of the service and its producer as a majorcharacteristic that distinguishes products and services, you can imagine theimplications for marketing the services of consultants, musicians, stageperformers and advertising creatives. Talk to some of these people ororganisations to find out in what ways have they tried to overcome themarketing implications of inseparability.

...........................................................................................................................

© ALI

© ALI

13

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

1.5 SERVICES CLASSIFIED

A larger number of classification schemes for services have been developed toprovide strategic insights in managing them. Utilizing different bases, theseschemes allow us to understand the nature of the service act, the relationshipbetween service organisation and its customers, the nature of service demandand the attributes of a service product. Let us discuss the schemes briefly.

1. The Nature of the Service Act

Using two dimension of tangibility of the service act and to whom services aredirected at. Lovelock5 has classified services according to whether services aredirected at people or possessions, at minds, physical possessions or assets.Table 1.4 will help you understand this classification scheme.

Table 1.4

Nature of the Service Act Services Directed At

Tangible Action People Possession

Services directed Directed at goods,at peoples bodies Physical possessions

Healthcare, Salons, TransportationRestaurants, Laundry/DryTransportation cleaning Lawn care

Intangible Action Services directed Services directedat peoples minds. at intangible assets

Education BankingBroadcasting Legal ServicesInformation InsuranceMuseums Accounting

2. Relationship between Service Organisation and Customers

In the service sector both institutional and individual customers may enter intocontinuing relationships with service providers and opt for receiving servicescontinually. Services can therefore be classified on the basis of whether thenature of the relationship is continuous or intermittent and whether a consumerneeds to get into a membership relationship with the service organisation toaccess and utilise the service.

Table 1.5: Services and Customer Relationships

Type of Relationship

Nature of Delivery Membership Non Membership

Continuous Insurance Police protectionEducation Public highwayBanking

Discrete Theatre seat subscription Car rentalcommuter tickets Pay telephone

Restaurant


© ALI

© ALI


14

3. How the Service is delivered

Lovelock has used two issues of number of delivery sites (whether single ormultiple) and the method of delivery to classify services in a 2 × 3 matrix.Then implications here are that the convenience of receiving the service is thelowest when the customer has to come to the service and must use a single orspecific outlets. As his options multiply, the degree of convenience can go onrising, from being able to choose desirable sites, to getting access at convenientlocations. (Table 1.6.)

Table 1.6

Service Delivery Modes

Nature of Interaction between Customer Availability of outlets

and Organisation

Single site Multiple site

Customer goes to service organisation Theatre Bus ServiceFast Food Chain

Service organisation comes to the customer Lawn care Mail deliveryPest control Emergency auto repair

Customer and organisation transact business Credit cards Telephone company at arms length Local TV station Broadcasting

4. Proportion of Tangibility and Intangibility

Using the characteristic of intangibility of services, Shostack6 proposed that allgoods and services can be placed on a tangibility intangibility continuum, withservices clustering towards low to high intangibility. Accordingly, services canbe classified as those with a low intangibility content (a fast food restaurant)and a pure service, having very high intangibility content (Education,consultancy, Medical advice).

5. Service Inputs

Services based on this criterion have been classified as primarily equipmentbased or primarily people based service depending upon which input is primaryapplied to get service outputs. The equipment based services can be furtherclassified according to whether they are fully automated, or consist ofequipment monitored by unskilled persons (lift operators, delivery van personnel)or need the presence of skilled personnel to man the equipment (quality control,diagnostics services).

6. Contact between the Consumer and the Service Provider

Services also differ in the extent of contact that needs to be maintainedbetween the User and Provider, the marketing implication in this case being thenecessity of physical presence of the provider as well as need to managedesired quality of personnel in case of high contact services. On this basis allservices can be classified as high contact or low contact services, dependingupon the time a user needs to spend with the service organization/provider inorder to utilize/acquire the service. Examples of low contact services aretelecommunications, drycleaning and broadcasting while high contact servicesare education, hospitality, theatre performance.

7. Profit and Public vs Private Services

Service can also be classified on the basis of whether they are primarilydirected at public at large or primarily at individuals7. The public servicesinclude utilities and infrastructural services like transport and communication.They also include services provided by the state for public welfare likehospitals, educational and vocational institution, parks and museums etc. Theprivate services on the other hand include the whole gamut of service designed

© ALI

© ALI

15

for and consumed by customers as individuals for e.g., restaurants, beauty careand medical advice. The implications underlined by this classification manifestthemselves in issues regarding planning and design of service for public vs.private consumption. Involved here are issues of process, volume anddistribution of services when they are designed as public services. Serviceshave also been classified by Kotler8 as services designed for profit and nonprofit services, depending upon the marketing objectives to be pursued in theexchange of services.

1.6 THE SERVICES MARKETING MIX

The unique characteristics of services make the traditional 4 P marketing mixseem inadequate. Careful management of these 4 Ps – Product, Price, Placeand Promotion though essential, are not sufficient for successful marketing ofservices. Further the strategies for the four Ps require some modification whileapplying to services.

Since services are produced and consumed simultaneously, the contactpersonnel or the service delivery personnel become extremely important. It isduring these encounter of service providers and customers i.e. the process – onwhich a lot depends with regards to the final outcome as well as the overallperception of the service by the customer. The actual physical surroundingsduring these encounters have also a substantial bearing on the service delivery.All these facts lead to the development of an expanded marketing mix withthree new P’s added to the traditional mix. These are:

People All human actors who play a part in servicedelivery and thus influence the buyer’s perceptions;namely, the firm’s personnel, the customer, and othercustomers in the service environment

Physical evidence The environment in which the service is deliveredand where the firm and customer interact, and anytangible components that facilitate performance orcommunication of the service.

RangeQualityBrandnameWarrantyPostTransactionservice

PolicesProcedures

MechanisationEmployeecustomer

involvementFlow of

activities

Leveldiscounts,AllowancesCommissionsPaymenttermsConsumer’sperceivedvalueQuality/Pricerelationships

LocationAccessibilityDistributionchannelsDistributioncoverage

AdvertisingPersonalSelling SalesPromotionPublicityPublicrelation

TrainingDiscretionCommitmentIncentivesAppearanceInterpersonalbehaviourAttitudesOthercustomersDegree ofinvolvementCustomercontact

EnvironmentFurnishingsColour,LayoutNoise levelsFacilitatinggoodsTangible clues

PRODUCT PRICE PLACE PROMOTION PEOPLE PHYSICALEVIDENCE

PROCESS

Figure 1.2: The Marketing Mix for Services

Source: Booms, B.H. and Bitner, M.J, Marketing Strategies and Organisation Structure forServices Firms, in Donnelly J and George W.R. (eds), Marketing of Services, AMA,1981


© ALI

© ALI


16

Process The actual procedures, mechanisms and flow ofactivities by which the service is delivered - theservice delivery and operating system

Because of the simultaneous production/delivery and consumption of services,the nature of marketing departments and marketing functions become quitedifferent as compared to goods. The marketing function all activities whichinfluence the preferences of the consumers towards the offerings—is mainlyhandled by marketing departments in case of goods. Here as far as consumersare concerned, marketing departments (the organizational entity which isresponsible for some, but not necessarily all marketing activities performed bythe firm) can plan and implement most of the marketing activities i.e. themarketing department is able to control almost the total marketing function. Inthe service sector the situation is entirely different.

A traditional marketing department in services can only control a minor part ofthe marketing function. Usually, it doesn’t have the necessary authority tomanage the buyer/seller interaction. The marketing department, therefore,cannot plan and implement activities pertaining to interactive marketing function.

Therefore the marketing function, which is a key function in service sectorrequire a special treatment. The total marketing in services include threedifferent types of marketing as shown in Figure 1.3.

Figure 1.3: The Services Marketing Triangle

Company(Management)

Interactive MarketingDelivering the Promise

CustomersProviders

Internal MarketingEnabling the Promise

External MarketingSetting the Promise

As can be seen from the triangle, the traditional marketing mix and marketingdepartments basically address to ‘External Marketing’ only. However, all threesides are critical to successful services marketing and the triangle can’t besupported in the absence of any one of the sides.

1.7 SUMMARY

The term service is rather general in concept and includes a wide variety ofservices. Services are essentially performance. The service sector has grownsubstantially in all the developed economies as well as in India. The reasons forgrowth in service industries include increasing affluence, more leisure time,greater life expectancy, increasing complexity of life etc. Marketing of servicesneed a different treatment because of the unique characteristics of servicesthat distinguish them from tangible goods. These characteristics are intangibility,

© ALI

© ALI

17

inseparability, heterogeneity, perishability and ownership. The unit discussedtheir marketing implications and means of overcoming them. A number ofclassification schemes for services have been identified and discussed toprovide strategic insights in managing them. The unit ends with the identificationof the service marketing mix which includes product, price, place, promotion,people, process and physical evidence.

1.8 SELF–ASSESSMENT QUESTIONS

1) What do you understand by the term ‘service? Describe the reasonsbehind the rapid growth of service sector.

2) How do services differ from products? What are the marketing implicationsof service characteristics?

3) Explain the different classification schemes for services giving suitableexamples.

4) Briefly discuss the services marketing mix and the services marketingtriangle.

5) Attempt the following objective type questions:

Q.1: In the pre-industrialised era which activity/activities are/were the mainstayof the economy?

1. Primary and Secondary

2. Primary, Secondary and Tertiary

3. Secondary and Tertiary

4. Primary only

Q.2: The first service economy of the world was/were:

1. Those countries which participated in the World War-II

2. USA

3. USA and Japan

4. Russia, Japan and United States

Q.3: Marketing implications of the service characteristic “Intangibility” are allof the following, except:

1. Sampling difficult

2. Difficult to judge quality and value in advance

3. Relatively easy to promote

4. Not possible to patent or to have copyright

Q.4: Marketing implications of the service characteristic “Inseparability” are allof the following, except:

1. Limited scale of operations

2. Geographically distributed market

3. Requires presence of performer

4. Direct sale

Q.5: The marketing solution to the problems posed by service characteristic“Intangibility” are all of the following, except:

1. Use of brand name

2. Increase the tangibility

3. Increase the production of service

4. Create “world-of-mouth”


© ALI

© ALI


18

Q.6: The marketing solution to the problems posed by service characteristic“Inseparability” are all the following, except:

1. Develop reputation

2. Work faster

3. Train more service performances

4. Learn to work in large groups

Q.7: The marketing solution to the problems posed by service characteristic“Perishability” are all of the following, except:

1. Increase tangibility

2. Match demand to supply

3. Differential pricing to create demand during low demand periods

4. None of the above

Q.8: Which one out of the following is not the example of the servicesorganisations where service provided is a tangible action directed at thecustomer’s bodies:

1. Hospital

2. Beauty Parlors

3. Information

4. Transportation

Q.9: From the point of view of service delivery and type of relationship,banking services are examples of:

1. Discrete delivery and membership

2. Non continuous and non-membership

3. Continuous and non-membership

4. Continuous and membership

Q.10: From the point of view of the service delivery and type of relationshipfast food outlets are the examples of:

1. Discrete delivery and membership

2. Non continuous and non-membership

3. Continuous and non-membership

4. Continuous and membership

Q.11: Out of the following, which one is the example of a service deliverymode in which the service organisation goes to the customer:

1. Theatre

2. Mail Delivery

3. Education

4. Health Service

Answers:

1. 4 2. 2 3. 3 4. 2 5. 3 6. 17. 1 8. 3 9. 4 10. 2 11.2

1.9 FURTHER READINGS

Adrian Palmer, Principles of Services Marketing, (New York: McGraw Hill),1998.

Christian Groonross, Service Management and Marketing, New York. JohnWiley, 2000.

© ALI

© ALI

19

Christopher H. Lovelock, Services Marketing: People, Technology, Strategy,(New Jersey: Pearson), 2001.

Donald W. Cowell, The Marketing of Services, (London: Heineman), 1996.

Hans Kaper, Piet Van Helsdinger and Wonter de Vries Jr, Services MarketingManagement (New York: John Wiley), 1999.

John E.G. Bateson, Managing Services Marketing, (III ed), (Oriando: DrydenPress), 1995.

K. Douglas Hotfman John E. G. Bateson, Essentials of Services Marketing,(Orlando: Harcourt College Publishers), 2002.

Payne: Essence of Services Marketing, (New Delhi: Prentice Hall of India).

Ravi Shanker, “Services Marketing: Text and Readings,” (New Delhi: ExcelBooks, 2002).

Teresa A. Swartz and Dawn Iacobncci, Handbook of Services Marketingand Management, (New Delhi: Sage),2000.

Valarie A. Zeithaml and Mary Jo Bitner, Services Marketing, (New Delhi,Tata McGraw-Hill), 2000.

1.10 REFERENCES

1. Bell, Daniel “The Coming of the Pass Industrial society” as qusted inCowel Donald, 1985, The Marketing of Services, Hinemann; London

2. Kotler, Philip, 1989, “Marketing Management – Analysis Planning andControl”, Prentice Hall of India Private Limited: New Delhi.

3. Stanton, W.J., 1981, “Fundamentals of Marketing”, McGraw Hill; NewYork.

4. Batesou J, “Do We Need Services Marketing”, Marketing ConsumerServices, New Insights, Report 75-115, Marketing Science Institute, Boston1977.

5. Love lock, Christopher H. 1991, “Services Marketing”, Prentice HallEnglewood Cliffs, N.J.

6. Shostack, G.Lynn, 1977, Breaking Free from Product Marketing, “Journalof Marketing”, Vol. 41, No.2.

7. Philip Kotler, 1991.

8. Ibid. (7).


© ALI

© ALI


20

UNIT 2 ROLE OF SERVICES IN ECONOMY

Objectives


explain the International scenario regarding service sector and trends inservice trade,

understand how India is also becoming a service economy, employment inservice sector, and the emerging national scenario on services, and

identify key service sectors and discuss their present scenario.

Structure

2.1 Introduction

2.2 International Scenario

2.3 Service Sector in India

2.4 Analysis of Specific Service Sectors

2.5 Summary


2.7 Appendix : Service Tax in India

2.1 INTRODUCTION

The unit beings with an introduction on how globalization has given a boost tothe services sector. Thereafter, the international scenario showing thecontribution of services sector, as against agriculture and industry, to the GDPof various countries across the globe, has been described. This section alsocovers Service sector liberalization, role of WTO and the share of servicessector in the world trade. The next section of this unit details the Indianscenario and the growth in specific sectors like, tourism, financial services,telecom services, health services and information technology.

Services are extensively used by people day to day in all aspects of life. Fromeducation to entertainment, finance to fast food, travel to telephone,advertisement to amusement parks, market research to maintenance services,and retailing to recreation…and so on. Today services are increasingly beingused by corporate as well as household sector. The explosive growth in thissector started in the 20th century, especially after the end of World War II.Due to large scale destruction during the war lot of economic activities, had tobe carried out to bring the war torn economies back to strength. This resultedin a number of new projects fuelling the demand for financial services.

Today households as well as firms are demanding more services as well asservices of increasing quality and sophistication. There are number of reasonsfor this growth in service sector which have been discussed in the previous unit(Unit 1). In addition to these factors, globalization has resulted in growth ofservice sector as well. Globalization of economies has led to an increaseddemand for communication, travel and information services. This has beenfuelled by the rapid changes brought by new information technology.Globalization has also made increased and new demands on legal and otherprofessional services. Also, increased specialization has led to greater relianceon specialist service providers at international level e.g., advertising and marketresearch.

© ALI

© ALI

21

It is quite obvious from Figure 2.1 that while the role of agriculture has beenreducing in the economies of industrial societies, that of service sector has beenincreasing at a fast pace. As the economies shift from developing to developedstage they will show more and more shift towards services.

Figure 2.1: The growing importance of service sector inindustrial societies

Source: J. Geruhuny and I. Miles, The New Service Economy, London, 1983.

In US economy, the fastest growing segment is services. The economies ofother developed countries are also dominated by services. This trend of growingdominance of services has been so strong that some people term it as theSecond Industrial Revolution.

At times it is argued that growth in services is at the expense of manufacturingsector of the economy. However, it is not true. In fact services andmanufacturing are positively linked to each other. Micheal Porter in his book,‘The Competitive Advantage of Nations’ identified three distinct links betweenmanufacturing and services as explained below:

i) Buyer/supplier relationship: Many service industries have come intoexistence through the de-integration of service activities by manufacturing firms.An automobile manufacturer may outsource number of service activities liketransportation, warehousing, marketing research, legal services, education andtraining of its employees, information processing etc. Service industries dependa lot on manufacturing firms for a significant share of their sales.

ii) Services tied to the sale of manufactured goods: Sale of a wide varietyof manufactured goods creates demand for associated services. The sale ofconsumer durables require ongoing need for servicing, sale of computers leadsto demand for training services and after sales services, exports of anymanufactured goods would require sale of insurance, financial services andtransportation services.

1700 1800 1900 2000

YEAR

% o

f O

utpu

t and

Em

ploy

men

t

010

0

Primary

Manufacturing

Services

Primary

Manufacturing

Services

Role of Services inEconomy

© ALI

© ALI


22

iii) Manufactured goods tied to the sale of services: This link is reverseof the previous one. The sale of certain services leads to demand formanufactured goods, for example sale of engineering or management consultingfrom a nation can lead to demand for equipment and other associatedmanufactured goods from that nation. Also provision of a service requires a lotof manufactured goods.

2.2 INTERNATIONAL SCENARIO

The tremendous growth of service sector has resulted in its increasedimportance to the world economies. As early as in 1948, US service sectorcontributed 54% of GDP, and with the increasing trend in the use of services itnow generates 80% of the GDP.

Table 2.1: Sectoral Distribution of GDP (in %), 2002 (Estimates)

G D P

Country Services Industry Agriculture

Denmark 71 26 3

France 71 26 3

Germany 68 31 1

India 50 25 25

South Korea 54 41.6 4.4

Russia 59.6 34.6 5.8

Nigeria 35 20 45

Switzerland 64 34 2

U.S.A 80 18 12

Taiwan 67 31 2

Source: The World Fact Book 2003, www.cia.gov

Service sector dominates the economies of other developed nations as well. Ascountries develop, the role of agriculture in the economy declines and that ofservices rises. Highly developed countries all have more than 50% of GDP andemployment derived from services. A particular characteristic of thedevelopment of service employment over time is that it is less sensitive tobusiness cycle fluctuations than other types of employment.

The service sector comprises 80% of US employment, up from 55% in 1950.Most of the absolute growth in number of jobs in US in recent years is inservice sector. According to University of Michigan study, a 1/3rd cut in globalbarriers to trade in services would increase US annual income by $150 billion($ 2,100 per American family of four). Total elimination of barriers in serviceswould raise US annual income gain by over $ 450 billion ($ 6,380 per family offour). Apart from US, leaders of major global service industry associationsrepresenting the EU, Australia, Hong Kong, and Japan called for urgentprogress in the multilateral liberalization of trade in services.

Trade in services also benefits developing countries greatly. The infrastructureof modern and growing economies and the gains made from liberalizing trade inservices and agriculture are enhanced with open service sectors. The benefitsof a modern services sector reverberate across an entire economy, touching

© ALI

© ALI

23

every product, idea and consumer. Modernizing services can help developingcountries jump start the economic growth necessary for reducing poverty. Theservice sector is the fastest growing part of the economy in many developingcountries, with the World Bank reporting that services account for 54 per centof their GDP.

In the OECD countries, services account for 69% of economic output, whileagriculture accounts for 2.1%. Even in low income countries, services accountfor an average of nearly 50% of GDP, with agriculture representing 23%. Morethan half of all global flows of foreign direct investment are now in theservices sector. This investment is normally in the form of investment in localcompanies, often with local partners. Access to modern services (financial,professional and infrastructure services, for example) is essential to growth anddevelopment in any country. WTO commitments are vital to attracting thisinvestment. While the value of trade in services is well below that ofmerchandise trade, services account for a larger portion of virtually all theworld’s economies; liberalization of services trade is therefore clearly in theinterest of developing countries. (Source: http://www.esf.be/)

Service Sector — Role of WTO

WTO’s 134 trade ministers met in Seattle Summit (1999). The broad objectiveof the summit was to expand private markets by removing barriers to the globalmovement of goods, services, and capital, with a major focus on publicservices. The WTO hopes to open the public funding streams which pay forpublic services for commercial exploitation. US and European governments usethe WTO to promote the commercial interests of their transnationalcorporations, which they see as the source of economic prosperity.

As profits in manufacturing industry are falling, the corporate lobby is targetingthe proportion of gross domestic product that governments spend on publicservices. In many European countries, governments are spending more than15 per cent of GDP, in health and education alone. The WTO is devising theinternational laws and regulatory frameworks which will enable to open uppublic funding pools and public services to the market. For example, TheGeneral Agreement on Trade in Services (GATS) opens up service provision,like education and health care, to direct foreign competition and ownership.

In addition to GATS, the WTO has two other devices crucial to opening uppublic services and their funding pools.

1. Procurement Reform

WTO devised it to supply the legal and regulatory framework within whichpublic bodies contract for goods, services, and investment funds. Procurementreform is a primary mechanism for opening up public services to internationalcompetition. European Commission proposals focus to unlock ‘new potentialmarkets’ by extending private firms’ involvement with public services and bycreating contracting rules to ensure ‘acceptable returns for investors’.

2. Disputes Settlement Procedure

The WTO disputes settlement procedure allows one member state to challengethe domestic laws of another and provides a mechanism for changing the waysin which governments regulate and subsidize public services. The US iscommitted to making mandatory a disputes system which outlaws subsidies andregulations which are not market-friendly.

The next unit of this block discusses the issues related to international trade inservices, the WTO, and India in detail.


© ALI

© ALI


24

Leading Exporters and Importers in commercial services

Besides the US most of the West European countries as well as Mediterraneancountries are net exporters of services. Germany, Japan,, most of the SouthEast Asian countries, and Canada are net importers. The Third World countriesare net service importers too. As per 1999 figure India ranked 25th in exportsof commercial services valued at U.S.$ 13.9 billion and ranked 21st in imports,valued at U.S.$ 17.2 billion. Table 2.2 and Table 2.3 give details of internationaltrade in services. You may visit the WTO website to find out further details onthe regional shares in world trade in services.

Table 2.2: World exports of commercial services by category, 2002

(Billion dollars and percentage)

Value Share Annual percentage change

2002 1995 2002 1995-00 2000 2001 2002

All commercial services 1570 100.0 100.0 4 6 0 6

Transportation 350 25.2 22.3 3 7 -1 4

Travel 480 33.7 30.6 3 4 -2 4

Other commercial services 740 41.1 47.0 6 7 2 9

Source: WTO

Table 2.3: Leading exporters andimporters of other commercial services, 2002

($ bn and percentage)

Share in world Value exports/imports Annual percentage change

2002 1995 2002 1995-00 2000 2001 2002

Exporters

United States 141.2 16.0 19.1 11 5 4 6

United Kingdom 84.1 8.2 11.4 13 5 -1 15

Germany 54.7 7.7 7.4 3 -3 4 20

Japan 37.4 7.8 5.1 1 16 -8 3

France 34.3 7.2 4.6 -3 1 2 9

Netherlands 28.7 4.1 3.9 1 -3 21 11

Ireland 23.4 ... 3.2 ... ... ... 23

Italy 23.4 4.4 3.2 -2 -5 20 2

Hong Kong, China 21.1 2.5 2.9 10 17 0 5

Belgium 19.8 ... 2.7 ... ... ... ...

Spain 19.0 1.7 2.6 12 8 15 15

Canada 18.7 2.5 2.5 11 9 -2 -5

India 18.1 0.5 2.4 41 38 28 12

Austria 17.8 3.0 2.4 3 8 6 0

Singapore 17.2 3.5 2.3 -1 14 2 6

Above 15 560.0 ... 75.7 ... ... ... ...

Importers

United States 86.2 8.5 12.5 13 12 8 11

Germany 65.3 10.6 9.5 5 -2 8 -1

© ALI

© ALI

25

Japan 48.4 10.6 7.0 0 -4 -1 1

United Kingdom 34.9 4.4 5.1 10 8 -4 8

Ireland 34.8 ... 5.1 ... ... ... 14

Italy 30.9 5.7 4.5 0 1 14 5

France 30.6 5.9 4.4 -2 -6 10 16

Netherlands 30.0 4.2 4.3 5 7 10 9

Spain 21.7 2.4 3.2 10 2 10 14

Austria 21.4 2.9 3.1 6 5 5 12

Canada 21.0 3.2 3.1 8 6 2 -4

China 17.1 2.5 2.5 2 1 12 24

Belgium 17.0 ... 2.5 ... ... ... ...

Korea, Republic of 15.4 2.0 2.2 10 26 -6 9

Sweden 12.4 1.5 1.8 11 7 6 0

Above 15 485.0 ... 70.7 ... ... ... ...

Source: WTO

The composition of service exports is very different from country to country.Michael Porter, in his work “The Competitive Advantages of Nations” hassuggested that nations exhibit strikingly different patterns of national competitiveadvantages in services as they do in manufactured goods. Table 2.4 showspattern of international leadership in different service industries.

Table 2.4: Estimated leading positions of National Competitive Advantage inInternational Service Industries

Country Leading Position in Industry

USA Fast Food, Education and Training, Health CareServices and Hospital Management, Hotels, CarRental, Accounting, Advertising, Commercial Banking,Money Management, Information, Trading,Entertainment

U.K. Specialty Stores, Auctioneering, Advertising, Trading,Money Management

Switzerland Trading, Commercial Banking, Money Management

Italy Design Services

Germany Money Management

Source: Adapted from ‘The Competitive Advantage of Nations’, Michael Porter, 1990, p 225.

For a greater number of developed countries services industries have grown toa level of definite competitiveness in international trade whereas theircompetitive advantage in merchandise has started to recede. However, for mostdeveloping countries service industries are at various stages of developmentranging from low to intermediate. For most of these countries service sectorsare recognized as strategic to their development and consequently, are subjectedto intensive regulations. Ranging from architecture to telecommunications,financial to health services and beyond, services today are the largest and mostdynamic component of both developed and developing country economies.


© ALI

© ALI


26

2.3 SERVICE SECTOR IN INDIA

The service sector is also assuming increasing importance in Indian economy.In line with the global trend, the services sector in India is growing rapidly. In2002, India’s service exports are recorded $ 20.70 bn, as against $ 4.60 bn in1990, a growth of 350%.

Table 2.5: World Service Exports and India’s Share

Year Total world India’s service India’s share inservice exports exports in $ bn world services

$ bn exports

1990 807.01 4.60 0.57

1991 844.83 4.90 0.58

1992 960.79 4.90 0.51

1993 943.40 5.00 0.53

1994 1052.63 6.00 0.57

1995 1192.99 6.80 0.57

1996 1250.00 7.00 0.56

1997 1313.43 8.80 0.67

1998 1321.43 11.10 0.84

1999 1333.33 13.20 0.99

2000 1435.00 17.60 1.20

2001 1460.00 20.40 1.40

2002 1540.00 20.70 1.30

Source: WTO

The share of services in the country’s GDP was 56.1% in 2002-03 (RE), upfrom the 51.5% recorded in 1998-99 and 36% in 1980-81. In contrast, theindustrial sector’s share in GDP has declined from 25.38 per cent to 21.8 percent in 1990-91 and 2002-03 respectively. The agricultural sector’s share hasfallen from 30.93 per cent to 22.1 per cent in the respective years. The growthin the services sector has averaged 8.5 per cent during the period 1994-2000.Dr. Manmohan Singh, the then Union Finance Minister, in his budget speech forthe year 1994-95 introduced the new concept of Service Tax. The number ofservices being taxed has increased from 3 in 1994-95 to 51 in 2002-03. Thecorresponding increase in revenues from services tax has been from Rs. 410crores to 4,125 crores. The details of service tax in India have been given inAppendix at the end of this unit.

The rise in the service sector’s share in GDP marks a structural shift in theIndian economy and takes it closer to the fundamentals of a developedeconomy. If the service sector bypasses the industrial sector, economic growthcan be distorted. Service sector growth must be supported by proportionategrowth of the industrial sector; otherwise the service sector grown will not besustainable.

It is true that, in India, the service sector’s contribution in GDP has sharplyrisen and that of industry has fallen. But, it is equally true that the industrialsector too has grown, and grown quite impressively through the 1990s (exceptin 1998-99). Three times between 1993-94 and 1998-99, industry surpassed the

© ALI

© ALI

27

growth rate of GDP. Thus, the service sector has grown at a higher rate thanindustry which too has grown more or less in tandem. The rise of the servicesector therefore does not distort the economy.

The service sector is further subdivided into several groupings. Figure 2.2 givesthe major groupings and their relative share in Indian economy.

Figure 2.2: Service Share by Sub-sectors% of GDP, 2002-03 (Revised Estimates)

Service Sector (56.1%)

Source: RBI Annual Report 2002-03

Employment in Indian Service Sector

Exhibit 2.1

Services Sector : The growth Engine

Indians eat out more than ever. They take their clothes to dry cleaners, their cars tomechanics, their dogs to veterinarians. They go to beauty salons for hair cuts. For homethey hire maids, gardeners, plumbers, electricians, interior decorators and architects. Outsidethe home, school teachers, police officers and public servants contribute to their dailylives. Lawyers, accountants, stock brokers and insurance agents help keep finances andpersonal affairs in order. To maintain their health and well being they turn to doctors,nurses and dentists. All this – and more – is India’s service economy.

One in every two Indians earns his livelihood by providing services. An INDIA TODAY –ORG MARG poll shows that a majority of middle class families want their children towork in the services sector.

Source: Rohit Saran, Growth Engine, India Today, February 19, 2001

The importance of service sector in Indian economy can be further gauged bythe fact that the majority of new employment in the organized sector has comein the service sector only. According to economic survey, from 1993-94 to1999-2000, the financial, insurance, real estate and business services sector,employment increased to over. 46 lakh from 33 lakhs in this period. In the hoteland restaurant sector employment increased to 3.75 crore from 2.68 crore andin the transport, storage and communication services sector, it increased to 1.36crore from 98 lakh. India is a signatory to the General Agreement on Trade inServices, and is actively engaged in seeking full opportunities for freemovement of “natural persons” on a temporary basis as non-residents acrossborders to enable it to supply services globally. India should explore allpossibilities to export services which might solve its economic problems,including unemployment and poverty.

Trade, Hotels,Restaurants,

Transport andCommunication

24.3%

Construction5.3%

Financing,Insurance Real

Estate andBusiness

Services 12.7%

Community,Social and

Personal Services13.8%


© ALI

© ALI


28

Table 2.6: Employment in organized sector by industry division

(Figure in ‘000)

For the year ending March 31, 2001 1991 1981 1971

Total 27790 26734 22879 17473

Agriculture etc. 1433 1447 1321 1074

Mining and quarrying 954 1099 948 586

Manufacturing 6443 6333 6047 4761

Electricity, gas and water etc 987 945 718 481

Construction 1138 1222 1161 1019

Services 16835 15689 12684 9552

Source: Statistical Outline of India, 2003-04, Tata Services Limited p.167

Table 2.6 gives statistics of employment in organized sector in India. The highergrowth of employment in service sector is partly because with the growth ofeconomy and technological developments, a smaller proportion of work force isneeded by the manufacturing sector. Total employment in the organized sectorin the last 30 years has increased by around 59%, the increase in employmentin service sector in the corresponding period has been around 76%. With thechanging pattern of Indian economy, a shift in employment pattern is bound tohappen.

2.4 ANALYSIS OF SPECIFIC SERVICE SECTORS

The fact that the service sector now accounts for more than half the GDPprobably marks a watershed in the evolution of the Indian economy. India’shigh capabilities in Information Technology, and its booming IT software exportswhich now account for 2% of the GDP, are well known. India’s healthservices, manned by highly qualified and experienced personnel, super-specialtyhospitals specializing in both modern and traditional Indian medical systems likeAyurveda, Unani, and nature- cure supported by state-of-the-art equipment, areattracting patients from across the world, and constitute a significant segmentof India’s services sector.

Education is another field which is not only a huge segment of the servicessector within the country, but also a foreign exchange earner by way of NRIsand foreign students enrolled in major medical, technological and otherinstitutions in India, and also export of manpower even to the westernworld.

The entertainment industry, particularly films and TV, which happen to beamong the fastest growing in the world. Indian films are popular across WestAsia, Afghanistan, Central Asia, Russia and in South East Asia and are nowpenetrating the Western world. India, the second largest scientific and technicalmanpower in the world, has been providing varied consultancy and otherservices to the world.

There is immense scope for India to undertake project and managementconsultancy, repair and maintenance work pre-publishing services, and R&D invarious disciplines, and interested parties from across the world are welcome totap these and other capabilities available in abundance in the country. Thetourism industry in the country is well equipped, and also fast growing to offer

© ALI

© ALI

29

tourists with diverse interests and means, all the services needed to make theirvisit memorable. India, as a subcontinent with varied geographical, climatic,ethnic, cultural, religious and social strands intertwined, India is a one-stopdestination for any tourist wanting a kaleidoscopic experience of life in itsentirety. We will now discuss some of the prominent service sectors in brief.The last two blocks of this course are devoted to sectoral applications ofservices marketing concepts discussed in the first three blocks.

Hospitality and Tourism

Tourism has become the world’s largest employer and this sector is one of theworld’s largest economic forces with more than 200 trillion dollar yearly. Thissector is today second largest foreign exchange earner for India. A record2.8 million tourists made their way from various parts of the world to Indiain calendar 2003, registering a rise of 15.3 percent over 2002, while as manyas 4.5 million Indians traveled abroad accounting for a rough 30 percentgrowth.

The number of government approved hotels increased from 348 in 1980 to1,490 in 2002 bringing in a corresponding increase in number of hotel roomsavailable from 21,581 to 80,936. Table 2.7 gives the details of foreign touristarrival in India and earnings from tourism.

Table 2.7: Foreign Tourist Arrivals and Earnings from Tourism

Year Foreign Tourist Arrivals Earnings (US$ Billion)(Million)

1980 0.80 1.40

1990 1.71 1.51

1996 2.29 2.96

2001 2.54 3.04

Source: Statistical outline of India 2003-2004 , TSL, p.98

Marketing issues specific to Hospitability and Tourism services and detailed dataregarding this sector will be covered in Unit 12.

Financial Services

The role of financial services in stimulating and sustaining economic growth iswell known. A distinct feature of Indian Financial System is the dominance ofpublic sector institutions in practically all areas like banking, term lending andinsurance. At the end of March 2002, 97 commercial banks, 196 Regional ruralbanks, 52 scheduled urban co-operative banks and 16 scheduled stateco-operative banks were operating.

One of the most important segments of the financial system is commercialbanking. The saving deposits with the commercial banks have shown a steadyrise from Rs. 101,861 crores in 1995-96 to Rs. 279,107 crores in 2001-02.

With the opening of the banking sector to the foreign competition, andliberalized regulatory norms followed by RBI, the private banks have been usingtechnological advances in every sphere of banking to up the performancelevels. With an emphasis on retail finance and growing use of new technologies,Indian banks have repositioned themselves as universal finance solution providerwith capabilities ranging from investment banking to project financing, andexport financing on the corporate side, and from providing loans to selling


© ALI

© ALI


30

Table 2.8: Saving Deposits with Commercial Banks (Rs. Crores)

Year Indian Banks Foreign Banks Total

1995-96 99347 2514 101861

1996-97 112570 2875 115445

1997-98 136770 3194 139964

1998-99 160889 3836 164725

1999-00 187173 4727 191900

2000-01 217452 5530 222982

2001-02 272119 6988 279107

Source: India infoline.com

insurance and mutual funds on the retail side. More details about the financialservices sector will be taken up in Unit 11.

Telecommunication Services

Telecommunication sector has witnessed a total transformation throughout theworld in the last two decades due to rapid technological advances. Today, anadvanced telecom system is a necessity for a nation’s manufacturing as well asservice industries. Consider for example, the growing use of telecom in serviceslike banking, retailing, trading, health, education and transportation. At thebeginning of the seventh five year plan in 1985, the then government decided tofocus on improving the telecommunication sector and constituted theTelecommunication Board and the Department of Telecommunication (DOT)within the Ministry of Commerce to oversee operations, maintenance anddevelopment of telecom services. The emphasis on this sector increased furtherwith liberalization initiative taken by government in the current decade. The planoutlay for telecom sector, which was 2.5 per cent of national plan outlay duringthe sixth plan, was increased substantially to 11.9 per cent in the eighth planamounting to a whopping Rs. 406 billion. The outlays on communication(including IT) during tenth plan was Rs. 990 billion.

050

100150200250300350400450

I pla

n 51

-56

II Plan

56-6

1

III P

lan 6

1-66

Annua

l Plan

66-

69

IV P

lan 6

9-74

V Plan

74-

78

Annua

l Plan

78-

80

VI Plan

80-

85

VII Plan

85-

90

Annua

l Plan

90-

92

VIII P

lan 9

2-97

0

2

4

6

8

10

12

14

Telecom plan outlay % of National Plan Outlay

Rs.Billion

Source: The India Infrastructure Report, Vol. III, 1996, p. 115

Figure 2.3: Investment in Telecom in Plan Periods© ALI

© ALI

31

The number of fixed lines has increased from 5.8 million in 1991-92 to 42.58million (Fixed including WLL-F) in 2003-04. Mobile telephony has brought abouta revolution in Indian telecom sector. During the year 2003-04 it witnessed agrowth of 160% over 2002-03. The growth of fixed and mobile subscribersduring 2003-2004 is shown below in Table 2.9.

Table 2.9: Fixed and Mobile Subscribers (in Million) in India

Service March 2003 March 2004 % growthduring the

year

Fixed including 41.48 42.58 3WLL(F)

Mobile including 13.00 33.58 160Cellular andWLL(M)

Gross Total 54.48 76.16 40

Source: TRAI

You will study the details of telecommunication sector and the marketing issuesrelated to it in Unit 17 of this course.

Health Services

According to The economic Times healthcare 2001-02 report, India’s healthcareindustry grew by 13 per cent per annum over the last decade and is currentlygrowing at 17 percent annually. Presently the industry size is $18 billion.According to the report, India can reach a size of $ 40 billion by 2005-06. Thegrowth is being propelled by an increasingly affluent and more consumeroriented middle class population of 100 million, who are seeking and willing topay for a higher standard of healthcare. During 1990 to 1996, the middle andhigher income group has increased from 14% to 20%.

Table 2.10: Health Services in India during last four decades

(Figure in ‘000)

1996/97 1992 1991 1981 1971 1961

Hospitals 15.1 13.7 11.2 6.8 3.9 3.1

Hospital Beds 870 835 810 569 349 230

Doctors 484 411 394 269 151 84

Primary Health 22.4 20.7 20.4 5.7 5.1 2.6

Nurses 566 385 340 154 81 36

Source: Statistical Outline of India 2000-2001, TSL, P. 212

However, a number of changes in the last few years like more consumerawareness, increasing purchasing powers and especially setting up of corporatehospitals with huge capital investment has led to more competition andmarketing efforts. With the growing population and other factors cited above,the health services are going to increase at a fast pace with more participationcoming from the private sector. In Unit 13 we will be taking up details relatedto the health services sector.


© ALI

© ALI


32

IT and BPO

The Indian IT sector has proved to be the country’s fastest growing segment,even in troubled times in the globally challenging economic environment of2001-03. Outsourcing of IT requirements by leading global companies toIndian majors picked up pace during 2002-03, in line with worldwide trends.The software sector logged in a revenue of Rs.47,500 crore during 2002-03,a jump of 30% from the previous year. Similarly, offshore project revenuesgrew by blazing 49%. Indian companies entered in to high value segmentssuch as system integration, package implementation, IT outsourcing, and ITconsulting. The revenue contributions by the US market continued to rise onaccount of the large number of ITES / BPO projects getting outsourced toIndia.

The Indian ITES industry is estimated to grow to Rs. 810 bn in 2008. In India,ITES-BPO segment registered a growth of 59% to reach Rs. 113 bn (US $2.3billion). The ITES contributed 25% to the total IT Software and Serviceexports from India during FY03. Captive ITES-BPO players have almostdoubled their share in Indian software exports, growing by a phenomenal 90%in last financial year. ITES-BPO segment is projected to register a growth of54% to clock revenues of US $ 3.6 billion during FY 2003-04. India continuesto offer great value proposition for the ITES companies. “Outsourcing to Indiahas helped companies achieve 40-50 per cent cost savings. Companies are alsoable to generate higher free cash flows due to reduced investments in physicalinfrastructure, telecom and equipment.” (Source: India Infoline)

2.5 SUMMARY

This unit explained the role of services in national economies and theirsignificance in international trade. Services are used by individual as well ascorporations. All the developed economies have more than sixty percent of theirGDP contributions from the service sector. As the economies develop, the roleof agriculture declines and that of service rises. The world exports ofcommercial services was valued at U.S. $ 1,570 billion in 2003 with U.S.A,U.K. Germany, Japan, France being the leading exporters while U.S.A,Germany, Japan, U.K. and Ireland were the leading importers. India’s serviceexport stood at U.S. $ 20.7 billion in 2002. The share of services in India’sGDP is more than half and the growth in employment in organized sector hasbeen greater in service sector. The unit also gave you brief details of hospitalityand tourism, financial services, telecommunication services, health services andIT sector.

2.6 SELF ASSESSMENT QUESTIONS

1. Discuss the international scenario of role played by services sector innational economies. Do you feel India is following the trend displayed bydeveloped economies in this regard?

2. Explain the trends in international trade in services and identify the keyexporting and importing nations?

3. Select any three major service industries in India and explain the trends ofgrowth in them.

© ALI

© ALI

33

2.7 APPENDIX

SERVICE TAX IN INDIA*

1. INTRODUCTION OF SERVICE TAX IN INDIA

Dr. Manmohan Singh, the then Union Finance Minister, in his Budget speechfor the year 1994-95 introduced the new concept of Service Tax and statedthat ‘’ There is no sound reason for exempting services from taxation,therefore, I propose to make a modest effort in this direction by imposing a taxon services of telephones, non-life insurance and stock brokers.’’

Service Tax had been levied on the recommendations made in early 1990’s bythe Tax Reforms Committee headed by Dr. Raja Chelliah. The Committee alsorecommended charging of tax on services such as advertising, insurance, sharebroking and telecom etc. to begin with on the pattern of advanced economies.The basic objective of Service Tax is broadening the tax base, augmentation ofrevenue and larger participation of citizens in the economic development of thenation.

Bringing services under taxation is not simple as the services are intangible andare provided by large groups of organized as well as unorganized serviceproviders including retailers who are scattered across the country. Further, thereare several services, which are of intermediate nature. The low level ofeducation of service providers also poses difficulties to both-tax administrationand assessees. As stated earlier, service tax was introduced in India for thefirst time in 1994.

The Finance Acts of 1996, 1997, 1998, 2001, 2002 and 2003 added moreservices to tax net by way of amendments to Finance Act, 1994. As of 2003,total number of services on which Service Tax is levied has gone upto 58despite withdrawal of certain Services from the tax net or grant of exemptions(Goods Transport Operators, Outdoor Caterers, Pandal and ShamianaContractors, and Mechanized Slaughter Houses).

2. SERVICES COVERED UNDER SERVICE TAX

The provisions relating to Service Tax were brought into force with effect from1st July 1994. It extends to whole of India except the state of Jammu &Kashmir. The services, brought under the tax net in the year 1994-95 ,are asbelow:

1. Telephone

2. Stockbroker

3. General Insurance

The Finance Act (2) 1996 enlarged the scope of levy of Service Tax coveringthree more services, viz.,

4. Advertising agencies

5. Courier agencies

6. Radio pager services.

But tax on these services was made applicable from 1st November, 1996.The Finance Acts of 1997 and 1998 further extended the scope of service taxto cover a larger number of services rendered by the following serviceproviders, from the dates indicated against each of them.

7. Consulting engineers (7th July, 1997)


* www.servicetax.gov.in (part of CBEC website)

© ALI

© ALI


34

8. Custom house agents (15th June, 1997)

9. Steamer agents (15th June, 1997)

10. Clearing and forwarding agents (16th July, 1997)

11. Air travel agents — (1st July, 1997)

12. Tour operators (exempted upto 31.3.2000Notification No.52/98,8th July, 1998, reintroduced w.e.f.1.4.2000)

13. Rent-a-Cab Operators (exempted upto 31.3.2000 VideNotification No.3/99 Dt. 28.2.99,reintroduced w.e.f. 1.4.2000)

14. Manpower recruitment Agency (1st July, 1997)

15. Mandap Keepers (1st July, 1997)

The services provided by goods transport operators, outdoor caterers andpandal shamiana contractors were brought under the tax net in the budget1997-98, but abolished vide Notification No.49/98, 2nd June,1998.

The Service Tax is leviable on the ‘gross amount’ charged by the serviceprovider from the client, from the dates as notified and indicated above.

Government of India has notified imposition of service Tax on twelve newservices in 1998-99 union Budget. These services listed below were notified on7th October, 1998 and were subjected to levy of Service Tax w.e.f.16th October, 1998.

16. Architects

17. Interior Decorators

18. Management Consultants

19. Practicing Chartered Accountants

20. Practicing Company Secretaries

21. Practicing Cost Accountants

22. Real Estates Agents/Consultants

23. Credit Rating Agencies

24. Private Security Agencies

25. Market Research Agencies

26. Underwriters Agencies

In case of mechanized slaughter houses, since exempted, vide NotificationNo.58/98 dtd. 07.10.1998, the rate of Service Tax was used to be a specificrate based on per animal slaughtered. In the Finance Act’2001, the levy ofservice tax has been extended to 14 more services, which are listed below.This levy is effective from 16.07.2001.

27. Scientific and technical consultancy services

28. Photography

29. Convention

30. Telegraph

31. Telex

32. Facsimile (fax)

33. Online information and database access or retrieval

© ALI

© ALI

35

34. Video-tape production

35. Sound recording

36. Broadcasting

37. Insurance auxiliary activity

38. Banking and other financial services

39. Port

40. Authorised Service Stations

41. Leased circuits Services

In the Budget 2002-2003, 10 more services have been added to the tax netwhich are listed below. This levy is effective from 16.08.2002.

42. Auxiliary services to life insurance

43. Cargo handling

44. Storage and warehousing services

45. Event Management

46. Cable operators

47. Beauty parlours

48. Health and fitness centres

49. Fashion designer

50. Rail travel agents.

51. Dry cleaning services.

and these services have been notified on 1-8-2002 and were subject to levy ofService Tax w.e.f. 16-8-2002.

In the Budget 2003-04 seven more services along with extension to threeexisting services have been added to the tax net which are listed below. Thelevy of service tax on these services is effective from 1st July, 2003.

1. Commercial vocational institute, coaching centres and private tutorials

2. Technical testing and analysis (excluding health and diagnostic testing)technical inspection and certification service.

3. Maintenance and repair services

4. Commission and Installation Services

5. Business auxiliary services, namely business promotion and Support services(excluding on information technology services)

6. Internet café

7. Franchise Services

The extension to following three service was given in the Budget 2003-04 asaforesaid.

1. Foreign Exchange broking services

2. Maxicab repair services

3. Minor ports (other than major ports)

The rate of Service Tax has also been increased from 5% to 8% on all thetaxable services w.e.f. 14.5.2003.

Service Tax is administered by the Central Excise Commissionerates workingunder the Central Board of Excise and Customs, Department of Revenue,


© ALI

© ALI


36

Ministry of Finance, Government of India. The unique feature of ServiceTax is reliance on collection of tax, primarily through voluntarycompliance.

3. SERVICE TAX REVENUE

The Service Tax collections have shown a steady rise since its inception in1994. They have grown almost to 10 folds since 1994-95 i.e. Rs. 410 crores(1994-95) to Rs. 4125 crores (2002-03).

The revenue and assessee statistics from the year 1994-95 to 2002-03 areshown in Table 1.

Table 1

Financial Revenue % Growth No. of Services No. of % Growthyear Rs. Crores taxed assessees

1994-95 410 Base year 3 3,943 Base year

1995-96 846 101 3 4,866 19

1996-97 1022 24 6 13,982 187

1997-98 1515 49 18 45,991 228

1998-99 1787 18 30 1,07,479 133

1999-00 2072 16 27 1,15,495 7.45

2000-01 2540 23 26 1,22,326 5.91

2001-02 3305 26 41 1,87,577 53

2002-03 4125 25 51 2,32,048 24

Source: www.servicetax.gov.in (Part of CBEC website).

© ALI

© ALI

37

UNIT 3 INTERNATIONAL TRADE INSERVICES, THE WTO, AND INDIA

Objectives

After studying this unit you should be able:

to outline recent trends in service sector trade and investment flows withparticular focus on India’s prospects in this sector,

to provide an overview of the GATS and recent developments in the GATSnegotiations, and

to discusses India’s broad sectoral as well as cross-sectoral negotiatingstrategy in the GATS negotiations and associated domestic reform issuesthat need to be addressed if India is to realize its potential in services.

Structure

3.1 Introduction

3.2 Global Trends in Services

3.3 India’s Opportunities and Constraints in the Service Sector

3.4 GATS: An Overview

3.5 Negotiating Strategy and Domestic Reforms

3.6 Summary



3.9 References

3.1 INTRODUCTION

The service sector today encompasses a wide range of areas and activities. Itextends beyond the traditional areas of finance, insurance, transport,communication, and tourism to new and dynamic areas such as software andinformation technology services, environmental, and consultancy services. Overthe past two decades, the service sector has expanded rapidly and has come toplay an increasingly important role in national economies and in the internationaleconomy. Given the growing role of services in the Indian economy and India’semergence as a global player in services like software and health, globalizationof services presents new opportunities and challenges for India. The WTOnegotiations on services under the General Agreement on Trade in Services orGATS is thus of great significance as it provides India with a multilateralnegotiating forum to address its trade and investment interests and concerns inthe service sector.

3.2 GLOBAL TRENDS IN SERVICES

Around the world, there has been a structural shift away from primaryactivities and manufacturing towards services. Services today account for over70 per cent of production and employment in many advanced countries withproducer services such as transport, communication, and distribution aloneaccounting for 20 per cent of GDP. In developing countries, services havesimilarly risen in importance, accounting for 40 per cent or more of total outputin some countries and also constituting a significant share of total employment.

© ALI

© ALI


38

The growth in service sector output and employment has also beenaccompanied by increased internationalization of service sector transactions,driven by rapid advances in information and communication technology, thegrowing presence of multinational corporations and outsourcing of activities, andderegulation of services. According to the WTO, the value of commercialservices exports grew sevenfold between 1980 and 1999, from $ 358 billion in1980 to US $ 933 billion in 1990 to $1.4 trillion in 2000 while trade inmerchandise goods recorded a fivefold increase over this same period.Between 1990-2000, world exports of commercial services kept pace with thegrowth in merchandise exports, at an average rate of 6 percent per year.1,2

FDI in services has also expanded considerably in the past decade. By the endof the 1990s, FDI in services constituted about 40 per cent of the global stockof FDI. It consistently exceeded FDI in manufacturing during the 1990s.Overall, services trade represents about 20 per cent of global trade flows.3

Even this latter estimate is likely to underestimate the true value of servicestrade as it excludes the value of cross-border intrafirm services transactions,which have been rising rapidly in recent years.

Activity 1

Select any one service out of Financial Services, Hospitality Services,Telecommunication Services or Healthcare Services and find out the trends ofgrowth in that sector. (You may refer to business magazines, Internet or anyother Source).

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

Characteristics of Services Trade4

Services have traditionally been viewed as being nontradable, intangible, andnonstorable. However, recent trends clearly indicate that services are tradablein various forms and that services trade is concentrated among certaincountries, sectors, and activities. The following discussion highlights some of themain characteristics of services trade in terms of its modes of delivery,geographic, and sectoral profile.

A) Four Modes of Service Delivery

Services can be traded through various forms and modes of delivery, includingtransborder data and information flows and movement of capital, labour,consumers, and goods embodying services. The GATS conceives of services asbeing traded through four modes of supply, namely: cross border supply (mode1) consumption abroad; (mode 2) commercial presence; (mode 3) and;movement of natural persons (mode 4).

i) Cross-border Trade: Mode 1

Cross-border trade is similar to the traditional notion of goods trade. In thismode, the service is embodied in a transportable media such as paperdocuments, computer diskettes, or digital form, and is transmitted via telecomlinks. In the balance of payments (BoP), mode 1 is represented mainly byservices minus travel and government services, although this is not fullyaccurate due to overlap with other modes of services trade. Mode 1 basedservices trade has grown rapidly in recent years, in large part due toadvancements in information technology and increased scope for transmission ofinformation and transborder data flows. It grew faster than world GDPbetween 1985 and 1997. By 1997, cross border trade in services accounted for3.1 per cent of world GDP and 13 percent of total world exports of goods and

© ALI

© ALI

39

services. In value terms, it increased threefold during this period, from US $270 billion in 1985 to $890 billion in 1997. Even for countries with modestservice exports, if one looks at indicators of relative specialization (ratio ofmode 1 based services trade to total exports of goods and services), cross-border services trade features importantly. Given the growing potential forservices trade via means such as e-commerce, telemedicine, and e-banking,mode 1 based services trade is likely to expand significantly in future.

ii) Consumption Abroad: Mode 2

Consumption abroad refers to services trade where the consumer of the servicemoves to the country that produces the service, as in the case of tourism.Mode 2 refers mainly to travel services, as given in the BoP, although there islikely to be some underestimation due to reasons such as e-commerce whichmake it difficult to separate out modes 1 and 2. In 1997, exports of travelservices have increased faster than for mode 1, rising from US $120 billion in1985 to US $ 430 billion, or 20 per cent of total services trade. Consumptionabroad as measured by the travel services component of the BoP accountedfor 1.5 per cent of world GDP and 6.3 per cent of global exports of goods andservices.

iii) Commercial Presence: Mode 3

Commercial presence is when services trade involves the establishment ofservice operations in the consuming country as in the case of setting up bankbranch offices or law offices overseas. It is analogous to foreign directinvestment. Mode 3 covers juridical persons and legal entities that sharecharacteristics of corporations, joint ventures, partnerships, and representativeoffices and branches. In existing BoP statistics, commercial presence isrecorded in the form of data on international FDI flows and income stocks infinancial accounts.

However, FDI information alone does not provide an accurate picture of thetotal value of operations by service firms overseas. For instance, if a foreignaffiliate is treated as a resident in the host country, the value of its services isnot recorded in the BoP. An important supplementary measure of mode 3 basedservices trade is provided by the Foreign Affiliates Trade in Services (FATS)statistics. The FATS collects both inward and outward information oncommercial presence through indicators such as sales, employment, and valueadded of majority owned enterprises located in foreign countries. Inward FATSstatistics deal with the value of services provided by foreign affiliatesestablished in the home country while outward FATS statistics deal with thevalue of services provided by foreign affiliates owned abroad by residents ofthe home country5. Gross output of foreign affiliates for 1997 is estimated at $820 billion, or about 38 per cent of total services trade. The value of productionby foreign affiliates constituted 2.9 per cent of world GDP and 12.1 per cent ofworld exports of goods and services.

iv) Movement of Natural Persons: Mode 4

This mode involves the delivery of the service through the temporary cross-border movement of service suppliers as in the case of software andconstruction services. There are two categories of such service providers, theself-employed and employees. The self employed are individual foreign servicesuppliers who go overseas on their own to supply services. Employees areforeign natural persons employed by service suppliers to provide services,where the employer could be from the home or third countries. At present,mode 4 based services trade is captured in the BoP accounts undercompensation for those established abroad. By this measure, world income fromthe compensation of employees stood at $ 30 billion in 1997, or 1 per cent oftotal services trade and a meagre 0.1 percent of world GDP. These values are

International Trade inServices, the WTO, and

India

© ALI

© ALI


40

small relative to those associated with other modes of supply. Mode 4 basedservices trade is less than 4 per cent of the value of cross border trade in services.

While the relative insignificance of mode 4 based trade reflects the smallervolume of trade via movement of natural persons, due to various restrictions oncross-border labour mobility, it is also due to problems in capturing the extent ofsuch trade. Measures of mode 4-based services trade are the mostproblematic. The compensation category does not capture compensation toservice providers who are temporarily abroad for more than one year, since bythe BoP definition, such persons are defined as residents of the host country.This lends a downward bias to the estimates.

Activity 2

Classify the following services, as per the classification given above:

Financial Services

.....................................................................................................................

Hospitality Services

.....................................................................................................................

Telecommunication Services

.....................................................................................................................

Healthcare Services

.....................................................................................................................

B) Geographic Profile

Services trade is highly concentrated among a few developed countries and afew regions of the world. Developed countries account for 70 per cent or moreof global services trade and this predominance holds across all four modes ofsupply. 6Developing countries are relatively smaller players in services tradethan in merchandise trade. Services trade between developed and developingcountries occurs mostly in the context of modes 3 and 4 which relate to crossborder flows of capital and labour, respectively. The latter reflects theimportance of capital and labour endowments in determining comparativeadvantage and the direction of trade and factor flows in services.

C) Sectoral Composition

Trade data on commercial services is collected in the BoP for three broadcategories of services, namely. travel, transport, and other services. Based onavailable BoP statistics, transportation services account for about one quarter oftotal services trade, travel services for about one third, and other commercialservices for the remaining 40 per cent. A look at the relative growthperformance of the three sub sectors further indicates a shift in compositiontowards “other” services and away from transport and travel services, with theformer category recording relatively higher annual growth rates in recent years.Within the miscellaneous “other” services category, other business services,which include a variety of professional services such as advertising, legal,accountancy, technical, repair and maintenance, and other supporting services(many of which go unreported) account for 50 per cent of trade. Individualactivities such as communication, finance, and insurance occupy a much smallershare of trade in this category.

D) Data Issues in Services

While existing data clearly indicate the predominance of certain countries,subsectors, and forms of delivery in services trade, it is important to note thatservice sector data are subject to many shortcomings due to statistical,

© ALI

© ALI

41

conceptual, and methodological difficulties in measuring this sector. There aremajor discrepancies between national income accounts and balance of paymentsstatistics for the service sector. Such measurement problems and the resultinglack of comprehensive and accurate data on services are a major constraint toanalysing services trade and investment flows.

3.3 INDIA’S OPPORTUNITIES AND CONSTRAINTSIN THE SERVICE SECTOR

Over the past two decades, the service sector has replaced agriculture as thedominant sector in India. The service sector’s share in India’s GDP has risenfrom 36 per cent in 1980-81 to around 56 percent in 2002-03 while the shareof the primary sector has fallen over this period, from 38 per cent to 24 percent. The share of manufacturing has remained stagnant at about 22 per centof GDP.7 This aspect has been discussed in detail in the previous unit.

India has witnessed considerable growth in service sector trade, particularlyduring 1990s. Net inflows of invisibles stood at $16 billion in 2002-03. Netinvisibles receipts from non-factor services were an estimated $ 6 billion andnet receipts from software services stood at $8.8 billion in 2002-03.8 Theservice sector accounts for about one quarter of total trade in goods andservices, with services exports and imports each constituting about 25 per centof total exports and total imports, respectively. Close to 80 per cent of thistrade is in transport, travel, and other business services.9 The most notableexpansion has been in the software services sector. Exports of softwareservices have risen from a few hundred million US dollars in the early 1980s toaround $ 9.6 billion in 2003-03 and are expected to reach $ 50 billion by2008.10 Today, India’s presence as well as its future potential in the globalsoftware industry is well recognized, at home and abroad. In several otherareas such as construction and engineering services, health services,telecommunications, and financial services, there is growing recognition in Indiaand abroad of the country’s trade and investment potential.

Activity 3

Identify those Services in India which have grown during the last 4-5 years.Also think about the possible reasons for growth.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

Characteristics of India’s Service Sector Trade

Trade statistics for India’s service sector are highly aggregate in nature. BoPdata are available for only a few services, including, travel, transport, insurance,and other business services including software services. Several categories,including important sectors such as communication, construction, finance,computer and information services, and personal, cultural, and recreationalservices, are not covered in India’s BoP statistics or are subsumed withinbroader categories, reflecting the problems in collecting information on specificservice activities. Tables 3.1 show trends in the value of India’s service sectorexports and imports.


India

© ALI

© ALI


42

Table 3.1: India’s Services Trade (US $ million)

Items 1990-91 1995-96 2000-01 2002-03

1) Travel, net 1,064 1,546 294 -438Receipts 1,456 2,713 3,168 3,029Payments 392 1,167 2,874 3,467

2) Transportation, net -110 -158 -1,257 - 3Receipts 983 2,011 1,913 2,544Payments 1,093 2,169 3,170 2,547

3) Insurance, net 23 36 135 57Receipts 111 179 257 371Payments 88 143 122 314

4) Miscellaneous, net 161 -1,405 2,990 6,511Receipts 1,986 2,411 12,875 18,735Payments 1,825 3,846 9,885 12,224

Of Which :Software Services, net N.A. N.A. 5,750 8,863Receipts N.A. N.A. 6,341 9,600Payments N.A. N.A. 591 737

Source: RBI Annual Reports (www.rbi.org)

The data clearly indicate that India’s services trade has undergone a majorexpansion during the last few years. This expansion, however, has not beenuniform across subsectors. The composition of India’s services trade has shiftedaway from traditional service activities such as travel and transport towardsother services, and in particular, towards other business services. The share oftransport and travel services in total services trade has declined considerably.This structural change in India’s services trade mirrors the structural changes inglobal services trade where there has been a similar shift from traditionalsectors towards business and professional services. The latter shift is due inlarge part to the growth in information technology and software services withtheir enabling impact on many business activities.

However, as noted earlier, the BoP statistics should be interpreted with caution.The categories are very broad and heterogeneous. There is considerableoverlap across activities and sectors and many services may be altogetherexcluded from India’s BoP statistics for lack of information and systematiccompilation of data. The BoP figures also exclude FDI in India’s service sector,which is likely to result in under-representation of subsectors such ascommunications, transport, and financial services where FDI plays a greaterrole.

Using the mode-wise classification of services trade, all four GATS modesappear to be important in India’s service trade. Consumption abroad or mode 2is an important mode of supply given the significant share of travel services inboth services exports and imports. Cross border supply or mode 1 is alsoimportant given the recent growth in business process outsourcing and backoffice activities in India and the growing scope to deliver services cross borderthrough electronic and telephonic means. India also relies heavily on movementof natural persons for its services exports, reflecting its comparative advantagein exporting labour-intensive services. The importance of cross border labourmobility is evident from the growing role of other business services in totalservices trade, since many of these professional services require movement ofprofessional service providers to the overseas market. The predominant

© ALI

© ALI

43

subsector within this segment is software services which relies on cross bordermovement of software service providers to provide on-site and customizedsoftware services in overseas markets. It is difficult, however, to gauge thesignificance of this mode in India’s services trade since data on compensationof employees and on transfers and remittances and the usual proxy measuresfor mode 4 are not available separately for service activities and because thereis no separation of temporary from permanent movement of labour.Nevertheless, if private transfers and remittances are any indicator of theimportance of revenues from cross border labour mobility, inflows amounted toa significant $12 billion in 2001-02 and $14.8 billion in 2002-03 while outflowshave been very small in comparison at $ 67 million and $ 367 millionrespectively. Through the 1990s, India has been a net recipient of labourincome as indicated by positive net transfers, indicating the role of cross-borderlabour mobility in India’s services exports.

On the import side, the main mode of interest to India is commercial presence,or mode 4. Data available from the RBI’s Annual Report indicate that servicesreceive a large share of FDI in the country. For instance, between August 1991and upto July 2000, FDI inflows totalled $16.5 billion in the telecommunicationssector, $10.7 billion in the financial sector, and $ 6 billion the transport sector.Within services, financial and telecommunications services account for the bulkof FDI. Given impending deregulation and liberalization of many state monopolysectors such as insurance, telecommunications, and air transport, and relaxationof foreign equity norms in view of the need for major capital investments inmany areas, the role of FDI in India’s services trade is likely to grow.

Constraints to India’s Trade in Services

There are many policy-related, infrastructural, and other constraints to India’strade in services. On the export front, India’s exports of professional servicesare adversely affected by external barriers such as immigration and labourmarket regulations, recognition and licensing provisions, and discriminatorytreatment with respect to taxes, subsidies, and government procurement policies.For instance, Indian professionals are subject to entry quotas, cumbersomeadministrative procedures for issuance of visas and work permits, wage parityrequirements, economic needs tests, and nationality and residency conditions. Inprofessions like health, architecture, and accountancy services, credentials ofIndian professionals are not recognized in major countries due to the absence ofmutual recognition agreements, which either requires them to undergo furthertraining in the host country or restricts their scope of practice. Deficiencies indomestic standards of training and infrastructure and quality of manpower alsoaffect India’s’ exports of professional services.

On the import front, there are again numerous domestic regulatory barriers. Forinstance, India’s imports in key infrastructure services such as energy, banking,insurance, and telecommunications are constrained by restrictions on foreignequity participation, authorization and approval requirements, and restrictions onthe scope of activity and form of legal entity. Such barriers not only affectcompetitiveness and efficiency in the sector concerned, but also have largereconomy-wide implications for export prospects in other sectors, given their vitalinput role. For example, regulatory barriers in the air transport services sectoraffect India’s export potential in tourism services. There are also licensing andnationality based restrictions arising from regulatory capture in variousprofessional services, which affect market access by foreign firms andindividual service providers, consequently hurting quality, cost competitiveness,and the scope for technology and skill transfer in such services.


India

© ALI

© ALI


44

3.4 GATS : AN OVERVIEW

One of the most significant achievements of the Uruguay Round of negotiationsfrom 1986-1993, was to broaden the scope of world trade rules to coverservices. Services negotiations were conducted on a separate track from thoseon goods, under the aegis of the Group for Negotiations on Services (GNS).11

The resulting agreement, GATS, establishes multilateral rules and disciplines togovern international trade and investment in services.

Key features of the GATS

The GATS is a comprehensive legal framework of rules and disciplinescovering 161 service activities across 12 classified sectors. These includeactivities as wide ranging as telecommunications, financial, maritime, energy,business, education, environmental, and distribution services. It excludes servicessupplied in the exercise of governmental functions.12

The GATS has three main elements. The first is a set of general concepts,principles, and rules, which are applicable across the board to measuresaffecting trade in services. Some of the key provisions include obligationsconcerning transparency, domestic regulation, restrictive business practices,behavior of public monopolies, and Most Favoured Nation (MFN) treatment.13

The second element is a set of sector-specific or cross-sectoral commitmentson national treatment and market access which are applicable to those activitieslisted in a country’s schedule of commitments. The third important element TSis a series of attachments including annexes to the agreement which pertain tosectoral specificities and Ministerial Declarations regarding GATS’implementation. This three tier structure reflects the need to have:

1. General principles applicable to all services to advance overall liberalizationin services;

2. National schedules to enable countries to proceed at their own pace inliberalizing services; and

3. Sectoral agreements to ensure that trade liberalization in some sectors issupported by the establishment of compatible regulatory regimes ormodification of existing ones.

The GATS defines services trade as occurring through four modes of supply,modes as discussed earlier. This modal breakdown addresses the complexnature of international transactions in services and the diverse forms in whichservices are embodied, in consumption, production, and distribution-relatedactivities and in the form of goods, human capital, and information. It alsobrings into the purview of GATS, regulatory issues concerning investmentpolicies and immigration and labour market legislation, hitherto outside thedomain of the multilateral trading system.

The GATS’ commitment structure and framework is distinct from that of otherWTO agreements. Countries make commitments on market access and nationaltreatment for specific sectors in sectoral schedules of commitments and acrosssectors in horizontal schedules of commitments. The former are applicable tothe particular sector at hand while the latter relate to all sectors and couldcompliment, override, or qualify the sectoral commitments. Countries are free todecide which service sectors they wish to schedule, i.e., table for negotiations,and thus subject to market access and national treatment disciplines. The latterhas also been termed as a positive list approach to liberalization. These marketaccess and national treatment commitments are made for each of the fourmodes of supply, i.e., there are in all eight commitments per subsector oractivity in both the sectoral and the horizontal schedules. In addition, countries

© ALI

© ALI

45

also specify in their schedules, the limitations and exceptions they wish tomaintain which violate market access and national treatment, again by mode ofsupply. Limitations listed in the horizontal schedules typically include generallaws and policies, which restrict the use of a mode of supply by foreignsuppliers, independent of the sector concerned. Countries may also choose toinscribe additional limitations or qualifying conditions to their commitments.

Under the market access obligation, a country must accord treatment to foreignservice providers which is no less favourable than that provided for under theterms, limitations, and conditions specified in its commitment schedule. Theselimitations take the form of restrictions on the number of foreign servicesuppliers, the value of transactions or assets, the total quantity of servicesoutput, the number of natural persons who may be employed, the type of legalentity, and the extent of foreign capital participation.

Table 3.2 below illustrates the typical format of the horizontal and sectoralschedules of commitments.

Table 3.2: Sample Schedule of GATS Commitments

Commitments Mode of supply Conditions and limitations Conditions andon market access qualifications on

national treatment

Horizontal Cross-border “None” E.g., “None” othercommitments supply than tax measures that(i.e., across all result in differences insectors) treatment with respect

to R&D services.

Consumption “None” “Unbound” forabroad subsidies, tax

incentives, and taxcredits

Commercial E.g., “Maximum foreign E.g., “Unbound” forpresence equity stake of 49 subsidies. Approval

percent” required for equitystake over 25 percent.

Temporary entry E.g., “Unbound” except E.g., “Unbound”of natural persons for the following: except for categories

Intra-corporate transferees of natural personsof executives and senior referred to in themanagers; specialist market access column.personnel subject toeconomic needs test forstays longer than oneyear; service sellers forupto three months

Specific Cross-border E.g., “Commercial presence E.g., “Unbound”commitment supply is required”

E.g., Consumption E.g., “None” E.g., “None”Architectural abroadservices

Commercial E.g., “25 percent of senior E.g., “Unbound”presence management should be

nationals

Temporary entry E.g., “Unbound, except as E.g., “Unbound,of natural persons indicated in Horizontal except as indicated in

Commitments HorizontalCommitments”.

Source: Hoekman in (eds.) W. Martin and A. Winters (1995).


India

© ALI

© ALI


46

The national treatment obligation requires a country to accord treatment toforeign service suppliers which is no less favourable than that accorded to itsdomestic service providers, except as specified in its limitations and conditionsunder its national treatment commitments. Typical violations of nationaltreatment include differential treatment of foreign service providers in the caseof subsidies, taxes, government procurement policies, and provision of variousbenefits.

An entry of “none” in the above schedule means that a member binds himselfnot to have any measures, which violate market access and national treatmentfor a specific sector and mode of supply. These are also termed fullcommitments. Unbound implies that no commitment is made for a particularmode of supply. The rest of the entries, which include specification of someconditions and limitations are known as partial commitments. Thus, the GATSnot only gives countries the discretion to choose sectors for negotiations butalso gives them the flexibility to decide the degree of liberalization which theywish to commit in these tabled sectors.

GATS Commitments

Liberalization has been limited thus far under the GATS. Given the discretionarynature of the commitment process, countries have typically not scheduled themore sensitive and regulated service sectors. More commitments have beenforthcoming in sectors like tourism and software which are relatively open andunregulated as opposed to services like education, health, distribution, andtransport where there may be equity, employment, and government monopolyrelated considerations. Moreover, even in sectors that have been scheduled,often the coverage of subsectors and activities is quite limited. Commitmentsare mostly partial in nature and tend to bind less than the status quo, especiallyin the case of developing country commitments on commercial presence.Hence, existing policies have often not been locked in through commitments.Liberalization in mode 1 has also been limited as commitments in this mode aremostly unbound for reasons of technical infeasibility, indicating the uncertaintyabout telecom based delivery of services and e-commerce at the time of theUruguay Round. However, the most strikingly limited liberalization has been inthe case of mode 4 where countries have refrained from making sectorspecific commitments and have made broad horizontal commitments for selectcategories of service suppliers, namely those associated with commercialpresence and at higher skill and professional levels. Moreover, even thesehorizontal commitments have been subject to a large number of restrictionsrelating to immigration and labour market policies, recognition requirements,nationality and residency conditions, and differential treatment in terms of taxes,subsidies, and procurement policies. Thus, the interest of developing countries inexporting labour based services, especially through cross border movement ofsemi-skilled and unskilled service providers, has been completely unmet.

India has made limited commitments in the Uruguay Round. It did not schedulemajor sectors like energy, distribution, accountancy, and legal services and evenin sectors like financial services, which it did schedule, its commitments did notextend to subsectors like life insurance. India’s commitments are largelyuniform across sectors and are more restrictive than existing policies, reflectingthe fact that India did not try to address sector-specific interests and concernsand took a conservative approach to the negotiations. Its commitments inmodes 1, 2, and 4 are mostly unbound and commitments in mode 3 are subjectto a foreign equity ceiling and local incorporation requirement. Overall, Indiahas not used the GATS negotiations to lock in its existing policies in variousservice sectors. It has also not benefited from greater market access in othercountries given the limited liberalization in its key modes of interest, namelymodes 1 and 4.

© ALI

© ALI

47

GATS 2000 Negotiations

Talks resumed in GATS 2000 as mandated during the Uruguay Round and arecurrently underway. The objective of this round is to deepen the existingcommitments through a request-offer process, to strengthen and develop variousprovisions in the GATS, and to establish mechanisms for better implementationof these provisions.

The request-offer process and India

As of June 30, 2002, many countries have put forward their sectoral andhorizontal requests to other member countries. Developed country requestslargely reflect their interest in liberalizing capital-intensive sectors liketelecommunications, financial, energy, and distribution services through improvedmarket access commitments in mode 3, as well as their interest in improvingtransparency in regulation and in administrative procedures in developingcountries. Requests by developing countries are mainly focused on labour-intensive services and on improving market access under mode 4, throughcoverage of a wider range of skill categories and of independent andcontractual service providers, who are de-linked from commercial presence.

India has received requests from all major developed countries. The thrust ofthese requests has been to commit to full market access in a variety ofinfrastructure services like insurance, banking, telecommunications, and energyservices and to reflect India’s FDI liberalization and regulatory reforms in thesesectors in its commitments. Greater market access has also been sought forcommercial presence and movement of intracompany transferees and businessvisitors in business services like legal and accountancy services. India has inturn made requests to all its major trading partners. These requests have mainlyfocused on India’s export interests in mode 4. In this regard, India has made abold proposal on mode 4, also endorsed by several other developing countries,to institute a streamlined GATS or service provider visa for intracompanytransferees, business visitors, contractual service providers, and independentprofessionals for a uniform one year period. This visa would be distinct fromnormal immigration visas, so as to effectively separate temporary frompermanent movement of labour. India has further proposed that entry quotas,wage parity requirements, social security taxes, economic needs test and othersuch restrictions be eliminated for those qualifying for a service provider visa.The GATS or service provider visa would be characterized by:

i) Strict time frame for issuance (2-4 weeks maximum);

ii) Flexibility in issuance on shorter notice for select categories of providersand border availability;

iii) Transparent and streamlined application process;

iv) Mechanisms to find status of application, rejection, requirements;

v) Easier renewal and transfer procedures;

vi) Safeguard mechanisms to prevent entering permanent labour market andabuse;

vii) Scope to challenge rejections, delays, and unfair practices under thedispute settlement mechanism.

India has also requested due recognition of qualifications for its serviceproviders and improved enforcement of GATS provisions for facilitating entryinto Mutual Recognition Agreements.

Initial offers have been forthcoming as of March 31, 2003. There are more fullcommitments in mode 1. This is of significance to India as it ensures liberaland predictable market access through cross border supply and thus for


India

© ALI

© ALI


48

business process outsourcing and back office service exports by India. There isalso some improvement in the offers on commercial presence, with removal oflimitations such as economic needs tests and authorization/approval requirementsand relaxing of limits on foreign equity participation. However, improvements inmode 4 have been very limited. A few offers, such as by the EU and Canada,cover new categories of service providers such as graduate trainees,independent professionals, and contractual service suppliers that are of exportinterest to developing countries like India. These offers also increase the lengthof stay and relax associated conditions on stay and entry. However, theseoffers still do not distinguish between temporary and permanent movement oflabour. They continue to subject GATS related movement which is temporary tothe usual immigration and labour market regulations which are applicable topermanent migration. Moreover, limitations in the form of entry quotas,differential taxes and subsidies, economic needs tests, and discretionaryapplication of recognition norms continue to hold. Hence, so far, India does nothave much to gain from the offers in this mode.

It is expected that the offers would be finalized by the end of 2004 and wouldbecome part of a new round of WTO negotiations. Although the initialcommitments to date show only marginal improvements in terms of marketaccess and conditions of operation relative to the earlier Uruguay Roundcommitments, there has been much greater willingness on the part ofdeveloping countries to negotiate further liberalization of services. India, whichhad earlier resisted the inclusion of services in the multilateral trading system, istoday one of the most vocal proponents of improving multilateral guidelinesunder the GATS and for increasing market access for developing countryservice providers. This shift in position on services reflects the growingawareness of the significance of this sector to the country’s overall reform andliberalization agenda, its wider implications for growth and productivity, and therealized comparative advantage in selected services.

Activity 4

Write your understanding of GATS in 50 words.

............................................................................................................................

............................................................................................................................

............................................................................................................................

............................................................................................................................

3.5 NEGOTIATING STRATEGY AND DOMESTICREFORMS

In order to benefit from the GATS negotiations, India needs to have a coherentexternal and domestic strategy. It needs to: (a) identify the country’s strengths,weaknesses, and trade potential and requirements in individual service sectors;(b) identify the concessions India would like to obtain in specific service sectorsand from specific markets; (c) determine what it could concede in turn; (d)recognize the political economy constraints and limitations it would face inliberalizing services; and (e) identify the domestic reforms and measures itwould need to implement to support its negotiating strategy.

The thrust of India’s strategy in infrastructure services, where it is primarilyan importer, has to be on opening up the domestic market to greatercompetition and in particular, to foreign direct investment. India should considerliberalizing its earlier commitments on market access and national treatment,keeping in mind needs such as capital infusion, technology upgradation,

© ALI

© ALI

49

synergies with other sectors, and the larger economy-wide impact on efficiencyand competitiveness. The commitments have to be framed in the larger contextof ongoing regulatory reforms and liberalization in these sectors and mustreflect policy intentions. Overall, it must:

1. Bind the status quo at a minimum so as to reflect the current regulatoryenvironment and recent reforms, signal predictability of its policies, andreduce the scope for backtracking.

2. Expand the coverage of its commitments by including new subsectors andactivities which were previously not bound, by including more sectors whichwere not previously scheduled, and by increasing the scope of the existingcommitments by removing or relaxing various limitations.

3. Pre-commit to further liberalization so as to signal future intentions,particularly where the course of future policy and a timetable for phasing inhas been declared and use the transition period to undertake necessarydomestic measures on regulatory capacity and institutional frameworks.

4. Leverage across sectors by offering greater market access through FDI insectors like insurance and telecommunications which are of interest to majordeveloped countries like the EU and the US in return for improved marketaccess under cross border supply and movement of natural persons forservices like IT, health, BPO, and others where it has export potential.

India’s strategy in the area of professional services has to be both outwardand inward oriented since these are services where India has both export andimport interests. Given its comparative advantage in labour and knowledge-intensive services, India needs to obtain more liberal commitments from keyexport markets, particularly for modes 1 and 4. In this regard, India needs toadvance with its proposal on mode 4 through its developing country coalition,“Friends of mode 4”, for the institution of a separate GATS or service providervisa and its model schedule of commitments for mode 4. The introduction of aGATS visa to separate temporary from permanent labour would also facilitatethe removal of social security taxes, economic needs and other necessity tests,and other restrictions. In addition, India would also need to insist on discussingissues relating to classification of service providers and transparency inadministrative procedures.

In view of India’s recent emergence as an outsourcing hub, its negotiatingstrategy also needs to put sufficient emphasis on liberalizing market accessthrough cross border supply. Recently, India has proposed a horizontal formulafor mode 1 whereby countries would make a full commitment in this modeacross all sectors, barring those like financial services where there may beconcerns of financial stability and fraudulent practices arising from unrestrictedcross border flows of capital. This approach has been motivated by theprotectionist backlash to BPO and back office services in developed countriesand would help pre-empt future protectionism in the private domain byguaranteeing unrestricted market access under mode 1. Although India cannotchallenge the latest US bill which bans offshoring of US government contracts,given the carve out clause for government services under the WTO, it needs tore-think its position on government procurement under the WTO. It needs toassess the market access implications of government procurement restrictions.As noted earlier, it would be India’s interest to advance the proposals on bothmodes 1 and 4 through a quid pro quo negotiating strategy of offering greatermarket access in sectors of commercial interest like banking and insurancethrough commercial presence for improved market access in these two modes.

On the domestic side, India should also consider scheduling more professionalservice sectors and opening up these services to foreign commercial presence


India

© ALI

© ALI


50

and service suppliers. Such an approach would be conducive to the needs ofgreater efficiency, competition, higher quality and standards in many of theseservices and would help overcome the regulatory capture that exists in thehome market in some of these professions.

These negotiating strategies have to be supported by various domestic reformsand measures. More liberal market access conditions in infrastructure servicesneed to be supported by initiatives to encourage private participation in suchservices. This would require liberalization of FDI policies, divestment of thegovernment’s share in related public sector enterprises, and creation of anappropriate regulatory structure to ensure transparency, fairness, and a levelplaying field without jeopardizing consumer and national interests. The fallout interms of displacement of labour and associated reforms in labour laws and inlegal and institutional frameworks, would also need to be addressed. Similarly, inthe case of professional and manpower based services, India will not be able torealize its export potential unless it undertakes steps to improve quality,standards of training and infrastructure, and regulatory mechanisms to enforcestandards. Investments in telecom infrastructure and supporting facilities andamendments to domestic laws and acts affecting competitiveness in suchservices may also be required.

Activity 5

Talk to some corporate people from a service organization and ask them abouttheir understanding of implications of GATS for India. Summarize yourinterviews in 50 words.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

3.6 SUMMARY

Service sector trade and investment are likely to grow rapidly in the comingyears. The prospects for further liberalization of these flows are also promisinggiven heightened awareness about the importance of a competitive and efficientservice sector and much greater willingness on the part of governments acrossdeveloped and developing countries to deregulate and liberalize servicesautonomously. The GATS framework provides countries with the opportunity tolock in their liberalization in the service sector. India is likely to emerge as animportant player in both exports and imports of services. So far, India hastaken a very cautious and conservative approach to the GATS negotiations. Butif India is to realize significant market access gains in sectors and modes ofinterest, then it must also be willing to make substantial market accesscommitments in services and to overcome its defensive posture in thesenegotiations.


1. What are the four modes of service delivery? Explain by taking examples.

2. What is your understanding of GATS and its implications for India?

3. In what specific Services sector, India has core competence, which can bestrategically exported. Give Justifications.

© ALI

© ALI

51


Chanda, R., Globalization of Services: India’s Opportunities andConstraints, Oxford University Press, New Delhi, 2002.

“Movement of Natural Persons and Trade in Services: Liberalizing TemporaryMovement of Labour under the GATS”, ICRIER Working Paper No. 51, NewDelhi, November 1999.

“Movement of Natural Persons and the GATS”, World Economy, Vol. 24, No.5, May 2001, pp. 631-654.

Chaudhuri, S., A Mattoo, and R. Self, “Liberalizing Mode 4: A PossibleApproach”, prepared for the UNCTAD Expert Group Meeting on Movement ofNatural Persons, Geneva, July 29-31, 2003.

GATT, General Agreement on Trade in Services, Geneva, April 1994.

Government of India, Economic Survey 2002-03, New Delhi, 2003.

Hoekman, B., “”Assessing the General Agreement on Trade in Services” in W.Martin and A. Winters (eds.), The Uruguay Round and the DevelopingEconomies, 307, World Bank Discussion Papers, World Bank, Washington, DC,1995.

IMF, Balance of Payments Statistics, Washington, DC, 1999.

Karsenty, G., “Just How Big are the Stakes? An Assessment of Trade inServices by Mode of Supply”, WTO, Geneva, 1999.

NASSCOM, The IT Software and Services Industry in India: A StrategicReview, New Delhi, 2000.

Sauve, P. and R. Stern (eds.), GATS 2000-New Directions in Services TradeLiberalization: An Overview, Centre for Business and Government, HarvardUniversity and Brookings Institution Press, Washington, DC, 2000.

Warren, T. And C. Findlay, “How Significant are the Barriers? MeasuringImpediments to Trade in Services,” in Sauve and Stern (eds.), Washington, DC,2000.

WTO, Annual Reports, Geneva.

WTO, Council for Trade in Services, Special Session, “Proposed Liberalizationof Movement of Professionals under the General Agreement on Trade inService”, Communication from India, S/CSS/W/12, Geneva, 24 November, 2000.

WTO, Initial Offers and Requests, Geneva, 2002 and 2003.

3.9 REFERENCES

1. Warren and Findlay (2000), p.5.

2. WTO Annual Report (1999 and 2000).

3. Stern and Sauve (2000) and Karsenty (1999).

4. Estimates for the different modes of supply were obtained from Karsenty(1999). The latest available estimates are for 1997 for such a mode-wiseallocation of services trade.

5. There are differences, however, between the GATS and the FATS conceptsof foreign affiliates and related service trade statistics. GATS refers to allforeign affiliates while the FATS only refers to the majority owned affiliates.GATS covers services provided by service and manufacturing companieswhile the FATS covers the output of companies by primary activity. SinceFATS proxies service products with total production of companies in servicesectors and leaves out the value of service activities undertaken by


India

© ALI

© ALI


52

companies in agriculture or manufacturing, it may result in someunderestimation. At the same time, since the service sector also producesgoods, FATS may overestimate the value of service activity.

6. Statistics on the geographic profile of services trade are from the WTOAnnual Report (2000).

7. RBI Annual Report (2002-03).

8. Ibid 7.

9. IMF, Balance of Payments Statistics (1999).

10. Nasscom (2000).

11. During the course of the discussions, it was decided, however, that serviceswould be part of a single legal undertaking, the WTO, and would be subjectto the same principles, i.e., those of Most-Favoured Nation treatment,national treatment, and transparency.

12. This carve out clause would apply to sectors such as health and educationservices which are typically in the public sector domain. However, due tolack of clear terminology in this carve out provision and given the growingrole of private delivery in even such sectors, it is often difficult to determinewhich activities can be covered by GATS and which are excluded.

13. Article VI on domestic regulation establishes disciplines to ensure thatregulations such as qualification requirements, technical standards, andlicensing procedures are based on objective and transparent criteria, are notmore burdensome than required for ensuring the quality of the service, anddo not constitute restrictions in themselves. Article VII on recognition whichestablishes procedures for mutual recognition of licenses, education, andexperience and calls for equal opportunities to other countries to negotiateaccession to bilateral or plurilateral mutual recognition agreements. ArticleIII on transparency requires countries to establish enquiry points to providespecific information on laws, regulations, and administrative practices withbearing on services trade. There are also several safeguard type provisionswhich permit a country to introduce restrictions for BoP reasons or tosafeguard public morals, law and order, consumer interests, security,and privacy.© A

LI© A

LI

53

UNIT 4 CONSUMER BEHAVIOUR INSERVICES

Objectives

After studying this unit you should be able to:

review the basic concepts of Consumer Behaviour;

outline the stages in consumer decision making process;

explain the factors influencing buyer behaviour; and

understand the concepts of search, experience and credence qualities andtheir implications on consumer decisions making process for services.

Structure

4.1 Introduction

4.2 Decision Making Roles

4.3 Classification of Buyers

4.4 Consumer Decision Making

4.5 Factors Influencing Buyer Behaviour

4.6 Search, Experience and Credence Quality

4.7 Summary



4.1 INTRODUCTION

All of us buy different services for various reasons. One person may prefer togo to a restaurant for good food while the other may opt for an exclusiverestaurant, for status. One person may prefer to read ‘The Times of India’early in the morning, while the other may prefer to read the same newspaperafter coming back from the office. There are women who don’t go to beautyparlors at all, whereas there are others who go regularly. Similarly, there aremany such examples telling us that people show different behavior in buyingand using different products and services.

The discipline of marketing which helps in developing a deeper insight in thesebehavioral differences is called “Buyer Behaviour”. We have developed anappreciation that the meaning of marketing orientation is that a firm should aimall its efforts at satisfying its customers. And to keep customers satisfied itbecomes essential to have a deeper knowledge regarding the behavior of thebuyer.

4.2 DECISION MAKING ROLES

It is being said, that for the purchase decision some other people might also beinvolved and they may have different roles to play. But generally, and moreoften for services, both individual or organizational, these roles are played bymore than one person. For a marketing person, it is important to know whoplays what role in the purchase decision, so as to adapt the service format andpromotional efforts to these key players.

© ALI

© ALI


54

Conceptually, the consumer decision making roles are best exhibited by thefollowing example. At a confectionery shop visited by a family to buy bread, achild asks his parents for a candy. The child becomes the ‘initiator’. Themother suggests that only one piece may be purchased of ‘X’ brand, she playsthe role of ‘influencer’. The father orders for one piece of ‘X’ brand and paysfor it, playing the role of ‘decider’ and ‘buyer’. Finally, the candy is eatenaway by the child, which means that he plays the role of ‘user’.

In the purchase of any particular service six distinct roles are played. Theseare:

i) Initiator: The person who has a specific need and proposes to buy aparticular service.

ii) Influencer: The person or the group of people who the decision makerrefers to or who advise. These could be reference groups, both primaryand secondary. It could be even secondary reference group like word ofmouth or media, which can influence the decision maker.

iii) Gatekeepers: The person or organization or promotional material whichact as a filter on the range of services which enter the decision choiceset.

iv) Decider: The person who makes the buying decision, irrespective ofwhether he executes the purchase himself or not. He may instruct othersto execute. It has been observed at times, more typically in house hold orfamily or individual related services, one member of the family maydominate in the purchase decision.

v) Buyer: The person who makes the actual purchase or makes bookingsfor a service like travel, hotel room, hospital, diagnostic lab, etc.

vi) User: The person who actually uses or consumes the product. It can beother than the buyer. In a number of services, it has been observed thatusers are also the influencers.

The number of persons who play these six distinct roles is not fixed. At timesmore than one persons are involved (as we have seen in the above example)and at times only one person plays all the six roles. For example, while buyinghousehold grocery items a housewife plays all the roles and makes thepurchases. In organizational buying the dynamics of these six roles becomesmuch different and while selling to an organization due care should be taken inidentifying who is playing what role.

To summarize, let us take the example of a business traveler who is asked byhis superior to visit a particular branch office. May be in this case the bossworks as the initiator. The travel agency, which handles that company’s travelbooking, with its limited resources may work as a gatekeeper. The financeoffice may put restrictions on economy class and that too in the state runairlines, may work as influencer. The administrative division which makes thebooking and handles the bills may become the buyer and finally the executive,who travels is the user, who was not left with any choice.

Activity 1

You are the sales manager for credit cards in your bank and you have learntthat a company is setting up a branch office in your city. You are planning tomake a visit for institutional sales. Identify the people you would come acrossand also the roles they are likely to play.............................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................

© ALI

© ALI

55

4.3 CLASSIFICATION OF BUYERS

Typically, buyers can be classified into two categories: Personal andOrganizational. Personal buyers are those who buy a particular item for his orher own consumption or use. For example you may like to buy an AnnualMaintenance Contract (AMC) for you personal computer installed in yourhouse. The other category of buyers is called organizational buyers. Theorganizational buyers are those who buy the goods or services for theorganizational use. For example, a government department may buy a similarAMC for the office computers. Another example can be of a hospital whichmay buy beds for the use of patients.

However, irrespective of the type of buyer, the buying roles remain the same,though the number of persons who play these roles may vary. In organizationpurchases, also called B-2-B (Business to Business) purchases more people areinvolved and typically they fall under influencer’s category. Because of largenumber of people working as influencers, generally the B-2-B purchases takelonger time to minimize on perceived risks. The elements which are reviewed inthe evaluation process might range from price, quality, reliability, etc. As thecomplexity of the service offer increases, in B-2-B purchases, the importanceof confidence in service supplier increases.

4.4 CONSUMER DECISION MAKING

The consumer’s decision to purchase or reject a product or service is themoment of final truth for the marketer. It signifies whether the marketingstrategy has been wise, insightful, and effective, or whether it was poorlyplanned and missed the mark. Marketers are therefore interested in theconsumer decision-making process by which a consumer selects one alternativeamongst the lot available. The decision not to buy is also an alternative.

A simple consumer decision-making model, as shown in Figure 4.1, ties togetherthe psychological, social and cultural concepts into an easily understoodframework. The decision model has three distinct components input , process ,and output.

Input component of the model include firm’s marketing efforts (marketing mixactivities) which communicate the benefits of the products and services topotential consumers and the non-marketing socio-cultural influences. Socio-cultural influences include family, friends, social class, subculture and culture.The combined effect of firm’s marketing efforts, influence of family andfriends, culture etc. affect what consumers purchase and how they use them.The process components deals with the consumer decision making whichinvolves need recognization , prepurchase search and evaluation of alternatives.

Figure 4.1: Input, Process, Output Model of Consumer Behaviour

External Influences

Firm’sMarketingEfforts

Socio-culturalEnvironemtn

INPUT

Purchase

Post purchaseEvaluation

OUTPUT

Psychological

Field

PROCESS

Decision Making

Consumer Behaviour inServices

© ALI

© ALI


56

The decision making is affected by the psychological field i.e. the internalinfluences. These influences include motivation, perception, learning, personalityand attitudes. The output portion of consumer decision making model includestwo associated activities i.e. purchase behaviour and post purchase evaluation.

A more comprehensive purchase model was suggested by Fisk3, who dividedthe purchase behavior into three distinct stages viz. Pre-consumption Phase,Consumption Phase (Service Encounter) and Post-consumption Phase.

The first stage called the pre-purchase stage includes activities which takeplace before the actual purchase decision. These activities are typically called,problem/need recognition, information search on various alternatives andevaluation of alternatives to select the best of them. At this stage, the individualrecognizes a need or problem whose solution usually involves a potentialpurchase. He searches for information from various sources-both internal andexternal and arrives at a set of possible solutions – ‘The evoked set’.

The second stage is called the consumption stage. This arises if outcome of theprepurchase stage is a decision to buy a certain brand of service. In this stagethe expectations of the pre-consumption stage are compared with the actualservice delivery. This stage is therefore called the service encounter stage.Finally, the post-purchase stage, which results in a decision whether to purchasethe same service again or not.

Figure 4.2: The Three-stage model of consumer behaviour

The reasons why people buy or the motives of buying can be put into threecategories, namely: buyers goals, wants and beliefs. As far as general intentionsare concerned, people prefer to be in good or positive conditions and nototherwise. They prefer to be rich and not poor, entertained and not bored,clean and not dirty, healthy and not sick, fed and not starved etc. A moreacceptable and positive condition gives rise to a vision which the consumertracks in the pattern of purchase for a better life.

This positive and preferred vision in pursuit of better life is also called as theset of goals to which a buyer strives. These set of goals, perhaps, cannot beachieved simultaneously and therefore priorities are being set to attain thesegoals. The other aspect of these goals is that they also keep on changing asthe time passes, hence leaving a scope for the firm to influence the goals of abuyer.

On the other hand, wants emerge from the buyer’s goals. To want a particularproduct or service is nothing but to have a preference and desire to use it orpossess it. For the purpose of convenience, wants are classified into two;standing wants and a current wants. Standing wants are those wants which arerelated to permanent goals and the current wants are those reflecting ourexisting circumstances.

At this stage a clarification may be noted that the needs are common to all butwants are socially and culturally oriented. For example, all of us have the basicneed for food when we are hungry while the choice of a restaurant will bemade by different people, differently, keeping in view a set of variables, liketype of food, quality of food, price, atmosphere, etc.

Pre Consumption Post ConsumptionConsumtion

© ALI

© ALI

57

Activity 2

In continuation to Activity 1, carry out this activity. If the branch manager ofthis new office is considering to give ‘Corporate Card’ to his executives, whatdecision process he is likely to go through? Discuss.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

4.5 FACTORS INFLUENCING BUYER BEHAVIOUR

There are a number of factors or variables which affect the buying behaviour.For example; people go on holiday during the vacation time so vacationsbecome a variable. Similarly, a person may not buy any of the saving schemestill he comes in the tax bracket, so “tax payer” becomes a variable. A personmay visit an exclusive restaurant during ‘happy hours’, which he does not visitnormally. In this case the marketing efforts of the organization (sales personand the scheme) becomes the factor influencing to buy. Similarly, there areother factors which affect the buying decision. These factors can be classifiedinto four major categories, namely: situational factors, buyer’s socio-culturalfactors, personal factors and psychological factors. These have beensummarized in the Figure 4.3

1. Situational Factors

The situational factors influencing the buying behaviour are, the influence oftime pressure in product and brand choice, the atmosphere of the retail outlet,occasion of purchase etc. For example, if you are traveling, then demand forlodging and boarding will obviously be there.

2. Socio Cultural Factors

Buyers or consumers do not take buying decision or the decision not to buy, ina vacuum. Rather, they are strongly influenced by Socio Cultural factors.

Figure 4.3: Factors Influencing Buyer Behaviour

Buying Decision

Time, store's atmosphere, marketing stimuli

Culture, Reference Groups, Family

Personality, life style, other demographic factors like; age, gender, occupation etc.

Perception, attitudes,

motivation

Psy

cho

log

ical

Fac

tors

Per

son

al F

acto

rs

Situational Factors

Socio-Cultural Factors


© ALI

© ALI


58

a) Cultural Factors: Children acquire from their environment a set of beliefsvalues, and customs which constitute culture. These beliefs, values and customsgo deeper and deeper as a person grows. Therefore, it is sometimes said thatculture is learnt as a part of social experience.

The various sub-categories within a culture can be identified based on religion,age, gender, occupation, social class, geographical location etc. Thisclassification is significantly relevant from the consumer behaviour point ofview. To elaborate, let us come back to our earlier example of people buyinghospitality and tourism services. It has been observed that people from Gujaratgo out on vacations more often. Eating out is a very common phenomenon inthe north of India.

b) Reference Groups: There are certain groups to which people look to guidetheir behaviour. These reference groups may guide the choice of a product butmay not be the brand. Peer groups and the peer pressure has generally beenobserved to play an important role in the purchase of credit cards, cell phones,etc.

The knowledge of reference group behaviour helps in not only offeringsubstitutes but also in pricing and positioning them. It is important to note thatthere are ‘negative’ reference groups also and some persons don’t want toassociate themselves with these groups. The negative reference groups guidethe behaviour in terms of “what not to do”.

c) Family: The family is another major influence on the consumer behaviour.The family consumption behaviour to a large extent depends on the family lifecycle. The stages in family life cycle include bachelorhood, newly married,parenthood with growing or grown up children, post-parenthood and dissolution.Knowledge of these stages helps greatly in knowing the buying process. Oftenfamily members play a significant role in the purchase of a particular service,for example it’s the teenage children who influence the parents to decide on adestination and middle aged buy more of insurance services than the youngerones.

3. Psychological Factors

a) Perceptions: It is the process by which buyers select, organize andinterpret information into a meaningful impression in their mind. Perception isalso selective in which only a small part is perceived out of the total what isperceptible. Buyer’s perception of a particular product greatly influences thebuying behaviour. For example, if the buyer’s perception of a product is notpositive it requires much harder efforts from the marketing or sales person toconvince the buyer on the qualities of the product and thus suggesting him topurchase it.

b) Attitude: An attitude is a learned predisposition to respond in a consistentlyfavourable or unfavorable manner with respect to a market offer ( i.e. a brand,a particular shop or retail outlet, an advertisement, etc.). Attitude is adispositional term indicating that attitudes manifest themselves in behaviour onlyunder certain conditions. Knowing a buyer’s attitude towards a product withoutknowing the personal goals is not likely to give a clear prediction of hisbehavior. For example, someone may have a highly favourable attitude towardscar insurance but stays away from buying it since he has no use for it, as hedoesn’t own a car.

c) Motivation: Motivation is the driving force within individuals that compelthem to action. This driving force is subconscious and the outcome of certainunfulfilled need. Needs are basically of two types. First, the ‘innate needs’

© ALI

© ALI

59

those needs an individual is born with and are mainly physiological. Theyinclude all the factors required to sustain physical life e.g., food, water, shelter,clothing, etc. Secondly, the ‘acquired needs’ those which a person acquires ashe/she grows and these needs are mainly psychological, like love, fear, esteem,acceptance etc.

For any given need, there could be a variety of goals. The specific goalselected is dependent on the experiences, cultural norms and values, (apartfrom other characteristics) of the individual. Failure to achieve a goal generatetwo types of responses. First, called the defense mechanism, which includeswithdrawal, rationalization etc. and second is called search for substitute.

4. Personal Factors

a) Personality: Personality can be described as the psychologicalcharacteristics that determine how an individual will react to his or herenvironment. There are a number of dimensions (personality traits) againstwhich an appreciation of an individual’s personality can be developed. Eachpersonality trait denotes two absolute points and a person’s personalitycharacteristics can be identified somewhere between those two absolute points,indicating the proximity to either of the two. Some of the traits are as follows:

Personality Trait Behavioural Dimensions

Rigidity Rigid—————–––––––– FlexibleLeadership Leader————————– FollowerNeuroticism Stable————————–– NeuroticExtroversion Extrovert———————– IntrovertDependability Independent——————– DependentAchievement High achiever—————– Low achiever

Let us examine how buyer behaviour is affected by the personality of anindividual and for this we take the example of extroversion. Extrovert is aperson who is more sociable, likes meeting people, making more friends, prefersto move about, careful about his appearances and doesn’t like reading books orconfining to the four walls of a room. On the other hand an Introvert is aperson who prefers to be left alone, would like to read books rather thanmaking friends, shies away from social gatherings. There are a number of productswhich are preferred more by extroverts rather than introverts. Perhaps the productssuggesting status are purchased more by the extroverts than the others.

b) Life Style: Lifestyle as distinct from social class or personality is nothingbut a person’s pattern of living and is generally expressed in his/her activities,interests and opinions. Some of the dimensions of life style are as follows:

Activities Interests Opinions

Work Family Themselves

Hobbies Home Special issues

Entertainment Job Products

Shopping Fashion Future

Media

Achievements

Life styles suggests differences in the way people opt to spend on differentproducts differently. Life style variables (psychographics variables) help a firmto identify the ‘Inner consumer’ or the feelings of the consumer about theirproducts which needs to be stressed in advertising campaigns.


© ALI

© ALI


60

c) Demographic Factors: Buyer’s demographic factors like age, gender,education, occupation, etc. also have influence on the purchase behaviour.These factors are very much significant in the study of behaviour of buyers.For example, fast food outlets are more patronized by the teenagers than theelderly persons- example of age as a factor; air travel is more used by theexecutives than the factory workers-examples of occupation as a factor.

In sum, knowledge of all such dimensions of the buyer will help you inunderstanding his needs and wants and also help you in integrating all thoseelements in your product offer which the consumer wants.

4.6 SEARCH, EXPERIENCE, AND CREDENCEQUALITIES

One of the most significant differences between goods and services is that ingoods “Search Qualities” dominate while services are dominated by“Experience and Credence Qualities”.

Figure 4.3: Continuum of evaluation for different types of products

Source: Zeithaml and Bitner, Services Marketing, Tata McGraw-Hill.

Search qualities are those attributes of a product which the consumer candetermine before the purchase. This is more common in physical goods. Forexample colour, style, fit, feel, smell etc.

The second is the experience qualities, which are the attributes which can onlybe determined after the purchase, or during the process of consumption. Thethird, is the credence qualities i.e. characteristics which the consumer can notevaluate even after the consumption, like auto repair or medial diagnosis. Forexample, it may be difficult for a patient to assess whether or not a hospitalprovided appropriate services. Such characteristics exist invariably in services.In nutshell, most goods are high in search qualities and most services are highin experience or credence qualities. Figure 4.3 gives a continuum of evaluationfor different types of products based on search, experience and credence qualities.

As services are rich in experience and credence qualities, the followingimportant aspects related to consumer decisions making process need to beunderstood.

Easy to evaluate Difficult to evaluate

Mostgoods

MostServices

Clo

thin

g

Jew

elr

y

Fu

rnitu

re

Ho

use

s

Au

tom

ob

iles

Re

sta

ura

nt

me

als

Va

catio

n

Ha

ircu

ts

Chi

ld c

are

Tele

visi

on

re

pair

Le

ga

l se

rvic

es

Roo

t ca

nal

Aut

o re

pair

Med

ical

dia

gnos

is

High in searchqualities

High in credencequalities

High inexperience

qualities© ALI

© ALI

61

Information Search: In the case of services, consumers rely more onpersonal sources of information for pre purchase evaluation. Also theyindulge in more post purchase evaluation than pre purchase evaluation andas a result the amount of post purchase evaluation done in services is muchhigher that in case of goods. Some of the reasons for this are:

i. Mass communication conveys very little about experience qualities.

ii. Most of the service providers are local/independent and thereforelack the financial or marketing acumen to promote their offering.

iii. Shared advertising is rare as the producer and retailer are the samein services.

iv. Very few attributes of services could be discovered prior to purchase.

Criteria for Evaluating Quality: Consumers normally tend to evaluate thequality of a service offering through its price and physical facilities providedby the service provider. Higher the price better is the quality perceived.Same holds good for physical facilities. This is especially true when othercues for evaluating quality are not available.

Evoked Set of Alternatives: In services the customers’ “evoked set ofoffering” is small. This is due to the following:

i) Differences in retailing: In services the offerings of the competitorsare rarely exhibited unlike in case of goods. Also it is highlyuncommon to find more than one provider of a service in a givenarea.

ii) The consideration set is small as very little information is availableprior to purchase.

In case of Non-professional services the evoked set includes self provision ofservices. e.g. housekeeping, laundry etc.

Innovation Diffusion: Consumer adoption of innovations is much slower incase of services than in products. This is because consumers have to find adistinct benefit in the offering of the competitor to shift to that. Complexityof services makes it difficult to evaluate the ability of the provider andindivisibility does not allow trying the service before consumption.

Perceived Risk: Consumers associate greater risk with buying servicesthan with goods. This is on account of intangibility of services which makesit difficult to get information about the offering. Most services are notstandardized even if they are provided by the same provider because a lotdepends on the person’s caliber and ability to customize it based on theneed of the consumer. Another important reason is that unlike in goods mostservices do not come with guarantees/warranties.

Brand Loyalty: Brand switching is lesser with services as compared toservices. This is due to the following factors:

i) Greater search and monetary cost associated with moving to anotherservice provider.

ii) Fewer substitutes are available for services.iii) The rapport that a consumer creates with a service provider prevents

him from moving to a new provider as there is always a possibilitythat the new provider may not understand his needs as well as theprevious one did.

Attribution of Dissatisfaction: The provision of the service is based onthe requirements stated by the consumer. As such he holds himself partlyresponsible if the service provided is not up to his requirements and hencecomplains less frequently.

Perceived Control: The model proposed by Bateson emphasizes thatconsumers evaluate services control, they are able to exercise in a givensituation. Perceived control theory is based on the premise that customers


© ALI

© ALI


62

feel more satisfied with a service if they believe that they have greatercontrol over the service delivery. This notion is useful when designing newservices Similarly, if the employees also think the same way, satisfactiondrawn from the job is higher. However, they two may not co-exist.Simultaneously, therefore, it is important for the organization to balance outbetween the two, by developing adequate service standards, communicatingthe same to the consumers, to deliver the services adhering to thosestandards and developing systems for operational efficiency.

4.7 SUMMARY

The buying process of services are typically different from the manufacturedgoods. Since the services are intangible, it is difficult to evaluate them beforethe purchase. Though similar to manufactured goods, the three stages ofconsumer decision making, input variables, process variables and outputvariables are the same, but in services, the process variable differs significantly.

There are a number of factors which influence buyer behaviour. These includesocio-cultural factors, psychological factors, personal factors and situationalfactors. The buyer behaviour for services is quite different from goods asservices are rich in experience and credence qualities unlike goods, which arerich in search qualities.


1. In what ways the buying process differs between individual buyer and theorganizational buyer?

2. What are the differences between ‘search’ , ‘experience’ and ‘credence’qualities? Explain with the help of examples.

3. Why do consumers of services perceive higher levels of risks associatedwith their purchases? Discuss with the help of examples.

4. Briefly describe the buying process taking the example of ‘Home-LoanFinancial Services’.


1. Adrian Palmer, Principles of Services Marketing, London: McGraw Hill,1998, p.87

2. J.A. Howard and J.N. Sheth, The Theory of Buyer Behaviour, New York,John Wiley and Sons; 1969

3. R.P. Fisk, Toward a Consumption/Evaluation Process Model forServices, in Donnelly and George, Marketing of Services, 1981 pp.191-195.

4. Valarie A. Zeithaml, How Consumer Evaluation Processes Differ BetweenGoods and Services, in (Donnelly and George, Marketing of Services, 1981pp.191-195) pp.39-47.

5. John E.G. Bateson, “Perceived Control and the Service Encounter, in,John A.Czepiel, Michael R. Solomon, and Carol F. Suprenanat, eds., TheService Encounter, (Health: Lexington Mass), 67-82.

© ALI

© ALI

63

FURTHER READINGS : BOOKS ON SERVICESMARKETING

Given below is a list of books on “Marketing of Services” which you may finduseful for further reading for this course.

S. Baron and K. Harris, Services Marketing – Text and Cases , Palgrave,2003

J. Bateson, Managing Services Marketing: Text and Readings, Dryden,1995

L.L. Berry and A. Parasuraman, Marketing Services : CompetingThrough Quality, The Free Press, 1991

D. Carson and A. Gilmore (eds.), Service Marketing- Text and Readings,Mercury Publications, 1996

D. Cowell, The Marketing of Services, Heinemann, 1996

W.J. Glynn and J.G. Barnes (eds.), Understanding Service Management,John Wiley and Sons, 1995

C. Groonross, Service Management and Marketing, Lexington Books,1990

J.L. Heskett, W.E. Sasser, Jr. and C.W.L. Hart, Service Breakthroughs -Changing the Rules of the Game, The Free Press, 1990

D.L. Kurtz and K.E. Clow, Service Marketing, John Wiley, 2002

C. H. Lovelock, Services Marketing, Prentice Hall

A. Payne, Essence of Services Marketing, Prentice Hall of India, 1996

R.T. Rust, A.J. Zahorik and T.L. Keiningham, Service Marketing, HarperCollins, 1996

Ravi Shanker, Services Marketing- The Indian Perspective, Excel Books,2002

T.A. Swartz, and D. Iacobucci (eds.), Handbook of Services Marketingand Management, Sage Publications, 2000

H. Woodruffe, Services Marketing, Macmillan India, 1997

V.A. Zeithaml , A. Parasuraman and L.L. Berry, Delivering QualityService – Balancing Customer Perceptions and Expectations, The FreePress, 1990

V.A. Zeithaml and M.J. Bitner, Services Marketing, , Tata McGraw-Hill,New Delhi, 2003.

© ALI

© ALI

1



Block

2SERVICES MARKETING MIXUNIT 5

Product and Pricing Decisions 5

UNIT 6

Place and Promotion Decisions 17

UNIT 7

Extended Marketing Mix for Services 29

© ALI

© ALI

Services Marketing Mix

2


Prof. Ravi Shankar Dr. Tapan K. Panda Prof. B.B. KhannaCourse Editor IIM Khozikode DirectorIIFT, New Delhi Calicut School of Management Studies

IGNOU, New Delhi

Prof. Madhulika Kaushik Dr. Rupa Chanda Dr. Kamal YadavaSchool of Management Studies IIM Bangalore Course Coordinator and EditorIGNOU, New Delhi School of Management Studies



Prof. L.M. Johari Dr. V. Chandrashekhar Prof. J.B. NaddaFMS, Delhi University Mahindra Days Hotels & Resorts Goa UniversityDelhi Bangalore Goa



Mr. Amrish Sehgal Ms. Rekha Shetty Prof. Madhulika KaushikBhutan Tourism Development Apollo Hospitals School of Management StudiesCorpn. Madras IGNOU, New DelhiBhutan






ISBN-81-266-1263-0






Printed at:

Print Production

Mr. A.S. Chhatwal, Asstt. Registrar (Publication),Sr. Scale, SOMS, IGNOU

© ALI

© ALI

3

BLOCK 2 STRATEGIC ISSUES

In unit 1 of the course you were introduced to the marketing mix for services.As you are now aware, in addition to the traditional 4Ps of marketing mix-Product, Price, Place and Promotion, marketing mix for services includes threeadditional elements - People, Physical Evidence and Process. In this block wewill be discussing these seven marketing mix elements. Unit 5 on Product andPricing decisions explains the concept of the service product, issues involved indeveloping new services offerings, service branding and positioning, and pricingof services. Unit 6 details out issues related to Place and Promotion decisions.In this unit different methods of distribution have been discussed alongwith thevarious elements of promotional mix. The last unit of this block covers theextended marketing mix elements of People, Physical Evidence and Process.

© ALI

© ALI


4







3. STRATEGIC ISSUES



11. Financial Services Issues in Social Destination12. Tourism and Hospitality Services Marketing India13. Health Services Marketing of Health14. Case Study: Serving the Global Indian




© ALI

© ALI

5

UNIT 5 PRODUCT AND PRICINGDECISIONS

Objectives

After studying this unit, you should be able to:

Define the service product concept , describe the various elements of thetotal service package and suggest how to go about developing a newservice offering.

Understand the concepts of service branding and positioning.

Describe how characteristics of the services influence the pricing decisions.

Discuss the pricing strategies that may be used to sell services.

Structure

5.1 Introduction

5.2 The Service Product

5.3 Developing New Service Offerings

5.4 Service Branding and Positioning

5.5 Pricing

5.6 Summary


5.8 References

5.1 INTRODUCTION

In practice the core of marketing is considered to be the marketing mix. NeilBorden1, while quoting from an article of James Culliton2, wrote that amarketer is viewed as a "decider", or an "artist" or a "mixer of ingredients"who plans various means of competition. "He may follow a recipe prepared byothers, or prepare his own as he goes along, or adopt a recipe to theingredients immediately available, or experiment with or invent ingredients noone else has tried." If a marketer was a "mixer of ingredients", what hedesigned was a marketing mix.

Borden further wrote that "it was logical to proceed from a realization of theexistence of a variety of marketing mixes to the development of a concept thatwould comprehend not only this variety, but also the market forces that causemanagements to produce a variety of mixes. It is the problems raised by theseforces that lead marketing managers to exercise their wits in devising mixes orprogrammes to fight competition."

As discussed in Unit1, the marketing mix in services includes 7 Ps. This unitcovers two of the marketing mix elements i.e. Product and Price.

5.2 THE SERVICE PRODUCT

Product, in the marketing context is anything which is offered to the market forexchange or consumption. In goods marketing we always say that there is atangible component to which some intangibles like style, aftersales service,credit, etc., are integrated. In the case of services, on the contrary, thetangible component is nil or minimal.

© ALI

© ALI


6

Conventionally, we describe a product as an object, which is developed,produced, delivered and consumed. However, in services there is no or a littletangible element. Therefore, the services are considered to be as benefitswhich are offered to the target market. There are two important things tonote. First, a service is a bundle of features and benefits and secondly, thesebenefits and features have relevance for a specific target market. Therefore,while developing a service product it is important that the package of benefitsin the service offer must have a customer's perspective.

Kotler3 has identified five levels of a product, as listed in Table 5.1. Theexample given in the table is that of a hotel. It is the core and the basic whichmight be the same for most of the competing products and it is the other levelswhich make them different.

Table 5.1

FIVE PRODUCT LEVELS

1 CORE BENEFIT The fundamental benefit or service thecustomer is buying (Hotel : Rest / Sleep)

2 BASIC PRODUCT Basic, Functional Attributes (Room; Bed;Bath…)

3 EXPECTED PRODUCT Set of attributes / Conditions the buyernormally expects (clean room, large towel,quietness)

4 AUGMENTED PRODUCT That meets the customers' desires beyondexpectations(Prompt Room Services, and Checkin / out, Music, Aroma)

5 POTENTIAL PRODUCT The possible evolution to distinguish the offer(all-suite hotel)

Activity 1

For any 3 brands of a particular service (say Hospitals), prepare a comparativetable of all the 5 product levels.

Brand 1 Brand 2 Brand 3

1 CORE BENEFIT

2 BASIC PRODUCT

3 EXPECTED PRODUCT

4 AUGMENTED PRODUCT

5 POTENTIAL PRODUCT

Gronroos4 construed that the services a product offers consist of three levels.As shown in Figure 5.1, the first level is that of the basic service packagewhich includes core service, facilitating services and supporting services. Thesecond level is that of an augmented service offering where accessibility,interaction and customer participations is given equal importance in deliveringthe service product. The third level is that of the market communication of theservice offering as in its absence the augmentation service package does nothave any relevance to the customer.

1. The Service Package

The 'package' concept of service product suggests that what you offer to themarket is a bundle of different services, tangible and intangible but there is a

© ALI

© ALI

7

main or substantive or 'core' service and around it are built the auxiliary orperipheral or facilitator services. It is important to note that facilitating servicesare mandatory, and if they are left out, the entire service would collapse. Inthe service package there are yet other types of services called supportingservices. The basic difference between these services from facilitating servicesis that these services do not facilitate the consumption of core service, but areused to increase the value, and, thus, differentiate it from competition.

For example, in a 500-room hotel the core service is lodging and room service,bell boy service is facilitating service, and health club, car rental are supportingservices. However, it may not be always possible to draw a line of distinctionbetween facilitating and supporting services. For example, in a typical cityhotel, business center might be the supporting service, but in a business andconvention hotel, the same service would be facilitating service.

Figure 5.1: The Service Product

Source: Christian Gronroos, Service Management and Marketing, Lexington Books, 1990

Nevertheless, it is important while developing the service product package toconsider all the three levels of service: core, facilitating and supporting.

2. The Augmented Service Offering

It has been said that the basic service package is not equivalent to the serviceproduct the customer perceives, which is, in fact based on customer'sexperience and evaluation. Therefore, there is a need to involve the customerin the production of service offering and thereby reinforcing that the basicservice package has to be expanded to a more holistic model of augmentedservice offering.

Here the suggestion is that issues related to the accessibility of the service,interaction with the service organization and consumer participation are alsointegral elements of the service product. Gronross identified the relevance ofthese issues in relation to the augmented services offering. The details aresummarized in the Table 5.2. Some of these aspects are covered in the Unit onextended marketing mix.

Core Service

Supporting Services

Facilitating Services

Consumer Participation

Accessibility of the Services

CORPORATE IMAGE

WORD OF MOUTH

MARKETING COMMUNICATION

Product and PricingDecisions

© ALI

© ALI


8

Table 5.2: Elements of Augmented Service Offer

Accessibility of – Number and skills of personnelthe Service – Working hours and time used in performing various

tasks– Location of service outlet– Exterior and interior of service outlet– Infrastructure, hardware, documentation– The number and knowledge of consumers

simultaneously involved in the process.

Interaction with service – Interactive communication between employees andorganization customers

– Interactions with the physical and technicalresources of the organization needed in the serviceproduction process

– Interaction with other customers involved in theprocess

Customer participation – How well the customer is aware about the processof service delivery and his or her role

– How well the customer is prepared to shareinformation

– How well the customer is willing to shareinformation or use service equipment

Source: Christian Gronross, Services Management and Marketing, Lexington Books,1990, pp 76-80.

3. Market Communication of the Service Offering

It is true that a favorable image enhances the service experience, and a badimage may even destroy it. Therefore, the issue of management of imagethrough communication becomes an integral part of developing the serviceproduct. But the important point to note here is that apart from theconventional methods of promotion, corporate image and word of mouth are, ifnot more, equally important. A negative comment from a fellow customer ismore than adequate to neutralize the effect of your efforts of mass mediaadvertising, media blitz and direct promotions. You will study more aboutcommunication in the next unit.

Activity 2

For any service organization, identify all the levels of service offer, assuggested in the Gronroos model and also study the marketing implications.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

5.3 DEVELOPING NEW SERVICE OFFERINGS

In order to develop a service product, as a manager you will have to followthe following stages:

i) the customer benefit concept;

ii) the service concept;

© ALI

© ALI

9

iii) the service offer;

iv) service forms, and

v) the service delivery system

i) Customer Benefit Concept: The service product which you offer inthe market place must have its origin in the benefits which the customersare seeking. But the problem is that customers themselves may nothave a clear idea of what they are seeking or they may find it difficultto express or it may be a combination of several benefits and not asingle one. Over a period of time, the benefits sought may also change.This change in customers may come about by a satisfactory or unhappyexperience in utilising the service, through increased sophistication inservice use and consumption, and changing expectations. All these makethe issue of marketing a service product very complex.

ii) Service Concept: Using the customer benefits as the starting point, theservice concept defines the specific benefits which the service offers. Atthe generic level the service concept refers to the basic service which isbeing offered. A centre for the performing arts may offer entertainmentand recreation. But within this broad framework, there can be specificchoice paths for satisfying the entertainment objective, such as, drama,musical concerts, mime, poetry recitation, dance etc. Defining the serviceconcept helps answer the fundamental question, 'What business are wein?'

iii) Service Offer: Having defined the business in which you are operating,the next step is to give a specific shape and form to the basic serviceconcept. To refer to the example of the centre for the performing arts,the service concept is to provide entertainment. The service offer isconcerned with the specific elements that will be used to provideentertainment: drama, music, mime, poetry recitation, and dance. In thecategory of musical concerts the choice may be vocal or instrumental,with vocal whether light or classical, Hindustani or Western. While theserepresent the intangible items of the service offer, the physicalinfrastructure of the centre, in terms of its seating capacity, comfortableseats, quality and acoustics, provision of air-conditioning, snack bar andtoilets are the tangible items. The tangible aspects can be controlled byoffering the best possible benefit, but the quality and performance of theactors, singers, musicians cannot be controlled. Theoretically, a managermust control both the tangible and intangible components. But in practice,he can control only the tangible components and lay down norms for theintangible components (e.g. maximum duration of recital, brief introductionbefore each dance item, etc.)

iv) Service Forms: In what form should the services be made available tothe customers is another area of decision-making. Should all the showsof the centre be available in a package deal against a yearly membershipfee or seasonal ticket? Should there be daily tickets with the consumerhaving the freedom to watch any one or more performances beingstaged on that particular day? Or should each performance have aseparate entrance ticket, with a higher priced ticket for a well-knownperformance? Service form refers to the various options relating to eachservice element. The manner in which they are combined gives shape tothe service form.

v) Service Delivery System: When you go to your bank to withdrawmoney from your account, you either use a cheque or a withdrawal slipin which you fill all the particulars and hand it over to the clerk , whoafter verifying the details, gives you money. The cheque or withdrawalslip and the clerk constitute the delivery system. In a restaurant, the


© ALI

© ALI


10

waiters are the elements of the delivery system. The two main elementsin a delivery system are the people and the physical evidence. Thecompetence and public relations ability of a lawyer represents the'people' component, while his office building, office door, letterhead, etc.are all elements of the 'physical evidence'. The physical evidencecomponents have also been called 'facilitating goods' and 'supportinggoods'. These are the tangible elements of the service and they exert animportant influence on the quality of the service as perceived by theconsumers. Figure 5.2 presents a graphical conceptualisation of theservice product.

Figure 5.2: Conceptualisation of the Service Product

Level 1 Consumer Benefit Concept Concerned with what benefitsdo customers seek

Translated intoService Concept Concerned with what general

Level 2 benefits will the service offer

Translated into

Level 3 Service Offer Concerned with greater detailedshaping of the service conceptdecision on: service elements(tangible and intangible)service forms (in what way andhow)service levels (quality andquantity)

Translated into

Level 4 Service Delivery System Creation and delivery ofservice using guidelines builtinto the service offer.Concerned with peopleprocesses, facilities etc.

As a manager marketing services, you would like to market not just oneservice but a range of services. You would need to take decisions on the lengthand width of the range of services, the manner in which they complement andsupport each other, and how well they face up to the competitor's offerings.Table 5.3 illustrates the concept of a range of services, using the example of aclub.

Table 5.3: Examples of Range of Service

Customer Groups

Children Mixed Adults Only women or men Business groups

Swimming Swimming Beauty parlor/Massage Conference roomslessons lessons facility

Badminton Badminton, Yoga/Judo Lessons Secretarial assistancelessons Tennis lessons

Indoor games Card rooms Tournaments Video coverage

Library Billiards Kitty parties

Film shows Facilities for parties& receptions

© ALI

© ALI

11

The service or services which you offer must be targeted at specific marketsegment. The target market segment must have a definite need for theservice. In the illustration of the club in Table 5.3 the recreation facilities forchildren would succeed only if the parents of the children perceive a definiteadvantage in the trade-off of money versus time. The parents must perceive itworthwhile to spend money on the children to keep them busy rather thanspending their own time.

Activity 3

You have studied that a service product can be analysed at the level of thecustomer benefit concept, the service concept, the service offer and the servicedelivery system. Try to recapitulate the services that you have enjoyed, while ata restaurant or a hotel. Analyse the services offered by the hotel or restaurantat the five levels studied by you.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

5.4 SERVICE BRANDING AND POSITIONING

Choosing a brand name for a consumer product or service is one of the mostimportant decisions. A well chosen brand name can provide a number ofspecific advantages to the organisation. These include suggesting productbenefits, evoking feeling of trust, confidence, security and simplifying shopping.The American Marketing Association defines a brand as follows: 'A brand is aname , term, sign, symbol, or design, or a combination of these, intended toidentify the goods or services of one seller or group of sellers and todifferentiate them from those of competitors.' Though branding has receivedconsiderable attention from marketers and academicians, the main focus hasbeen on physical goods rather than services. However, services branding hasstarted to receive considerable attention lately. The intangibility factor associatedwith services has led to the suggestion that branding and image creation maybe even more critical for services. For a service brand to be effective it shouldpossess distinctiveness, relevance and memorability.

Keeping in view the transition of Indian economy to one which is dominated byservices, The Economic Times in its survey of India's most trusted brands hasstarted including a separate category of service brands. According to its survey

Table 5.4: Top Service Brands of India 2003

Category Telecom Airlines Food Hotels Pvt. Sector LifeServices Banks Insurance

Rank

1 Reliance Indian Pizza Hut Taj Hotels ICICI Bank LICIndia Mobile Airlines

2 BSNL Air Sahara McDonalds Oberoi UTI Bank ICICIHotels Prudential

3 Airtel Jet Airways Café Coffee ITC Hotels HDFC HDFCDay Bank Standard

Life

Source: Brand Equity, The Economic Times, 17 Dec 2003


© ALI

© ALI


12

of most trusted brands - 2003,the top services in different service categorieswere as given in Table 5.4 below. It is important to learn that brand can be amajor determining element in the purchase of services and a means of addingdifferentiation. Service managers should keep their focus on branding anddifferentiation in order to avoid the shift to commodity status where competitionis primarily on price and terms. On the other hand competition in specialitybranded services is based on the other elements of the marketing mix includingcustomer service, advertising, brand name etc.

Service Positioning

Positioning is the act of designing the company's offering and image to occupya distinctive place in the target market's mind. This requires the companies toexamine their markets, determine the structure and nature of markets segments.The various steps in determining a positioning plan include:

i) Define a market's segments

ii) Decide which segment to target

iii) Understand what the target consumers expect and value

iv) Develop a service which caters to these needs

v) Evaluate consumer perceptions of competing services

vi) Select an image for the product matching the aspiration of the targetedconsumers

vii) Communicate with the determined customers and make the productsuitable available.

You will appreciate that service positioning involves three basic steps i.e.Segmentation, Targeting and Positioning . The market segmentation can be doneon the basis of a number of variables like Geographic ( region, climate etc.),Demographic (age, family size, gender, income, occupation, education, socialclass etc.), Psychographic (lifestyle, personality) and Behavioural (benefits,occasions of use, usage rate etc.).

5.5 PRICING

In the case of products, the term 'price' is used for all kinds of goods- fruits,clothes, computers, building etc. but in the case of services, different terms areused for different services. Table 5.5 represents the term used for someselected services.

Table 5.5: Price Terminology for Selected Services

Terminology Service

Admission Theatre entry

Commission Brokerage service

Fare Transport

Fee Legal service

Interest Use of money

Premium Insurance

Rent Property usage

Salary Employee services

Tariff Utilities

Tuition Education

Source: Donald Cowell, "The Marketing of Services" Heinemann, London

© ALI

© ALI

13

A) Pricing and Service Characteristics

In determining the prices of services, the one characteristic which has greatimpact is their perishability and the fact that fluctuations in demand cannot bemet through inventory. Hotels and airlines offering low rates in off-season areexamples of how pricing strategy can be used to offset the perishablecharacteristics of services.

Another characteristic of services that creates a problem in price determinationis the high content of the intangible component. The higher the intangibility, themore difficult it is to calculate cost and greater the tendency towards non-uniform services, such as fees of doctors, management consultants, lawyers. Insuch cases, the price may sometimes be settled through negotiation between thebuyer and seller. On the other hand, in services such as dry cleaning, thetangible component is higher, and the service provided is homogeneous. It iseasier to calculate the cost on a unit basis and have a uniform pricing policy.In general, the more unique a service the greater the freedom to fix the priceat any level. Often the price may be fixed according to the customer's ability topay. In such cases price may be used as an indicator of quality.

The third characteristic to be kept in mind while determining prices is that inmany services, the prices are subject to regulations, either by the governmentor by trade associations. Bank charges, electricity and water rates, fare for railand air transport in India are controlled by the government. In many othercases, the trade or industry association may regulate prices in order to avoidundercutting and to maintain quality standards. International air fares areregulated by international agreement of airlines, sea freight fares may beregulated by shipping conferences. In all such cases, the producer has nofreedom to determine his own price.

The two methods which a service organisation may use to determine prices arecost-based pricing and market-oriented pricing. In the former, the price may beregulated by the government or industry association on the basis of the costincurred by the most efficient unit. Such a pricing strategy is effective inrestricting entry and aiming at minimum profit targets. The market-orientedpricing may either be a result of the competition or customer-oriented. In caseof competition-oriented pricing, the price may be fixed at the level which thecompetitor is charging, or fixed lower to increase market share. Customer-oriented pricing varies according the to customer's ability to pay.

B) Role of Non-monetary Costs

Non-monetary costs refer to the sacrifices perceived by the consumers, otherthan monetary costs, when buying and using a service. Many a times the nonmonetary costs may become even more important than monetary costs. Thenonmonetary costs can be broadly divided into the following categories.

i) Time Costs: Because services are inseparable, most of them would requiredirect participation of the consumer i.e. they involve time. The time requiredby a consumer would include actual time of interaction with the serviceprovider as well as the waiting time. Therefore, the consumer is not onlyspending his money but also sacrificing his time. At times the consumer maybe required to travel to a service which may involve time as well asadditional monetary cost.

ii) Search Costs: These involve the efforts put in by the consumer insearching information, finding out alternatives and evaluating them. Typicallysearch costs are far greater in case of services as compared to goods.There are a number of reasons for this. Services being rich in experienceand credence qualities are rarely displayed on shelves in service outlets for


© ALI

© ALI


14

customers to evaluate them. Also in many services it is difficult to know theprice in advance.

iii) Psychic Costs: These include fear of not understanding or fear of rejectionor fear of uncertainty. For example, while applying for a bank loan thecustomer has a fear of the loan application being rejected. At times,customer may find the service product difficult to understand like variousoptions in life insurance or difficult to use like ATMs, on line trading etc.

As marketers you should not concentrate just on monetary costs alone asconsumer make decisions based on monetary as well as non-monetary costs. Infact by reducing non-monetary costs, it may be possible for you to increasemonetary price.

C) Pricing Strategies

The pricing strategies that may be used to sell services are:

a) Differential or flexible pricing;

b) Discount pricing;

c) Diversionary pricing;

d) Guaranteed pricing;

e) High price maintenance pricing;

f) Loss leader pricing;

g) Offset pricing; and

h) Price bundling.

a) Differential or Flexible Pricing is used to reduce the 'perishability'characteristic of services and iron out the fluctuations in demand.Differential price implies charging different prices according to:

1) customer's ability to pay differentials (as in professional services ofmanagement consultant, lawyers);

2) price time differentials (used in hotels, airlines, telephones where thereis the concept of season and off season and peak hours); and

3) place differential used in rent of property-theatre seat pricing (balconytickets are more expensive than front row seats) and houses in betterlocated colonies command high rent.

b) Discount Pricing refers to the practice of offering a commission ordiscount to intermediates such as advertising agencies, stock brokers,property dealers for rendering a service. It may also be used as apromotional device to encourage use during low-demand time slots or toencourage customers to try a new service (such as an introductorydiscount).

c) Diversionary Pricing refers to a low price which is quoted for a basicservice to attract customers. A restaurant may offer a basic meal at a lowprice but one which includes no soft drink or sweet dish. Once thecustomer is attracted because of the initial low price he may be tempted tobuy a drink or an ice-cream or an additional dish. Thus he may end upbuying more than just the basic meal.

d) Guaranteed Pricing refers to pricing strategy in which payment is to bemade only after the results are achieved. Employment agencies charge theirfee only when a person actually gets a job, a property dealer charges hiscommission only after the deal is actually transacted.

e) High Price Maintenance Pricing strategy is used when the high price isassociated with the quality of the service. Many doctors, lawyers and other

© ALI

© ALI

15

professionals follow this pricing strategy.

f) Loss Leader Pricing is one in which an initial low price is charged in thehope of getting more business at subsequently better prices. The danger isthat the initial low price may become the price for all times to come.

g) Offset Pricing is quite similar to diversionary pricing in which a basic lowprice is quoted but the extra services are rather highly priced. Agynecologist may charge a low fee for the nine months of pregnancythrough which she regularly checks her patient, but many charge extra forperforming the actual delivery and post-delivery visits.

h) Price Bundling: Some services are consumed more effectively incombination with other services. When customer perceive value in packageof services that are interrelated, price bundling is an appropriate strategy. Itbasically means pricing and selling services as a group rather thanindividually.

In addition to deciding on what to charge, the pricing strategy of a service firmshould also address the following issues:

Who should collect payment? (Organisation or a specialist intermediary)

Where should payment be made? (Location of service delivery or aconvenient outlet or customer's home)

Where should payment be made? (Before or after delivery, timings)

How should payment be made ? (Cash, credit card , third party payment etc.)

How should prices be communicated to the target market? (Communicationmedium, message content etc.)

5.6 SUMMARY

This unit covered two elements of the seven marketing mix elements forservice - Product and Price. Service Product was explained to you with thehelp of Kotler's five product level concept and Gronroos's three level concept.The steps in developing a new service were identified and discussed. Theseinclude developing a consumer benefit concept which should be translated intoservice concept. Service concept then helps the organisation in detaileddesigning of the service offer which is to be translated into the service deliverysystem. The unit also explained the issues related to service branding andpositioning

While determining the prices of services it is important to consider theperishability and intangibility aspects. Also, a number of services are subject toprice regulations by the government. A number of pricing strategies can beused by services marketers. These include differential pricing, discount pricing,loss leader pricing etc. In addition a number of other decisions related to pricinghave to be undertaken like who should collect the payment, where, when and how.


1. Differentiate between core, facilitating and supporting services, givingsuitable examples.

2. Discuss the various stages in the development of a new service offering.

3. What are the basic differences between pricing of goods and pricing ofservices? Does characteristics of services influence their pricing? Discuss,taking each service characteristic, one by one.


© ALI

© ALI


16

4. Think about some of the services that you use frequently, for examplerestaurant or out-door catering. From the lowest end eating out joint to amost exclusive restaurant you visited, identify how the price of theseservices are expressed? How does the price reflect the other elements ofthe total service offer?

5. Enlist those services, in which there is a price competition. Also enlistsome of those services in which there is non-price competition. Identifyreasons, thereafter, for suchpricing strategies in these two categories ofservices.

6. Read the case on "Dosa King" given in the last unit (Unit 19) of thiscourse and answer the questions asked in the case.

5.8 REFERENCES

1. Neil H.Borden, "The Concept of Marketing Mix", Journal of AdvertisingResearch, June 1964, pp. 2-7.

2. James W.Culliton, The Management of Marketing Costs, (Boston :Graduate School of Business Administration, Harvard University), 1948.

3. Philip Kolter, Marketing Management : Millenium Edition, (New Delhi :Practice Hall of India, 2000).

4. Christian Gronross, "Developing the Service Offering - A Source ofCompetitive Advantage," in C.Susprenant (ed), Add Value to Your Services,(Chicago : American Marketing Association), p.83, 1987.

© ALI

© ALI

17

UNIT 6 PLACE AND PROMOTIONDECISIONS

Objectives

The objectives of this unit are:

To examine how service characteristics influence distribution decisions.

To identify the methods of distribution for service industries.

To propose guidelines for advertising, sales promotion and other promotionalmethods for service industries.

Structure

6.1 Introduction

6.2 Place or Distribution

6.3 Methods of Distribution in Services

6.4 Promotion

6.5 Summary

6.6 Self-Assessment Questions

6.7 References and Further Readings

6.1 INTRODUCTION

Distribution means 'PLACE' decisions and like manufactured goods suchdecisions are important in service industries as these decisions relate toLocation, Delivery and Coverage. Though it might be easy to understand theseconcepts for 'physical items', however we have examples of unsold or spareseats in Airlines sectors, unsold rooms in hotels and unsold table covers inrestaurants. The service characteristics have direct impact on distributiondecisions and in this unit we shell examine the same. We will also be taking upanother marketing mix element - Promotion. The various components of'promotion mix' viz. - advertising, sales promotion, publicity and public relations -will be discussed in relation to services.

6.2 PLACE OR DISTRIBUTION

The most important decision element in the distribution strategy relates to theissue of location of the service so as to attract the maximum number ofconsumers. The inseparability characteristic of service such as those of doctors,teachers, consultants, mechanics etc. poses a distribution constraint since theyare able to serve only a limited, localised market. The other characteristic ofservices which affects the distribution strategy is the fixed location of servicessuch as universities, restaurants, and hospitals which necessitates the customerto go to the service location rather than vice-versa.

The first decision variable in planning the distribution strategy relates to thelocation of the service. In deciding where to locate your service, you shouldraise the following questions as they would help you arrive at the right decision.

i) How important is the location of the service to the customers? Will aninconvenient location lead to purchase being postponed or being taken overby a competitor? The answer is 'yes' in case of services such as drycleaning, fast food outlets where convenience is the most critical factor. The

© ALI

© ALI


18

answer is no in case of services provided by doctors and beauty parlors,where the customer's involvement with the provider of the service is veryhigh and the decision is made on the basis of reputation, competence andpast experience.

ii) Is the service, technology-based or people-based? How flexible is theservice? Can the equipment and people be moved to another locationwithout any loss in quality?

iii) How important are complementary services to the location decision? Canthe clientele be increased by locating services where complementaryproducts or services already exist? Garages and mechanic shops locatednext to petrol stations are examples of complementary location decision.

The second decision variable in the distribution strategy is whether to selldirectly to the customers or through intermediaries. In case of services whichare inseparable form the performer, direct sale is the only possible way ofreaching the consumer. In case of other services such as hotels, airlines,property, life insurance, they may operate through middlemen.

The third decision variable in the distribution strategy is how to provide theservice to a maximum number of customers in the most cost-effective manner(if the service is not of the kind that is inseparable). Some of the recentinnovations in the area are rental or leasing, franchising and service integration.

6.3 METHODS OF DISTRIBUTION IN SERVICES

Distribution in services can be broadly classified into two categories- directsales and sales via intermediaries. The following table provides examples ofboth of these categories.

Direct Sales Sales via Intermediaries

Electronic channels e.g., Agents & Brokers e.g., travel /ATMs, Online courses insurance agents

Franchisees e.g., McDonald's

Quasi Retailing

1) Direct Sales

Direct sales has specific marketing advantages as they help in maintainingbetter control over how the service is provided or performed and also inobtaining direct feedback from customers. There are obvious problems also indirect sales, like; problems of expanding the business and coping with highworkloads where the services of a particular individual may be in demand ordirect sale means limited geographic market coverage.

a) Direct Sales Through Electronic Channel

To overcome such problems companies are exploring possibilities of direct salesthrough electronic channels. The typical benefits the companies see inelectronic distribution of services are:

Consistent delivery for standardized services

Low cost

Customer convenience

Wide distribution

© ALI

© ALI

19

Customer choice and ability to customize

Quick customer feedback

Activity 1

Compare the advantages (or disadvantages) of online railway reservationsystem with conventional reservation window system.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

b) Franchising

The other recent trend in distribution of services is that of franchising.Franchising is the granting of rights to another person or institution to exploit atrade name, trade mark or product in return for a lump-sum payment or aroyalty. Franchise is characteristed by the following features:

a) Ownership by one person of a name, an idea, a secret process orspecialised piece of equipment and the goodwill associated with it.

b) The grant of a licence by that person to another permitting the exploitationof such name, idea process or equipment and the goodwill associated hisrights.

c) The inclusion in the licence agreement of regulations relating to operation ofthe business in the conduct of which the licencee exploits his rights.

d) The payment by the licencee of a royalty or some other consideration forthe rights that are obtained.

In service Industries franchises operate in the area of hotels, restaurants, carrentals, fast food outlets, beauty parlours, pest control, travel agencies, officeservices, packers and movers, couriers, business centres, etc.

The advantages provided by a franchising arrangement are as follows:

1. There are usually training materials already developed, for both franchiseesand their workers.

2. Expansion through franching can proceed quickly.

3. The franchiser need apply only minimal controls; it does not have to developas large a bureaucracy to govern the business.

4. A franchiser's overhead is lower because the franchisee does hiring,collections, local promotions, etc.

5. There are economies of scale to advertising and promotion.

6. The franchisee is responsible for most of the cost control.

7. There is often less risk attached to franchise expansion than with thecreation of new service ventures that may not have been tested as well.

8. Franchises usually have a better record for staying viable business than thetypical service business startup.

9. Local operators are committed because they have their own capital at risk.

10. The service tasks, service standards, and service delivery systems areusually well defined and structured, and thus they work well. They havebeen prototyped, and many of the potential problems with the operationshave already been identified and ironed out.

c) Quasi Retailing

The quasi-retail outlets, sell services rather than goods, like-

Place and PromotionDecisions

© ALI

© ALI


20

– Hairdressers – Amusement arcades– Travel Agents – Employment agencies– Car hire agencies – Hotels– Restaurants – Driving Schools

Arguments against Quasi-Retailing are that they can push up property values.Also they may create dead frontages which discourage window shopping. Someservice outlets may be closed on peak shopping days (e.g. banks on Saturday)and too many quasi-retail outlets in a centre can reduce the range ofconventional retail store choice, if the quasi retail establishments are closed orotherwise.

Arguments for Quasi-Retail are that many complement other retail businesses.For example users of facilities like banks and building societies may use shopsselling goods on the same shopping trip. Service outlets can have imaginativewindow displays to encourage window shopping. There are some suggestionsfor quasi retail establishments to succeed. Firstly, they should encouragecustomers to travel longer distances, as the retail radius of the outlet mightotherwise remain small. This can be done by special promotions and displays.The Golden arch of McDonald's can be seen from a distance and can help thepeople to identify it. The second suggestion is to locate service outlets nearcomplementary facilities, like: multiple theatre complexes and entertainmentcenters.

The third suggestion which can be considered is to centralize service productionfacilities but decentralize customer contact facilities (e.g. photograph processing,pathological labs, etc.), which will help in expansion of the market andreduction in service production cost.

The fourth suggestion is to reduce the range of service offer at individualservice outlets to match the market requirements and also to reduce theoverheads. For example the Apollo Clinics are not the full service hospitals butthey help in market coverage and delivery of services. There could be manymore suggestions and therefore each service organization must evaluate how itcan be benefited from quasi retailing.

Activity 2

Do you think that a specialty hospital like Escorts or Apollo can cater to therequirements of the public through one main hospital in a particular region ofthe country? If no, then what relative advantages you see in "Quasi RetailOutlets" of the health care organization?

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

2) Sales via Intermediaries

To the extent the middlemen exist in a service channel, they are typically salesagents, brokers since there are no inventories to be purchased or distributed.Service Channel tends to be direct. Therefore, this Production/Distribution houseshould be located, to 'sell' whatever you have in the inventory where it ispossible. Place decisions are therefore, all extra-corporate entities betweenproducer and prospective users that is utilized to make the service availableand/or convenient. A Distribution Channel for a service organization is,therefore, is a sequence of firms (or units) involved is moving a service fromproducer to consumer.

© ALI

© ALI

21

Key Issues Involving Intermediaries

The following are the major issues which should be addressed before hand indeciding the distribution strategy involving intermediaries:

conflict over objectives and performance

conflict over costs and rewards

control of service quality

empowerment versus control

channel ambiguity

A service organization can develop an effective channel system if it helps theintermediary to develop customer-based service processes by providing therequired support. Also through training it may develop the intermediary todeliver service quality and gradually move to a cooperative management systemand controls.

Keeping in view the characteristics of services and the potential managementproblems in retailing of services, as shown in Fig 6.1, there are distinct channelconfigurations, which one can notice in service sector. Rathmell has suggestedthe dominant channel configuration in the service sector where agents andbrokers play the key role in distribution of services.

Figure 6.1: Channel Configurations of Services

Agent: An agent is an independent intermediary, who may act in the name of,or for a principal. His contract will define these provisions along with territorialrights, exclusivity and sales commissions.

Broker: A broker is an independent intermediary between buyer and sellerwho bring parties together to facilitate the conclusion of sales contract. Abroker may have continuing relationship for his client under a contract period;for which he may charge fee for assistance. Alternately, a broker may be for aspecial job to be undertaken.

There are obvious benefits in distributing services through Agents and Brokers.Firstly, they help in reducing the selling and distribution costs besides a widerrepresentation in the market. Secondly, such intermediary's possess special skills

Product or Creator of Service

Customer or Industrial Customer

Agent or Broker(Selling)

Agent or Broker(Buying)

Agent or Broker


© ALI

© ALI


22

and expertise and also the knowledge of local markets. However these agentsand brokers also pose some challenges also. For example representation ofmultiple service principals may lead to poaching in territories of others resultingin loss of control over pricing and other aspects of marketing.

Activity 3

What services a travel agent can provide to a customer? List them out bytaking the example of any travel agency about which you are familiar:

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

Functions of Agents and Brokers

The major function of these agents and brokers is, like any other intermediary,to bring the producer of service and the user or consumer together.

For certain services, agents can be identified and deployed with selling as thechief function to be performed by them. These agents can be compared withthe agents for goods and they are classified as brokers or sales agents. Theexample of this kind of channel is transportation (travel agents) and office orfactory workers (employment agencies). However in some cases the agentsmay be trained in the creation and production of service and then franchised tosell it (eg, Shahnaz Hussain Beauty Parlors).

In case of certain services, actual product is not transferable and thereforetangible representations are created and transferred. This type of channel isused for marketing insurance services, where a contact document exists as aphysical and tangible representation of the services.

Another characteristic of services is that the services are generally notdelivered to the buyer and the creation of time and place utilities is a vitalfunction in the services marketing. Irrespective of whether one uses agents ormiddlemen or direct sales channel the factor of location keeping in view thepotential markets will be the most significant factor in channel selectiondecision. Duane David et.al, are of the view that location considerations alongwith personal sources of information are two of the critical factors in finalpurchase decision of many services.

The problem of standardization and uniformity restrains the service organizationto use middlemen to any great extent and limit the geographical area which theservice organisations propose to reach and cover. This lays emphasis on thesignificance of good selection to attain maximum coverage at the market place.Banking organizations have started reliving this fact and introduced extensioncounters, mobile banking apart from opening branches in rural areas.

Logistics in Services

The field of logistics has not been recognized as an area of consideration foreffective distribution of services, it could be the issue of locating a site for thenew branch of a bank or delivering health care facilities or location ofeducational institutions, etc. In India these logistical problems are alwaysovershadowed by the Government policy or interventions. There are guidelinessuggesting that to open a single branch in any urban area, a nationalized bankhas to first open a fixed number of branches in rural areas. For promoting theconcept of smaller family and immunization a number of Primary HealthCenters have been opened but neither have they had the required staff nor the

© ALI

© ALI

23

infrastructure. The significance of logistics is increasingly felt in the servicessector as the field of logistic is gaining importance in the manufacturingindustries.

6.4 PROMOTION

It is now established that there are clear differences in information usagesbetween goods and services. First, the difference is that consumers of servicesare less likely to purchase without information than those of buying goods.Secondly, the consumer of services will prefer personal sources over impersonalsources of information. And thirdly, the basic characteristics of services haveimplications for communication strategy. For example, in hospitality industry theintangible service offer is tangibalized and represented in the promotionalmaterial and customers decide to buy or not to buy on the strengths of thedescriptions and representations of the service offer in the promotional material.

Therefore, the above three differences influence the decisions with regard towith regard to (a) the communications objectives (b) target audiences and (c)planning of each of the sub elements of the promotion mix.

Promotion Objectives

Although there could be a variety of objectives to promote, but the basicobjectives of the promotion mix for services may fall under one of thefollowing:

1. Develop personal relations with client (personal relations might result insatisfaction, more than their service offer).

2. Make a strong impression of competency, honesty and sincerity (professionalorientation to service transaction so as to win buyers confidence in sellersabilities to deliver the services).

3. Should be able to use indirect selling techniques (creating derived demand oract as a buying consultant).

4. Manage to maintain a fine image by positive word of mouth.

5. Packaging and customization.

Activity 4

SBI has recently launched Credit Cards and Insurance services. What wouldbe the possible advertising objectives for there services?

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

Target Audience

While you are defining the objectives of your communication campaign, youshould also be clear about the target audience. In service sectors there is adirect contact between the person who provides the service and the customers.Therefore, some amount of promotion should be targeted at the employees soas to motivate them to serve the customer better. In such communications theobjective can also be to educate the employees about how to handle operationalproblems so as to increase their performance level.

The other set of target audience are similar to that of goods where the targetaudience may not necessarily be the buyer or user but also the influencer,decider or user of the buying cycle.


© ALI

© ALI


24

Planning the Promotion Mix

i) Advertising: Advertising is any kind of paid, non-personal method ofpromoting by an identified organisation or individual. Certain services such asentertainment (cinema, theatre), passenger and freight transport (roadways,airlines, trains), hotel, tourism and travel, insurance have been advertisingheavily in newspaper, magazines, radio, TV to promote greater usage andattract more customers. However, certain service professionals such as doctors,accountants, and lawyers, have rarely used advertising as a means ofincreasing their clientele. These groups have traditionally relied on word-of-mouth for attracting new customers. But this situation is changing and you cansee advertisements in the daily newspapers giving information about the locationand timings that a particular doctor is available for consultation. Theseadvertisements may also carry the message 'Honorary doctor to the Presidentof India's or ex-director of a prestigious medical college or institution. Suchmessages help create a positive image and credibility.

The Guidelines which can be kept in mind while promoting services are asfollows:

a) use simple, clear messages;

b) emphasise the benefits of service;

c) promise only that which can be delivered and do not exaggerate claims;

d) build on word-of-mouth communication by using testimony of actualconsumers in advertisements; and

e) provide tangible clues to services by using well-known personalities orobjects to help customers identify the service.

One other aspect which is of importance in designing an appropriate advertisingstrategy is the high level of consumer-organisation interaction required in certaintypes of services (beauty saloons, management consultant, doctor). In thesetypes of services, the objectives of advertising have been identified as:

a) creating an understanding of the company in the customers' minds bydescribing the company's services, activities and its areas of expertise

b) creating a positive image for the company

c) building a strong sense of identification with the customer by turning hisneeds, values and attitudes

d) creating a positive background for the sales people to sell the services byproviding all relevant information about the company.

George and Berry, keeping in view the intangibility of services, proposed that inthe case of services a customers is buying the performance of the servicepersonnel and therefore the advertising in service industries should not onlyrestrict itself to encouraging consumption, but also it should encourageemployees to perform well. They proposed the following six basic guidelines tohelp design effective advertising programmes.

– The advertising should have positive effects on contact personnel.

– The advertising should capitalize on the word of mouth.

– The advertising should provide tangible clues to the customers.

– The advertising should make the service offering easily understood.

– The advertising should contribute to the continuity.

– The advertising should promise what is possible.

ii) Consumer Promotions: Lovelock and Quelch, while listing the variousobjectives of promotion and types of promotions which a service provider can

© ALI

© ALI

25

use, emphasized that in execution of any type of consumer promotion scheme,one should carefully consider the six basic elements, namely, product scope,market scope, value, timing, identification of the beneficiary and protectionagainst competition. They further suggested that unlike physical goods thevarieties of schemes available as consumer sales promotion schemes are highlylimited. For example,

– Sampling cannot be used frequently because of the cost of service.

– Premiums are frequently used to give an element of tangibility.

– Price/quantity promotion can help generating long term commitment fromconsumers e.g. group rates for hotels.

– Coupons are lesser in use.

– Refunds and future discounts not much in practice.

– Prize Promotions can be used effectively and add excitement andinvolvement.

Activity 5

Identify promotions which you have recently seen offered by

a. Commercial Banks

b. Hospitals

c. Retail Chains

d. Multiplex Cinema Houses

............................................................................................................................

............................................................................................................................

............................................................................................................................

............................................................................................................................

iii) Guidelines for Selling Services: Much has been written on the salesmanagement, primarily in the context of product marketing. Johnson observedthat for a service sales personnel the following do's and don'ts should befollowed.

First, the service sales person should develop a personal relationship with theclient. Quite often it is the personal relationship rather than the service itselfthat results in satisfaction or dissatisfaction with the service. If there is adistinct need for a high quality personalized service, then one must pay moreattention to its organizational structure.

Secondly, it is suggested that one must adopt a professional orientation as thekey to most service transactions is the buyer's confidence in the seller's abilityto deliver the desired results. It is therefore important that a service salesperson must make a strong impression of competency, honesty and sincerity.

Thirdly, a service sales personnel has to use indirect selling techniques, as whathe/she is promoting is an intangible. This can be done either by creating aderived demand or by playing the role of buying consultant. Most hotels firstsell the location and then their hotel to the customer.

Fourthly, they have to build and maintain a favourable image. The publicopinion plays a greater role in marketing a service; therefore managing word-of-mouth publicity is important. We will specifically take up this issue at the endof this section.

And lastly, a service seller sells services and not a service. At any given point


© ALI

© ALI


26

Exhibit 6.1

Role of Non Verbal Communication in Service Encounters

The delivery of most services involves considerable interpersonal contact betweenservice provider and customer. Interpersonal communication is especiallyimportant in the so-called "pure" services, where delivering the service involves ahigh degree of person-to- person interaction and no exchange of tangible objects.The nonverbal aspects of interpersonal communication - the form ofcommunicating thoughts and emotions without using words- are at least asimportant as the verbal components in shaping the way a customer feels abouthis or her dealing with an employee. Customers who are complaining or seekingretribution are likely to pay particularly close attention to an employee's nonverbalcommunication. Nonverbal communication is also particularly important whencustomers attempt to evaluate services such as health-care and legal services,where quality is especially difficult for the average consumer to assess.

The authors suggest that service managers should:

1) Ensure that service employees understand that nonverbal communication is atleast as important as verbal communication.

2) Train service employees to be sensitive to nonverbal cues through, forexample, role playing and showing videotapes of actual service delivery.

3) Provide continuous feedback and periodic reminders to staff about theimportance of nonverbal communication.

4) Offer voice training to employees who need it, so they speak with a voicewhich displays warmth and trust.

5) Attempt to match employees' manner of dress with customers' expectations.For example, cool colours might be used when wanting to project an image offriendliness, poise and warmth, and warm colours to project an image ofactivity and excitement. Employees should normally dress formally inprofessional services and when interacting with upper-class customers. Theymay dress more causally when interacting with a lower-class clientele.

6) Conduct periodic surveys to assess customers' perceptions of serviceemployees' nonverbal behaviour. Consider using mystery shoppers to achievea similar end.

7) Provide incentives to encourage employees to adopt the recommendedchanges in nonverbal behaviour.

Source: Sundaram and Webster, "The Role of Nonverbal Communication in ServiceEncounters", Journal of Services Marketing, Vol. 14, No.5, 2000

of time, a service seller is dealing with a host of services rather than one.Their thoroughness on each and ability to package them to suit each customer'sneeds would determine the success. In other words the ability of seller tocustomize the service offering is very important.

iv) Public Relations and Publicity: In certain service industries it is notpossible to use the conventional promotion tools with success. For example inadvertising industry mass media advertising is really rare. There are someservices where the size of the operation is not large enough that one canafford heavy promotional budgets. There are other who cannot afford to copeup with their existing workload. There are still others who find it difficult toadvertise or promote as it might lead to a bad taste. For example, a hospitalmight find it very difficult to promote abortion services. Similar could be thecase for open-heart surgery or other services.

Arising out of these reasons the conventional promotional tools have a limiteduse. Duncan suggested that the services sector industries have to think aboutother promotional tools like public relations and publicity.

© ALI

© ALI

27

There are very successful examples like a medical doctor specializing in eyecare running his own clinic-cum-nursing home and organizing free eye camps inall over the region. This community service not only spread his name but alsoproved his competence. The local newspapers might carry stories about suchcamps to give further boost to the promotion.

Therefore promotional activities like community relations, event management,media blitz, corporate identity programmes have relevance and they should beused innovatively and effectively.

v) Word of Mouth: Services being rich in experience qualities, word of mouthplays an important role in promoting services. Services are adopted, if not more,as much because of word of mouth communications as because of activepromotion by marketers. However, people seldom pass on information about aproduct or service without some reasons. Managers who want to takeadvantage of word of mouth communication should make specific efforts in thisdirection. Given below are some suggestions for stimulating a positive word ofmouth (apart from providing excellent service quality)

Offering a gift, discount or other reward to customers who bring in newcustomers.

Asking customers who express satisfaction, to tell their friends.

Running a newsletter and asking customers to contribute. Contribution maybe in terms of letters, stories or ideas. This can also be done throughwebsite.

Reward your regular customers with some freebies.

Target opinion formers.

Activity 6

Identify the role of PR for Delhi Police. Do you think any other communicationtool can be more effective:

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

6.5 SUMMARY

When it comes to distribution of services the channels are direct or short, withmaximum of one-to-two level. Direct distribution of services can be throughelectronic channels, franchising or retailing. Services can also be distributedthrough intermediaries like agents or brokers. Promotional issues are also uniquein service industries and typically public relations takes a front seat, whileadvertising is more of 'corporate advertising.' The unit provides you guidelineson different elements of promotional mix.

6.6 SELF-ASSESSMENT QUESTIONS

1. Differentiate between the channels of distribution and distribution logistics, asapplicable in the Services Sector. Explain both these concepts in the contextof a courier company.

2. What are the relative advantages (or disadvantages) of direct sales vs. salesvia intermediaries? Give specific examples in support.


© ALI

© ALI


28

3. You may be aware that NIIT decided to go for an extensive franchisenetwork. Discuss how franchise operations are beneficial to a serviceorganization, rather than theirs own outlets?

4. What is the concept of Quasi Retailing? Identify at least three organizationswhere Quasi retailing is a must, Also enumerate the advantages of QuasiRetailing for these organizations.

5. Differentiate between agents and brokers. Suggest marketing situationswhere such members of intermediaries are important.

6. What guidelines you would follow for developing an advertising campaignfor a service organization? Discuss by taking the example of a commercialbank or an insurance company.

7. It is been said that PR Tools are more relevant in service organizations.Discuss.

6.7 REFERENCES AND FURTHER READINGS

1. John M.Rathmell, Marketing in Service Sector (Cambridge Mass: Winthroppublishers), 1974, p.110.

2. Duane L.David, Joseph P.Guiltinan and Wesley H.Jones, “ServiceCharacteristics, Consumer Research, and the Classification of RetailServices”, Journal of Retailing, Fall 1979, pp. 3-23.

3. Ravi Shanker, “Distribution of Services”, Managing Distribution, (NewDelhi : Manas Publication), 1992, p.125

4. William R. George and Leonard L Berry :”Guidelines for the Advertising ofServices”, Business Horizons, July-August, 1981.

5. Christopher H.Lovelock and John A. Quelch, “Consumer Promotions inService Marketing,” Business Horizons, May-June, 1983.

6. Eugene M.Johnson, “The Selling of Services” In :Victor P.Nuell, eds;Handbook of Modern Marketing, (New York : Mc Graw Hills), 1987.

7. Tom Duncan, A Study of How Manufacturers and Service CompaniesPerceive and Use Marketing Public Relations, (muncie, Ind :Ball StateUniversity), December 1985.

8. Philip Kotler, “Megamarketing”, Harvard Business Review, March-April,1986, pp. 117-124.© A

LI© A

LI

29

UNIT 7 EXTENDED MARKETING MIXFOR SERVICES

Objectives

The objectives of this unit are:

To introduce the extended marketing mix for services

To describe the fifth ‘P’ of the marketing mix called ‘People’ andemphasize on the need for internal marketing in a service organization

To discuss the relevance and roles of ‘Physical Evidence’ in servicemarketing

To explain the meaning and significance of ‘Process Management’ inmarketing of services and the issues involved therein.

Structure

7.1 Introduction

7.2 People

7.3 Internal Marketing

7.4 Physical Evidence

7.5 Process

7.6 Summary

7.7 Self Assessment-Questions


7.1 INTRODUCTION

For service industries, it was observed that the traditional marketing mix wasinadequate because of three main reasons. The first reason was that theoriginal marketing mix was developed for manufacturing industries, whichimplies that the services offered by service companies ought to be changed in amore product like manner so that the existing marketing tools can be applied.This was practically difficult.

The second reason was that the marketing practitioners in the service sectorfound that the marketing mix does not address to their needs. They observedthat the services have certain basic characteristics, which in turn havemarketing implications (as discussed in Unit 1). For example there is aproblem as regard to maintaining the quality due to lack of standardization orservices can’t be inventoried, patented or transferred.

The third reason was that since services are basically different in comparisonto physical products the marketing models and concepts have, therefore, to bedeveloped in direction of the service sector.

The above three criticisms suggest that a revised framework for servicemarketing mix is required and dimension of each of the mix elements should beredefined. The marketing mix has extended beyond 4Ps for marketing ofservices. These additional Ps are added to meet the marketing challenges posedby the characteristics of services.

Booms and Bitner though without any empirical work suggested a ‘7 P’marketing mix model arising out of the above three observations. McGrath and

© ALI

© ALI


30

others endorsed such an approach, and a number of marketing research studiessupplement the relevance of each of the ‘7 Ps’. A detailed account of each ofthe additional ‘P’ of the services marketing mix is as follows:

7.2 PEOPLE

People constitute an important dimension in the management of services in theirrole both as performers of services and as customers. People as performers ofservices are important because, “A customer sees a company through itsemployees. The employees represent the first line of contact with the customer.They must, therefore, be well informed and provide the kind of service thatwins customer approval. The firm must recognise that each employee is asalesman for the company’s service”. The importance of customers in servicesstems from the fact that most services imply active and involved customer-organisation interface.

a) Service Personnel: Service personnel are important in all organisations butmore so in an organisation involved in providing services. The behaviour andattitude of the personnel providing the service is an important influence on thecustomer’s overall perception of the service and he can rarely distinguishbetween the actual service rendered and the human element involved in it.How often have you had the experience of holding onto a telephone receiverafter dialing for Assistance or Trunk Booking and receiving no response? Whatdo you think has been the role/contribution of the telephone operators towardsgiving our telephone system the image which it has today?

The case of telephone operators is still controllable because the telephonesystem presents a low contact organisation. High or low contact is defined onthe basis of percentage of total time the customer has to spend in the systemcompared with the relative time it takes to service him. By this definition,restaurants, hospitals, schools represent a high contact organisation. The otherimportant distinction of service personnel is between those that are visible tothe customer and those that are not. In a restaurant, the waiters are visiblewhile the cook in the kitchen is not. As a marketing manager you have todevote more time training the visible personnel, since they have greaterresponsibility in maintaining relations with the customer. The rice dish which isnot cooked properly is the cook’s fault but it is the waiter who will have tobear the brunt of the customers’ anger. The manner in which the waiterbehaves with the customer will be an important determinant in the restaurantlosing that customer forever or retaining him as a regular client.

As a marketing manager your primary concern is the visible service personneland especially so if yours is a high contact organisation. You have to beconcerned with ways in which you can improve the quality and performance ofyour service personnel. This can be done through:

a) careful selection and training of personnel;

b) laying down norms, rules and procedures to ensure consistent behaviour;

c) ensuring consistent appearance; and

d) reducing the importance of personal contact by introducing automation andcomputerisation wherever possible.

We will discuss these aspects in the next section on Internal Marketing(Section 7.3)

© ALI

© ALI

31

b) Customers: Customers are important because they are a source ofinfluencing other customers. In the case of doctors, lawyers, consultants onesatisfied customer will lead to a chain reaction, bringing in his wake a numberof other customers. Thus as a marketing manager, your first task should be toensure complete satisfaction of the existing customers. The kind of customersthat you attract exerts an important influence on prospective customers. Theprospective customer may feel attracted towards the organisation (it may be arestaurant, club, school, college) because it has his ‘type’ of customer or thecustomer may turn away if he perceives the existing customers to be of a kindwith whom he would not like to associate. You have to decide about the classof customers you would like to have and work towards providing your serviceorganisation an image which will fetch you your future customers.

7.3 INTERNAL MARKETING

Although the discussion on significance of employees in the business activitystarted in mid-seventies the concept of internal marketing was introduced onlyafterwards. One school of advocates of this concept initially suggested that theemployer should apply market research, market segmentation and traditionalmarketing activities like advertising in order to attract employees and makethem perform in the desired way. Such traditional marketing efforts should beused internally.

It was Gronross who suggested that internal marketing should be broader thanthe traditional marketing. He suggested that internal marketing should beviewed as a managerial philosophy. According to him, “The internal marketingconcept states that the internal market of employees is best motivated forservice-mindedness and customer-oriented performance by an active marketinglike approach, where a variety of activities are used internally in an active,marketing like and coordinated way.” The starting point in internal marketing isthat the employees are the first internal market for the organization.

a) Strategic and Tactical Objectives of Internal Marketing

Gronrooss clarified that the basic objective of internal marketing is to developmotivated and customer conscious employees. If this is the case, then it hasstrategic as well tactical implications. His point of view has been summarizedin Table 7.1.

Table 7.1: Strategic and Tactical Objectives of Internal Marketing

Overall Objective To develop motivated and customer-conscious personnel.

Strategic Level Objective To create an internal environment that supports customer-consciousness and sales-mindedness among the personnelthrough supportive:

Management methods;·

Personnel policy;

Planning and control procedures.

Tactical Level Objective To sell services, supporting services (used as means ofcompetition), campaigns, and marketing efforts to theemployees based on these principles:

the personnel are the first market of the servicecompany;

the employees must understand why they areexpected to perform in a certain manner, or in acertain situation, actively support a given

Extended MarketingMix for Services

© ALI

© ALI


32

service or supporting service;

the employees must accept the services andother activities of the company in order tosupport the service in their contact with theconsumers;

a service must be fully developed and internallyaccepted before it is launched; and

the internal information channels must work;personnel selling is needed internally, too.

Source: Christian Gronross, “Internal Marketing: An Integral Part of Marketing Theory.” In:J.H. Donnelly and W.R. George, Eds., Marketing of Services, (Chicago: AmericanMarketing Association), 1981.

Parsuraman and Berry suggested that a service company can only be as goodas its people. A service is a performance, and it is usually difficult to separatethe performance from the people. If the people don’t meet customers’expectations, then neither does the service. Investing in people quality in aservice business means investing in product quality.

b) Elements of Internal Marketing

To realize its potential in services marketing, a firm must realise its potential ininternal marketing-the attraction, development, motivation, and retention ofqualified employees. Internal marketing paves the way for external marketingof services. The companies that practice internal marketing most effectively will:

1. Compete aggressively for talent market share;

2. offer a vision that brings purpose and meaning to the workplace;

3. equip people with the skills and knowledge to perform their service rolesexcellently;

4. bring people together to benefit from the fruits of team play;

5. leverage the freedom factor;

6. nurture achievement through measurement and rewards; and

7. base job-product design decisions on research.

The seven components of internal marketing practice, as indicated above lendus to an action checklist, which is given in Table 7.2.

Table 7.2: Action checklist on Internal Marketing

1. Do we compete as hard for employees as we do for end-customers? Are weimaginative in how we compete for talent? Are we bold? Do we experimentand try new strategies? Do we use a variety of media? Do we use the rightpeople to recruit and interview- people who will make a strong impression,people who can sell?

2. Does our company stand for something worthwhile? Do we offer ouremployees vision that they can grab hold of and believe in? Do we have areason for being that makes our company as special place to work? Do wecommunicate our vision well? Do we weave it into our company culture atevery opportunity?

3. Do we prepare our people to perform excellently? Do we view skill andknowledge development as an investment rather than an expense? Do we viewit as an ongoing process rather than an event? Do we view it as a confidencebuilder and a motivator? Do we teach our people “why” and not just “how?”Do we go beyond training and educate as well?

4. Do we stress team play? Do our organizational structure, physical workenvironment, training and educational efforts foster teamwork? Do our

© ALI

© ALI

33

employees understand where they fit in the company team? Do theyunderstand the big picture?

5. Do we allow our employees the freedom to come through for their customers?Do we make rules that fit the aspirations of our best employees rather thanprotect us from our worst employees? Do we work at keeping our policy andprocedure manuals thin? Do we work at building empowerment into ourculture?

6. Do we measure and reward that which is important? Do we measure andreward employee performance that contributes most to our vision? Do we usemultiple methods to measure and to reward? Do we emphasize fairness in themethods we use? Do we give all employees the opportunity to be recognizedfor their excellence?

7. Do we listen to our employees? Do we use formal and informal researchtechniques to investigate their attitudes, concerns, and needs? Do weproactively solicit their input? Do we act on what we learn? Do we use thedata to improve the job-product?

Source: Adapted from Leonard L. Berry and A. Parsuraman, Marketing Services: CompetingThrough Quality, Free Press, 1991, pp. 171-172.

Activity 1

From the table 7.2, identify those activities which are important in a commercialbank, where you operate your Savings Account.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

c) Importance of Internal Marketing in Organizational Success or Failure

A successful service firm implies a significant level of internal marketing also.The employees of a service firm have to share the same concern as theconceptualizer of the service. In fact, the service has to be marketed first tothe intermediate customers who are the employees of the firm, morespecifically, the front line employees or the contact persons. In such a case, aservice strategy has to be focused internally also. A complete strategic vision,when due importance is not given to caring of employees, traps the service intoa cycle of failure. Figure 7.1 and 7.2 show the cycles of failure and success.

High customer turnover

Failure to develop customer loyalty

No continuity inrelationship for

customer

Customer dissatisfaction

Employees can’t respond to customer

problems

Employees become bored

Employee dissatisfaction; poor service attitude

Repeat emphasis on attracting new customers

Low profit margins Narrow design of

jobs to accommodate low skill level

Use of technology to control quality

High employee turnover; poor service quality

Payment of low wages

Minimization of selection effort

Minimization of training

Emphasis on rules rather than service

Empl

oye eC

ycle

Custome r Cyc

le

Source:

Figure 7.1: Cycle of Failure

Source: Schlesinger and Heskett


Customer Cycle

© ALI

© ALI


34

It is clear from these cycles that proper selection, training and the developmentof employees ensures success (Schlesinger & Heskett, 1991).

Implementation of such a strategy is fairly difficult task. It requires a serviceorientation which is more of a software to excellence. For service industries,personnel hold the key to success and the process needs sharing of values byevery employee in the organisation. An implementation process for a hospitalfor example could involve the following six steps:

1. Overcome differences: CEOs need to create a compelling vision of thefuture for the board, medical staff, management team and support staff.

2. Identifying key strategic initiatives like realising physician and hospitalfinancial incentives: Focusing on the complete range of health care,including prevention, diagnosis and recovery, making the hospital campusmore user-friendly and tailoring ambulatory care program to consumerneeds.

3. Remove the barriers: Once the CEOs have a strategic plan, they need totackle organisational elements that will inhibit its success. For example, arethere too many layers of management? Do incentives and compensationplans mesh with the strategic goal?

4. Identify information needs for decision making: Make sure that informationneeds are met at all levels of the hospital-from CEO to clerk.

5. Develop a process of continual improvement: Once you have translated yourstrategy into action, constantly assess its performance and ways thatperformance can be improved.

6. Empower and motivate your staff: This is the only way that total qualitymanagement can be fully integrated into every aspect of the hospital.

7.4 PHYSICAL EVIDENCE

Cleanliness in a doctor’s clinic, the exterior appearance and interior decor of arestaurant, the comfort of the seating arrangement in a cinema hall, adequate

Figure 7.2: Cycle of Success

Source: Schlesinger and Heskett

Cy

Low customer turnover

Customer loyalty

Continuity inrelationship with

customer

High customer satisfaction

Extensive training

Employee satisfaction, positive service attitude

Repeat emphasis on customer loyalty and

retention

Higher profit

marginsBroadened job designsLowered turnover,

high service quality

Above average wages

Intensified selection effort

Employe

ecle

Custom

er Cycle

Train, empower frontlinepersonnel to control quality

Source: SchleCustomer C

ycle

© ALI

© ALI

35

facility for personal needs at the airport all contribute towards the image of theservice (organisation) as perceived by the customer. The common element inthese is that they all physical, tangible and controllable aspects of a serviceorganisation. They constitute the physical evidence of the service. There maybe two kinds of physical evidence:

a) peripheral evidence

b) essential evidence

Peripheral evidence is actually possessed as a part of the purchase of servicebut by itself is of no value. An airline ticket, a cheque book, or receipts for aconfirmed reservation in a hotel are examples of peripheral evidence. Acheque book is of value only if you have money in the bank-without that is ofno significance. Peripheral evidence adds on to the value of essential evidence.In a hotel you may find a matchbox, writing pad, pen, complimentary flowersand drinks, which you may take away. These are representations of peripheralevidence. Such evidence must be designed keeping in mind the overall imagewhich the organisation wishes to project and the reminder value of the evidencein its ability to remind the customer about the organisation.

Whereas peripheral evidence is possessed and taken away by the customer, theessential evidence cannot be possessed by the customer; the building, its sizeand design, interior layout and decor, logo and equipments etc. are constituentsof the essential evidence. The essential evidence is a very critical input indetermining the atmosphere and environment of the service organisation.Contrast the essential evidence of a five-star hotel (its long driveway, grandentrance manned by a liveried doorman, sophisticated decor of lobby) with thatof a fast food outlet (with bright colours, loud music, and bright lights) andjudge the kind of rich and formal atmosphere of the former with the relaxedand casual atmosphere of the latter. You can use physical evidence to build astrong association in the customers’ mind and also to differentiate your servicefrom the competition. As a marketing manager it is your responsibility tomanage the physical evidence in order to create the ideal environment for yourservice. You can do this in two ways: one by making the service more tangible,and two, by making it easier for the customer to grasp the concept of the service.

One obvious way of making the service more tangible is by developing atangible representation of the service as is done in the case of credit cards.Credit cards have a physical entity and are identifiable by their brand name(American Express, Diners, Visa, BOB, i.e., Bank of Baroda) and distinct looksof the card. Other ways by which a service can be made more tangible is bystandarising the physical attributes such as location, interior decor, colourscheme etc. Most airlines use a uniform for all their staff to help create asense of identification. Similarly, Indian Airline’s white and orange colourcombination is well-recognised.

The second way is to make it easier for the consumer to understand theconcept of the service which you are offering, with easily perceived objectsand ideas. Promoters of package tours may provide detailed information aboutthe hotel, food and transport facility they would be using to help the customersunderstand the concrete dimensions of the tour and thus reduce their anxietyarising out of uncertainty. Specific information about the various dimensions ofthe service should be provided to prospective customers . As a marketingmanager you can help the customers to understand the service you are offeringby stressing the organisation and customer relationship. Advertising agenciesassign one account executive or a team to a particular client to help himidentify with the agency.


© ALI

© ALI


36

Activity 2

What are the components of physical evidence in case of

a) Railways

b) Banks

c) Theatre performances?

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

Julie Baker in her doctoral work theorized that the physical environment is acomposite impression of ambience, design and social relationships. Sheaccordingly termed these three factors as ambient factors, design factors andsocial factors. As summarized in Figure 7.3 the ambient factors relate to thebackground conditions below the level of a customers immediate awareness.The design factors on the contrary are those visual stimuli that exist at theforefront of a customer’s awareness. The social factors relate to interactiveenvironment comprising of people.

PHYSICAL ENVIRONMENT

�� Ð ��

(��,��,��)

Ð �� .

Ð ��

�� Ð ��

�� .

Ð �� .

�� Ð ��

��, ��, ��, �� .

Ð �� , ��.

Figure 7.3: Ambient, Design and Social Factors of Physical Environment

Activity 3

For a specialty restaurant identify the ambient, design and social factors whichare important from the customer’s point of view:

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

Roles of Physical Evidence

The primary role of evidence management is to support the organisation’smarketing programme by making it possible to manage both intended andunintended cues which can give adequate evidences to customers and therebyinfluence perceptions. Interestingly, the physical evidences also influenceemployees who interact with customers during the service delivery.Parsuraman et. al. identified six specific roles of evidence as represented inFigure 7.4.

© ALI

© ALI

37

Depending on the competitive situation, marketing objective and the resources,an organization can use evidence for some or all of the above roles, thoughthese roles are not mutually exclusive. Arising out of the above reasons theservices organization are expected to use a two prong marketingcommunication strategy aimed at not only tangibalizing the message but alsothe service.

Tangibalizing the service implies that tangibles associated with the service areemphasized in communication as if they themselves form the service. Forexample, DHL courier service is advertised with a visual of an airport showinga fleet of their aircrafts and Benz trucks. Alternately, you create tangiblerepresentations of the service to symbolize. For example, ‘comfort’ in air travelcan be tangiblized using comfortable seats with extra leg-space. This can alsobe emphasized in advertising.

The second step of marketing communication, tools aim at tangibalizing themessage by creative use of evidence in messages, by guaranteeing the serviceand by encouraging positive word of mouth. By tangibalizing the message theservice organization makes the advertising message less abstract and morecredible through the use of physical evidence. For example, “Personal Point” isgiving physical evidences as regard to the weight loss of their customers. Theother method of tangibalizing the message is to guarantee the service. Forexample, some of the private airlines emphasize on a higher percentage of ontime arrivals and departures.

Hart suggested that though warranties are effectively used in manufacturinggoods quite successfully, they can equally be applicable in service industries. Ifthe quality of the service and the service delivery of an organization areexcellent, a service organization then can possibly guarantee it to gaincompetitive advantage. We will discuss the issues related to service guaranteesin the next block.

Socializingemployees

Shaping firstimpression

Managing trust

Facilitatingquality ofserviceChanging the

image

Providingsensory stimuli

ROLEOF

EVIDENCE

Figure 7.4: Role of Evidence in Services Marketing Extended MarketingMix for Services

© ALI

© ALI


38

The third method of tangibalizing the message is to create and encourage afavourable word of mouth. In service sector the consequences of selecting awrong service supplier are invariably higher and as a result the customersinvariably seek the opinion of others. It is in this context the word of mouth isimportant in giving tangible clues to customers.

7.5 PROCESS

In a service organisation, the system by which you receive delivery of theservice constitutes the process. In fast food outlets the process comprisesbuying the coupons at one counter and picking up the food against that atanother counter.

The process of a delivery function which can be compared with that ofoperations management implies the conversion of input into the finished product.But in a service organisation there is no clear cut input or output. Rather it isthe process of adding ‘value’ or ‘utility’ to system inputs to create outputswhich are useful for the customers.

Services can be described on the basis of the types of processes used in thedelivery of the services. The three kinds of delivery processes that areapplicable in case of service products are line operations, job shop operationsand intermittent operations. Self-service restaurants and shops are examples ofline operations. The consumer moves through logically arranged operationswhich are arranged in a sequence. In a self-service departmental store, theconsumer starts picking up the items he needs and pays for them near the exit.This kind of delivery process is relevant when the service you are providing isfairly standard and the consumers’ requirement is of a routine nature.

When the consumers require a combination of services using differentsequences, the job shop type of operation is more useful. Hospitals, restaurantsand educational institutions usually have this type of delivery process. In ahospital, some patients need only consultation in the Out Patient Department,some others may need consultation as well as medication or X-ray, somepatients require hospitalisation for surgery, medication or investigations. All thesecategories of consumers require a different combination of dishes. A collegemay offer courses for full-time students as well as for working people throughcorrespondence.

Intermittent operations are useful when the type of service is rarely repeated.Firms offering consultancy for projects use this kind of delivery system.Advertising agencies also use the intermittent delivery system since eachadvertising campaign requires a unique set of input factors.

As a manager you are interested in optimising the efficiency of yourorganisation without sacrificing the qualitative aspect. Some of the criticalquestions you need to focus upon are:

a) What are the steps involved in delivering the service to the consumer?

b) Are they arranged in the most logical sequence?

c) If not, can some steps be eliminated, combined or rearranged to form asmoother sequence?

d) What are the steps in which the consumer is involved?

e) Can the consumers’ contact be reduced or totally eliminated?

f) Can we introduce automation to speed up the delivery process?

© ALI

© ALI

39

You will appreciate that the importance of process management is that itassures service availability and consistent quality. Without sound processmanagement, balancing service demand with service supply is extremelydifficult. Service cannot be inventoried; therefore, it becomes essential to findout ways and means to handle peak load to optimize different customer needswith varied expertise levels within the service organization.

In marketing management, operations management has been recognized as anintegral function. In manufacturing sector, for example, logistics in distributionare vital to satisfy the customer needs. Similarly in services sector, wherethere is no tangible product, the operations management is vital to deliversatisfaction because here the operations management would decide how theprocess of service delivery would function, or in other words, the interactiveexperience that would deliver the service benefits to the consumers.

Cowell identified that the issues in operations management or processmanagement are many, as summarized in Table 7.3. However, the degree towhich these issues are successfully managed would decide or determine notonly the satisfaction but it might also give a competitive edge to anorganization.

Table 7.3: Issues in Process Management

S.No. Area of Operations Explanation

1. Process Planning and Control Operation specifications to achieve serviceoutput in terms of quantity, quality, deliveryand costs.

2. Operations Planning Detailed specification of each sub system.

3. Facilities Design Design, layout, locations, materials handlingand maintenance.

4. Scheduling Detailing the timings at which serviceoperations should be completed by agreeddelivery promises within available resourcesand with their economic utilization.

5. Inventory Planning and Control Planning and controlling the inventory ofpeople and capacity.

6. Quality Control Quality standards are attained in each servicesystem.

7. Operations Control Information flows into and out of servicesystems and ensures that operations areundertaken at specific tunes as per schedule.

8. Forecasting and Anticipating demands and forecastingLong Term Planning capabilities that need to be inducted in the

system.

Shostack gave a much-simplified version and described the ‘process’ in threestages. First, a process can be broken down in logical steps to facilitateanalysis and control. Secondly, there are more than one available options ofprocesses in which output may differ. Finally, each system includes theconcept of deviation or tolerance standards in recognition that the processes are‘real time’ phenomena that do not conform perfectly to any model ordescription, but functions within a norm.

Shostack further observed that in marketing literature no description on processis found although concepts, which relate to process like ‘standardization’ and‘customization’, are frequently mentioned. In her article Shostack describedprocesses in two ways.


© ALI

© ALI


40

The first way is according to the steps and sequences that constitute theprocess and she termed it as ‘complexity of process’. The second is accordingto the exceptional latitude or variability of those steps and sequences, whichshe called ‘divergence’. Any service process is a combination of both-complexity and divergence. Analyzing the number can identify a service’scomplexity and intricacy of the steps required and the degree of freedominherent or allowed in a process step or sequence can be called its divergence.In reality there could be services where process can be of high complexity andlow divergence. Such services are called standardized services. For example,housing loan from any financial institution. On the other hand, there could beservices with low complexity and high divergence. Such services can be calledcustomized services.

When we are developing clarity on understanding of process management, anunderstanding of above described phenomenon is essential as complexity anddivergence are not fixed rather they are factors that can be changed oradjusted for efficiency in the process. A change in overall complexity ordivergence generally indicates one of the four overall strategic directions, eachwith positive consequences and also the risks, as summarized in Table 7.4

Table 7.4: Alternative Directions of Structural Changes

Strategic Options Advantages Disadvantages

Reduced Divergence – Uniformity would reduce – Inflexibility in operatingcost, improve productivity procedures.and make distribution easier. – Lower customization and

– Increase perceived reliability, thus consumer rejectionuniform service quality and inspite of low cost.greater service availability.

Increased Divergence – Greater customization and thus – Difficult to manage,niche positioning strategy. control and distribute.

– Less dependence on volume. – Limited number of– More margins as market may customers may be

respond positively to available who are willingpersonalization and thus to pay the price thatprestige. customization demands.

Reduced Complexity – Reduced complexity indicates – Reduced complexity cana specialization strategy. also be perceived as

– Narrowing the service offering stripped down service.makes distribution and control – It can be competitivelyeasier. risky if other providers

– Perceived positively in the continue to offer amarket provided it stands out. broader, more extensive

full-service alternative.

Increased Complexity – Higher complexity usually – Too much complexity canindicates a strategy to gain be confusing as a resultgreater penetration in the overall quality may fall.market by adding more – Highly complex serviceservices. system may be vulnerable

– Increasing complexity can to inroads by competitorsincrease efficiency by who specialize.maximizing the revenuegenerated from each customer.

One can observe that how changes in complexity and divergence influencedtheir market position. For managers in service industries, taking a structuralapproach can help increase their control over some of the critical elements ofthe service system management. Therefore, for marketers in service industries,process design may be a tool that can substantially increase their impact androle in marketing their services.

© ALI

© ALI

41

Activity 4

Compare the relative advantages and disadvantages of “Conventional tokensystem in retail banking with the teller system and ATM system.”

............................................................................................................................

............................................................................................................................

............................................................................................................................

............................................................................................................................

............................................................................................................................

............................................................................................................................

7.6 SUMMARY

Service industries have typically lagged behind manufacturing firms in adoptingand using marketing concepts. But this is now changing. It is said thatservices marketing strategy calls not for external marketing but also for internalmarketing to motivate the employees and interactive marketing to create skillsin the service provides. The unit provided you an action checklist on internalmarketing. The importance of internal marketing was highlighted using cycle ofsuccess and cycle of failure. The next element of extended marketing mixdiscussed in the unit is Physical Evidence, which includes both peripheral aswell as essential evidence. The various elements of physical evidence areambient factors, design factors and social factors. The unit outlines the role ofphysical evidence as well. The last part of the unit was devoted on ‘processmanagement’. The various aspects involved in process management wereoutlined. These include process planning and control, operations planning,facilities design, scheduling inventory planning and control, quality control,operations control and forecasting.


1. What do you think are the main reasons for including the element of peoplein the marketing mix for services?

2. Do you think that physical evidence really matters in marketing of services?Discuss with the help of examples.

3. Can varied process management be followed in marketing the sameservice? Discuss by taking an example.

4. Write short notes on the following:

a) Physical evidence as an element of Marketing Mix.

b) Significance of Internal Marketing..

5. Compare and contrast the employee’s attitude and behavior towardscustomers amongst the following organization. Do you see the significanceof employees in servicing the customers better? Identity how a motivatedemployee can provide higher customer satisfaction in these organizations.

a) Nationalized bank and a foreign bank operating in India.

b) Indian Airlines and any private airlines.

c) Super bazaar and a private department store.

6. In the above organizations identify the various physical evidences andsuggest ways to improve upon them.


© ALI

© ALI


42


1. B.H.Booms and M.J.Bitner, “Marketing Strategies and OrganisationStructure for Service Firms,” in J.Donnelly and W.R.George (eds.),Marketing of Services, (Chicago :American Marketing Association),1981.

2. Christian Gronross, “The Internal Marketing Function,”StrategicManagement and Marketing in The Service Sector, Report No. 83-104, (Cambridge : Marketing Science Institute), 1983.

3. Christian Gronross, “Internal Marketing : An Integral Part of MarketingTheory,” In, J.H.Donnelly and W.R. George, eds, Marketing ofServices, (Chicago : American Marketing Association), 1981.

4. V.C.Judd “Differentiate with the 5th P:People”, Industrial MarketingManagement, No 16, p.241-247.

5. Leonard L.Berry and A.Parsuraman, Marketing Services : CompetingThrough Quality, (New York : Free Press), 1991, pp.152, 171-172.

6. G.Lyan Shostack, “Service Positioning Through Structural Changes,Journal of Marketing, Vol 51, Jan. 1987, pp 34-43)

7. A. J. Mcgrath, “When Marketing Services 4Ps Are Not Enough”,Business Horizons, May-June, 1986, pp.44-50.

8. Leonard L.Berry and A.Parsuraman, Marketing Services : CompetingThrough Quality, (New York : The Free Press) p.94,1991.

9. S.Majaro, Marketing in Perspective, (London : George Allen), 1982.

10. Julie Baker, “The Role of the Environment in Marketing Services: TheCustomer Perspective, in John A.Crepiel, Carole Congram and JamesShanahan (eds), The Service Challenge: Integrity for CompetitiveAdvantage, (Chicago : American Marketing Association), 1987, p.80.

11. R.Doswell and Paul Gamble, Marketing and Planning Hotel andTourism Projects, (London : Hutchinson), 1979.

12. Christopher W.L.Hart, “The Power of Unconditional ServiceGuarantees,” Harvard Business Review, July-Aug, 1988 pp-54-62.

13. Donald W. Cowell, The Marketing of Services, (London : Heinemann),1984, p.243.

14. G.Lynn Shostack, “Service Positioning through Structural Changes”,Journal of Marketing, Vol 51, Jan 1987 p.34-43.© A

LI© A

LI

43

FURTHER READINGS : BOOKS ON SERVICESMARKETING

Given below is a list of books on “Marketing of Services” which you mayfind useful for further reading for this course.

S. Baron and K. Harris, Services Marketing – Text and Cases , Palgrave,2003

J. Bateson, Managing Services Marketing: Text and Readings, Dryden,1995

L.L. Berry and A. Parasuraman, Marketing Services : CompetingThrough Quality, The Free Press, 1991

D. Carson and A. Gilmore (eds.), Service Marketing- Text and Readings,Mercury Publications, 1996

D. Cowell, The Marketing of Services, Heinemann, 1996

W.J. Glynn and J.G. Barnes (eds.), Understanding Service Management,John Wiley and Sons, 1995

C. Groonross, Service Management and Marketing, Lexington Books,1990

J.L. Heskett, W.E. Sasser, Jr. and C.W.L. Hart, Service Breakthroughs -Changing the Rules of the Game, The Free Press, 1990

D.L. Kurtz and K.E. Clow, Service Marketing, John Wiley, 2002

C. H. Lovelock, Services Marketing, Prentice Hall

A. Payne, Essence of Services Marketing, Prentice Hall of India, 1996

R.T. Rust, A.J. Zahorik and T.L. Keiningham, Service Marketing, HarperCollins, 1996

Ravi Shanker, Services Marketing- The Indian Perspective, Excel Books,2002

T.A. Swartz, and D. Iacobucci (eds.), Handbook of Services Marketingand Management, Sage Publications, 2000

H. Woodruffe, Services Marketing, Macmillan India, 1997

V.A. Zeithaml , A. Parasuraman and L.L. Berry, Delivering QualityService – Balancing Customer Perceptions and Expectations, The FreePress, 1990

V.A. Zeithaml and M.J. Bitner, Services Marketing, , Tata McGraw-Hill,New Delhi, 2003


© ALI

© ALI

1



Block

3STRATEGIC ISSUESUNIT 8

Service Quality 5

UNIT 9

Managing Demand and Capacity 24

UNIT 10

Customer Retention 38

© ALI

© ALI

Strategic Issues

2



IGNOU, New Delhi













ISBN-81-266-1264-9






Printed at:

Print Production


© ALI

© ALI

3

BLOCK 3 STRATEGIC ISSUES

Block 3 of this course deals with strategic issues concerning servicesmarketers. The block consists of three units. The first unit (Unit 8) deals withService Quality. In the last two decades interest in the issues related to servicequality has increased tremendously and a number of researchers have beenworking on it. In this unit you will be acquainted with a wide range of topicson Service Quality including service quality models and measurement of servicequality. Unit 9, the second unit of this block, discusses management of demandand capacity. Because of the perishability aspect of services, servicesmarketers face a major challenge in matching demand and capacity. In this unitstrategies for matching capacity and demand and for managing customerwaiting have been discussed. The last unit of the block titled ‘CustomerRetention’ highlights the importance of retaining customers for service firms andoutlines issues related to customer retention and loyalty including servicerecovery and service guarantees.

© ALI

© ALI

Strategic Issues

4







3. STRATEGIC ISSUES







© ALI

© ALI

5

UNIT 8 SERVICE QUALITY

Objectives


define service quality,

identify the reasons for a different approach to service quality,

explain the determinants of service quality,

understand service quality models and their application,

understand the linkage between service quality and profitability, and

measure service quality.

Structure

8.1 Introduction

8.2 Reasons for Different Approach to Service Quality

8.3 Service Quality Models

8.4 Benefits of Service Quality to the Organisation

8.5 Measuring Service Quality

8.6 Communicating with Customers about Service Quality

8.7 Case Study

8.8 Summary



8.1 INTRODUCTION

Quality came to the service literature at the beginning of the 1980’s. This isquite in contrast to the manufacturing sector wherein quality management has along and rich history. In the twentieth century, especially the second half,increasing global competition forced many manufacturing companies to developand adopt quality management practices aimed at increasing competitiveness byeliminating waste, increasing efficiencies, reducing costs, improving customersatisfaction and involving every member of the organisation in doing so.However, from 1980’s the interest in service quality has increasedtremendously. One reason why service quality is becoming an important issue isthat all the developed countries as well as a number of developing countrieshave become service economies. As explained in Block 1, in India also servicesector is the largest contributor to GDP, ahead of agriculture as well as industrysector. Another reason for the rising importance of service quality is that it isproving to be a winning competitive strategy. More and more companies areemphasizing on providing excellent service quality in order to have a distinctivecompetitive advantage over their competitors in a world where establishing along term technology based competitive advantage is becoming increasinglydifficult.

The conceptualization and measurement of service quality perceptions havebeen one of the most debated and controversial topics in the service marketingliterature.

The term ‘Service Quality’ has been defined in different ways. Given beloware some of the definitions :

© ALI

© ALI

Strategic Issues

6

Service quality as perceived by customers, can be defined as ‘the extent ofdiscrepancy between customers’ expectations or desires and theirperceptions’ (Zeithaml, Parasuraman and Berry,1990)

Quality is whatever customers say it is, and the quality of particular productor service is whatever the customer perceives it to be (Buzzel and Gale,1987)

Service quality is the delivery of excellent or superior service relative tocustomer expectations (Zeithaml and Bitner, 1996)

Quality of a service, as perceived by the customer is the result of acomparison between the expectations of the customer and his real-lifeexperiences (Gronroos, 1982)

You will notice that all these definitions revolve around the fact that servicequality is essentially what customers perceive. Only customers judge quality andall other judgments are irrelevant. Therefore, the ultimate aim of an excellentservice quality system is to satisfy the customer’s need and go beyond todelight the customers.

The principles and practices as applied to goods quality, are not sufficient for‘Service Quality’. This is because of some basic differences between goodsand services with regards to how they are produced, consumed and evaluated.

8.2 REASONS FOR DIFFERENT APPROACH TOSERVICE QUALITY

You may recollect the characteristics of services that distinguish them fromgoods, as explained in Unit 1. This would help you in understanding the reasonsfor different approach to service quality, as explained below:

i) Services are predominantly intangible in nature. Since services areperformances, acts and experiences, it is not possible to have exactspecifications for them, unlike physical objects like automobile, machinetools, television set etc. for which exact specifications can be set andcommunicated. Further, services can’t be tested prior to sale to determineits quality. That means services are low in ‘search qualities’- attributesthat a consumer can determine before purchasing a product and strongerin ‘experience qualities’ - attributes that can only be discerned afterpurchase or during consumption. Also, there are certain services whichconsumers find difficult to evaluate even after purchase and consumptioni.e. ‘credence qualities’. (Please refer Unit 4 giving the continuum ofgoods and services high in search, experience and credence quality).Therefore, the criteria customers use to evaluate services is morecomplex, thereby increasing the difficulties of marketers.

ii) Another very important aspect requiring separate treatment of servicequality is the ‘inseparability’ aspect of services. The inseparability ofproduction and consumption in services reflect the more active partrequired from the service provider as well as the consumer. It is in thisinteraction where usually the quality is judged by the customer.

The interaction between production and consumption in services as shown inFigure 8.1 may be broad e.g. restaurants or air travel or it may be thin e.g.trunk call through telephone exchange. This nature of services wherebycustomer often has to be in service factory makes it difficult for serviceproviders to ensure quality before service is rendered to the customers. This isquite opposite to goods where they are engineered, produced and quality

© ALI

© ALI

7

controlled prior to sending them to customer for consumption.

iii) Services are ‘heterogeneous’ in nature. The service performance may vary

from producer to producer for the same service

from customer to customer even with the same producer

from day to day for the same producer

Therefore, ensuring consistent service quality is a big challenge to organizations.

Based on what you have studied so far in this unit you will appreciate thefollowing underlying themes about service quality as highlighted byPasasuraman, Zeithaml & Berry (1985):

Service quality is more difficult for the consumer to evaluate thangoods quality.

Service quality evaluations are not made solely on the basis of theoutcome of service, they also involve evaluation of the process ofservice delivery.

Service quality perceptions result from a comparison of consumerexpectations with actual service performance.

8.3 SERVICE QUALITY MODELS

Considering the complex nature of how customers judge service quality, numberof researches have been done in the area and models have been developed toexplain the nature of service quality evaluation. However, two major workshave received widespread attention and acceptance. The first is the ‘Nordic’perspective (Gronroos) which defines the dimensions of service quality in broadterms consisting of functional and technical quality. The second, the ‘American’perspective (Parasuraman, Zeithaml and Berry) uses five service qualitydimensions. The two models are discussed in detail here below:

Gronroos Model

This model suggests that the quality of a service as it is perceived bycustomers has two dimensions, namely, a technical or outcome dimension i.e.what the customers get and a functional or process related dimension i.e. howthe process and service encounter are perceived. These two have been termedas ‘technical quality’ and ‘functional quality’. For example, a restaurantcustomer will judge the service on the basis of his perception of the food (whatis being delivered-technical quality) as well as how the food was served(functional quality). A patient will judge the services of a hospital not only onthe basis of cure element (technical quality) but on care element (functionalquality) as well. Gronroos postulated that as long as the outcome or the

Production Consumption Production Consumption

123456789012123456789012123456789012123456789012123456789012123456789012

Interaction of buyer and seller‘Service Encounter’

GOODS SERVICES

�� 8.1: �� 8.1: �� 8.1: �� 8.1: �� 8.1: �� Service Quality

© ALI

© ALI

Strategic Issues

8

technical quality is acceptable, the process dimension, or functional quality,frequently may be more critical to consumer’s overall quality perception. Also,in certain cases the technical quality or the outcome may be difficult for thecustomers to judge (remember credence quality discussed in the Block 1 andreferred earlier in this unit) and in such cases the quality perceptions will bebased to a large extent on functional quality.

The quality perception process includes much more than just the twodimensions of service quality. Good perceived quality is obtained when theexperienced quality meets or exceeds the expectations of the customer, that is,the expected quality. This means that even if the experienced quality is good,the total perceived quality may still be low, if the expectations of the customersare very high or unrealistic. Conversely, the total perceived quality may be higheven if experienced quality is not very good, if the customer has very lowexpectation. Fig 8.2 brings about the perceived service quality model.

Expected Quality Experienced QualityTotal Perceived Quality

Image

Market CommunicationImageWord-of-MouthCustomer Needs

Technical Quality:What

Functional Quality:How

Source: Gronroos, C. (1988) : Service Quality : The Six Criteria of Good Service Quality,Review of Business 3, p. 12.

�� 8.2: �� 8.2: �� 8.2: �� 8.2: �� 8.2: ��

The image of the company doesn’t only have an impact on the expectedquality but also on perception of the quality experienced. It works as a filteri.e. if the image of the service provider is good in the minds of the customer,minor errors or mistakes are likely to be overlooked and conversely if theimage is negative the impact of a mistake is likely to be greater than itotherwise would be. The model suggests that the total perceived quality is notdetermined by the level of the technical and functional quality dimensions only,but rather by the gap between the expected and experienced quality.

The expected quality depends on a number of factors like marketcommunication, image, word of mouth communication, corporate image andcustomer needs, few of which are directly under firm’s control and others onlyindirectly controlled. Factors under firm’s direct control include advertising,direct mail, public relations, sales campaign etc. (i.e. market communication)whereas factors like image, word-of-mouth and customer needs are not directlyunder firm’s control but can be influenced. The marketers should understandfrom this not to overpromise. Delivering on promises is an important aspect of

© ALI

© ALI

9

perceived service quality. Also, it should be appreciated that customerexpectations are not static but keep on changing over period of time.

Activity 1

Consider the following services and identify the Technical Quality andFunctional Quality elementsa) Airlines b) Retail Banking – savings accountc) Hotels d) Health Care

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

Gaps Model of Service Quality

Parasuraman, Zeithaml and Berry (PZB) have done extensive work in the areaof service quality. According to them Perceived Service Quality can be definedas ‘the extent of discrepancy between customers’ expectations or desires andtheir perceptions. Put simply, Perceived Service Quality = Perceived Service –Expected Service.Based on their research work, they identified that customersconsider five dimensions in their assessment of service quality, as given below:

Reliability: Ability to perform the promised service dependably andaccurately (example: flights depart and arrive on schedule).

Responsiveness: Willingness to help customers and provide promptservice (example : no waitings at the hospital).

Assurance: Employee’s knowledge and courtesy and their ability toinspire trust and confidence. (example : knowledgeablemechanics at auto service centre).

Empathy: Caring, individualized attention given to customers(example: specific type of room provided to the guestbased on his previous stay, acknowledges customer byname).

Tangibles: Appearance of physical facilities, equipment, personneland written materials (example: seating and airconditioning in a theatre).

Of the five dimensions, reliability is considered to be the most important one. Itrefers to the company delivering on its promises. In a competitive market placeit is absolutely essential for a firm to be reliable in order to attract customerloyalty. Assurance dimension is likely to be of great importance in case ofservices perceived to be of high risk by the customers or services which arerich in credence qualities e.g. health services. Tangibles may be given greatimportance by new customers to judge service quality especially when othercues may not be available. By focusing on empathy a service company canmake the customer feel unique and special whereas responsiveness dimensionemphasizes promptness in dealing with customer’s requests, complaints orproblems.

PZB further focused on finding the deficiencies within companies that result inpoor quality perceptions by customers. The reasons for gap between customers’perceptions and expectations (Gap5 – Customer Gap) were identified as :

Service Quality

© ALI

© ALI

Strategic Issues

10

Provider Gap 1 : Not knowing what customers expectProvider Gap 2 : Not selecting the right service designs and standardsProvider Gap 3 : Not delivering the service standardsProvider Gap 4 : Not matching performance to promises

Based on the above, a gap analysis model was developed as shown inFigure 8.3.

Word – Of - Mouth Communication Personal needs Past Experience

Expected Service

Perceived Service

Service Delivery

Translation of Perceptions into Service Quality Specifications

Perception of Customer

Expectations

CUSTOMER

External Communications to

Customers

COMPANY

GAP 1 GAP 3

GAP 2

GAP 4

GAP 5 (Customer Gap)

�� 8.3: �� 8.3: �� 8.3: �� 8.3: �� 8.3: �� (��)�� (��)�� (��)�� (��)�� (��)

1. Provider Gap1 : Not knowing what customers expect: This gap is thedifference between customer expectations of service and companyunderstanding of these expectations. Service firms executive may not alwaysunderstand what features connote high quality to consumers in advance,what features a service must have in order to meet customer needs andwhat levels of performance on those features are needed to deliver highquality service.

2. Provide Gap 2 : Not selecting the right service designs and standards:A company might correctly perceive the customers’ needs but may not set aspecificied performance standard. This may occur because managementsometimes believes that customer expectations are unreasonable orunrealistic. Also availing of other factors like resources constraints, marketconditions and/or management indifference – may result in discrepancybetween company perception of consumer expectation and the actualspecification established for a service.

3. Provider Gap 3: Not delivering the service standards: This is the gapbetween service quality specifications and actual service delivery. Even ifthere are customer driven service standards, a high quality service deliveryis not a certainty. The main reason for this gap is involvement of humanbeings in the service delivery – especially the role of contact personnel. Thevariability in employee performances makes it hard to maintain standardizedquality. Failure to match demand and supply, customers not fulfilling theirroles and problem with service intermediaries may also result in creating thisgap.

© ALI

© ALI

11

4. Provider Gap 4: Not matching performance to promises: This isessentially a gap between what you deliver and your externalcommunication. Media advertising and other communication by a firm canaffect consumer expectations. Therefore, a company must be certain not topromise more in communication that it can deliver in reality. Promising morethan what can be delivered will raise initial expectations but lower perceptionof quality when the promises are not fulfilled.

In order to bridge the gap between customers’ perceptions and expectations,the provider gaps 1 to 4 are required to be filled. The key contributing factorsleading to Provider Gaps and strategies to reduce the gaps have beenhighlighted below.

GAP CAUSES OF GAP STRATEGIES TO REDUCE GAP

Gap 1 Lack of marketing research Communication with customersorientation Conduct marketing researchInadequate upward communication Encourage upward communicationToo many levels of management

Gap 2 Inadequate management Top management commitmentcommitment to service quality Develop Service Quality goalsPerception of infeasibility Standardization of tasksAbsence of goal setting Address feasibility of customerAbsence of customer-driven expectationsstandardsResource constraints

Gap 3 Deficiencies in human resource Teamwork, Empowerment, Rolepolicies clarity, TrainingFailure to match supply and Synchronize demand & capacitydemand Communicating with customersCustomers not fulfilling roles

Gap 4 Overpromising Avoid propensity to overpromiseIneffective management of Increase horizontal communicationcustomer expectations Managing customer expectationsInadequate horizontalcommunication

The Gaps Model thus helps in finding out the reasons for the quality problemsand the ways to close the gaps.

Activity 2

Choose any service organization you are familiar with and using the gaps modelof service quality identify the gaps the organisation suffers from and thepossible reasons for these gaps.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

8.4 BENEFITS OF SERVICE QUALITY TO THEORGANIZATION

A good or excellent service quality would result in customer satisfaction orcustomer delight. But how does it have a positive impact on the bottom lines of

Service Quality

© ALI

© ALI

Strategic Issues

12

the companies. Broadly, this may be categorized into two parts. One is theimproved ability of the firm to attract new customers - either through positiveword of mouth or due to advertising of its superior quality offering. Secondly,its ability to retain existing customers, who feel satisfied with the serviceoffering and become repeat customers. This would ultimately help in greaterrevenues and profits. In fact, the positive relationship between perceived qualityand profitability has been documented empirically. Buzzell and Gale in ‘ThePIMS (Profit Impact of Marketing Strategies) Principles’ (Free Press, NY,1987), have mentioned that in the long run, the most important single factoraffecting a business unit’s performance is the quality of its products andservices relative to those of competitors.’ A quality edge boosts performance intwo ways; in the short run, superior quality yields increased profits via premiumprices and in the longer run, it is the more effective way for business to grow.Quality leads to both market expansion and gains in market share.

PZB in their research have found out relationship between customers’perception of the quality of service rendered by a company and theirwillingness to recommend the company to their friends. There was a dramaticdifference between the quality perception of customers who would and thosewho would not recommend their service companies to their friends. Thecustomers who showed their intention to recommend had a significantly highscore of perceived service quality than those who mentioned that they wouldn’trecommend (scores of - 0.5 and - 2.3 respectively).

A summary of results of some of the researches which prove a positiverelationship between service quality and profitability is given below. (Extractedfrom Zeithaml, Berry and Parasuraman, “The Behavioural Consequences ofService Quality”, Journal of Marketing, Vol. 60, April 1996, pp 31-46)

Companies offering superior service achieve higher than normal marketshare

Mechanism by which quality influences profits include increased marketshare and premium prices.

Business in the top quintile of relative service quality on average realize an8% higher price than their competition.

The Hospital Corporation of America found a strong link between perceivedquality of patient care and profitability across its many hospitals.

Improved service quality increases favourable behaviour intention anddecreases unfavourable intention of customers. Behavioural intention can beviewed as indication that signal whether customer will remain with or defectfrom the Company.

Ford Motor Company has demonstrated that dealers with high servicequality scores have higher than normal profit, return on investment and profitper new vehicle sold.

Positive and significant relation exists between customers perception ofservice quality and their willingness to recommend the company.

Positive co-relation exists between service quality and repurchase intentionand willingness to recommend.

Rust, Zahorik and Keiningham have developed a model showing relationshipbetween service quality improvement and profitability as shown in Figure 8.4.The model shows relationship between the two as a chain of effects. Asuccessful improvement effort results in an improvement in service qualitywhich in turn results in increased perceived quality and customer satisfactionand probably reduced costs. Increased customer satisfaction in turn leads to

© ALI

© ALI

13

higher level of customer retention and also positive word of mouth. Newcustomers attracted by positive word of mouth coupled with retention ofexisting customers result in higher revenues and market share. The increasedrevenues combined with the decreased costs, lead to greater profitability. Theeffect of word of mouth, which is difficult to measure in practical businesssituation, is thus shown in dotted lines.

The biggest responsibility for a good service quality system rests with themanagement of the organization. It should establish a policy for service qualityand customer satisfaction. Successful implementation of this policy dependsupon management commitment to the development and effective operation of aquality system. It should also provide sufficient and appropriate resources toimplement the quality system and achieve the quality objectives. The resourcesinclude personnel as well as material resources. Human resources play anextremely critical role in service firms and therefore proper attention has to begiven to employee motivation, training and development. Regular communicationwithin the service organization should be a feature at all levels of management.The service organization should develop, establish, document, implement aquality system as a means by which stated policies and objectives for servicequality may be accomplished. The quality system elements should be structuredto establish adequate control and assurance over all operational processesaffecting service quality. The quality system should emphasize preventive actionthat avoid the occurrence of problems while not sacrificing the ability torespond to and correct failures, should they occur. Services companies can alsobenefit by benchmarking which is defined as the ‘continuous process ofmeasuring products, services and practices against the toughest competitors orthose companies recognized as industry leaders’. This concept was originallydeveloped in the manufacturing sector, but is now being used successfully inservice sector as well.

Improvement Effort

Service Quality Improvement

Perceived Service Quality and Customer Satisfaction

Customer Retention

Revenues and Market Share

Profitability

Word - of - Mouth

Attraction of New Customers

Cost Reduction

Improvement Effort

Service Quality Improvement

Perceived Service Quality andCustomer Satisfaction

Customer Retention

Revenues and Market Share

Profitability

Word-of-Mouth

Attraction of NewCustomer

Cost Reduction

�� 8.4: � �� 8.4: � �� 8.4: � �� 8.4: � �� 8.4: � ��

Source: Return on Quality : Making Service Quality Financially Accountable, Rust, Zahorikand Keiningham, Journal of Marketing, April, 1995, p-60

Service Quality

© ALI

© ALI

Strategic Issues

14

CEOs’ Views on Benefits of Service Quality

OBEROI HOTEL CHAIN It you want to be ahead of your competitors,your quality has to be monitored all the time. Intoday’s competitive scenario, maintenance ofquality is not enough, you have to improve it. Ifyou have quality not only will your customer notleave you, you can charge a higher pricebecause customers are willing to pay.

VYSYA BANK The main objectives of the TQM drive is toachieve maximum possible customer satisfactionand employee satisfaction because only a happystaff member will go out of his way to offersatisfying services to the customer andimproving the bottom line.

HDFC The nature and quality of our service willdetermine our reputation in the market.

Source: Business Today, 3rd Anniversary Issue, Jan 7-21, 1995 p. 238, 259 & 268

8.5 MEASURING SERVICE QUALITY

The most widely-used measure for service quality has been the ‘SERVQUAL’measure of Parasuraman, Zeithaml and Berry, according to which customerassessment of service quality results from a comparison of service expectationsand actual performance. The SERVQUAL scale was first published in 1988and has undergone numerous improvements and revisions since then. This scalewas developed and validated using service providers in four service sectors :retail banking, credit cards, securities brokerage and product repair andmaintenance. The developers of the scale acknowledge that the five servicequality dimensions are general dimensions that relate to most of the services. Itmeasures the service quality on the five service quality dimensions discussedearlier in this unit viz. Reliability, Responsiveness, Assurance, Empathy andTangibles. Reliability largely concerns whether the outcome of service deliverywas as promised. The other four dimensions relate to the process of servicedelivery or how the service was delivered. Servqual scores are expressed asthe difference between expectations and perceptions i.e. it measures the gapbetween the service that consumer think should be provided and what theythink actually has been provided. Respondents complete a series of scale,which measure their expectations on five service quality dimensions andsubsequently, they are asked to record their perceptions of that company’sperformance on those same dimension. When perceived performance ratingsare lower than expectations this is sign of poor quality; the reverse indicatesgood quality.

Example:

A) Expectation Statements (E)Strongly StronglyDisagree Agree

The physical facilities at banks 1 2 3 4 5 6 7should be visually appealing

Banks should give customers 1 2 3 4 5 6 7individual attention

© ALI

© ALI

15

B) Corresponding Perception Statements (P)Strongly StronglyDisagree Agree

The physical facilities at XYZ 1 2 3 4 5 6 7Bank are visually appealing

XYZ bank gives customers 1 2 3 4 5 6 7individual attention

Service quality scores would be expressed as P-E

The original SERVQUAL instrument consisted of 22 statements covering thefive service quality dimensions (4 questions on tangibles, 5 on reliability, 4 onresponsiveness, 4 on assurance and 5 on empathy) – i.e. a set of 22statements covering expectations and a set of 22 corresponding statementscovering perceptions. Expectations and perceptions statements includes aspectslike (i) equipments, physical facilities, appearance of employees, materialsassociated with the service like pamphlets or statements (tangibles) ii) timelyprovision of service, performing the service right the first time, meeting thepromises, sincere interest in solving the problems (reliability), (iii) promptservice, willingness to help, employees never too busy to respond to customerrequests (responsiveness), (iv) behaviour of employees instilling confidence,feeling of safety in transactions, employees having knowledge to answer thequestions (assurance) and (v) individual attention to customers, employeesunderstanding specific needs of customers (empathy). In addition toexpectations and perceptions section the SERVQUAL contained a “pointallocating question” which was used to ascertain the relative importance of thefive dimensions by asking respondents to allocate a total of 100 points amongthe dimensions. The servqual instrument has been used extensively, with orwithout some modifications. Stevens, Knutson and Patton, based in the servqualinstrument developed an interview schedule – ‘Dineserv.per” for continualassessment of customers’ perceptions regarding service quality of restaurantsand suggested that it could be administered every two to three months to 50 to100 recent customers, selected at random. Exhibit 8.1 gives the details of theDineserv.per interview.

The SERVQUAL scale can be used

i) To determine a company’s service quality along each of the five servicequality dimensions.

ii) To find out relative importance of service quality dimensions asconsidered by the customer.

iii) To compute overall weighted SERVQUAL score, which takes intoaccount the relative importance of each dimension as well.

iv) To track customers’ expectations and perceptions over time

v) To compare a company’s SERVQUAL score against those ofcompetitors.

As mentioned earlier the SERVQUAL instrument has been used withmodifications in a number of studies. Though it is a widely used instrument,some researchers have also identified problems in using the instrument as wellas the gap theory methodology. Cronin & Taylor suggest that instead ofmeasuring expectations and perceptions, measurement of performance alonewould be enough for measuring service quality. They have suggested that theperformance based scale developed (SERVPERF) is efficient in comparisonwith the SERVQUAL scale as it reduces by 50% the number of items thatmust be measured.

Service Quality

© ALI

© ALI

Strategic Issues

16

Exhibit 8.1

The “DINESERV.PER” Interview

Introduce yourself, say that you’re trying to measure the quality of the service at yourrestaurant, since you’re always trying to improve, and that this will take only about tenminutes. Ask if you may have their time and cooperation. If they agree, ask them toindicate their position on each of the 29 statements by assigning a number from seven(strongly agree) to one (strongly disagree). If their feeling is between those extremes, theyshould assign an intermediate number.

The restaurant…..1) has visually attractive parking areas and building exteriors.2) has a visually attractive dining area.3) has staff members who are clean, neat, and appropriately dressed.4) has a décor in keeping with its image and price range.5) has a menu that is easily readable.6) has a visually attractive menu that reflects the restaurant’s image.7) has a dinning area that is comfortable and easy to move around in.8) has rest rooms that are thoroughly clean.9) has dining areas that are thoroughly clean.

10) has comfortable seats in the dining room.11) serves you in time in the dining room.12) quickly corrects anything that is wrong.13) is dependable and consistent.14) provides an accurate guest check.15) serves your food exactly as you ordered it.16) during busy times has employees shift to help each other maintain speed and

quality of service.17) provides prompt and quick service.18) gives extra effort to handle your special requests.19) has employees who can answer your questions completely.20) makes you feel comfortable and confident in your dealings with them.21) has personnel who are both able and willing to give you information about menu

items, their ingredients, and methods of preparation.22) makes you feel personally safe.23) has personnel who seem well-trained, competent, and experienced.24) seems to give employees support so that they can do their jobs well.25) has employees who are sensitive to your individual needs and wants, rather than

always relying on policies and procedures.26) makes you feel special.27) anticipates your individual needs and wants.28) has employees who are sympathetic and reassuring if something is wrong.29) seems to have the customer’s best interest at heart.

The first ten items are about tangibles; items 11-15, about reliability, items 16-18, aboutresponsiveness; items 19-24, about assurance; and items 25-29, about empathy

Source: Steven, Knutson and Patton, “Dineserv: A tool for measuring Service Quality inRestaurants, Cornell Hotel and Administration Quarterly”, April 1995, p.59

While conducting surveys to assess the service quality it will always bebeneficial to ask some additional questions on customer satisfaction andloyalty with regards to the service provider. The loyalty issue can beaddressed by asking questions on the customer’s repurchase intention andalso his likelihood or willingness to recommend the company and brand toother people (a positive word-of-mouth). We will discuss more about issuesrelated to customer loyalty in the last unit of this block.

Apart from conducting customer surveys like the one using SERVQUAL asdescribed above, some of the other methods which service organizations use toobtain information about their service quality are briefly explained below:

a) Transaction Surveys: This type of research involves tracking theinformation about one or all of the key service encounters with thecustomer. These surveys are also called ‘trailer calls’ or ‘post transactionsurveys’. This is usually done with the help of a small questionnaire

© ALI

© ALI

17

immediately after a service transaction has taken place e.g. survey ofairlines passengers while disembarking or that of a hotel guest whilechecking out. These surveys also provide the management a tool formonitoring the performance of individual service contact personnel.

b) Complaint Solicitation and Analysis: Customers tend to voice theirdissatisfaction through complaints. An analysis of the complaints can help inidentifying quality failure points. We will discuss the issue of complaintmanagement in detail in the last unit of this block.

c) Mystery Shopping: In this method outside research companies are used bythe service organization who send people posing as customers in order tojudge the service quality. The mystery shopper is unknown to the serviceprovider. This is a popular method in the retail sector. Mystery shopping, alsotermed as Ghost Shopping, can be a very effective way of reinforcingservice quality standards.

d) Asking Customers: This involves asking customers directly what theywould like to be done to increase the quality of service and theirsatisfaction. This can be very effective in business – to – business situation.This primarily concerns with the expectation aspect. A slight variation of this,which includes perceptions about the service quality as well is to formcustomer panels i.e. ongoing groups of customers who are assembled toprovide perceptions about a service over a period of time.

e) Intermediary Research: This form of research is useful in services whereintermediaries form an important part of the service delivery process andhave a major direct contact with customers. In such situation intermediariescan provide valuable feedback to the service firm regarding quality ofservice as perceived by the customers.

8.6 COMMUNICATING WITH CUSTOMERS ABOUTSERVICE QUALITY

Communication with customers involves listening to them and keeping theminformed. The ISO standard brings about the various elements of an effectivecommunication with customers. This involves :

Describing the service, its scope, its availability and timeliness of delivery.

Stating how much the service will cost.

Explaining the inter-relationship between service delivery and cost.

Explaining to customers the effect of any problems, and how they will beresolved, should they arise.

Ensuring that customers are aware of the contributions they can make toservice quality.

Providing adequate and readily accessible facilities for effectivecommunication.

Determining the relationship between the service offered and the real needsof the customer.

The need for proper communication is highlighted by the fact that thecustomers’ perceptions of service quality are acquired often throughcommunication with the service organization’s personnel and facilities. Alsoadvertisements of the service should reflect the service specification and takeaccount of the customer perception of the quality of service provided. Themarketing function should recognize the liability, risks and financial implication ofoffering exaggerated or unsubstantiated claims for a service. It is here thatimportance of linkages between operations and marketing come into picture.

Service Quality

© ALI

© ALI

Strategic Issues

18

Valarie Zeithaml suggests that communicating service quality begins with anunderstanding of the importance to customers of the various aspects of servicequality. Isolating quality dimensions that are most important to customerprovides a focus for advertising efforts. Some of the propositions developed byhim regarding advertising for services include :

Focusing on the most important dimension of service quality will result inmore effective communication than focusing on other dimensions.

When marketing and operations interact to create external communications,customer expectations are more realistic than when these functioning do notinteract.

The more vivid the advertisement, the stronger the effect in influencingcustomer expectations about quality.

Advertising that features actual employees doing their jobs is more effectivein communicating excellence than advertising that uses professional talent.

The more positive employees feel about the advertising that the companyruns, the more willing they will be to provide service.

Activity 3

Collect a few print advertisements of different service companies and identifythe service quality dimensions(s) being emphasized in them.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

A case study, titled “Turnaround through Service Quality — British Airways”has been presented below to demonstrate as to how service quality can be areal winner in transforming an ailing organization into industry leader and theway British Airways succeeded in achieving it.

8.7 CASE STUDY: TURNAROUND THROUGHSERVICE QUALITY — BRITISH AIRWAYS

Introduction

This illustrative case study has been developed to highlight the importance ofservice quality in achieving success for an airline and to determine the waysand means by which this could be achieved by British Airways (BA). Thetransformation of BA from a state owned airlines making huge losses in early80’s and known for its indifference to passengers to the highest profit makingairline in the world in 90’s and famous for its excellent quality of service, wastruly remarkable and spectacular. During this period (80’s & 90’s) the airlineswas privatized, the load factor consistently improved and the shareholders’worth increased multifold. In a number of passenger surveys, BA was rated asthe world’s best airline. So, what were the reasons for this extraordinaryturnaround of an ailing airline into an industry leader and how this wasachieved?

After deregulation of airline industry in the west, a number of carriers becametoo focused on prices and lowering them that they simply overlooked the factthat the industry was basically built on service. Some airlines made the mistakeof thinking themselves as simply transportation companies which took peoplefrom one airport to another. However, to succeed airlines have to thinkthemselves as service companies that happen to fly airplanes. Since most of

© ALI

© ALI

19

the airlines operate same planes, charge quite similar prices, to distinguish it hasto be done through quality of service. Good service, delivered on a continuousand consistent basis is definitely a competitive advantage for any business andsurely so for airlines.

The Road to success

Much of the success of BA is attributed to the policies and strategies initiatedby Sir Colin Marshall, Chief Executive, who was appointed in 1983. Theturnaround strategy revolved around a focus on its customers and anobsession with improving service quality. The airline recognized that insteadof being in the business of flying airplanes, it was in fact in the business ofsatisfying passenger requirements.

To be a truly customer oriented company required a lot of changes andinitiatives to be taken ranging from restructuring to empowerment of employees.Airline industry is a service industry in which the quality of the offering is notjust dependent on the outcome (safe and timely arrival) but also on the way inwhich the service is delivered i.e. the functional quality. BA’s researchesconfirmed this, finding that a customer’s view of the airline depended not solelyon product, bur their reaction to the ambience, environment and culture theyexperienced with the airlines. Since this involves a lot of interaction betweenemployees and customers - ‘the moments of truth’ - the quality of theseinteractions have a great impact on overall perception of quality judged by thecustomers. BA recognized the important role which the employees play inoverall success of the airline and major initiatives were taken for training,motivating the employees, to expose them to think about customer service andthe critical role they play in achieving the goal of being a service orientedorganization.

Programmes undertaken

The first major initiative taken in early 80’s was the “PUTTING PEOPLEFIRST” programme which was gigantic in scope. The aim of this programmewas to involve each of the 30,000 employees (The number was reduced from59,000 in 1979 to reduce the costs) of BA and it actually did so. Their wasabsolute commitment from the top management to make the effort a successand this can be gauged by the fact that Sir Colin Marshall himself attendedninety seven per cent of the courses. This course was aimed to help theemployees in improving their skills as service providers. It was emphasized thatit takes the dedication of each employee to succeed in delivering quality. Toachieve consistent quality, every individual in the organization must believe thatsuccess depends on how well he or she serves the customer. This programmewas just the starting point and was followed by number of the quality initiatives.“CUSTOMER FIRST TEAMS” were established whereby employees in smallgroups were encouraged to give their ideas for improving customer service.More than a hundred teams were set up and out of thousands of ideasgenerated, over 700 were followed through and implemented.

BA, realizing the importance of internal marketing and the internal customers,organized a programme called “A DAY IN THE LIFE” in which employeesfrom different departments appraised each other of their activities andfunctions. This gave a good opportunity to the employees to understand theworking of each department and knowing each other better. Since servicesmanagement requires a great deal of co-ordination between marketing andoperations, this effort helped in achieving a finer fit between the two. Further atraining course “MANAGING PEOPLE FIRST “ was introduced for allmanagers. They were shown how to train and support their sub-ordinates andbe good leaders. In April 1992, BA launched another customer initiative entitled“WINNING FOR CUSTOMERS”. Through all these programmes, it was

Service Quality

© ALI

© ALI

Strategic Issues

20

successful in dismantling the bureaucratic style of working and moving towardsbeing a customer friendly airline.

Simultaneously, BA put emphasis on building the infrastructure and tangibleelements of service as well. This, together with initiatives on employeeimprovement, provided the customers a world class service. The marketing mixand market segmentation were carefully developed and number of new brandswere created, which are quite famous now. Adequate importance was placedon customer retention through programmes like ‘Air Miles and Latitude’(Frequent Flyer Programme).

Providing world class service went simultaneously with cost savings throughincreased efficiency. This was one area which helped to raise its totalproductivity by fifteen per cent in three years during the beginning of 90s. Theairline remained profitable when others were making losses (including the yearof the first Gulf War) and the industry was in recession in early 90s.

Benchmarking with the best service in the industry and customer feedbackwere also vigorously taken. In order to provide the customer a choice ofschedules and networks, foundation was laid for a world network through aweb of stakes, marketing alliances and code share deals. Growth, expansionand use of technological developments were undertaken. All these wereproperly communicated to the customer. Saatchi and Saatchi developed a seriesof outstanding global TV commercials aimed at relationship marketing whichhelped in building BA’s image as world’s favourite airline. The significant aspectof all its communication was the credibility. BA delivered what it promised tothe customers.

Conclusion

BA’s efforts in employee training, focus on internal marketing, businessefficiency programme, customer feedback initiatives etc. all helped the airline innot only increasing profits but also improvement in all major areas - more ontime arrivals and departures, fewer complaints, better inflight and groundservices, better reservation and information services - i.e. an overallimprovement in service quality. In fact, improvement in service quality was thefocus of all the initiatives.

The customer service orientation of the airline is rightly highlighted in thefollowing statement of a cabin services manager of BA. “We like passengersto feel, when they finish their journey on one of our aircrafts, that we havegone that extra mile for them, that we have delivered that extra drink, thatextra smile, that extra piece of information.”

8.8 SUMMARY

The unit described the concept of service quality to you. The term servicequality can be described as the delivery of excellent or superior service relativeto customer expectations. Because of some basic differences between goodsand services with regards how they are produced, consumed and evaluated,service quality requires a different approach as compared to goods quality. Youhave also learnt the underlying themes of service quality that it is more difficultfor the consumers to evaluate than goods quality, that service qualityevaluations are made on the basis of outcome as well as process of servicedelivery and that service quality perceptions result from a comparison ofconsumer expectations with actual service performance. Two specific models ofservice quality, Gronroos Model and Gaps Model developed by Parasuraman,

© ALI

© ALI

21

Zeithaml and Berry have been discussed. Gronroos models suggests that thequality of a service as it is perceived by the customer has two dimensions,namely a technical or outcome dimension and a functional or process relateddimension. The gaps model identifies the four provider gaps which areresponsible for the gap between customer’s perceptions and expectations(customer gap). The five dimensions of service quality - Reliability,Responsiveness, Assurance, Empathy and Tangibles were also explained to you.

This unit also explained to you the linkage between service quality andprofitability. Servqual – a scale to measure service quality has been discussedalong with its possible applications. The final section of the unit give anillustrative case study of British Airways to demonstrate the importance ofservice quality in achieving success for an organization and highlights the waysand means by which it was achieved.


A) Objectives Type Questions

i) Multiple Choice Questions

1) According to Gronroos, Service quality can be broken into

a) Internal and External Quality

b) Technical and Functional Quality

c) Goods and service quality

d) None of the above

2) The knowledge and courtesy of employees and their ability to conveytrust describes which of the service quality dimensions?

a) Assurance

b) Empathy

c) Reliability

d) Responsiveness

3) The gap between expected service and company perception ofconsumer expectations can be because of

a) poor service design

b) failure to match demand and supply

c) inadequate marketing research orientation

d) overpromising

4) Which of the four service provider gaps can be closed in themarketing function alone?

a) Gap 1

b) Gap 2

c) Gap 3

d) Gap 4

ii) True or False

5) Technical quality refers to the outcome whereas functional qualityrefers to the process.

6) Customer’s expectations are influenced by word-of-mouth, personalneeds, past experience and external communication

Service Quality

© ALI

© ALI

Strategic Issues

22

iii) Directions for questions 7-10. Given below are examples of specificquestions raised by customers regarding different dimensions of servicequality. Identify the service quality dimensions.

7) Do the tools used by the service engineer look modern?

8) Is my bank statement free of errors?

9) Does some one in the bank recognize me as a regular customer?

10) When there is a problem with my bank statement, does the bankresolve them quickly?

Answers

1) b 2) a 3) c 4) a

5) True 6) True 7) Tangibles 8) Reliability

9) Empathy 10) Responsiveness

B) Discussion Questions

1) What do you understand by the term Service Quality? What are theunderlying themes of service quality?

2) Define the five dimensions of service quality. Give suitable examples ofeach dimension.

3) Briefly describe the gaps model and explain the significance of the fivegaps that the model identifies.

4) In the gaps model of service quality which of the four service providergaps do you believe in the most difficult to close and why?

5) Is good service quality a cost or a revenue producer? Discuss with thehelp of examples.

6) Using SERVQUAL scale, create a questionnaire for a service firm thatyou patronize or are familiar with.


1. Cronin and Taylor ,” Measuring Service Quality: A Reexamination andExtension”, Journal of Marketing, July 1992.

2. Gronroos, “Strategic Management and Marketing in the ServiceSector”, Swedish School of Economics and Business Administration,Finland, 1982.

3. Kurtz & Clow, Service Marketing, John Wily & Sons, 2002.

4. Parasuraman, Zeithaml and Berry, “A Conceptual model of ServiceQuality and its Implications for Future Research” Journal ofMarketing, Vol. 49, 1995, pp 41-50

5. R.D. Buzzell and B.T. Gale, “The PIMS Principles”, Free Press NY,1987.

6. Rust, Zahorik and Keningham, “Return on Quality - Making ServiceQuality Financially Accountable”, Journal of Marketing, April, 1995,pp.58-70

7. Zeithaml, Berry and Parasuraman, “The Behavioural Consequences ofService Quality,” Journal of Marketing, Vol.60, April 1996, pp.31-46.

8. Zeithaml and Bitner, “Service Marketing”, Tata McGraw Hill, 2nd Edn.2000, New Delhi.

© ALI

© ALI

23

9. Zeithaml, Parasuraman and Berry, “Delivering Quality Service -Balancing Customer Perceptions and Expectations,” Free Press, NY,1990.

10. Zeithaml V, “Communicating with Customer about Service Quality inService Management Effectiveness”, Ed. Bowen, Chase and Cummings,Jossey Bass, San Francisco, 1990, pp. 369-383.

Service Quality

© ALI

© ALI

Strategic Issues

24

UNIT 9 MANAGING DEMAND ANDCAPACITY

Objectives

After studying this unit, you should be able to

Explain the importance of managing demand and capacity for serviceorganizations.

Identify the demand patterns and their underlying reasons.

Develop strategies for matching demand and capacity.

Understand the concept of yield management.

Provide strategies for managing customer waiting.

Structure

9.1 Introduction

9.2 Understanding Demand Patterns

9.3 Strategies for Matching Capacity and Demand

9.4 Yield Management

9.5 Managing Customer Waiting

9.6 Managing Demand and Waiting Lines : Case of an Amusement Park

9.7 Summary



9.1 INTRODUCTION

In the first unit of this course you have studied the characteristics of serviceswhich distinguish them from goods. One of the characteristics is perishablitywhich means that services cannot be saved or stored. While marketers ofphysical goods hold inventories to buffer fluctuations in demand and supply, it isdifficult or impossible for services marketers to do so. Therefore, many servicebusinesses frequently find it difficult to match supply (capacity) and demand. Attimes there may be too much of demand (movie halls or restaurants onweekend evenings) and sometimes too little demand may exist (low weekendoccupancies in business hotels). However, a theater owner or a restaurantcannot take an empty seat from Thursday night and add it to the capacity onFriday or Saturday night. A low occupation for a business hotel on weekends isan irretrievable loss. Similarly a hospital bed or an airline seat left vacant is aloss for ever. Inability to synchronize supply and demand has a significantimpact on the service organization’s bottom line through lost opportunity (whendemand is greater than capacity) and through high costs (when demand is lowin relation to fixed capacity resulting in under utilization of capacity)

Zeithaml, Parasuraman and Berry conducted an exhaustive survey in U.S.A (in1980’s) covering 1,000 service firms to find out the extent to which problemsreported to be associated with services actually presented problems for thesample firms. Out of the eight commonly cited difficulties unique to services,only one problem area – ‘The demand for services fluctuates’ - received amean score exceeding the mid-point on the 5 point scale (1 indicating noproblem at all to 5 indicating a major problem). This problem received a scoreof 3.27 and another important finding was the absence of any significantdifference across different types of services firms with regard to this problem.

© ALI

© ALI

25

Perception of demand fluctuation as a somewhat serious problem appeared tobe universal. A similar study conducted in India in 1996-97 with reference topassenger airline industry covering more than a dozen airlines operating in Indiarevealed similar results. The problem area that the demand fluctuates, receiveda mean score of 3.66 with 60 percent of the airlines indicating a score of 4 to5. The next highest score was 2.94 with regard to problem area that servicequality is difficult to control.

In this unit we will discuss various issued related to managing demand/capacity(supply) imbalances.

Activity 1

Compare a service organization with a manufacturing firm in terms of inventorycapacity (e.g. car repair and maintenance service with an automobilemanufacturer). Can you identify the implications for the service organization?

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

9.2 UNDERSTANDING DEMAND PATTERNS

A service organization with a fixed capacity may be faced with one of thefollowing four conditions:

1. Excess demand: The demand exceeds the maximum available capacity.This results in some customers being turned away. Also, even for thecustomers receiving the service, the quality of service may get affected(refer service delivery gap in the gaps model discussed in the previous unit).This may happen because of overcrowding and/or overstretching ofresources.

2. Demand exceeds the optimum capacity level: Optimum capacity refersto the best use of capacity from the perspective of both, customers and thecompany. In most of the cases it is less than the maximum capacity. Forexample, in the counseling session at your study centre, while the maximumcapacity of the rooms may be 60-70, the optimum capacity for conductingthe session may be 30-40 only for ensuring proper interaction. In thesituation when demand exceeds optimum capacity, while no one is turnedaway, customers may perceive deterioration in the quality of servicedelivered.

3. Demand and supply are balanced at the optimum capacity: This is theideal situation. No one is turned away, no one is overworked in the staff andcustomers receives quality service.

4. Excess capacity : Demand is less than optimum capacity and thereforeresources are underutilized. In certain cases this may also pose the risk thatcustomers may have doubts about the service provider.

All the above four possibilities have been given in Fig. 9.1. The capacity of theservice organization includes physical facilities, equipments and human resources.

The first step in finding out ways to manage demand and capacity is tounderstand the demand patterns and the factors which affect it. Betterknowledge of demand patterns leads to better managerial decision making. Thedemand patterns may have a regular and predictable cycle or in some cases itmay be largely random in nature and difficult to predict.

Managing Demand andCapacity

© ALI

© ALI

Strategic Issues

26

a) Predictable Demand Variations: Many businesses are subject to periodiccycles. These cycles may be daily (variations by hour), weekly (variation byday), monthly, seasonal and/or yearly. Try to identify services which mayexhibit these types of predictable demand variations. For example, in case ofa hotel there may be variation in demand on different days with businesstravelers going back on weekends, thereby reducing the demand. A hotelmay also witness seasonal variation with high demand during a particularseason due to large inflow of tourists. A restaurant faces hourly variationswith low demand during 3.00 – 7.00 pm. (happy hours being offered bymany restaurants during these times, with large price discounts). Amusementparks have greater demand during weekends as compared to weekdays andalso greater demand is witnessed during school vacations.

As marketers you must find out if such predictable cycles exist in yourbusiness. If it is so, then you must find out and analyze the causes of thesecyclical demand variations. Do these happen because of seasonal change,employment schedule, salary dates, school vacations, public or regionalholidays etc? A proper analysis of these causes will help you in devisingsuitable strategy for managing the demand fluctuations.

b) Random Demand Fluctuations: At times the demand pattern may appearto be random with no apparently predictable cycle. Some degree of randomvariation in demand is faced by virtually all service firms. Although suchvariations cannot be predicted, marketers should nevertheless understand theunderlying causes that typically cause them. For example bad weather mayresult in an unexpectedly low customer turnout at a movie hall or anamusement park. A disaster like accident, floods etc. may result in higherdemand for health services and telecommunication services. A properunderstanding of the underlying causes will prepare you to deal with suchrandom demand fluctuations.

In order to understand the demand patterns and underlying causes, it may beuseful to do a segmentation analysis. Different segments of customers mayreveal different patterns as well as causes. Such an analysis will help you inpinpointing underlying causes of demand fluctuations and in identifying certain

Demand Exceeds Capacity(business lost)

Demand Exceeds OptimumCapacity (Service quality

declines)

Ideal Use

Excess Capacity (wastedresources, may send bad

signals)

Maximum Availablecapacity

Optimum capacity

TIME

(Source: Christopher Lovelock, Managing Services- Marketing Operations and HumanResources, 2nd Edn. Prentice Hall, p.155)

�� 9.1: �� 9.1: �� 9.1: �� 9.1: �� 9.1: ��

© ALI

© ALI

27

peaks of specific customer categories. This may help you in identifying certainsegments which could be easily diverted to off-peak periods. You may alsodiscourage segments that are not profitable or are inconsistent with the serviceimage, at least during peak periods.

Once you properly understand the above issues you can suitably devicestrategies for matching demand and capacity.

Activity 2

Select a restaurant in your neighborhood and find out its demand patterns andalso identify the underlying reasons.

............................................................................................................................

............................................................................................................................

............................................................................................................................

............................................................................................................................

9.3 STRATEGIES FOR MATCHING CAPACITY ANDDEMAND

Managers can use a wide variety of strategies for matching capacity anddemand. This requires a clear understanding of demand patterns as well as theorganization’s capacity constraints. The strategies to be adopted can be broadlydivided into two categories :

1) Changing demand to fit supply (capacity) – marketing mix strategies2) Changing supply (capacity) to fit demand – input scheduling strategies

Let us discuss the above two strategies in detail.

1) Strategies for Managing Demand

The organization should determine the optimum level of demand for its givencapacity. Once this has been determined, it can vary its marketing mix elementsof product, price, place and promotion to change demand in line with thecapacity.

a) Product: As a service provider you can alter the service offering toeven the demand. The changes in service offering may be seasonal orbased on days of the week or time of the day depending on the natureof demand fluctuations. A hotel for example may focus on weekendfamily entertainment and recreation package to cope up with low demandfrom business executives during weekends. A management institute mayoffer more management development programmes during the vacationperiod of its regular management programme students. However, asmarketers you must ensure that by offering different types of services theimage or positioning of the service firm is not diluted or confused.Increasing demand during slack period doesn’t mean that you should takebusiness from any segment that is available.

b) Pricing: The demand curve suggests that quantity of product demandedvaries with the price. Many service marketers reduce price during theperiods of low demand to increase the demand. Airlines offer low faresduring odd hours like late night flights, movie theaters offer a lower priceticket for the morning show, hotels offer large discounts during offseasons and also higher than normal prices during say Christmas or Newyear, restaurants and many retail outlets offer happy hours whereindiscounts are offered. Using price as an effective tool for managing


© ALI

© ALI

Strategic Issues

28

demand would require a proper understanding of the demand curve – itsshape, slope etc.

Also, you should appreciate the existence of different demand curvesfor different segments during the same time period. As marketers youmay also face an additional challenge when multiple segments are servedat the same time and these segments have paid different prices. Thisrequires putting in certain usage conditions (for example for availing lowpriced fares in airlines customers have to book in advance and there arehigher cancellation charges) and/or providing value enhancement to higherpaying customers.

c) Place (Distribution): Many service firms modify their time and place ofdelivery as a strategy to match demand and capacity. Bank may changeits timings on specific days or during specific period, finance companiesuse mobile vans for distribution and collection of forms, hospitals likeApollo have created satellite clinics to deal with routine consultations,tests and medical services.

d) Promotion: You can also shift the demand by properly communicatingwith your customers. The customers should be made aware of the peaktimings of the demand and also the benefits they can get in availing theservice during non-peak timings. They should also be properly informedabout changes in product, pricing and distribution. This can be done byputting signages at the service outlets (like banks) or advertising. Servicefirms can also use sales promotion to manage demand. Many airlinesoffer free ticket for companion in the business class, some businesshotels offer free stay for spouse during the weekend stay. Properpromotional strategy can help the service organization in shifting demandfrom high to low period as well as stimulating demand during low periods.

Activity 3

Select any service organization and analyze how it uses it marketing mixelements to influence demand.

............................................................................................................................

............................................................................................................................

............................................................................................................................

............................................................................................................................

2) Strategies for Managing Capacity

Managing capacity involves changes in different components of the resourcesof a firm like people, facilities, equipments, time etc. By making changes inthese components you can achieve a better match between demand andcapacity.

a) Using Part-time Employees: During periods of peak demand, servicefirm may hire additional part-time employees. This helps in increasingcapacity as well as reducing costs. However, issues like attitude of parttime employees, training concerns, higher turnover etc have to be properlyaddressed.

b) Employees Working Overtime: Some of the concerns raised aboveregarding part time employees can be eliminated by having employeeswork over time. However, working for longer hours may have adverseimpact on service quality and also involves higher costs as overtimecharges are generally at higher rates.

c) Cross Training Employees: Cross training of employees results in aflexible capacity, wherein employees can perform several different jobs.Southwest Airlines strongly believes in this philosophy. The same

© ALI

© ALI

29

employee may move from ticketing to gate counters. This helps inavoiding underutilization of resources and also increasing the efficiency ofthe employees.

d) Scheduling: During peak demand periods people, facilities, andequipments are used at full capacity. However, facilities and equipmentsalso require proper maintenance. This can be scheduled during periods oflow demand. Similarly, for human resources, off-peak periods can beused for training purposes as well as for granting vacations.

In addition to the above, service firms can also meaningfully manage itscapacity by increasing customer participation (customers can be used asproductive resources e.g. self-service in restaurants), outsourcing, modifying thecapacity (e.g. reconfiguring hotel rooms), renting facilities or equipments, andtaking a subcontract work.

The strategies discussed above for managing demand and capacity have beensummarized in Table 9.1

�� 9.1: �� 9.1: �� 9.1: �� 9.1: �� 9.1: ��

High Demand/Slack Supply Slack Demand/Over Supply

Managing Demand Educate customers to Modify service offerings(Changing demand to curtain usage during peak Offer discounts, salesfit capacity) periods (through signages promotion schemes

or advertising)Offer incentives for usage Modify hours of operationsduring non-peak periods Bring service to the customersCharge full price–nodiscounts or premiumpricingTake care of regularcustomers first

Managing Capacity Hire part-time employees Schedule training of employees(Changing capacity to Keep employees overtime Maintenance, repairs,match demand) Cross train employees renovations

Outsource, rent facilities/ Schedule employee vacationsequipments Take on subcontract work

9.4 YIELD MANAGEMENT

Yield management is a method for managing demand and capacity profitably byservice organizations. It extensively uses computer based technology to studypatterns in consumer behaviour in order to manage differential pricing. Yieldmanagement has gained widespread acceptance in airline and hotel industry. Ithelps a firm sell the right capacity to the right type of customer, at the righttime for the right price. Put in simple terms,

Yield = Actual revenue = Actual capacity used X Average actual price .

Potential revenue Total capacity X Maximum Price

It is a measure of the extent to which an organization’s resources are beingused to their full revenue generation potential. Yield can be increased by anorganization by a properly planned differential pricing strategy. Yieldmanagement techniques are useful and appropriate: i) when a firm is operatingwith a relatively fixed capacity, ii) when demand can be segmented, iii) wheninventory is perishable, iv) when the product is sold in advance, v) when demand


© ALI

© ALI

Strategic Issues

30

fluctuates substantially, and vi) where marginal sales cost is low, but capacitychange costs are high (Sherly Kimes, 1989). Yield management may require alot of mathematical programming, economic models and expert systems.

Take the example of an airline. It may not be in a position to sell all its seatsat full prices. This may result in a number of seats remaining vacant. Once anaircraft takes off with vacant seats, that capacity is lost for ever. Consideringthat incremental cost of taking additional passengers is low, airlines offerdiscounted / apex fares with certain conditions, in order to bring in morerevenues and increase the yield. Same is the case with hotels.

Yield in case of hotel would be = room – nights sold X actual average room rate

room – nights available X published room rate

Take a hypothetical example of a 100 room hotel with a rate of Rs. 2,000 pernight i.e. potential revenue is Rs. 2 lakh per night. However, it doesn’t get fulloccupancy at these rates and attract only 50% occupancy, resulting in a yieldof 50 percent. On the other hand if the room rates are reduced by 40% i.e.to Rs. 1,200 per night, it attracts 100% occupancy. In this case the yield

becomes 60% ⎟⎟⎠

⎞⎜⎜⎝

⎛××

10020001001200

However, a combination of the two can be a better alternative for the hotel.Selling 50% of the rooms at full tariff and remaining 50% at reduced tariff of

Rs. 1,200 would result in higher yield ⎟⎟⎠

⎞⎜⎜⎝

⎛200,000160,000

of 80 percent.

In order to make yield management successful, the marketers should identifythe main market segments being served / those can be served. The next stepwould be to do a proper sales forecast for each segment at particular pricelevels. Based on this forecast a proper mix of different customer segments atdifferent times can be suggested for maximizing the yield. These steps shouldbe done on a continuous basis so as to adjust to the changing market conditionsas well as making use of greater information available about segment wisedemand patterns.

Managerial Implications

Sherly Kimes in her widely quoted article “Yield management – A tool forcapacity constrained service firms (Journal of Operations Management, Oct.1989) has identified a number of management issues to be taken into accountwhile implementing a yield management system. While yield management maygive a firm competitive advantage, it could also result in the following :

Loss of competitive focus : As most yield management systems focus onmaximizing revenue or yield, it may result in neglecting important issues likeservice quality. That is to say, short term profit maximization may overshadow long term competitive advantages.

Customer Alienation : A customer who pays a higher price for a servicethan other customers may feel alienated and dissatisfied. He may consider itto be unfair to him. Therefore proper customer education should be anintegral part of any yield management system to be effective.

Employee Morale Problem: Yield Management seems to take awaydiscretion from sales and reservation people. Therefore, it should be properlystructured to allow for some judgment on the part of the employees.

Lack of Employee Training : A yield management system will requireextensive training of all employees. They should understand its objectives aswell as its operation and how its affects their jobs.

© ALI

© ALI

31

Also in order to make the yield management successful a strong informationsystem within the organization as well as commitment from the topmanagement is essential.

9.5 MANAGING CUSTOMER WAITING

In the previous sections you have learnt about demand patterns and strategiesto match demand and capacity. However sometimes it is not possible to matchdemand and capacity and waiting by customers become inevitable. Waiting is acommon phenomenon at hospitals, restaurants, banks, hair cutting saloons etc.In such situations waiting time becomes one of the key factors in consumer’sevaluation of service. While reducing waiting time is important for marketers, itis equally if not more, important to reduce the customer’s perceived waitingtime. If a customers perceived waiting time is less, he will be more satisfiedwith the service. Thus service waits can be controlled by two broad techniquesviz. Operations Management and Perception Management.

1) Operations Management : It involves reducing the amount of timecustomers have to wait. This can be done in a number of ways. Firstly thefirm should analyze its operational processes in order to identify and removeinefficiencies or bottlenecks, if any. Secondly, in case waiting cannot beavoided, a reservation system can be used. This will help in getting thecustomer out of a queue. Thirdly, customers can be encouraged to use thefacilities during non-peak hours. Fourthly, greater use of informationtechnology can be made wherein customers can use telephone, computers,etc to conduct business. For example, banks can deploy ATMs, providephone banking and internet banking to reduce pressure at the branches.Lastly, as marketers you can also differentiate waiting customers whereinsome customers may wait for more time while others receive a quickerservice. The differentiation can be done on the basis of a number of factorslike importance of the customer, urgency of the job, duration of the servicetransaction and payment of a premium price. In case queues cannot beavoided, the organization has to decide on the type of queuing system to beadopted. There are number of possibilities in this regard. Take for examplethe computerized railway reservation centres wherein there are multiple-queues and the customer has the option to join whichever queue he wants toand can also switch over to other queue if the wait appears to be shorter inthat. Another option is to have a single queue system wherein first cum firstserve rule applies to everyone. A slight variation of single queue system canbe that each customer on arrival is given a number and waits at thereception area enabling the customer to sit, relax and mix up with othercustomers.

Exhibit 9.1. Managing Waiting Lines at Sri Venkateswara Temple, Tirupati

More than fifty thousand pilgrims visit the Sri Venkateswara Temple every day.‘Sarvadarsanam’ (darshan for all) timings are different on different days of week. Onnormal days, about 18 hours are allotted for Sarvadarsanam and on peak days it is openfor 20 hours. There is also a provision of ‘Special Darshan’ on purchase of tickets.Pilgrims who use the queue for Special Darshan have a shorter waiting time. This queuemerges with the Sarvadarsanam queue at a fixed point and the darshan timings are thesame as that for Sarvadarsanam.

The Sudarsanam token system was introduced to minimize the waiting time forSarvadarsanam, Special Darshan and other paid darshan/sevas. Some of its features:

The tokens are available free of cost at a number of convenient places in the town.The time for darshan is indicated on the token.Pilgrims can enter the Vaikuntam Queue Complex at Tirumala at the time indicated on


© ALI

© ALI

Strategic Issues

32

the tokens.They can have darshan within two hours of entering the Queue Complex.As this system saves on waiting time, it provides pilgrims with enough time to visittemples in the vicinity.In order to keep a track of the number of pilgrims and ensure their smooth flow, onetoken is issued per head. Collective tokens for groups are not issued.

Source: www.tirumala.org

2) Perception Management: Limited success of operations management inwaiting line management has led to increased interest in managing theperceptions of wait experience. If you cannot control the actual waitduration, then control the customer’s perception of it. Maister has proposedfollowing eight principles that you can use as service marketers to influencecustomer’s perception of waits and their satisfaction with waiting lines

Unoccupied time feels longer than occupied time.

Preprocess waits feel longer than in-process waits.

Anxiety makes waits seem longer.

Uncertain waits are longer than known, finite waits.

Unexplained waits are longer than explained waits.

Unfair waits are longer than equitable waits

The more valuable the service, the longer the people will wait.

Solo waiting feels longer than group waiting.

Therefore, you should appreciate that though operations management techniquesare important, however, while developing strategies for waiting lines you shouldnever overlook the effects of perceptions management. The followingsuggestions can be used in order to make waiting fun or at least tolerable.

1) Determine the acceptable waiting time for your customers.

2) Since unoccupied time feels longer than occupied time, keep customersoccupied by installing distractions that entertain and physically involve them.For example, television sets can be installed in the waiting areas, magazinesor reading materials related to the service can be provided. Exhibit 9.2provides an interesting illustration in this regard.

3) Provide ‘waiting duration information’ i.e. information about the expectedlength of a wait and/or ‘queuing information’ i.e. a consumer’s position inthe queue, with continuous updates. Michael Hue & David Tse suggestthat in short waits, no information is needed. In case of intermediate waits,waiting duration information appears to be a better choice than queuinginformation. However, in case of long waits, waiting duration informationmay be less effective then queuing information. Also providing queuinginformation is more important as compared to waiting duration informationwhen service organization has difficulty in accurately estimating the length ofwait or when the waiting line is not visible to customers.

4) If unexpected delays occur, explanation should be given to the customers.This helps in reducing uncertainty and customer irritation. The key is toimpress upon the customer that he has not been forgotten. Simple things likeproviding a glass of water or a cup of tea to the waiting customer can help.

5) Try to modify customer arrival behaviour.

6) Keep resources not serving customers out of sight. This can be done bykeeping idle employees out of view and conducting activities that do notinvolve customer interactions out of the customer’s sight.

7) Try to reduce pre-service waiting by transferring some of the pre-servicewaiting to the service encounter phase. For example, menu cards may be

© ALI

© ALI

33

provided to the customers while waiting, to decide on their orders, medicalinformation may be collected from the patient prior to actually meeting thedoctor.

8) A smiling service person who knows his job well can be very helpful inovercoming many negative effects of waiting. Therefore, training andincentives / rewards for providing good service should be made.

Exhibit 9.2. “Waiting in line : Experiment by Bank of America”

Bank of America through their review of data realized that there might be opportunities toreduce perceived wait times without reducing actual wait times. An earlier study by marketresearchers had also revealed (the study was conducted by intercepting some 1000customers standing in bank lines) that after a person stands in line for more than threeminutes, a wide gap opens between actual and perceived times. While a two-minute waitmay usually feel like a two-minute wait, a five minute wait may feel like a ten-minutewait. Also, psychological studies have revealed that if you distract a person from a boringchore, time seems to pass much faster.

In the summer of 2001 the bank installed television sets over the teller booths at one ofits branches to test its hypothesis that “if you entertain people in line by puttingtelevision sets in the transaction zone – above the row of tellers in a branch lobby – youwill reduce perceived wait times by at least 15%”. The results obtained were significant.After the installation of the T.V. sets the degree of overestimation of wait times droppedfrom 32% to 15% at the test branch. Before the implementation of this experiment,customers who waited longer than five minutes, significantly overestimated their waitingtime by 32%. (Average actual time : 6.17 minute, Average perceived time : 8.16 min).After the installation of monitors in the bank lobby these overestimates for the samecustomer groups dropped to 15% (Average actual time : 6.14 minutes, Average perceivedtime : 7.04 min). Considering that long waits have direct impact on customer satisfaction,the bank through a research also concluded that a branch with more than a thousandhouseholds in its customer base would be able to recoup up the cost of installing T.V. setsin less than a year because of increased customer purchases and retention due to highercustomer satisfaction. (Based on the study analysis that every one point improvement inbank’s customer satisfaction index added $1.40 in annual revenue per household and thatthe reduction in perceived wait times would translate into a 5.9 point increase in overallbanking-centre customer satisfaction)

Source: Stefan Thomke, “R&D Comes to Service: Bank of America’s Path breakingExperiments,” Harvard Business Review, April 2003, p.76-77.

9.6 MANAGING DEMAND AND WAITING LINES:CASE OF AN AMUSEMENT PARK

Introduction: In this section we are giving you a brief case situationconcerning an amusement park. Also given are the comments and possiblesolutions to the problems raised, given by top executives of service companies(The case situation and the comments / solutions have been excerpted from aHarvard Business Review Case Study – details given in sources at the bottomof this section). In the last part of this section we have also brought out someof the innovative practices adopted by successful amusement parks with regardsto managing demand and waiting lines. Before we move over to the casesituation, let us fist take a brief look at the amusement park industry as such.

The industry has it origin about 400 years ago in the Danish capitalCopenhagen. In India the industry is in the growth stage with around 1000crore said to have been invested in the last few years. This growth is primarilya result of higher disposable incomes and an increasing willingness on the partof the customers to consider new forms of entertainment. Foreign companieslike Universal Studio, Time Warner and Disney are eyeing the Indian market.Presently the leading players in the Indian market include Appu Ghar in Delhiand Essel World near Mumbai with a lot of new players like Sammy’sDreamland in Bangalore also coming up.


© ALI

© ALI

Strategic Issues

34

Case Situation: The amusement park with a successful history was nowfacing problems. It had its first money losing year last year followed by anotherone now. The park had three ways to bring in more revenues: increase visitper customer, increase average spending per visit or attract new customers.Because of a mature industry (U.S.A) all three were hard to do. As pulling inpeople from broader geographical areas seemed an unlikely proposition due tothe wide availability of such parks, attracting new customers required newvalue proposition. With this background, it was proposed to offer a “preferredguest card” to win more business from moneyed and time pressed group ofpeople. Under this plan, visitors could pay an additional fee to get free rein ofthe park: Card Holders would enter the ride through separate lines which wouldgive them first crack and they would be seated immediately at any in-parkrestaurant. It was hoped that this plan will help to up-sell the people who arealready coming to the park. And by making it possible to spend less time inqueues, the guest card will also attract a different type of customer – timestarved, high-income professionals and their families, who might otherwise avoidthe whole experience. However, certain objections were raised against such ascheme. “I don’t even think it’s a great experience for the preferred guests.Who want to feel all that animosity diverted at them? The key to this businessis the customers feeling good while they are here. With this scheme neitherside’s coming back” commented an executive. A possible solution given to thiswas to separate the lines and limiting the percentage of special tickets issuedon any given day. If the ‘preferred guest card’ scheme was not implementedthe park might be forced to raise price across the board.

Before moving on to the next part, analyze the above situation and identifypossible solutions.

What Experts Say : In this part comments of three senior executives fromdifferent service industries have been briefly given

i) A cofounder of a premium health care service:

Creating two types of service at different prices will create problemfor the park.

Raise the admission price instead

ii) Chief Marketing office of a leading bank:

It makes good business sense to segment customers and to offer adifferent level of service-at a higher price-to those at the upper endof the market.

The key is to do it discreetly and in a way that does not degrade thequality of service to the basic customer.

The expedited line should be hidden from the view of those waiting inlonger one.

iii) A former CEO of large Airlines:

Service differentiation at an amusement park must be subtler thanwhat has been proposed.

The park can offer all its guests the opportunity to reserve a time slotfor a particular ride. A fixed number of seats may be allocated toreservation (say a third or a half) and then give the customerslining up an option to wait or to make ride reservation for later in theday.

Some Practices in Successful Amusements Parks: Disney lands offer aform of reservation – Fastpass – by which guests may go up to one of therides offering the Fastpass service and obtain reservation to come at a certain

© ALI

© ALI

35

time. At the specified time they come back and bypass the waiting line savingan hour or more in waiting. However, the customers are limited to oneFastpass every four hours in order to ensure that the rides are able toaccommodate both Fastpass and regular customers. Further, line management atDisney also involves continuously entertaining waiting customers and providingthem with the information regarding the duration of their waits. Signs areposted at intervals in the queue, stating the expected time until servicecommencement. Because of Fastpass, rather than waiting in line, customersspend more money in the restaurant and shops. Dreamworld in Australia catersto both international as well as local customers. Considering different pricesensitivities of local and international customers (while a Japanese couple willpay $78 - $39 per person entrance fees – without hesitation as this is a smallportion of their vacations, a local family of four looking for weekendentertainment may view $136- $39 adult charge and $ 29 charge for children— amounts to a large portion of their entertainment expenses). Dreamworldoffers a separate package to local customers involving yearly passes at muchlower prices. It is a common practice for tourist attractions such asDreamworld to offer special rates for local residents. It is however veryimportant for the parks to know its customer mix.

Sources

i) Economic Times, New Delhi – Dec 16, 2003 – “Foreign majors eye amusementpark industry” by Rahul Sachitanand.

ii) Harvard Business Review, Nov. 2001, HBR Case Study “ Are Some CustomersMore Equal Than Others ?” by Nunes and Johnson, pp 37-50.

iii) “Marketing for Hospitality and Tourism”, 3rd edn., by Kotler, Bowen andMakens, Prentice Hall, 2003 – page 418, 459-460.

iv) “Waiting for Services : The Relationship between Delays and Evaluations ofService,” by Shirley Taylor, Journal of Marketing, April 1994, p.66.

Activity 4

Visit any amusement park and/or talk to your friends about their experience atamusement parks. Identify strategies adopted by the parks to manage demand(e.g. on weekdays vs. weekends, special package for specific customers groupsetc.) and waiting lines.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

9.7 SUMMARY

This unit deals with issues related to managing demand and capacity in serviceorganizations. Considering the fact that services are perishable, demandfluctuation is considered to be a somewhat serious problem for servicesmarketers. A service organization with a fixed capacity may be faced with fourdifferent situations viz. excess demand, demand exceeding the optimumcapacity level, demand and supply being balanced at the optimum capacity andexcess capacity. The first step towards developing strategies for matchingdemand and capacity is to study the demand patterns and the underlyingcauses. The strategies for matching demand and capacity can be broadlydivided into two categories – changing demand to fit supply and changingsupply to fit demand. These two strategies have been discussed in detail in thisunit. Subsequently yield management technique for managing demand and


© ALI

© ALI

Strategic Issues

36

capacity profitably has been explained. Despite strategies for matching demandand capacity being in place, waiting by customers becomes inevitable in anumber of service industries. Service waits can be controlled by operationsmanagement and perceptions management. This unit outlines certain suggestionswhich can help you in better management of waiting lines. The last section ofthe unit gives you a brief case situation concerning demand management andwaiting lines issues in an amusement park.


A) Objective Types Questions

1. Which of the following strategies would you recommend to manage demandwhen it is too high?

a. offer discounts

b. bring the service to the customers

c. offer incentive to customers for usage during non-peak times

d. all of the above

2. Providing separate check-in lines for first class passengers by an airlines isan example of differentiating waiting customers on the basis of

a. urgency of the job

b. payment of premium price

c. duration of service transaction

d. none of the above

3. Which of the following is not true regarding waiting by customers?

a. uncertain waits are longer than known waits

b. unexplained waits are longer than explained waits

c. in-process waits feels longer than the pre-process waits

d. unoccupied time feels longer than occupied time.

4. In which of the following demand conditions would you witness the situationin which no customer is being turned away but the quality of service maystill suffer due to crowding or staffing being pushed beyond their abilities todeliver consistent quality?

a. excess demand

b. demand exceeds optimum capacity

c. demand and supply are balanced at the level of optimum capacity

d. excess capacity

5. Appropriate situation for effective yield management application includes:

a. ability to segment markets

b. product sold in advance

c. fluctuating demand

d. all of the above

6. Which of the following strategies for flexing capacity to match demandwould be appropriate when demand is too low?

a. perform maintenance, repairs

b. schedule vacations

c. schedule employee training

d. all of the above

© ALI

© ALI

37

7. Several major restaurant chains offer discounts on days when business isnormally slow. This strategy is employed because service are

a. perishable

b. variable

c. inseparable

d. intangible

Answers

1. c 2. b 3. c 4. b 5. d

6. d 7. a

B. Discussion Questions

1. Explain why is it important for service organizations to match demand andcapacity. What are the implications of a mismatch between the two?

2. Explain the significance of determining the demand patterns. Select anyservice organization of your choice and describe its demand patterns andits underlying causes.

3. Describe the strategies for matching supply and demand giving suitableexamples.

4. Explain the term ‘Yield Management’. Identify some of the managerialissues to be taken into account while implementing a yield managementsystem.

5. Select a service organization you are familiar with, where customers have towait in line for service. Develop a waiting line strategy for the organization.


Donald J Shemwell, Jr. And J. Joseph Cronin, Jr. “Services MarketingStrategies for coping with demand/supply imbalances” Journal forServices Marketing, Vol. 8, No. 4, 1994.

Shirley Taylor, “Waiting for Service: The relationship between delays andevaluation of services” Journal of Marketing, April 1994.

Sherlyl E. Kimes, “Yield Management: A Tool for Capacity-ConstrainedService Firms” Journal of Operations Management, Vol. 8 No. 4, 1989.

Karen Katz, Blaire Larson, Richard Larson, “Perceptions for the waiting-inline blues: Entertain, Enlighten and Engage” Sloan Management Review,Winter 1991.

Paul F. Nunes and Brain A. Johnson, HBR Case Study “Are SomeCustomers More Equal Than Others”, Harvard Business Review, Nov.2001.

Stefen Thomke, “R & D Comes to Services: Bank of America’sPathbreaking Experiments”, Harvard Business Review, April 2003.

Valarie Zeithaml, A. Parasuraman & Leonard Berry “Problems andStrategies in Services Marketing”, Journal of Marketing, Spring 1985.

Micheal Hui and David Tse, “What to tell customer in waits of DifferentLengths: An Integrative Model of Service Evaluation”, Journal ofMarketing, Vol. 60, April 1996.


© ALI

© ALI

Strategic Issues

38

UNIT 10 CUSTOMER RETENTION

Objectives


explain significance of retaining customers for service companies,

identify the reasons of customer switching and ways of managing it,

understand the need and importance of complaints handling,

discuss strategies for effective service recovery after a service failure,

explain the significance of service guarantees,

list the components of a good service guarantee.

Structure

10.1 Introduction

10.2 Importance of Customer Retention

10.3 Customer Switching

10.4 Complaining and Service Recovery

10.5 Service Recovery Strategies

10.6 Service Guarantees

10.7 Summary



10.1 INTRODUCTION

Ramesh walks into an empty PCO to make a phone call. He pulls out acrumpled piece of paper from his pocket and dials the number on it. ThePCO owner can’t help but listen in . “Hello, is that Mrs. Gupta, I offerA.C. maintenance services and was wondering if you need someone toprovide you the services this year. Oh, you’ve got someone who does thatevery year and you’re happy with them. I see,” says Ramesh solemnly.

“There’s nothing else needs doing that they don’t do? OK, Well, maybe I’ll callagain next summer to see if you’re still happy with them. Thanks, Mrs. Gupta”says Ramesh, and puts the crumpled paper pack in his pocket.

Ramesh walks out of the booth and heads for the door. The PCO ownerstops wiping and says :”My Dear Friend, I can’t let you walk out withoutsaying something. I was a salesman for twenty years and a good one.”

“And I tell you, you’ll get nowhere making one call and giving up. You needa list of numbers and you work your way through them. You’ll never getthe work of Mrs. Gupta house or anyone else’s with the attitude you’ve got.”

“Thanks for the advise” says Ramesh to PCO owner. “But, it’s OK. Really.You see, I already do A.C. maintenance services at Mrs. Gupta’s house”.

(Based on an anecdote of Don Peppers at ecustomerserviceworld.com)

Services marketers understand that having customers, not merely acquiringcustomers is crucial for service companies. There is a direct link betweencustomer retention over a period of time and profitability and growth. Further,

© ALI

© ALI

39

customer retention to a great extent depends on service quality and customersatisfaction. It also depends on the ability of the firms to encourage customersto complain and then recover when things go wrong. Complaints are a naturalpart of any service activity as mistakes are an unavoidable feature of all humanendeavour and thus also of service delivery. Service recovery is the process ofputting things right after something goes wrong in service delivery.

Service marketing literature also suggests that offering well designed serviceguarantees help in attracting and retaining customers.

This unit begins with a discussion on the importance of retaining customers forservice firms. The unit further explains the details of a complaint managementsystem and service recovery process. The last part of the unit deals withservice guarantees.

10.2 IMPORTANCE OF CUSTOMER RETENTION

The importance of retaining customers should be properly understood by theservices marketers. It is the cornerstone of a successful service. Generally, thelonger a customer stays with a company the more that customer is worth. Itinfluences employee and supplier loyalty as well, as people like to work forcompanies where customers are loyal. It also produces profits that influenceshare holder loyalty. In fact this all results in a positive spiral. Employeeretention and loyalty results in high quality of services which leads to customersatisfaction and delight which makes the customer stay with the organizationand increases its profitability which in turn brings employee loyalty. Thissequence is shown diagrammatically in Figure 10.1.

Customer Satisfaction

Customer Retention and Quality ServicesIncreased Profits

Employee Loyalty

Source: Zeithaml and Bitner, Services Marketing, Tata McGraw Hill, 2nd Edn. 2000, p. 143)

Why are customers more profitable for service firms over period of time?There are a number of reasons for this. To begin with, to acquire a customer acompany incurs promotional costs like advertising, sales promotion, personalselling etc. It is said that it costs five times more to attract a new customerthen retaining one. The operating costs decrease when a customer stays.Services being rich in experience and credence qualities, it takes some time forcustomers to get accustomed to it and once they are used to the service andare satisfied with a service provider, they tend to purchase more over a periodof time. As they remain satisfied with a service provider they will spread apositive word of mouth, which is extremely effective in case of services forattracting new customers. Longer the customer stays with an organization, morethe organization knows about him, which enables it to offer customized serviceswhich makes it difficult for the customer to defect. This may even provideopportunities to the organization to charge price premium by offering

Customer Retention

�� 10.1: �� 10.1: �� 10.1: �� 10.1: �� 10.1: ��

© ALI

© ALI

Strategic Issues

40

individualized services which may be difficult for the competitors to offer.Indian service companies are increasingly recognizing the importance ofretaining existing customers. “We believe that if we are able to satisfy existingcustomers; it will enable us to gain new customers through word-of-mouth”says ICICI Bank General Manager (Business World, 4 Nov. 2002).

Considering the importance of retaining customers in service business,Reichheld & Sasser coined a term ‘Zero defection’. They highlighted thatcompanies can boost profits by almost 100% by retaining just 5% more of theircustomers. In their pathbreaking article “Zero Deflections: Quality comes toservices” (Harvard Business Review, Sept. – Oct., 1990) they conclude that“Just as the quality revolution in manufacturing had a profound impact on thecompetitiveness of companies, the quality revolution in services will create anew set of winners and losers. The winners will be those who lead the way inmanaging towards zero defection”. You should appreciate as servicesmarketers that when you lose a single customer you do not lose a single orderbut a lifetime opportunity of profitability with that individual. You must thereforeunderstand the lifetime value of a customer. Consider a simple example of atelephone company. For example, if on an average customer pays Rs. 500 amonth and stays with the company for 20 years, his average life time valuefor the company will be Rs. 500 X 12 X 20= Rs. 1,20,000. Further, if by apositive word-of-mouth, he brings just one more customer to the organizationhis value to the organization doubles. Therefore, it is important for all theemployees within an organization to understand the lifetime value of theircustomers. Once they understand it, they will treat the customer accordinglyand will focus on building relationship with the very people who keep them inbusiness.

The following is an interesting illustration of Southwest Airlines of U.S.A.Southwest Airlines is amongst the most profitable US airlines and have madeprofits all through its existence. It is well known in the industry for its servicequality and customer focus. As part of its effort to keep employees informed,Southwest Airlines communicates the importance of every single customer byeducating employees about how many customers the company actually need tomake a profit. By demonstrating to employees how just a few people canmake the critical difference, the company encourages them to think about howtheir individual behaviours influence customer service. The company newsletter,LUV lines, put customer service in perspective with the following piece onprofitability:

“How important is every Customer to our future? The break-evencustomers per flight was 74.5, which means that, on average, only whencustomer #75 came on board did a flight become profitable. The data onour annual profit and total flights flown to clearly illustrate how vitaleach customer is to our profitability and our very existence.

When you divide last year’s annual profit by total flights flown, you getprofit per flight :

$179,310,000 (annual profits)divided by624,476 (total flights flown)=$287 (profit per flight)

Then, divide profit per flight by Southwest’s systemwide average one-wayfare of $58 :

© ALI

© ALI

41

$287 (profit per flight)divided by$58 (average one-way fare)= 5 (one-way fares – Customers!)

The bottom-line: only five Customers per flight accounted for our totalprofit last year. So, only 3 million of the 40 million Customers we carriedmeant the difference between profit and loss of our airline.

To take a step further, to have lost the business of only one Customer perflight would have meant a 20 per cent reduction in profit on that flight.That’s how valuable each Customer is to Southwest and you!”

Source: www.ecustomerserviceworld.com and Kevin Freiberg & Jackie Freiberg, “NUTS!Southwest Airlines’ Crazy Recipe for Business and Personal Success”)

10.3 CUSTOMER SWITCHING

By now, you will have well appreciated that in service business havingcustomers, not merely acquiring them is crucial. Therefore, it becomesimportant to understand what actions of service companies or their employeesmake customers switch from one service provided to another. Customers leavea provider for a wide variety of reasons. Consider when you were lastdissatisfied with a service provider or changed a service provider. What werethe specific reasons for your reaction? Was it because of perception of poorquality or failure of a service encounter? Susan Keavenly identified followingreasons for customer switching in service industries.

a) Pricing (high price, price increase, unfair pricing , deceptive pricing)

b) Inconvenience (location /hours, wait for appointment, wait for service)

c) Core service failure (service mistakes, billing errors)

d) Service encounter failures (uncaring, impolite, unresponsive,unknowledgeable)

e) Response to service failures (negative response, no response, reluctantresponse)

f) Competition (found better service)

g) Ethical problem (cheating, unsafe)

h) Involuntary switching (customer moved, provider closed)

An important aspect of the above to be understood by you is that six of theeight service switching factors are controllable from a service organization’spoint of view. Some of the aspects to be examined and action be taken to stopcustomer switching would include philosophy to deliver a technically correctservice every time (Recollect issues related to providing quality services asdiscussed in Unit 8). However, in case some thing goes wrong there should bestrategies in place for effective service recovery. We will discuss this aspect indetail in subsequent section. In order to reduce inconvenience the organizationshould have effective queue management, waiting line strategies and strategiesfor management of demand and capacity (discussed in detail in Unit 9).Customer defection caused by unsatisfactory service encounters – employeecustomer interactions can be reduced by proper training of employees, listeningto customers and keeping the customers informed.

Customer Retention

© ALI

© ALI

Strategic Issues

42

Activity 1

Discuss among your friends and colleagues the reasons why they haveswitched service provider(s). Analyze whether something could have been doneby the organization to prevent them from switching.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

For maintaining customer relationship you have to deliver quality servicesincluding service recovery and continuously monitor the relationship to find outcustomer satisfaction and loyalty. Another important aspect of keepingcustomers is the market segmentation. This aspect has been touched upon inUnit 5 of this course. Unless you properly segment your customers andunderstand their buying behaviour, expectations and perceptions, you will not beable to meet their needs and can’t retain them. In an interview to HarvardBusiness Review , British Airways’ CEO Sir Collin Marshall highlighted theimportance of segmentation for service business (HBR, Nov-Dec 1995). “Evenin a mass market business, you don’t want to attract and retain everyone. Thekey is first to identify and attract those who will value your service and then toretain them as customers and win the largest possible share of their life timebusiness. Using database marketing technique, we have focused more of ourmarketing efforts on retaining those customers and increasing our share ofbusiness. That is why our advertising spending is proportionately smaller thanthat of our competitors”.

Now-a-days the segments are becoming smaller and smaller to the extent thateven for mass services we talk of segments of one i.e. individualized service.This is referred to as Mass Customization. Joe Pine in his book MassCustomization has suggested different approaches towards mass customization.The important thing to understand is that it is not required to individualizeservices right from design to delivery in order to be differentiated, rather it canbe done in number of ways. For example, you can customize a standardizedcore by combining it with customized peripherals. A hotel while offering astandardized room may customize it to individual tastes by offering personalizedstationary, providing room location based on customer choice , keeping therefrigerator stuffed with eatables as per customer choice . (You have to havea good customer database in order to do so). Another way is to createcustomizable services which can be customized by the customers themselves.This can be done when customers can combine different components ormodules of a service product in unique ways suited to their individualrequirements. Please note that service offerings themselves are standardized.The IGNOU management programme, for example, though is a standardizedoffering yet you can customize it in terms of the courses you want to opt andtheir timings. The service provider can also offer point of delivery customizationwherein the provider allows the customer to communicate what they need atthe point of service delivery e.g. professional services, health care etc.

Loyalty Programmes

Loyalty programmes are often used in service industries like cellular companies,airlines, hotels, credit card companies, retail outlets etc. in order to buildcustomer loyalty. They aim at locking on the consumer by rewarding him forpatronizing a particular service for a period of time. In fact number of similarterms like relationship marketing programme, frequency programme, continuityprogramme, points programme and loyalty programme are often usedinterchangeably. One of the most visible form of loyalty programmes is the

© ALI

© ALI

43

frequent flyer schemes offered by airlines which reward customers with a freeflight on accumulating a certain number of points. Similarly, hotels awardregular customers with points, which can be redeemed for free meals or stay.While loyalty programmes are primarily aimed at ensuring that a customer staysloyal and buys more, they can also be used as a marketing tool to attract newcustomers and maximize their use of the particular service. The First Citizenclub (of retailer Shopper’s Stop), Jet Privilege programme (of Jet Airways),Taj’s Inner Circle are all examples of programmes which offer incentives forcustomer loyalty.

10.4 COMPLAINING AND SERVICE RECOVERY

As highlighted in the introductory part of this unit, complaints are a naturalconsequence of any service activity. Mistakes are critical part of every service.Since services are generally performed in the presence of customers, errors arebound to happen. While it may not be possible to prevent all the errors,companies can learn to recover from them. ‘Service Recovery’ refers to theaction taken by the service provider in response to a service failure. Tad andBrown define Service recovery “as a process that identifies service failures,effectively resolves customer problems, classify their root cause(s), and yieldsdata that can be integrated with other measures of performance to assess andimprove the service system.” A good recovery can turn angry, frustratedcustomers into loyal ones. Further more, customers who have been successfullyrecovered not only remain loyal but can become advocates for the organisationspreading a positive word-of-mouth.

When an error or service failure occurs the customer may or may notcomplain. A customer who doesn’t complain is less likely to come back to theservice provider. Therefore, service provider has to make specific efforts toencourage customers to voice their concerns. Complaints provide feedback onhow the service provider is performing in the market place. When customerscomplain, two potentially positive things happen for a service provider.

1) The provider gets the chance to fix the problem and retain the customer(service recovery)

2) Complaints can point to areas of the business that need improvement.

A good complaint culture and good complaint process may well lead a serviceprovider to improved financial performance. Researches have shown thatexcellent complaint management service recovery can significantly influencecustomer satisfaction & loyalty. The service provider in order to improvesolicitation of complaints should make it easy for the customers to get in touch.This can be done by providing multiple means of contact like toll free numbers,website, and customer contact point with service personnel. Further, theseshould be published on a continuous basis and the customers should be made tofeel that their feedback is invaluable and their opinions are wanted. Thecompany should treat a complaint as a gift and the one who complains as afriend.

Complaint Management

Bill Dee (Convener of the ISO Technical Committee ISO/TC 176 subcommittee3 working group on complaint handling) opines that any worthwhile complaintsmanagement system has to have certain basis features :

a) Visibility : Customers should know where to complain

b) Accessibility : Customer should know how to complain. As arule of thumb, the more formal the system for

Customer Retention

© ALI

© ALI

Strategic Issues

44

lodging complaints, the less accessible it is tocustomers.

c) Responsiveness: Complains need to be dealt with quickly. Thequicker the complains are dealt with, the higherthe customer satisfaction.

d) Customer-focused A service provider who adopts customerapproach: focused approach invites complaints and

indicates commitment to resolving complaints byits words and actions in all fairness.

e) Accountability: Someone in the organization has to takeresponsibility for complaint handling.

f) Continuous This is about looking at the root causes andimprovement: fixing them.

A good complaint management system must ensure that the complainant is keptinformed, the staff understands the complaint processes, complaints are takenseriously, employees are empowered to deal with the situation and there arefollow-up procedures to check with customers after resolution.

Activity 2

Send a complaint letter to a service provider you are not satisfied with.Analyse the response to your letter (or no response) and its impact on you asa service customer.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

Robert Johnston has developed a conceptual model linking complaintmanagement and financial performance as shown in Figure 10.2.

The author, through an empirical study, concluded that “It is not the complaintprocesses per se that leads to financial benefit but how organizations manage

Customer satisfaction Customer

retention

Complaint culture

Complaint processes

Process improvement

Financial performance

Employee attitude

Employee retention

�� 10.2 : � �� 10.2 : � �� 10.2 : � �� 10.2 : � �� 10.2 : � ��

Source: Robert Johnson, “Linking Complaint Management to Profit,” International Journal ofService Industry Management , Vol. 12, Nov. 2001

© ALI

© ALI

45

the intervening variables i.e. satisfying and retaining the customer /employeeand/or improving the product or bringing out process improvement. Financialbenefits accrue from satisfying and retaining dissatisfied customers throughservice recovery, by using information from complaints to improve bothoperational and organization-wide processes and by satisfying and retainingemployees. All this is contingent upon the organization’s complaint culture.”

Activity 3

Contact any service organization and find out the mechanism through which itencourages customer feedback and complaints.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

10.5 SERVICE RECOVERY STRATEGIES

The above discussion gives you a fair idea of need for complaint management,its components and the importance of service recovery. Let us now focus onstrategies for service recovery. Consider the following incident regarding anairlines (British Airways). “ An aircraft door was left open in a rainstormbefore take off and a passenger near the door unfortunately got showered”.Now imagine that you were a part of the airlines. What steps you would havetaken in such a situation? Now let us see what was actually done by theservice provider. “The flight attendant not only did everything that was routine– offered to have the customer’s garments cleaned or replaced and made surethat a customer relations representative contacted the customer later todemonstrate that we genuinely cared – but also made special gesture byoffering the passenger a complimentary choice of certain tax-free goods”.(Source: “Competiting on Customer Service: An Interview with BritishAirways’ Sir Colin Marshall, Harvard Business Review, Nov-Dec 1995)

Hart, Heskett and Sasser suggest that service companies must becomegymnasts, able to regain their balance instantly after a slipup and continue theirroutine. According to them companies that want to build the capability ofrecovering from service problems should do the following things.

1) Measure the costs of effective service recovery

2) Break customer silence and listen closely for complaints

3) Anticipate needs for recovery

4) Act fast

5) Train and Empower employees

6) Close the customer feedback loop

Let us briefly discuss the above strategies.

Measure the costs: As services marketers you should not underestimate theprofits lost when a customer departs unhappily. This has been highlighted inthe earlier part of this unit as well. Once this is appreciated, it will get dueattention as it is said that what gets measured is truly what gets managed. Thecompany should also keep in mind the costs the customer has to incur whenservice failure occurs. Excellent service companies will go that extra mile tocover the costs a failure incurs, or if the inconvenience is so great that thecompany cannot completely compensate the customer , the tone of theresponse must signal the company regret.

Customer Retention

© ALI

© ALI

Strategic Issues

46

Break the Silence: This refers to soliciting and encouraging complaints fromthe customers. In the preceding pages we have discussed this issue in detail.

Anticipate Needs for Recovery: Service providers can look for the weaklinks or the areas which tend to be problem prone and address them in theirservice recovery strategies.

Act Fast: Customers who complain want quick responses. The urgentresumption of service and an apology are often sufficient to make amends. (butnot always). Empathise with customers. Statements like “I can appreciate howyou feel,” You’re right”, “ It, shouldn’t have happened that way,” all conveyempathy for the customer. Also, symbolic atonements should be made. It canbe money, flowers, a ‘sorry’ note, free dessert by a restaurant, free upgrade inairlines etc. The speedy response to complaints /service failures requiresappropriate system and procedures as well as trained and empoweredemployees.

Train and Empower Employees: The organization must train the front linepeople and empower them. Simulated real life situations can be an effectiveway to develop recovery skills among employees. The company shouldempower the front line employees to act and should give them the authority,responsibility and incentives to follow with customer.

Close the Loop: If a customer complaint leads to corrective measure thecompany should tell the customer about the improvement. Even if somethingcan’t be fixed, the company should explain it to the customer. Effective way ofclosing the loop include making timely telephone calls and letting the customerknow that his suggestions might be implemented.

LEARN : Dissatisfied Customers Are Gold

In every business, mistakes happen and customers get angry. But when a problem is fixedproperly and stays fixed ….. customers loyalty actually increases! Here are five stepsyou can take to not only resolve the problem but actually build loyalty:

LISTEN carefully to your customer. You need to stop everything you are doing andgive your customer 100% of your attention. Active listening requires a lot of effortand cannot be accomplished when we are distracted.

EMPATHIZE with your customer’s concerns. Let him know that you sincerely careabout his problem even if you don’t agree with his comments.

APOLOGIZE even if you are not the cause of problem. When said sincerely, thewords “I’m sorry” can diffuse as much as 95% of most people’s anger.

RESOLVE the problem. Let the customer know you are on his side and will doeverything you can to help him get the problem resolved. If only an employee inanother department can fix it, help make the transition smooth so the customerdoesn’t have to tell his story more than once.

NOW is the time to address the problem. The faster a mistake is fixed, the morelikely it is that the customer will give your company another chance.

The best way to handle a situation in which the customer is angry or upset is toremember the acronym LEARN and apply the five steps listed above. Then feel greatabout the positive difference you made in that person’s day!

Source: Debra J. Schmidt; Spectrum Consulting Group (Also the author of the LoyaltyBuilder – a free on-line monthly news letter)

Frederick Reichheld very beautifully brings about the importance of customerloyalty, managing failures & defection in the concluding comments of his article“Learning from Customer Defection (HBR, March – April 96). “The key tocustomer loyalty is the creation of value. The key to value creation isorganizational learning. And the key to organizational learning is grasping the

© ALI

© ALI

47

value of failure. Customer defection is a unit of error containing nearly all theinformation a company needs to compete, profit and grow.”

Activity 4

Given below is a copy of a mail sent by an organization to M/s. ABC CarRentals Ltd. Review the communication and give a brief account of actions youwould have taken if you ever receive such a mail.

Mr. S Mohan President June 15, 2004ABC Car Rental Ltd.

Dear Mr. Mohan,

I was contacted by Mr. Ajay Gupta in December 2003 regarding ourrequirements for car rentals and how your company might be able to serve us.I find myself needing to order for these services for a large internationalconvention we are organizing in August 2004 and therefore decided to contactyour company for information. Instead of obtaining information. I am totallyfrustrated. First 1 went to your website. “Cool”, I thought,” I can click on thebuttons and get information.” Wrong, no help there. So I tried to e-mail youfrom that site – didn’t work. Additionally, there was no e-mail address on eitherletterhead or your website. My next step was a phone call. I called and got amenu. I pressed the number for the sales department. Then I had a waitthrough another menu to get a sale person. Ajay was a good choice, I thought,wrong. He’s out of the office, so I followed his instructions and pressed 222for someone else-more voice mail. Okay, then I pressed “O” for an operator.“All I want is talk to someone in sales,” I told the lady who answered. I wastransferred to someone who picked up the phone and hung up.

So I’ll go elsewhere for my requirements.

A. RoyVice- President

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

10.6 SERVICE GUARANTEES

When you buy consumer durables like refrigerator, T.V., Washing machine etc.,they invariably came with a product warranty wherein the company agrees toreplace or repair the product if something goes wrong. But what aboutservices? As compared to manufactured products, guarantees in case ofservices are a more recent phenomenon. Because of the intangible nature ofservices it was often thought as to what can be guaranteed. Products beingtangible, can be returned but can services be returned back if something goeswrong? However, now more and more service firms are offering serviceguarantees which may take the form of a satisfaction guarantee or guarantingspecific aspect of service delivery. Try to recollect any service guarantee thatyou have come across as a consumer of services.

A bank may offer a guarantee that an account will be opened or a credit cardwill be issued within a specified number of working days otherwise it will pay

Customer Retention

© ALI

© ALI

Strategic Issues

48

the customer a specified amount depending on the period of delay. A restaurantmay offer home delivery within a guaranteed time, say 30 minutes, failingwhich the customer may be given specified price-offs. A hotel may offer aunconditional satisfaction guarantee.

Why offer a Service Guarantee?

More and more service firms have started to realize that a good guarantee canact as a marketing tool for attracting customers as well as help in retainingcustomers. It also helps in cultivating and maintaining quality throughout anorganization. Some of the benefits of an effective service guarantee arehighlighted below.

i) Implementing a guarantee forces a company to focus on customers.

ii) Offering a guarantee provides employees with a service related goal andfacilitates goal alignment between employees and the organization. It canalso increase employee morale and loyalty.

iii) It encourages customers to complain and provides the opportunity to theorganization to make amends, thereby retaining the customers.

iv) Invoking of guarantee by the customer guarantees important andimmediate customer feedback. In the long run, analyzing informationcollected about why guarantees were invoked by customers can providemeaningful information for making improvements in service design anddelivery.

v) A well designed service guarantee can lead to increased service qualityexpectations, lower perceived risk and increased purchase intent.

vi) Service companies have a greater opportunity than manufacturers todifferentiate themselves through a guarantee .

Rust, Zahorik & Keiningham have brought about that a guarantee can be veryprofitable. The mechanism by which a guarantee is linked to profit is shown inFigure 10.3

Guarantee

People invoking the guarantee

Increased repurchase

Market share and profitability

improvement

Advertising featuring the guarantee

Increased sales from advertising

message

Increased sales from positive word

of mouth

+

++

+

-

Source: Rust, Zahorik and Keiningham, ‘Service Marketing’, Harper Collins, 1996, p.204

�� 10.3: �� 10.3: �� 10.3: �� 10.3: �� 10.3: �� © ALI

© ALI

49

The above figure highlights that with a guarantee, advertising is more effective,which attracts more customers.

People invoking the guarantee come back which may not have been thecase in its absence.

People who invoke guarantee resulting in effective service recovery, willspread a positive word of mouth, thereby attracting more customers.

Features of a Good Service Guarantee

A service guarantee can take the form of an unconditional guarantee ofsatisfaction or specific outcome guarantees allowing a company to spell outexactly which elements of the service it wants to stand behind. Unconditionalguarantees are powerful and a company’s promise to meet all of its customer’sexpectations. For example, a hotel guarantee states ‘if you are not completelysatisfied, we don’t expect you to pay’. Specific guarantees, on the other hand ,though smaller in scope, can still be quite powerful. For example a couriercompany offering a guaranteed delivery within 24 hours. Whatever may be thetype of guarantee, there are certain features which make the guaranteeeffective. Hart summarizes them into following main characteristics.

i) Unconditional: A guarantee should not have “ifs” , “and”, or “buts”. Itshould make the promise unconditionally.

ii) Easy to Understand and Communicate: It should be easy tounderstand for the customers as to what to expect as well as for theemployees as to what to do. The message should be short andmemorable and the standard clear.

iii) Meaningful: The guarantee should be meaningful in terms of what isbeing promised (things that customers care about) as well as in terms ofthe payout.

iv) Easy to Invoke and Collect: A good guarantee should be easy toinvoke. Service marketers should understand that once poor service hasbeen delivered, easy and quick settlement should be ensured

Activity 5

a) Identify a few service providers who offer a service guarantee. Evaluatethese guarantees on the characteristics of an effective guarantee discussedabove.

......................................................................................................................

......................................................................................................................

......................................................................................................................

......................................................................................................................

......................................................................................................................

b) Critically evaluate the following service guarantee offered by a Delhi basedmultiple chain restaurant for its home delivery

“30 MINUTES GUARANTEE

10% DISCOUNT ON DELAYED DELIVERY ORDERS*

* DISCOUNTS NOT APPLICABLE FOR ORDERS OVER RS.500/-”

......................................................................................................................

......................................................................................................................

......................................................................................................................

......................................................................................................................

......................................................................................................................

Customer Retention

© ALI

© ALI

Strategic Issues

50

It is often feared that a service guarantee especially an unconditional serviceguarantee may spell financial disaster for the company. However, it should benoted that a service guarantee is not a panacea and will not be beneficial forall the service firms. To begin with, a low quality firm should not offer them.Also there are situations which involve uncontrollable variables which can’t beguaranteed by a firm. Another big hurdle for many service managers inoffering guarantee is customer cheating. However, it is generally believed thatwhat inevitable cheaters cost a company most often amounts to very little ascompared to the benefits derived from a strong guarantee. It may alsobecomes less meaningful to offer service guarantee if customers perceive littlerisk in the service or there is very small perceived variability in service qualityamong competitors.

The following illustration highlights the benefits gained by M/s. Delta Dental (ADental Insurance company from Massachusetts, U.S.A) through theimplementation of an effective service guarantee program.

A Service Leader – DELTA DENTAL OF MASSACHUSETTS

On April 1, 1990, Delta Dental of Massachusetts, that sells dental insurance in USA,launched a Service Guarantee. They had 15% market share and lots of competition. In2003 they have 55 percent market share and NOT ONE competitor has copied theirservice guarantee.

Delta promises money if they fail on any of their seven guarantees, no questions asked.They have three types of customers; the organization that selects their insurance and paysthem, the employees of the organization, and the dentists. The guarantees were puttogether after finding out in early 1990 from the organizations, what was the mostimportant thing Delta Dental needed to deliver.

A sample :

THE GUARANTEE: Accurate and quick turnaround of ID card. A complete and accurateidentification card for each subscriber will be mailed to the group or subscriber’s homewithin 10 business days.

THE REFUND : $25 paid to the group per ID card.

This means if a firm signed up with 500 employees and someone got distracted and didnot send the ID card out until 11 business days, Delta Dental of Massachusetts wouldsend the group a refund of $12,500.

Instead of saying we are sorry, making excuses, Delta Dental send money instead. Theytrack the refunds monthly and yearly. They know exactly how many refunds they havepaid out for each of the 7 guarantees.

Total occurrence from April 1, 1990 – December 31, 2002 are 4,055 with payouts of$1,359,668. On the I D cards they have had 2,543 occurrences and payouts of $89,925.

They have added 570,000 new subscribers valued at $614 per subscriber sinceimplementing the service guarantee. The value of these new subscribers is $350 million(570,000 x $614). Not a bad return on $1,359,668.

Customer retention had remained high at 96.5% (1995-2002). Compare that to theprevious average of 92% (1987-1989)!

Source: www.customer-service.com

An interesting issue related to service guarantees is whether a firm with areputation for outstanding quality offer a service guarantee? This is becausewith such firms there is an implicit guarantee — an unsaid promise that thefirm will do whatever is necessary to satisfy a customer. Some researchershave even stated that an explicit guarantee by such firms may even beinterpreted as a signal for potential quality problems. Wirtz, Kum & Lee, based ontheir research done in Singapore, have given the following findings in this regard.

© ALI

© ALI

51

Service provider with a good but not outstanding reputation for servicequality has much to gain from the introduction of a well-designed serviceguarantee.

Benefits of a guarantee would also be positive, but less so for an alreadyhighly reputed firms. Therefore firms with a reputation for service excellenceshould carefully consider whether the costs of implementing a serviceguarantee are justifiable in terms of its market and/or operational impacts.

Customer of even the best providers may prefer the certainty of an explicitguarantee over the uncertainty intrinsic in an implicit guarantee.

10.7 SUMMARY

Retaining customers is of great significance for a service company’s growthand profitability. The units explains the importance of keeping customers. As thecustomer stays with the organization he becomes profitable by increase inpurchasing, reduced operating costs, price-premium and through referrals. Thereare a number of reasons why customers switch and most of these reasons arecontrollable for company’s point of view. Providing excellent service quality,maintaining customer relationship and effective segmentation are key to buildingcustomer loyalty. The unit further discusses the significance of complaintmanagement and key components of a good complaint management system.On receiving complaints or otherwise finding out a service failure the companyshould strive for an effective service recovery. For this the company shouldanticipate need for recovery, act fast, train and empower employees and closethe customer feedback loop. The last part of the units deals with ServiceGuarantees. A good service guarantee helps in creating customer focus,increasing employee morale and loyalty, seeking customer feedback, creatingdifferentiation, lowering customer perceived risk and increasing purchase intent.For a service guarantee to be effective, it should be unconditional, easy tounderstand and communicate, meaningful and easy to invoke.


A) Objectives Type Questions

1. The service guarantee must be about things that customers care about! Thisreflects which of the following characteristics of a good service guarantee?

a. Unconditional

b. Easy to Understand

c. Meaningful

d. Easy to Invoke

2. The example of self service salad bars wherein customers can create saladas per their own individual need is an example of

a. customizing the service around an standardized core

b. creating customizable service

c. offering point of delivery customization

d. all of the above

3. Customers are more profitable over the time because of

a. increased purchase

b. reduced operating costs

c. referrals through positive word-of-mouth

Customer Retention

© ALI

© ALI

Strategic Issues

52

d. all of the above

True or False

4. Customers leave for a variety of reasons most of which are not controllablefrom a company’s point of view

5. Service recovery refers to the action taken by the service provider inresponse to a service failure.

6. Service Guarantee benefits all service organizations alike.

Answers

1. (c) 2. (b) 3.(d)

4. False 5. True 6. False

B) Discussion Questions

1) What are the benefits to a service organization in retaining its customers?Discuss with the help of examples

2) Why do customers switch service providers? Can you do anything as amarketers to prevent the customers from switching?

3) What benefits do an organization derive in seeking customer complaints?Discuss the features of a good complaint management system.

4) Consider a service firm you are familiar with. Describe the importance ofservice recovery to the firm and develop a service recovery strategy for it.

5) What are the benefits derived by a service firm in offering a serviceguarantee? Discuss the characteristics of a good service guarantee.


Bill Dee, “State-of-the-Art Complaint Handling,” ISO Management Systems– Jul-Aug 2002.

Hart, Christopher, “The Power of Unconditional Guarantees”, HarvardBusiness Review, Jul-Aug 1988.

Hart, Heskeet and Sasser , “ The Profitable Art of Service Recovery”,Harvard Business Review, Jul-Aug 1990.

Robert Johnston, “Linking Complaint Management to Profit”, InternationalJournal of Service Industry Management, Vol.12, No.1, 2001.

Reichheld & Sasser, “ Zero defections: Quality comes to services”, HBR,Sept-Oct 1990.

Reichheld, “ Learning from Customer Defections” , HBR, Mar-Apr 1996.

Susan Keavenly, “Customer Switching Behaviour in Service Industries : AnExploratory Study,” Journal of Marketing, Vol. 59, April 1995.

Wirtz, Kum & Lee, “Should a Firm with a Reputation for OutstandingService Quality offer a Service Guarantee”, Journal of Services Marketing,Vol. 14, No. 6. 2000.

© ALI

© ALI

1



Block

4SECTORAL APPLICATIONS-IUNIT 11

Financial Services 5

UNIT 12

Tourism and Hospitality Services 23

UNIT 13

Health Services 46

UNIT 14

Case Study: Serving the Global Indian 62© ALI

© ALI

Sectoral Applications-I

2



IGNOU, New Delhi













ISBN-81-266-1265-7






Printed at:

Print Production


© ALI

© ALI

3

BLOCK 4 SECTORAL APPLICATIONS-I

In the first three blocks of the course we have covered the concepts andtheoretical framework underlying services marketing. The remaining two blocksi.e. Block 4 and Block 5, are geared towards exposing you to the actualapplication of marketing concepts in diverse service sectors. In this block threespecific sectors will be covered. Unit 11 is on 'Financial Services'. In the lastcouple of decades, India has witnessed a drastic change in the financialservices sector. This unit explains application of various marketing issues inBanking and Insurance services. Unit 12 covers 'Tourism and HospitalityServices'. As you are aware, marketing of tourism and hospitality services hasspecial significance in terms of its economic contribution to the economy of anysociety today. This unit explains the reasons behind the rapid development ofthis sector and the variables affecting the demand and supply of the tourismproducts. It also discusses the marketing mix for hotels in detail. Unit 13 isconcerned with the application of principles of services marketing to one ofthe most vital services sectors in any society, the 'health sector'. The last unitof the block is a case study on financial service marketing and relates tovarious issues concerning the banking industry in India.

© ALI

© ALI


4







3. STRATEGIC ISSUES







© ALI

© ALI

5

UNIT 11 FINANCIAL SERVICES

Objectives

After studying this unit you should be able to :

familiarise with the range of financial services available in India,

explain the consumer behaviour in the context of financial services,

explain the product, brand and other elements of marketing mix for thebanking services, and

understand the marketing strategies for the insurance services.

Structure

11.1 Introduction

11.2 Buyer Behaviour for Financial Services

11.3 Branding of Financial Products

11.4 Channels for Distribution for Banking

11.5 Pricing of Banking Products/Services

11.6 Promotion of Banking Products/Services

11.7 Insurance

11.8 Summary


11.1 INTRODUCTION

Financial services markets play a prominent role in the mobilization of savingsfrom all quarters of economy for useful inputs and for necessary formulationand implementation of various policies. This facilitates liquidity management inconsonance with the macro economic environment. Regulators like SEBI, RBIand the Government of India monitor for the suitable sustained economicgrowth in the economy. In the Indian financial system funds flow into the maineconomy for growth, from financial institutions, commercial banks, insurancecompanies, mutual funds, provident funds, and from non banking financecompanies. Of course the deposits and shares are mobilized from supplier offunds like individuals, businesses and governments.

Till early eighties, no one in the highly regulated banking/finance industryshowed any inclination to innovate or market new financial products, given theirrespective roles as bankers or finance companies all offered absolutely thesame products.

Product development or innovation of financial products interestingly requiresvery little or no additional investment. But the downside is that no brand canboast of a Unique Selling Proposition (USP) for long, as it can be copiedimmediately. Of course, the safeguard to some extent here is the very brandingof the product.

Following is the list of some typical financial products available in the market:

Savings and Recurring Account

Current Account

Fixed Deposits

Retail Loan Products

© ALI

© ALI


6

Commercial Loans

Leasing and Hire Purchase

Credit Cards

Insurance

Mutual Funds

Beside these, banks and finance companies provide a number of fee-basedservices such as merchant banking, issue management for raising equity fromthe market, foreign exchange advisory services etc.

In this unit we will be focusing on marketing issues related to banking andinsurance.

Activity 1

Visit a commercial bank in your city and enlist the financial services offeredby it.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

11.2 BUYER BEHAVIOUR FOR FINANCIAL SERVICES

While making even the simplest purchase, consumers go through a complicatedmental process. For us to appreciate the complexity of the consumer's buyingdecision, we need to understand the variety of individual influences onconsumer behaviour; the impact of environmental factors such as family,social, and cultural influences on the consumer; and how these components areintegrated in the consumer's mind.

A firm's marketing efforts interacts with non-commercial sources ofinformation to stimulate the purchase decision process. This process istempered by the individual influences on consumer behaviour, includingmotivation, personality, learning and perception. The process stops when theconsumers lose interest or evaluates the product and decides not to make apurchase. If the purchase is made, the consumer has an opportunity to seewhether the product satisfies his or her needs. If not, the consumer willdiscontinue the use of the product.

1. Individual Influences on Consumer Behaviour

The effort of the all marketing is to influences people's buying behaviour, but itis difficult to foresee the success of planned marketing programs becausehuman beings are all individuals. Each behaves differently, thereby making massconsumer behaviour patterns we see everyday:

People vary in their persuability. Some are easily persuaded to dosomething; others are skeptical and difficult to convince.

Some people have very 'cool heads' and control their emotions. Others are'hot heads' and get angry easily.

Some people are loner, whereas others need the security of a crowd.

Many people are oriented towards the acquisition of material things whilesome people are motivated mainly by spiritual matters.

Some people spend their money cautiously while others spend their moneyextravagantly.

© ALI

© ALI

7

Many other contrasts in the behaviour of people could be noted such asinterests in sports and hobbies, goal orientation, colour preference. All theseaffect consumers's buying decisions.

To further complicate the marketer's goal of influencing consumer behaviour,consider these observations. First, people's attitudes, beliefs and preferenceschange. What we have liked as children we may not like as adult. Thatincludes products, activities and living conditions.

Second, individual behaviour is inconsistent and difficult to predict from one dayto the next. An individual may like to go out and have diner today, but he mayprefer to stay home tomorrow.

Third, people are often unable to explain their own behaviour. A man may sayhe brought a shirt because he needed it and it was at a discount of 30%. Thereal reason may be different.

People often do not understand why they behave as they do. And if they dounderstand their true motivations, they may fear expressing them. For example,a businessman who purchases a new Mercedes probably would be reluctant toadmit it if the reasons for the purchase was his insecurity amongst his peergroup.

Activity 2

Talk to your colleagues about some of the purchases of financial services thatthey have been making. Ascertain how over a period of time.

i) Their preferences have been changed.

ii) Their buying patterns have changed.

Can you furnish some explanation for these changes?

............................................................................................................................

............................................................................................................................

............................................................................................................................

............................................................................................................................

2. Family Influences on Buying Behaviour

We are aware as to how our needs and expectations change over differentstages of our lifecycle. Your priorities as a teenager or a young adult or afamily man are very different. These differences are important as they enablethe marketer to fine tune his marketing effort by using family life cycle as asegmentation variable.

The family life cycle was developed in 1960 and was based on variables likemartial status, number and ages of children, work status and age. It has sincethen, been widely used as a segmentation tool.

Because our age, income and family requirements, except for the basicnecessities change over time, the family life cycle and identification of familyneeds over various stages of the FLC are useful inputs to the marketer. Thefamily life cycle consists of 5 stages, the young bachelor stage, the full nest I,the full nest II, the empty nest and the solitary survivor stage. Expenditurepriorities and need for money at different stages have interesting implication forthe demand for various financial services. Table 11.1 gives you an idea ofvarying requirements of consumers for banking services.

Financial Services

© ALI

© ALI


8

Table 11.1: Family Life Cycle and Banking Needs

Stage Financial Situation Banking Needs

Young Bachelor Stage Few financial burdens, per capita Credit Cards, auto loans, lowincome high,income low as cost banking servicescompared to future prospects

Full Nest I Married Home buying a priority, liquidity Mortgage, Credit cards,with young children low, may have working couples Overdraft saving

situation accounts Housing anddurables loans

Full Nest II Older Income stabilized. Good financial Home improvements loansmarried with older position. Mid career, comfortable Equity investment, certificatedependents children position, money involving matters of deposits, money market

deposit accounts, fixed orflexi-deposits, otherinvestments services

Empty nest - Older Significantly reduced income Social security services, fewcouple, with children loan services, healthnow not living at home, insurance servicesmay be retired.

Source: Adopted from Exhibit 6.4. The family life cycle and Banking needs "Marketing offinancial Service", Ann Pezzullo, American Bankers Association, McMillan.

11.3 BRANDING OF FINANCIAL PRODUCTS

Branding, which is a major input in the marketing strategy of commercialproducts, can be successfully used in the marketing of financial services too.Brand is a broad term that includes practically all means of identifying aproduct e.g., the LIC logo, Citibank’s “City” – schemes, Canara Bank’s “Can”-schemes. Brand name is that part of the brand which can be verbalized e.g.,Citihome, Canstar etc. Brand mark is that part of the brand which can berecognised but is not utterable e.g. the LIC folded hands symbol, Citibank’sdistinctive lettering etc. These constitute the logo of the company.

Branding is of two types – individual branding which is one-time affair likethe Reliance public issue “Khazana” or umbrella branding, the practice oflabeling more than one product with a single brand name e.g., Citibank’s“Citihome, “Citimoble”, and LIC’s “Jeevan Dhara”, “Jeevan Akshay”etc.

The concept of branding of financial products offers several advantages.Brands command customer loyalty for the product. Each brand has a consumerfranchise which can be used to its advantage. Financial products aim to attractthe investors to bring his savings into the market. This is quite a delicate taskbecause the investor’s money is involved. Most of the financial instruments arevery similar. This is where the advantages of branding can be exploited.Branding can help in creating differentiation between the various financialproducts or public issues. Branding can also help to create some insulation fromthe competitor’s promotional strategy.

A successful brand will be demanded by a consumer even if the price isslightly higher. Trust is the key element if people are expected to part withtheir money. A good name evokes that trust and gives the investors confidencethat their money will be safe. Branding, especially umbrella branding, helps theconsumers to decide whether to buy a product when the new product qualitycannot be determined prior to purchase. Another strong advantage of brandingis that good brands help to build the company’s corporate image. In umbrellabranding, the advertising and promotion costs of subsequent products can bereduced considerably. This is because the brand-name recognition andpreference is already there.

© ALI

© ALI

9

Branding of financial products has arrived in India in a big way. The firstexample of the handling of a public issue was when NTPC came out with its“Power Bonds” in 1986. Since then, the investors have seen Reliance Petro-Chemical’s “Khazana”, Deepak Fertilizer’s “Mahadhan” and others. Most ofthe major issues of 1989 were branded - Bindal Agro’s “Goldmine”, UshaRectifier’s “Usha Lakshmi”, Essar’s “Steel Bonds” and Larsen and Turbo’s“L&T Vision”. Banks too have gone in for umbrella branding in big way. Forinstance, we have a series of Canara Bank’s schemes like, “Canpep”, Canstar”and “Canstock”, or, the series of Citibank’s schemes – “Citione”, “Citihome”,“Citimobile”. Even institutions like LIC have jumped on to the brandingbandwagon with their schemes like “Jeevan Dhara” and “Jeevan Akshay”.

The importance of brand name is crucial in the branding exercise. The brandname should not be a casual after thought but an initial reinforcer of theproduct concept. First, it should suggest something about the product’s benefitsand qualities. Secondly, it should be easy to pronounce, recognise andremember. Third, it should be distinctive.

There are a couple of things to be careful about while using umbrellabranding. Spillover occurs when information about one product affects thedemand for other products with the same brand name. Spillovers can bepositive or negative. All products under the umbrella contribute to the brand’sreputation. This joint estimate of quality is used to evaluate product. Thecompany cannot control all the information revealed about its product, nor can itprecisely determine how information will be shared by its umbrella-brandedproducts. For instance, if customers are dissatisfied by “Citimobile” – thisdissatisfaction can spillover to “Citihome” and other Citi schemes. Thus, it isimperative to maintain the quality of all the products under the umbrella brand,all the times.

A brand line should not be extended indiscriminately. Ries and Trout have calledit the line extension trap when the new products added to the brand does moredamage to the previous products than good. Any new product should beconsistent with the established line. A “fit” is said to occur, when a consumeraccepts the new product as logical and would expect it from the brand. Thecompany should know when to draw the line about introducing new productswith the same brand name. In other words, brand name should not be over-used. For instance, if Canara Bank introduces fifteen more “Can” – schemes,the investors will not only get confused but also begin to doubt the quality ofthe previous schemes.

Developing a brand requires a great deal of long term investment especiallyadvertising, promotion etc. It is quite an expensive proposition and hence isworthwhile mostly for large public issues or long term plans like a bank’sschemes. Nonetheless, the advantage of branding can easily be exploited by themarketers of financial products. With a little bit of caution and planning,branding can be as successful for public issues as it is for toothpastes orcigarettes.

Activity 3

Identify any financial services offered by bank, where an attempt was made tocreate a successful brand. Also identify the reasons, which make you think thatit is a successful brand.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

Financial Services

© ALI

© ALI


10

11.4 CHANNELS OF DISTRIBUTION FOR BANKS

The channels of distribution in financial services perform a number of keyfunctions, as follows:

Sales and offer of services and products, as well as advising customers.

Contact and liaison with advertising and public relations agencies to assist indesigning more effective advertising/promotional campaigns.

Gathering of information necessary for planning marketing activities, strategydecision and product development.

In distributing financial services, firms employ a number of channels. Theadvantages of direct distribution channels – for example branches, used to belower operational costs and more efficiency. In comparison, the selling throughindirect channels offers convenience to the customers and more “impartial”advice, as in the case of agencies.

The Branch Network

Bank’s major distribution outlets are their branches. The design anddevelopment of the branch network will be affected by :

Characteristics of the products – importance of service quality, inseparabilityof the product, intangibility of the product.

Customer needs – convenience, operating hours, availability of ATM,telephone banking, home banking and so on.

Environment factors – legislation, development of information technology.

Competitors – if a branch network is efficient, it will be a competitiveadvantage keeping up to date with changes made by competitors.

Advantages of the branch network includes:

Its accessibility for customers.

It keeps a bank’s name in the public eye.

The prime sites.

Banks become accepted as an important member of the community.

Disadvantages of the branch network include:

It is costly to maintain premises.

The staff costs.

The major investment involved – the amount of capital tied up in it.

It is old fashioned, difficult to modernize.

Small branches can be difficult to enlarge when expansion is necessary.

Branch location and distribution

As the roles and functions of financial services continue to grow in mostcountries, pressures are building up for more efficient distribution systems.Historically, for financial services, branches have essentially been retail outlets.Although in the last few decades or so the roles of the branches havechanged, financial services customers still regard convenience of delivery asbeing decisive when choosing a financial organisation. Moreover, locationdecisions involves long-term commitment of resources and as such haveimplications on the long term profitability of the bank. In distribution of bankingservices the marketer is faced with a huge market that should be duly served.This market falls into two broad categories:

© ALI

© ALI

11

The mass (retail) market: Standard products, relatively inflexible inperformance and cost, can be offered to this market. It spells out the requirementsof geographical decentralization, standardized services, heavy advertising andpromotion, attractive services and above all cost effective processes.

The individual (corporate) market: This market constitutes single orders ofsufficient size of importance to be profitable singled out for individual treatment.It requires individualized services and counseling, such as comprehensive financialadvise, the availability of research services and negotiated terms and so on.

Banks are now changing the image of their branches. Bank branches used tobe serious, dull places that often intimidated customers. All the staff used towork behind security screens and this created an unfriendly atmosphere. Now,some security screens have gone, banking halls are brighter and a friendlyatmosphere has been created that is less daunting for customers. Branches aremore like a financial services shop. Newly designed branches are open, plannedand many staff have moved into the banking hall to tables, to advise customersin a friendly way about financial matters, opening of accounts, solve problemsor answering queries. Though the importance of ATM’s, telebanking andinternet banking is increasing, branches still continue to be the most importantchannel of distribution for banks.

Internet Banking

Security First Network Bank, an Atlanta (US) based saving bank, is one of thefirst international banks to go operational on the internet. Within 10 months ofits launch in October, 1995 it garnered 5550 accounts and US$ 15 milliondeposits across the world. The services being envisaged by Indian Banksinclude:

View transactions in their accounts, exchange messages with the officersconcerned in the bank through a mailbox, request cheque book and getprinted account statements, structure loans by asking a series of ‘what if’questions and getting answers.

Request for funds transfer between accounts, issue stop payment requestsand standing instructions and do deposit modelling

Have on-line connectivity providing the customer with the ability to directlydebit and credit the account without the bank’s intervention etc.

A study estimates that in a full service branch, the cost per transaction is US$1.07 as against US$ 0.54 for telephone banking, US$ 0.27 for ATM fullservice, US$ 0.015 for PC banking and US$ 0.01 for internet based banking.

Activity 4

a) Discuss with 15-20 bank customers, the uses and applications that they havebeen making of the electronic modes of banking. What are the specificadvantages they perceive?

.....................................................................................................................

.....................................................................................................................

.....................................................................................................................

b) Very large percentage of existing bank customers however, do not avail ofthe electronic banking facilities. Discuss with some of these customers toelicit the reasons for their non utilization.

.....................................................................................................................

.....................................................................................................................

.....................................................................................................................

Financial Services

© ALI

© ALI


12

11.5 PRICING OF BANKING PRODUCTS/SERVICES

No discussion on marketing mix for banking services can be complete withoutunderstanding the concept of pricing and its importance, in detail. Pricing canbe strategically used as a tool to meet/reduce the competition.

Pricing affects the product cost and also plays a key role in decision making ofthe buyers (customers). Pricing is affected by competition, seasonality andgeneral trend of demand and supply. In short it can be said that the price isdetermined by cost, demand and competition in the market.

Price in the eyes of the consumer is the evaluation of the total product offeringwhich includes the brand name, package, product benefits, service, delivery,credit extended etc. Price can be defined as the money value of a product orservice agreed upon in a market transaction and can be shown as – PRICE =sum of expectations + satisfactions.

In a competitive market, price is determined by free play of demand andsupply. Price will increase or decrease depending on increase or decrease indemand for product. Pricing decisions link the marketing actions with financialobjectives of organisations.

Pricing affects:

1) Sales volume

2) Profit margin

3) Rate of return on investment

4) Product position

5) Image of the organisation

Price simply read can be described as “cost plus profit”. Therefore, properanalysis of cost and proper decisions regarding profit level have direct impacton pricing decisions/strategy.

Normally direct expenses which vary with volume of production/sales arevariable costs and indirect expenses are fixed cost.

A) Pricing Objectives

The pricing strategy to be adopted depends on the objective to be achieved.These objectives can be:

1) Growth in Sales – A low price can achieve higher growth in sales volumebut may affect the profit level adversely.

2) Market Share- The customer acceptance is reflected by market share of aproduct and is an indicator of acceptability of price.

3) Competition- To face the competition, prices can be lowered to maintainsales or in the absence of it, prices can be revised but stable prices help inmaintaining image or brand name and quality.

4) Pre-determined Profit – If a profit level is pre-decided as a policy, theprice has to be maintained at a particular level despite other factors as toensure attaining that objective.

5) Corporate objectives to have pay-back in a specific period also can affectthe pricing and price level.

© ALI

© ALI

13

B) Pricing Methods

I) Market based pricing system

In order to understand consumers based inputs on pricing system, we shouldalso take into account the market related pricing systems which adopt one ormore of the following approaches:

i) Perceived value pricing

ii) Psychological pricing

iii) Promotional pricing

iv) Skimming

i) Perceived value pricing: This is based on the belief the consumershave about the value of products and pricing is based on theseassumptions. This is supplemented by market research and if price ismore than buyer – recognised value, it may affect sales whereas if priceis less than buyer – recognised value, the revenue will suffer.

ii) Psychological Pricing: In many pricing systems, pricing is based onprestige – and can be kept higher to promote the idea of status andquality.

Many other times the price will be just below a round figure say Rs.99.90 (to show it is less than Rs. 100) or Rs. 499.00 (i.e. not Rs. 500/-or above).

Sometimes instead of giving a 20% discount, the price per unit per-se willbe constant (uncharged) but it is advertised that on purchase of 4 unitsone unit will be free.

iii) Promotional Pricing: This is used for promoting high level of sales orto clear excess stock which although is with a reduced profit margin.

iv) Skimming: This strategy is to ‘skim and cream’ i.e. adopting a highprice approach. When the product is new and innovative and in amonopolistic or less competitive market, the price will be higher (like inmobile phones) which can be progressively reduced with entry of moreproducers.

II) Cost Based Pricing

There are four main cost based pricing methods which are :

1) Standard cost pricing

2) Cost-plus pricing

3) Break-even analysis

4) Managerial pricing

III) Competition Related Pricing Strategies

The competitive pricing means pricing to compete with the leader in the marketwith respect to the price. It can be either to set higher price initially and thento offer discounts known as ‘discount pricing’ or to significantly increase salesvolume by competing with others already leading in the market by undercuttingthe prices significantly with the sole idea of penetrating the market.

11.6 PROMOTION OF BANKING PRODUCTS /SERVICES

Promotion is a generic term used for the communication efforts of the firm thatare directed towards achieving the objectives of a marketing strategy.

Financial Services

© ALI

© ALI


14

The promotion efforts include the marketing communication through

Advertising

Sales Promotion

Personal Selling

Publicity

Bank’s internal communication process, etc.

These elements of promotion serve as the link between the Bank and thetarget segment of its market (customers). You may note that promotion doesnot mean only advertisements but a Bank’s conscious communication effortstowards integrating its marketing strategies with business plans. Promotion thusmeans the Bank’s well organized, planned and goal oriented communicationefforts which must be in congruence with its overall business goals andobjectives in the desired market area keeping specific needs of customer inmind.

In the service industry like Banking, promotion assumes all the more importantposition as what we really sell is ‘abstract’ thing i.e. service with the interestrates, range of product etc. being more or less same, the service given throughproper promotional channel makes all the difference between two Banks inmarketing context.

Promotion can thus mean ‘communicating with the buyers (customer), in orderto strengthen his attitudes that are favourable to the (Bank’s) sellers’ offeringand to change his attitudes which are unfavourable to the sellers. Thispresupposes ensuring that such buyers become satisfied customers of the Bank,now or later.

a) Advertising

Although advertising is a very effective and most frequently used promotionaltool in marketing of banking services, it is desirable to measure theeffectiveness (impact) of an advertisement campaign. For this there cannot beany one criterion to assess the effectiveness. Normally below mentionedmethods are used to measure effectiveness of advertising:

1) Usage Measurement: This is done through measuring business growth,interviewing consumers.

2) Measuring Recalls: This can be either unaided recall or aided recall –which assesses the extent to which advertisements are retained incustomers’ mind.

3) Psychological Measurement: This can be measured through interviews.

4) Attitude Measurement: This is done through structured interviews orattitude scales.

5) Measuring Awareness: This is done through YES/NO type questionnaires.

The success of advertising affects successful launching of product/schemes,customer’s positive response of increase in business share. This can reflect inthe business figures like Deposits, Advances, Profitability, etc. and thecomparison of pre and post advertisement figures can reveal the visible effectof advertising campaigns.

It can thus be summed up that effective advertising is the technique of creativecommunication. It ensures co-ordination and application of various batches ofthe art and profession to achieve a pre-determined end i.e. to communicate amessage to the public in general or to the desired segment of public/market inparticular. Advertising is significant both as a social and economic force.

© ALI

© ALI

15

Advertising serves as a ‘mouthpiece’ for the organisation’s objectives to bemade public.

In simpler words, advertisement makes use of communication process with in-built psychological and sociological contents which influence the buyer’sbehaviour in advertiser’s favour through a process cycle of – stimuli, response,motivation and reward.

Activity 5

Carefully look through bank advertisements on the television and newspapers.What are the major themes that have been used to promote the banks? Listthese themes.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

Do the promotion efforts vary? How?

i) With the type of Bank i.e. public, private or foreign?

.................................................................................................................

.................................................................................................................

.................................................................................................................

ii) With the type of product being marketed?

.................................................................................................................

.................................................................................................................

.................................................................................................................

b) Sales Promotion

Advertising and Sales Promotion as parts of the marketing mix are integratedwith the marketing objectives and they are often co-ordinated with other sellingefforts.

As the name suggests, sales promotion is a collective name given to allmeasures used to promote the sales. Any sales by an intending seller of aproduct presupposes a corresponding buyer and , therefore, to sell anything thebuyer has to be made aware about the product and its advantages to the buyer.The visible benefits of the product have to be demonstrated to facilitate buyer’sdecision to buy that product.

In a controlled economy and market if the competition is low or less, salespromotion may not be necessary if there is only one seller and many buyersbut in a competitive market place, the importance of sales promotion cannot beundermined.

In Indian context in general and in marketing of banking services in particularduring the launching of product, sales promotion is an important task.

Before deciding the sales promotion strategy it is important to keep in mindfollowing three essentials:

i) Product Knowledge: This is first essential. The employees and specializedstaff promoting a scheme/product must have the through knowledge of both theadvantages and disadvantages of the product. Only after ensuring the marketdemand and specific needs of customers, the product/scheme has to belaunched with full details made available to staff before hand to promote thisproduct in a better way.

Financial Services

© ALI

© ALI


16

ii) Market information: This means knowing who will buy the product, whenhe will buy and why he will buy? This gives an idea about the probable marketshare and enables to decide promotion (selling) strategy to specific segment ofthe market. This also enables the seller to decide on the advertising throughproper media keeping in view the specific needs of the potential buyers.

iii) Reaching the customer: After ascertaining the market and ensuringproper product knowledge to all concerned; when it’s time to reach thecustomer, the campaign has to take into account :

a) TIMING – to launch the product;

b) APPEAL – to target audience; and

c) GEOGRAPHICAL TIMING: to ensure that when the customers respond, inadequate quantity, product will be available at all probable locations ofdemand.

Personal Selling: Sales promotion also can be done through personal selling.In banking context, it is the person at the counter who is the primary contactpoint with both existing and potential buyers (customers). Well informed andwell-trained staff at the counter, eager to explain the schemes to the customerusing smile, courtesy and proper communication process can ensure successfulsales promotion through personal selling, within the branch, across the counter.

The pro-active approach of the staff and projecting a harmonious image of thebank taking keen interest in customers’ interest can do wonders to boost theimage and increase business of the bank. Seminar, exhibitions, depositmobilization-month/fortnight, branch anniversary etc. are some of the otherspecial sales promotion measures taken by banks.

The sales promotion is very important instrument which smoothens the processof selling a product to the customer successfully. A well thought strategy ofsales promotion, like planned advertising, should be looked at as an investmentand not just another expenditure. Sales promotion is a bridge betweenadvertising and actual selling in the field. Like the sum 2 + 5 = 5, when properadvertising is added with sales promotion, publicity and personalized services itcan bring rich dividends in promotional efforts.

c) Publicity

The Oxford English Dictionary gives definition of word “Publicity” as : “Thequality of being public, the condition or fact being open to public observation orknowledge- the business of making goods or persons publicly known”.

The publicity differs from advertising not in its aim but in its technique/s. Whilethe latter has a more specific job to do i.e. inform and motivate, publicity seeksto interest and draw attention, without essentially motivating or informing thepublic

Publicity can be good or bad. With high customer expectations and presence ofvarious consumer councils these days it is just possible that a branch of a bankcan get wide bad publicity for some mistakes/flaws or inadequacies in givingservice.

The publicity handouts or press releases are the commonest form of publicity.Such a press release must

i) give specific facts

ii) not give any sales promotion suggestion

iii) be accompanied by photograph

© ALI

© ALI

17

iv) be prepared/sent well in advance of the function/event. Publicity normallyis not paid for by the organisations. It comes through good liaison withpress reporters, journalists and column writers. Good public relationstrategy usually compliments publicity to boost the bank’s image.

Publicity does the job of reducing ill effects of bad news and also increasespositive effect of goods news if properly backed by proper public relations.

e) Internal Communication

Thus far we have seen the various promotional measures that are required inthe communication process to achieve the corporate goals and objectives of thebanks.

In order to supplement such external communication measures, most of thebanks also have internal communication strategies in the form of an annualbudget or business and corporate plan which spell out its goals, objectives andtargets during the financial year.

The expectations of the CMD are conveyed with respect to corporate goalsusing past data and changes in economy and business environment appealing tothe managers/staff to realistically assess the business potential in the commonarea of their branches and to arrive at revised business targets as expected bycorporate goals based on analysis of market and potential of branches.Motivational techniques and recognition measures are used in such an exerciseof budget or business plan.

The success of such an exercise largely depends on the realistic assessment ofpast data and realistic targets set. The utilization of the top-bottomcommunication ensures positive feedback/response from bottom to top.

Besides business plan exercise, internal communication also involves:

1) House Journals

2) Circulars

3) Corporate objective/Business plan booklets

4) D.O. letter for encouragement/appreciation

5) Posters etc.

11.7 INSURANCE

a) Need for Marketing Insurance Services

Thre is an enormous scope to exploit the potential market and raise per capitalife premium. The need for marketing insurance services also arises due tofollowing factors:

– The insurance products have a distinct feature where benefits of theproduct comes at the later date and at times after a considerable time.

– The demand unlike consumers products is not inbuilt.

– Among the financial services too the insurance sector gets the least priorityas other investments avenues provide immediate yields.

– In case of life insurance the case is further complicated as in India peoplehave belief, traditional culture and religious background and tendency toleave everything to fate. This happens specially in rural areas.

– The rural market is still untapped. The insurance sector is yet to exploit thissegment which have vast potentialities.

Financial Services

© ALI

© ALI


18

– The concept of proper financial planning, taxation and investment is stilllacking among the middle class strata.

– Over the period of time the L.I.C. have come out with multipurpose betteryielding attractive terms insurance’s policies which certainly needs effectivemarketing to wipe of the synergic ideas in the minds of people that lifeinsurance policies are mainly for death hazards.

– The General insurance have wide scope for marketing as small and mediumbusiness entrepreneurs are yet to reap the benefits of general insuranceschemes.

b) Scope for Growth of Marketing Insurance Services

The scope for marketing insurance services is vast and thereby marketing ofinsurance services needs a re-look. There are number of impending changesthat are likely to make this sector more dynamic. The Insurance Regulatoryand Development Authority (IRDA) has been established in 1999 for promoting,regulating and strengthening the insurance sector. The following factors mayfurther induce promotion of marketing activities in the insurance sector.

a) IRDA aims at promoting the regulating professional organizations connectedwith insurance and re-insurance business.

b) The insurance sector is thrown open to private and corporate sector. Thiswill certainly expand the business dimensions.

c) There is also a move to specify the percentage of life insurance business aswell as general insurance in rural and social sector.

d) With the increased spirit of investment education and awareness there arealready indications of increased participation.

e) The yield on other avenues of investments such as banks, other financialinstitutions, mutual funds, capital market have come down and almost at parwith insurance investments. This trend will further enhance the scope ofmarketing insurance services.

f) Service standards are bound to improve and insurance premium shouldcome down once the insurance reforms takes place. With such a positivedevelopment the marketing scope would further increase.

g) The process of privatization will bring in many customer friendly insuranceproducts.

h) The marketing of insurance services would take together new shape oncebanking services, insurance selling and fund management are all inter-related.

i) Though the market of general insurance is smaller in comparison to lifeinsurance nevertheless the scope of growth is ample.

j) The Budgetary provision have provided additional tax saving opportunity tocertain specified insurance products such as pension policies. This will givefurther fillip to marketing strategies.

Activity 6

Against the backdrop of recent opening up of the insurance sector, what doyou think are the marketing implications for nationalist providers like LIC andGIC?

..........................................................................................................................

..........................................................................................................................

..........................................................................................................................

..........................................................................................................................

© ALI

© ALI

19

c) Strategies for Effective Marketing

Selling of services are different from goods in that, they are sold beforeproduction and consumption take place. Goods are purchased first then sold andconsumed.

Services also have particular characteristics such as their intangibility andvariability where they are difficult to standardize. This makes it more difficultfor customers to evaluate them (especially when they have no understanding ofthe service being provided and are relying on professional competence). Thisassumes significant importance in case of insurance services.

Opening of insurance to private insurers has potential of increasing sales indifferent segments because of:

1) Sophisticated and knowledgeable selling by qualified agents,

2) Cost effective products,

3) Increased use of “Family Package” policies (A good product-mix)

i) Widowed mothers

ii) Un-married mothers

iii) Single parent family

iv) Multipurpose products

However to augment the business in this sector and exploit huge resourcesavailable in the markets, effective marketing strategies will have prominent role.The majority of insurance business is undertaken by the agents nominated forthe purpose. They have crucial role in mobilising the business. Therefore theirprofessional approach to consumers assumes significant importance. Thefollowing aspects have to be considered in this regard.

Awareness about Demographic Changes: An agent must keep himselfaware of latest trends, such as:

i) With increase in “Average Life Span” in our country, the number of agedpersons are on the increase every day. Therefore, the financial problems oflonger retired life are no less than those of early death. In future insurancemarket of Annuity and Pension plans is going to expand significantly.

ii) Restructuring of national economy has brought in its wake many VoluntaryRetirement Schems. The employees affected from these schemes formpotential group of pension or Annuity Schemes.

Product Knowledge: It is obvious that a life insurance agent must know theproduct he is selling. What he is selling is an INTANGIBLE commodity.Therefore, an agent should not have superficial knowledge about various typesof policies. He must be able to draw out the philosophy behind the launch of aproduct or insurance plan.

Ability to Convince: Imagine a situation where an agent says to his client “Iwill got to my office and find out.” Such a salesman will not be able toconvince his prospects. KNOWLEDGE IS POWER: Yes, it has the powers toconvince others. An agent, in order to be successful must attain trainingsessions or seminars on insurance whether held by his company or outsideagency. He should make it a habit to read daily the material connected with hisprofession.

Consumer Orientation: A customer is always right because he is the causeof your profession. You are for him. There may be many agents who areinterested in him. Why he should be interested in you only? Here lies the

Financial Services

© ALI

© ALI


20

secret of your skills of salesman. Therefore, an agent has to so establishhimself as to enable the client to think that Agent cares for his interests, i.e.

i) Agent understands his needs.

ii) Agent is considerate towards his difficulties.

Selling Right Type of Policy: An agent should never go by his personalgains. The benefit of the customer (life assured) should be uppermost in hismind. It is said a stitch in time saves nine. However, for an insurance agent aright advice brings nine opportunities. Therefore, always sell the right type ofpolicy.

Activity 4

Contact at least 5 people who have tried to claim their motor insurance orhousehold insurance policy in the event of a mishap. On the basis of theirfeedbak, note the kind of problems customers may face while collecting policyclaims. What is the advise that you would have for the marketers of insuranceon the basis of the feedback collected by you.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

d) Role of other Institutions in Marketing of Insurance Services

An open entry has been permitted to private corporate sector, foreigninstitutions, banks and other financial institutions to the insurance sector. Thesystematic and planned marketing strategies by new entrants in the market willcertainly give a different shape to marketing practices for various kinds ofinsurance services. We may mention the possible out come benefits as under:

a) Banking services, insurance selling and fund management are inter relatedsynergies. Therefore insurance selling by banks are mutually beneficial tobanks and insurance companies. Banking products offer insurance productthrough the banking channel will complement banking.

b) With the entry of corporate sector with sophisticated technology, the qualityof services will improve significantly and so is the cost effective products.This will certainly widen the market horizons.

c) The regulations and controlling measures by IRDA would provide protectionto investor.

d) The professional training institutes will also have important contribution intraining the personnel and thereby sharpening their professional skills. It willhave positive development on marketing of insurance services.

e) There is also a need to expose institutional structure more particularly in themarketing segment to rural and semi-urban areas.

The efficient and well organized marketing strategies will bring more number ofinvestors to insurance services and large population uncovered so far will haveadvantage of access to this sector.

Exhibit 11.1

Financial Services Firms and Product Innovations

Developing new products is of prime importance for organisations. Thefinancial sector is also recognizing the increasing importance of newproducts. Due to the rapidly increasing level of international competitionthere is a growing need for product innovation in banking and insurance

© ALI

© ALI

21

products. The service characteristics of intangibility and inseparability raisea number of issues related to new service development. The main problemregarding intangibility is that people cannot feel, see or touch the productbeing developed, which means that people should work closely together inthe development process. Prototype is hardly possible. Intensivecommunication is needed between the people involved in developing thenew services, maybe even more than would be the case in manufacturing.The simultaneity of production and consumption (inseparability) warrantsstrong customer and user involvement in the process.

Becoming more innovative requires alterations at the deepest levels of theorganisation. They key changes that are required to become moreinnovative are concerned with the organisational structure, the underlyingvalues and beliefs and information technology. An important issue inbecoming more innovative in the financial services is to designate explicitlya ‘place’ for product development. Also, considerable attention has to begiven to changes in the value system of the organisation. Generally, banksand insurance companies are diffused with stability. Employees in thesecompanies have to get used to a special product development function andits importance. Role of IT in product innovations has also to be understood.Changing the perspective and investing in IT would help in increasing theinnovations potential of many banks and insurances companies

Source: Patrick Vermeulen, “Managing Product Innovation in Financial Services Firms”,European Management Journal, Vol.22 No.1 pp. 43-50, Feb 2004.

11.8 SUMMARY

This unit explored the basic concepts for understanding the way a consumerbelieves in selecting and consuming financial products and services. In order tobe able to manage their marketing effectively, marketers of financial servicesmust understand why and how people believe, so that the pricing, distributionand communication of the organisation’s offer can be profitably offered to itstarget markets. Apart from needs and perceptions, a number of individualvariables like consumer learning, their personality and self concept as well asgroup variables like family culture, sub-culture, reference groups and societyaffect buyer behaviour.

The key elements in determination of the marketing strategies for financialservices are the marketing objectives of the organisation, its target segment andits marketing mix. The process would involve the best possible selection of theelements of the marketing mix to enable the greatest degree of fit between theneeds and wants of the selected target group and the organisation servicesoffer such that the exchange process results in value creation for the consumerand the organisation. Once the organisation, looking at the needs of the targetmarket determines what is sold to whom (decision on the service product), thepricing, promotion and distribution will be easier to determine. In practice, thedetermination of these elements involves a thorough understanding of buyerpreferences and company capabilities. In developing a marketing strategy forfinancial services, marketers would thus need to go through a two stepsprocess: First to select or identify its target market or markets and then todesign a marketing mix to meet the needs of the target market better than itscompetition can. In this unit you have been explained in details the branding,pricing, distribution and promotional strategies for banks.

Financial Services

© ALI

© ALI


22

The insurance services in our country have wide scope for growth. A largenumber of investors could be covered with effective marketing practices. Theoperational difficulties encountered so far in effective marketing will altogetherhave a new look henceforth due to large number of players in the market. Theprofessional skills to mobilize the business will have key role in competitiveenvironment. With the increased participation by various segments, the role ofother institutes will also increase considerably. Need and strategies for effectivemarketing of insurance services have been outlined in the unit.


1. Discuss the individual and family influences on buyer behaviour for financialservices.

2. Explain the importance of branding in marketing of financial services withthe help of suitable examples.

3. Explain the development of different types of bank branches and othermodels of delivery of banking service.

4. Explain briefly various methods of pricing financial products.

5. Define Promotion. What should be a ‘Good Promotion Blend’, for marketingbanking services?

6. Explain with the help of examples how effective marketing can be useful inenhancing the insurance business.

© ALI

© ALI

23

UNIT 12 TOURISM AND HOSPITALITYSERVICES

Objectives

After going through this unit you should be able to :

describe the nature of tourism as a service industry and identify theparticipants in the tourism process,

discuss the factors governing tourism supply and demand,

apply the various segmentation criteria to the tourism market,

identify the levels of demand for hotels, and

discuss the components of the hotel marketing mix.

Structure

12.1 Introduction

12.2 Factors Governing Tourism Demand and Supply

12.3 Segmentation in the Tourism Market

12.4 The Hotel Market

12.5 The Hotel Product

12.6 Hotel Pricing and Distribution

12.7 Communications

12.8 Extended Marketing Mix for Hotels

12.9 Marketing Consortium or Cooperatives

12.10 Summary



12.1 INTRODUCTION

The tourism and hospitality industry is identified by the products which areneeded to satisfy the demand for travel, accommodation, food and beverageaway from home. Demand for accommodation is a function of travel andtourism. A tourist is often defined as an individual spending at least 24 hoursaway from home for the purposes of pleasure, holiday, sports, business orfamily reasons. Tourism is one the major industries today, with over 720 milliontourist traveling annually. The annual average growth rate for the industry isestimated to be between 9% to 12% globally. Tourism as a service industrycomprises of several allied activities which together produce the tourismproduct. We find involved in the tourism product development, three major sub-industries. They are: (a) tour operators and travel agents; (b) accommodationsector (hotelling and catering); and (c) passenger transportation. According tointernational estimates, a tourist spends 35% of his total expenditure ontransportation, about 40% on lodging and food and the balance 25% onentertainment, shopping and incidentals.

The product in this case in not confined to travel and accommodation butincludes a large array of auxiliary services ranging from insurance,entertainment and shopping. Demand generation, in addition to the consumermotivation, is also heavily dependent upon powerful persuasive communicationboth at the macro (country) level and the micro (enterprise) level. The

© ALI

© ALI


24

participants in the process of this service business can be illustrated by theFigure below (Figure 12.1).

Figure 12.1: Element of International Tourism Industry

Source: John Lea, “Toursim and Development in the Third World”, Routledge, Chapman andHall Inc. 1991

Some of the pointers to nature of tourism as a service industry are:

1) Tourism accounts for nearly 6% of world trade.

2) Bulk of the tourism business is located in Europe and North America, with1/8 of the market share being shared between the other world regions.

3) The highest growth rate in tourism in recent years has been in the thirdworld

4) Tourism, like most pure services, because of the characteristic ofinseparability, exemplifies a product which cannot be sampled beforepurchase, the prospective consumers have to travel to a foreign destinationin order to consume the product. Technology today provides the opportunityof some assessment of sorts, through net generated images and richinformation. While these do provide some basis for evaluation, only theactual transaction of the service act would lead to realistic assessment ofthe product.

5) The major players in the tourism market include a number of intermediarycompanies. Some of them transnational in character, some of them exhibitvertical integration, both backward and forward, acquiring interests in allmajor sectors in this service industry. Quite common is the existence ofloose coalitions between intermediaries so that a more complete range ofservices can be offered to the consumer.

12.2 FACTORS GOVERNING TOURISM DEMANDAND SUPPLY

Because of the unique nature of the tourism product-it being an amalgam ofthe physical characteristics of a destination and the infrastructural as well asmanagerial efforts of the promoter; the determinants of tourism demandemanate from both individual; tourist motivations and the economic, social andtechnological factors. Not quite so apparent is the creation of tourism demandas result of sophisticated tourism promotion.

The economic, social, and technological determinants of tourism demand includehigh and rising incomes, increased leisure time, good-education, new, cheaperand faster modes of transport. Some of the important factors are discussedhere.

Travel demandinfluenced by:

rising incomes

increased mobility

improved transport

education

marketing

Travel destinationinfluenced by:

historicalconnections

accessibility

nature of touristproduct

search for foreignexchange

Tourist IndustryIntermediaries

travel agents

tour companies

hotel companies

transportcompanies

© ALI

© ALI

25

a) Income Levels

In the last 30 years, disposable incomes around the world have shown upwardtrends, thus allowing more money for activities like leisure travel. Smallerfamilies have meant higher allocations per person in family. More and morewomen are entering the work force and in real terms the cost of the travel hasfallen. The dramatic rise of tourism in the last 50 years can be attributed in alarge measure to the combined effect of more leisure time and rise in both realand disposable incomes.

b) More Leisure time

Increasing unionization of labour right from 1930 onwards has reduced thenumber of working hours per week. Changing managerial orientations towardshuman resources have increased the level of pay and paid vacation time inmost developed countries. Added to that is the component of social tourism, ineastern European countries where the state often pays for the cost of holidayfor certain classes of employees. All this has resulted in a larger number ofpeople having longer periods of leisure which could be allocated to travel.

c) Mobility

Better transportation and communication services have made the world asmaller place, and have brought both exposure and awareness of distant landsto large sections of potential tourists across the world. Faster modes of travelhave cut down on travel time, making it easier for people to economically planand execute trips aboard.

d) Growth in Government Security Programmes and Employment Benefits

The growth in government security programmes and well entrenched policies ofemployee benefits mean that quite a large number of families may have longterm financial security and may be more willing to spend money for vacations.

e) Growth of Business

Business travelers have always contributed to a large extent to the tourismtraffic. The increasing volume of transnational business and the attendantinternational travel has meant a spurt in the tourism business. Business travel isin fact such an important segment of the tourism market that many internationalairlines and hotel chains have targeted it as their key area of operation, developinga whole range of services to cater to the needs of the business travelers.

f) Tourism Motivation

Even if the people have the time, the money and the mobility to travel, tourismwill not occur unless people have the motivation to take a trip. Motivation totravel may spring from a variety of needs. A variety of typologies developedfor the tourists have classified tourists as those wanting to satisfy need forstatus and self–esteem, need for recognition as well as the need to know andunderstand, and the need for aesthetics.

Consumer may know what they want but are frequently unaware of the needthat underlines that want. A couple may want a winter cruise but may not beable to decipher why. All too often tourism marketing is focused on advertisingto the want and not addressing the underlying need. If such needs can beestablished and promoted, the result would be a more effective marketingeffort. For example the couple who want the winter cruise may feel that they,on their return will be the envy of the entire neighbourhood (need for status) ora person may feel that he would like to see a monument and its surroundingsfor himself in order to truly appreciate its beauty (need for aesthetics). If suchunderlying motivation can be unearthed, and the extent measured, it would bepossible to design tourism effort more effectively.

Tourism and HospitalityServices

© ALI

© ALI


26

A clue to the motivations regarding travel, apart for travelling for business isprovided by the tourist typologies, which classify tourists on the basis ofreasons for travel. Valerie Smith gave an interactive typology of touristsstressing the large variety of tourists and their behaviour at a destination.According to her, tourists can be classified into the following seven demandcategories:

i) Explorer: Very limited in number, these tourists are looking for discoveryand involvement with local people.

ii) Elite: People who favour special, individually tailored trips to exoticplaces.

iii) Offbeat: These are filled with a desire to get way from the usualhumdrum life

iv) Unusual: Visitors who are looking forward to trips with peculiarobjectives such as physical danger or isolation.

v) Incipient Mass: A steady flow, travelling alone or in small organizedgroups using some shared services.

vi) Mass: The general packaged tour market, leading to tourist enclavesabroad.

vii) Charter: Mass travel to relaxation destinations which incorporate asmany standardized, developed world class facilities as possible.

The interesting fact is that each of these categories has a corresponding rangeof impacts on the host society and destination, the more intensive effects,progressively, being felt in each category down the list.

Erik Cohen has suggested a cognitive normal typology to describe what travel,or a visit means to different people. Thus tourism could be :

i) Recreational: One of the commonest forms, the objective of travelhere is to relieve the tensions and strains of work, involves no deepersignificance.

ii) Diversionary: When the visit is a true escape from the boredom androutine of home life.

iii) Experiential: The tourist here is a modern pilgrim looking forauthenticity in the life of other societies because he has seemingly lost itin his own.

iv) Experimental: When the tourist wants to experiment with lifestylesother than his own.

v) Existential: The type describes a tourist who actually acquires a newspiritual centre as a result of the travel experience.

A different way of looking at tourists is by analyzing them psychographically.Plag felt that psychographically all tourists can be viewed as being spread alonga continuum. At one end are allocentric tourists who want an independentvacation experience and at the other end are psychocentrics who become partof the mass tourism market. According to Plag, different type of tourists areattracted to different tourist destinations depending upon their position betweenthe two extremes of the continuum. The new destinations generally appeal tothe small number of allocentric adventurous tourists, who prefer to fit in thelocal culture and consequently make few demands. As the destination gainspopularity, it loses its charm for the allocentric who moves away to untouchedlocales. The destination draws most of its tourists from the midcentric sectionnow. As the destination gives way to larger and larger number of arrivals, itgoes through another change and becomes dependent upon foreign investmentand manpower. The psychocentrics now feel at home in such place, as it

© ALI

© ALI

27

offers a range of facilities and services “just like back home”, whichincidentally change its identity from the natural geographic and social localeswhich initially lured the allocentrics.

Generalisations like these help tourism marketers to view tourism from heperspectives of both the tourists’ personal motivations (what does it do for me)and the host society. There is, for example, evidence to show that theaspirations of westerns tourists (comprising a major chunk of tourism traffictoday) may not tally with the priorities held by third world host countries for thedevelopment of their industry.

Some governments may wish to maximize income from the industry byencouraging mass tourism with a minimum of local contact (as in case ofbeach resorts in Mexico). Others may wish to make their tourist tradeupmarket to gain the same benefit from a smaller number of top spendinginvestors (as in the case of Bali) while still others may want to encouragemass tourism with maximum visitor-host interaction by encouraging the use ofvillage accommodation and hotels.

The Tourism Products and the Supply Factors

The supply factors, as the mix of destination, facilities and services is usuallycalled, can be broadly classified into five broad types.

a) Attractions: These may be natural (land forms, flora, fauna) or man made(historic or modern) or by reason of cultural or sociological destinations(music, art, folk lore).

b) Transport: Tourism growth is closely related to the supply and extent ofdevelopment in transport systems. Certain third world destinations andcertain locations within these countries are rendered in an advantageousposition, by easy access to the world air routes.

c) Accommodation: A critical component of the supply factor, accommodationcan be further divided into commercial sectors (hotels, guest houses, holidaycamps) and private residences or evencamping/canvassing sites.

d) Support and auxiliary services: Cover a large array of supportingservices such as shops, restaurants, banks and medical centres.

e) Physical and communication infrastructure: To make available thefacilities noted above, the infrastructural requirements needed are coveredunder this head. Examples are roads, airports, electricity, sewage disposaland so on. These are generally provided by government because of highcapital costs.

12.3 SEGMENTATION IN THE TOURISM MARKET

The tourism market can be segmented by using variables like: (a) age groups;(b) number of trips taken per annum/season; (c) income and education; (d)purpose of the trip. In contrast to the first three the last variable i.e. purpose ofthe trip has been fairly extensively used by the major players in the tourismindustry – hotels, tour operators and travel agents, and airlines.

Using this criterion segments have been identified as travel for business,vacation, convention, personal emergencies, visits to relatives and other types.The different elements in tourism marketing mix are then tailored to suit thedifferent demand elasticities of these segments. Table 12.1 gives an idea of thetourism market as segmented by purpose of travel, along with their majormarket characteristics. Other bases sometimes used to segment Tourism Marketare:


© ALI

© ALI


28

Table 12.1: Some Major Tourist Segments and their Main Marketing Characteristics

Main Tourist SegmentsMarketing Holiday Tourists Business Tourists CommonCharacteristics Interest Tourists

1. Typical Destination Resort-orientated Big City Visit friends,relatives,education,pilgrimage

2. Seasonality High, marketing mix No seasonality Partial seasonalitycan assist however inspreading demandlevels

3. Length of Stay Could be influenced Normally short and Prefer long stay.by promotion/ cannot be prolonged This will becommunications by advertising prolonged if the

costs of additionalstay are‘reasonable’

4. Mode of Transport Varied mode(s) of Airplane invariably. The cheapesttransport. Time Objective is to mode of transportspent on the way reach the destinationto destination is as soon as possiblepart of the holidayor package tour.

5. Hotel Accommodation Yes. Normally at Yes, normally Only to a veryUser un-expensive hotels expensive hotels limited degree

6. Requires Entertainment Very much so. Yes, but to a limited NoNormally the degreeentertainment is partof the tourist package.

7. Price Sensitivity Very sensitive Low price elasticity Sensitive(high price elasticity of demandof demand)

8. Role of Advertising/ Very important Rather limited Quite important,Marketing particularly salesCommunication promotions are

important

9. Tour Package(s) Of great interest and Of no appeal at all Limited appealImportance demand

Source: Meidan A, “The Marketing of Tourism in Marketing in Services Industries”, Ed.Lovelock, Prentice Hall Englewood Cliffs N.J.

a) Benefit Segmentation: Based on the realization that different tourists seekdifferent benefits from the tourism experience, benefit segmentation consists ofidentifying the benefits that the tourist might be looking for in a given productclass, identifying the kind of tourist who might be looking for each benefit anddefining the tourist destination which come closest to delivering each benefit.The objective here is to find sizable groups of people all seeking same benefitsfrom a tourism product. Once different benefit segments have been identifiedand grouped, each segment can then be measured in terms of volume ofconsumption, frequency of consumption and possible growth prospects.

© ALI

© ALI

29

b) Psychographic Segmentation: Using lifestyle and personality variationsamong consumers, psychographic segmentation seeks to determine variance inconsumer demand for tourism and then tailor or package the product to thesedemands. For example, travel agencies and tour operators market differently toordinary families seeking a relatively cheap summer holiday than to swingers(young unmarried, fun-loving people seeking ‘up-to-date’ destinations andhedonistic living)

c) Distance traveled: As a generalization, long distance travelers comprisethe larger and more profitable segment in the tourism market while nearertravelers may be seen as representing the low margin high traffic consumergroups. Marketers depending upon their marketing objectives and the need tobalance margins and volumes, use differential marketing mix to attract bothsegments.

12.4 THE HOTEL MARKET

The total hotel market, which consists of the total demand for hotel facilities,may be divided into various segments. These segments are determined as perthe needs of the people and the means they possess to pay for theirsatisfaction. The market for the hotel will be served according to what isprovided, how it is provided, and for how much. At a managerial level, it isrelevant to conceptualise the demand for the hotel sector at both the primaryand secondary levels, to be able to assess the requirements on the supply side.

Table 12.2: Primary and Secondary Levels of Demand

Primary level i. Basic demand which exists for hotelfacilities but not being served atpresent.

ii. Displacement demand arising fromthe clientele for other hotels wherethe customers’ needs are not fullymet by the market package offered.

Secondary level i. Created demand which does notexist so far, and arising from peoplewho do not normally use hotelfacilities, or from people who do notuse the hotel facilities in particulararea.

ii. Futuristic demand which may occurat sometime in the future, due tocertain socio-economic or socio-psychological factors or both, e.g.,rise in the standard of living andper capita income (‘green revolution’areas, new industrial complexes),increase in population, changingsocial systems and habits, etc.

A new hotel introduced in a particular segment of the hotel market mayeventually be able to exploit all these levels of demand. It is essential that thereshould be substantial basic demand which can be tapped by a new hotel.Displacement and created levels of demand require a period of time andsustained sales effort to realise their potential, whereas, the assessment offuture demand relates to the continuing long-term prosperity of the hotel. If thebasic demand is absent but if the displacement, created and future levels ofdemand promise well for an investment appraised on ’10 to 15 year basis’, the


© ALI

© ALI


30

decision to start a new hotel under such circumstances has perforce to be along-gestation decision.

For accommodation, each segment of the market, together with its primary andsecondary divisions, contains some or all of the potential buyers of hotelaccommodation, as shown in Table 12.3, which may sometimes overlap. Theremay well be more types according to the geographical, economic, industrial, andsocial characteristics of the location of each hotel. Similarly, for food andbeverages, each segment of the hotel market contains varied categories ofpotential buyers of catering services which may also sometimes overlap.

Table 12.3: Potential Buyers for Accommodation and Catering Services

Accommodation Transit tourists, passing throughthe particular location.Terminal tourists, for whom thelocation represents end of ajourney.Traveling businessmen.Visiting personnel, i.e., business orindustrial employees for whomtravel is an occasional part of theirjob.Organised tours.Conventions, conferences,workshops, meetings, where thelocation is pre-fixed by theorganisers.Social visitors, i.e., guests toweddings or other social functions.

Catering Occupant customers staying in thehotel.Transit or change customers-people other than local residents ofthe areas patronising the hoteleither by impulse of intentionallyplanned for meals, refreshments, etc.Organisation and societiesconsisting of members acting inunison.Local business customers whopatronise the hotel due to localindustrial or commercial activity.Meeting and conferences organisedby agencies from outside areas.People on tour who step into thehotel for meals, refreshments, etc.

12.5 THE HOTEL PRODUCT

The hotel product has a number of components like accommodation, food andbeverage, recreation and health, shops, car rental service, apart from others.But of all these, the accommodation and food and beverage components arethe primary ones.

© ALI

© ALI

31

Philip Kolter has identified 5 levels of a hotel product. These levels are:

1. CORE BENEFIT THE FUNDAMENTAL BENEFIT THE CUSTOMER ISBUYING (HOTEL: REST/ SLEEP)

2. BASIC PRODUCT BASIC, FUNCTIONAL ATTRIBUTES (ROOM; BED,BATH…)

3. EXPECTED PRODUCT SET OF ATTRIBUTES/CONDITIONS THE BUYERNORMALLY EXPECTS (CLEAN ROOM, LARGETOWEL, QUIETER LOCATION)

4. AUGMENTED PRODUCT THAT MEETS THE CUSTOMERS’ DESIRES BEYONDEXPECTATIONS (PROMPT ROOM SERVICE, MUSIC,CHECK IN/ OUT, AROMA)

5. POTENTIAL PRODUCT THE POSSIBLE EVOLUTION TO DISTINGUISH THEOFFER (ALL-SUITE HOTEL)

From the above table it is quite clear that at the “Core” level all hotels arealike and the differentiation starts as you start moving up.

The accommodation component of the hotel product requires a clearidentification of the type of clientele the hotel wishes to attract and serve.Regardless of ‘star’ categorisation, as customers tend to graduate from one‘star’ category to another, accommodation can be either of the luxury typealmost regardless of the price, or the economy type providing the essentials ofshelter frugally. Between these two there are a variety of accommodationfacilities-catering to customer whose accommodation is paid for; leisurecustomers who pay for their accommodation; customers who are part of groupseither on business or on pleasure. However, once the hotel property has beenconstructed to serve identified and specific customer segments, the possibility ofvariation is severely restricted. Admittedly, the economy type property cannot bemoved up into a luxury one without considerable expense and time although areversal from the luxury to the economy class is more feasible and lessproblematic.

To tide over the above difficulties, hotel architects, the world over, are nowdesigning properties with as much flexibility as possible to make multipurposeadjustable public rooms feasible. In the case of a hotel where such flexibilitydoes not exist, the hotel product decision for accommodation will dependentirely on the accuracy of selling rooms to the right type of customer.

On the other hand, the food and beverage component of the basic hotel productoffers greater scope for flexibility. Qualitative differentials can be very wideand would range from high class a la carte high-price menu restaurants withcomplete table service to the medium or low-priced menu dining rooms.Capital expenditure is relatively lower- decor, furnishings and fittings can bechanged more easily to transform the image of a restaurant or dining room ineither way. Availability of room service from either the hotel’s own kitchens orfrom outside is another area of flexibility. It is obvious, however, that residentguests in a hotel know what exactly they are buying in room occupancy and infood and beverage sales. Hence their experience of the hotel product willcondition their future relationship with the hotel and the patronage afforded.Table 12.4 below gives the various ways in which accommodation and foodservice products can be augmented.


© ALI

© ALI


32

Table 12.4: Hospitality Product Augmentation

Accommodation Food and Beverage

Reservation system convenience Speed of food serviceReservation system simplicity Ordering convenienceAcknowledgement of reservations TelephoneLift attendants Advance ordersRoom service Order-taking table staffStandard of housekeeping Complaints proceduresCourtesy Advance reservationsProcedures for handling overbooking Reliability of food/beverages qualityInformation service Customer advice on winesCustomer recognistion Provision of special foodsCredit provision Cooking to orderBaggage handling Acceptance of credit cardsPet/child care Variations in portionsProvision for disabled Home deliveriesGroup accommodation Extent of non-available menu itemsDiscounts on club referrals, etc. Fiber /calorie informationCleaning/laundry Provision of doggy-bagsCourtesy care Function-catering facilitiesWillingness to bill later Quality of table appointments

EntertainmentPrivacy / discretions

Source: Francis and Buttle, “Hotel and Food Service Marketing”

Activity 2

Compare the product mix of a city hotel with a resort hotel. Also identify thoseservices which may create a competitive differentiation for both types of hotels.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

12.6 HOTEL PRICING AND DISTRIBUTION

Pricing

It is difficult for a hotel to exercise differential pricing except for certainspecific purpose. These may typically be differentials in tariffs and pricesduring the peak and lean seasons; group rates; contract rates for airline crew;special conference rates or special concessions to attract customers etc.However, by and large, hotel pricing tends to follow or conform to pricingstandards applicable to the particular city area or resort, to competitive hotels,to the amount of traffic being generated in the hotel location, tourist location,international or national conference venue, and so on. Nevertheless, hotelpricing also suffers from a degree of lack of flexibility, although to a lesserextent than that of the hotel product. The depreciated valuation of the hotelproperty, its financial management efficiencies, credit policies and other factors,specially cost of empty room-nights, fixed overheads, also have a bearing ontariffs and menu prices.

Distribution

Hotel distribution relies on interdependence with other industries servingtravellers and tourists such as the transportation industry (airlines, railways,

© ALI

© ALI

33

roadways, shipping lines), travel agents and tour operators, national and statetourism organisations, shopping and entertainment providers. In sum, thoseservices which provide certain other facilities to the traveller or the touristwhich are bought when accommodation and food are assured.

Some interesting features of hotel distribution need critical examination. Thefirst is cooperative distribution which operates in passing on traffic overflowfrom one hotel to its neighbour, on a reciprocal basis, without affecting regularbusiness with the main intermediaries in the distribution system such as travelagents; tour operators; airlines and special business clientele. The second is theincreasing development of franchising. Franchising may take various forms butit basically involves making available to the franchisee (the beneficiary) of aservice, system that is designed and controlled for quality standards by thefranchiser. The franchisee gets the advantage of being part of a reservationand sales system which ensures a certain level of business which may not beavailable otherwise. The franchisee also benefits from the image of thefranchiser, professional advice and training provided by the franchiser. In theprocess, he improves his own operational image and efficiency. The franchiseralso benefits as his investment is not required in the franchisee’s properties. Atthe same time, the franchiser’s distribution system is expanded and thefranchisee is well motivated to succeed in his own business. Hotel distributionis, thus, an important element of the marketing mix.

Activity 3

Identify the role of a travel agent in marketing hotel services airlines.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

12.7 COMMUNICATIONS

Perhaps this element of the hotel marketing mix is the most important one as itis directly responsible for bringing customers to the hotel. Hotel marketingcommunications are either direct or indirect. The direct communications arethrough personal selling, advertising, sales promotion and direct mail. Appropriatemessages are conveyed to those who are potential buyers of the hotel productand those who directly influence decisions to buy the hotel product. Personalselling of the hotel product is effective when long-term relationship between thehotel and the customer is sought. It is also required where the level of businessper customer is likely to be significant. Indirect marketing communications forhotels include public relations and publicity, both of which may or may not forma part of the hotel’s marketing communication programme but may functionindependently. The major elements of the hotel communication mix thus are –mass media advertising, direct mail, sales promotion, public relations, andpublicity.

1) Advertising

Hotel advertising is an effective and, generally, a long-term effort to inform thecustomer about the existence of the property, giving details about the locationand types of facilities offered. Advertising is also aimed at influencing theattitude of the customer to bring about his acceptance of the particular serviceoffered. Informative advertising is necessary for a new hotel or a hotel offeringnew facilities or services which are different from the past. Persuasiveadvertising is aimed at a more competitive situation..


© ALI

© ALI


34

In advertising, a hotelier is dealing with a non-personal contact with the targetaudience, unlike sales promotion where the hotelier is aware of the identity ofthe target. The purpose of advertising is indeed the same as the purpose ofcommunication – it aims to inform and persuade the consumer or the traveltrade to change, to influence their attitude towards the advertiser’s product ororganisation.

Effective advertising not only gains the attention of the prospective guest,advertising will be the first introduction of the area, location and the hotel itself.The success of this introduction will invariably depend upon the impressionsmade. To ensure that this impression is favourable, all advertising should havethe touch of quality or class. A flavour of showmanship and originality inconcepts are required to make advertising efforts effective, distinctive,interesting and compelling. Further, to meet the competition, effective advertisingmust stand out as superior to competing advertisements, which, in turn, need aneffective advertising campaign.

In the hotel industry, planning the advertising campaign is very important as thehotel product has certain unique characteristics: it being highly intangible cannotbe exhibited; it is normally purchased in advance and from a distance; since itcannot be transported, it cannot be taken to the market-place. Hence one hasto depend on the descriptions and the representations of the hotel productrather than the actual product in the market-place. Additionally, if the hotelproduct in the market-place can only be promoted on the strength of thesedescriptions and representations, then its competitive position is a direct resultof the quality of those descriptions and representations. Therefore, theadvertising campaign should be planned carefully and well in advance.

The rationale behind identifying the target audiences and creating propermessage is that there is a need to differentiate marketing communication oradvertising approach to different target audiences. Market segments aredifferent because they have different needs, they have different requirements;they want to buy different products or they want to buy the same product, butfor different reasons. Hence, while making an attempt to communicate withdifferent target segments, there should be a differentiated communicationapproach. In communicating with the travel trade a hotel must provide the factsand figures in simple language whereas a consumer may like to listen toevocative language. While communicating with the prospective hotel guest, it isessential to identify psychological motivation and try to motivate the prospectivehotel guest through a message which promises a benefit – a benefit that willsatisfy the guest’s psychological or other needs. The hotel product facilities andservices can be advertised against a number of areas, as there are differentmarket segments, as mentioned below:

Conventions, conferences and meetings

Room occupancies

Reservations for various hotel facilities

Good eating and top class food

Family dinner

Dining, dancing, and discotheques

Bar and permit rooms

Buffets, special dinners, and lunches

Sophisticated entertainment

Popular entertainment

Weddings and special accommodations

Festival and parties

© ALI

© ALI

35

The objective of advertising in hotel industry vary from image building toimmediate sale. One may advertise keeping more than one objective or a mixof objectives in view. Some of the objectives of hotel advertising are given inTable 12.5.

Table 12.5: Objectives of Hotel Advertising

To increase sales– Induce potential guest/customers to visit the hotel– Obtain enquiries through mail/telephone on a priority basis– Promptly announcing special offers or any other attraction– Secure enquiries from travel agents/tour operators/wholesalers– Stimulate impulse action (e.g., book a table for dinner)– Induce conference buyers to contact hotel– Publicise unique selling points of the hotel – location, atrium or special

architectural features and any other specific feature – which wouldattract attention

– Support regular travel/tour agent in selling the hotel

To create awareness or interest in ‘Facilities/services available’.– Individual facilities (rooms, suites, pool, bar, health club, etc.)– Group of facilities, e.g., specialty restaurants, etc.– Special facilities/services, e.g., CCTV, audio-visual equipped conference

hall, full office-cum-secretarial services with internet, STD telephone, fax,etc.

To create awareness or interest in ‘Benefits to be gained by patronizing hotel’:– Specific, e.g., tangible, psychological, aesthetic– Financial e.g., prices, discounts, credit, etc.– Quantitative, e.g., portions, size of guest rooms, private balconies, etc.– Qualitative, e.g., guest room climate control, wide range of items on

menu– To create awareness or interest in ‘Versatile advantage of hotel’.– Mini- Frigidaire in guest room “do-it-yourself” tea/coffee/breakfast kit in

guest room– Multipurpose meeting room-cum-wedding hall– Collapsible bed-cum-divan/room convertible into meeting and private

dining room– “Wake-up call”-cum-”appointment reminder” device in guest room

To create awareness or interest in ‘Resources behind the hotel’.– Stand-by generator for uninterrupted power supply– Water purification system: “Drink from bathroom tap”– “Take a tour of our kitchen”: latest equipment– “Meet our managers”: quality of service-oriented staff

To effectively counter wrong impression created by:– Competitors– Media– Public Opinion

To educate guests/customers on:– Conveniences– Atmosphere and general finesse– New facilities/services provided

To create favourable image of hotel:– Good employer– Good corporate citizen– Role in the community– Foreign exchange earner– Developing and supporting ancillary-supplier industries/business


© ALI

© ALI


36

Determining and Creating Specific Advertising Message

With a penetrating knowledge of the consumer’s wants and the product’squalities, the hotel or the hotel organisation (or the advertising agency on behalfof the hotel or hotel organisation) has the background to create messages thatwill interpret the want-satisfying qualities of the product in terms of consumerwants. The advertising message thus becomes a connecting link with theadvertiser, with want-satisfying products or services and the potential hotelcustomer with wants to be satisfied. So there is a need to have a professionalapproach while designing the specific advertising message. Therefore, it isessential to know the job which has to be done; to know the hotel product; toknow the requirements of potential hotel customers; to know answers to therequirements of the potential customers.

The conference buyer, for example, needs certain specific information ofparticular interest and importance to him. So when a hotelier communicateswith the conference buyer through the news media (like press release, etc.)there is a need to differentiate between the communication approach. In caseof conference and convention market segment it is essential to providetechnical information, facts and figures in its communication. How high yourconference halls are? Whether the ceiling is flexible? It is important because ifthe ceiling is low and the conference buyer wants to have audio-visualpresentation that may not be possible.

The conference buyer would also be interested in the configuration of seatingarrangement – how many people can see the platform? How many people cansee the screen on which some audio-visual presentation may be projected?Information regarding secretarial services, computers, stenographers, typing,simultaneous interpretation, details of technical equipments, audio-visualprojector, overhead projector, slide projector, sound amplifiers, microphones, TVsets, CD players, computers etc. would also help a conference buyer in takingdecision whether to book a conference in a particular hotel or not.

An advertising copy is still incomplete – it needs more information. Theconference buyer is also interested in getting information about the rest of thehotel or hotel organisation, so the advertisement copy must provide informationregarding location of the hotel and how attractive it is, whether conference canbe held during a particular time of the year or throughout the year, transportfacilities, other services, track record with other conference buyers, prices, etc.In a nutshell, one can say that while advertising it is necessary to rememberwhat your advertising job is, what your hotel product is, what are therequirements of potential customers and what are the answers to therequirements of the potential customer.

Advertising Decisions: In the process of advertising, several decisions needto be taken. The most important is – how much to spend? A common methodis to allocate a percentage of the sales revenue, either past or anticipated, foradvertising expenditure. This takes no account of the real need for advertising.In fact, it may be essential to advertise heavily when sales revenue is low or ina situation of decreasing demand. Another method is to take an ad hocdecision as to how much the hotel can afford to spend on advertisinganticipating additional business. This is a very subjective approach and ignoresthe problem that advertising may be needed most when the business can leastafford it. A third method is to undertake advertising expenditure if the currentvalue of the extra revenue generated will be greater than the cost ofadvertising. This would be an acceptable decision if necessary information wasavailable as to how responsive the demand was to advertising expenditure.Very few companies can arrive at a sound investment decision approach of this

© ALI

© ALI

37

kind towards advertising expenditure. A fourth method is to achieve competitiveparity, i.e., in a situation where hotel units have agreed against using pricecompetition, individual units will aim to spend as much on advertising as theircompetitors do, resulting in an increase in the industry’s costs without anycorresponding benefit. The fifth method is to develop an advertising budget toachieve a certain set of objectives or tasks. It is in this method that the role ofadvertising, as part of the promotion element in the marketing mix, can beclearly identified to inform by answering the following four questions. First, isadvertising used to inform or persuade the customer, or is it to consolidate orreinforce the existing customer-acceptance of the hotel? Second, is theinformation to be conveyed through advertising general in nature or forpromoting a special facility or service? Third, is the advertising to reach habitualor impulse buyers, the customer himself or his influencing agent, existing ornew customers, local, national or international customer? Lastly, what will bethe overall effect of advertising or revenues-in particular, whether a generalincrease in occupancy or food and beverage sales is expected; alternatively ifoff-season facilities are to be utilised to be best advantage? If the advertisingdecision is based on the fifth method, it is possible to select appropriate media– newspapers or magazines, radio/TV or cinema, direct mail or handouts andbeam the correct advertising message to the appropriate audience.

2) Sales Promotion

Sales promotion is aimed at generating immediate response in terms of a buyingdecision. For a hotel which wishes to cash in on sales promotion, the specificpart of the business which stands to benefit, i.e., room sales or food andbeverage sales, has to be clearly identified and a promotion drive which willbring about the desired increase of sales must be launched. For instance, a hillstation hotel which normally has almost empty rooms during winter or off-season may promote its accommodation and other facilities when a famouswinter sports festival is to be held in that area or a national or internationalconference is to take place or any other special convention or workshop whereparticipating delegates also need relaxation. People who would normally not visitthe hill station in winter will do so when presented with such an opportunity.

There are two ways in which one can examine sales promotion. First, schemeswhich can be defined in terms of time, and second, as an ongoing permanentactivity/function. Irrespective of these distinctions one can clearly identify threegroups of activities under sales promotion: trade promotions; consumerpromotions; and displays.

Trade promotions are schemes which are generally intended to induce orpersuade the travel trade or the distribution channel to generate more demand.The term “travel trade” has been used in its generic form-to refer to all theavailable distribution channels or outlets to the hotel industry. Trade promotionsare, therefore, schemes which are intended to induce or persuade the traveltrade to sell more of the hotel product or hotel service and for this purpose avariety of incentives are given.

Consumer promotions are schemes to persuade the consumer, i.e., the potentialhotel guest or the user of hotel services, to buy a particular hotel product orservice, at a particular point of time. Consumer promotions should beunderstood as the first definition of sales promotion schemes which are definedin terms of time and are finite.

The third group of activities which include product display and related point-of-sale material, i.e., posters, show cards, display units, etc., help keep inperspective the view that one can’t obviously display the actual hotel product orservice at the point of sale and so one has to depend on the descriptions andrepresentations of the actual product.


© ALI

© ALI


38

Forms of Travel and Tourism Consumer and Trade Promotion Schemes:Hotel promotion, as individual schemes, more often than not are cooperativeschemes, i.e., they depend upon one or more of the other sector(s) of thetravel and tourism industry. Some schemes can be set up and operated by ahotel but a great deal of promotional schemes available to the hotel industry aredependent on the cooperation of other sectors of tourism and travel industry.The other reason is to enlarge the awareness of the opportunities available tothe different sectors in the industry. In Table 12.6 different types of salespromotion methods have been listed. The list is neither exhaustive nor are theexamples given for each type of promotion listed, meant to be exhaustive.These are some of the schemes available to the hotel as well as to the hotelindustry, as such. The examples prove that most promotions of the hotelproduct are cooperative and the industry is dependent on the cooperation ofother sectors, namely, airlines, transport operators, travel agents, tour operatorsor allied sectors.

Table 12.6: Forms of Travel and Tourism Consumer and Trade Promotion Schemes

Type of Promotions Example

1. Price-off Promotions Special terms for specific clients at specifictime; e.g., off-peak discounts: discountsfor specific departure/hotel stay dates ortimes, etc.

2. Premium Offers Special package deals, e.g., three weeksstay for the price of two; family plans;children free if accompanied by parents;special introductory prices, etc.

3. Couponing Coupons entitling the holder to specialterms, e.g., discounts at shopping centres,discounts for petrol, free excursions andsightseeing tours, free use of hotelrecreation facilities, etc.

4. Contests (consumer) Prizes awarded to consumers winningspecial contests, e.g., free holdings/stays.

5. Contests (trade) Prizes awarded to travel trade winningspecial contests, e.g., free holidays/stays,or other articles, usually products of thedestination country concerned.

6. Loyalty Schemes “X” sum of money off next booking ifdone within a certain period of time; “Giveaway” to loyal customers.

7. Trade Incentives/Discounts Offered to retailers/wholesalers forachieving specified sales volumes, e.g.,bonuses, override commissions, quantityor volume discounts, etc.

8. Guarantees Money-back guarantees in case ofcancellation of flights, tours failures, badweather, etc.

9. Credit Schemes Purchase of tours on installment paymentbasis, normally extended by travel tradeorganisations with bank affiliations–“Travel now, Pay later schemes”, etc.Acceptance of payment by credit card.

10. Cooperative Advertising Allowance or financial assistance given toa tour operator or travel retaileradvertising specified hotel/product.

© ALI

© ALI

39

11. Training Schemes Free familiarisation tours for travel agents/tour operators; training seminars andbriefings for sales personnel, etc.

12. Merchandising Support Free display material and other selling aidsoffered to retailer/wholesaler as a part ofthe special campaign.

13. Quiet Weekend There is a particular pattern in all thecommercial hotels around the world,namely, a quiet weekend, because businesspeople go home. How a hotel should goabout for generating additional business,because anything extra that one gets isreally worthwhile. The hotel or hotelorganisation can contact the people toorganise fairs, exhibitions, fashion shows,cultural sessions, etc., during these days.And one can contact them eitherpersonally or through direct mailing.

14. Welcome-cocktail To generate more demand for “Food andBeverage”, hotels offer the first drink freeas part of sales promotional effortsbecause after one drink the guest may wellask for more and thus give additionalbusiness to the hotel.

15. Honeymooners Return Trip Some hotels give special coupons tohoneymooners to come and celebrate theirfirst or subsequent wedding anniversary.This gives an aura and finesse to thehotel. It also ensures permanent customerand future business.

16. Discount for Agents and Airlines’ Travel sales promotional efforts help inCrew developing good relations with the travel

trade and may help in getting favourablepublicity.

17. Free Ticket for Sound-n-Light Some of the hotels give free tickets toShow their guest for sound and light shows

conducted in their hotels. This promotionaleffort helps in developing and cementinggood guest relations.

18. Sun-n-shine Guarantees Some of the beach resort hotels whosebusiness depends on sunshine can givesuch type of guarantees to their guestsduring the off-season. If there is nosunshine the money paid is returned tothe guest. If the hotel has some crediblesystem of good weather forecast, one canget good business.

19. Consumer Contests Some hotels in collaboration withconsumer goods organisations, organisecontests for joint promotion.

Activity 4

Identify how important it is for a hotel located at a Hill Station to use“Promotions” during off-season. Also identify the possible sales promotionschemes it can offer.

............................................................................................................................

............................................................................................................................

............................................................................................................................


© ALI

© ALI


40

3) Public Relations

Public relations can never be some kind of special sugar that can be sprinkledor coated on a sour or difficult situation to make it taste sweet orcomparatively functionally easy. Public relations, as a marketing communicationfunction, aims to supplement the total communications/promotional effort byhelping to create and enhance a favourable image of the hotel or the hotelorganisation; and by counteracting any adverse influence that may exist fromtime to time, as also by creating a proper goodwill for the hotel or hotelorganisation. It is needless to say that a well researched and effective publicrelations mechanism will pay handsome dividends in the long run. At all times,remain genuine and don’t attempt to oversell. Public relations ought to be asustained ongoing affair and it should be harmoniously integrated into the totalpromotional effort.

When it comes to operational levels, public relations must be distinguished interms of a ‘variety of public’ – guests, media professionals, governmentagencies, community, and employees – which are of interest to the hotel as aunit or the organisation and therefore strategies should be evolved to exercisehealthy relations with all such publics.

Guest Relations: There is an obvious public or group which is the customerand this form of public relations is termed guest relations.

Media Relations: Hotels also deal with the media, with the press and withelectronic media, in other words, with the mass media. Hotels need mass mediaeither for their own sake because they are opinion leader, also because theyinfluence public opinion, or they want to reach some other group through themedia. This aspect of public relations is described as media relations or pressrelations. This is probably the most important area of the total public relationsof a hotel organisation and indeed any organisation in the tourism industry.

Relations with Government Agencies: These are the authorities with whomthe best of relations, at various levels, have to be maintained whether they arecity authorities, local, state government or central government. They all have abearing on the operation of the hotel or hotel organisation.

Community Relations: There is also the community within which the hoteloperates. This is important from the point of view of a hotel and therefore,there is a need for community relations. The question of community relations isvery important for certain hotels that are located in fairly remote areas of thecountry. Also to those which cater to foreign tourists where there is a verysharp distinction in lifestyles and in the spending pattern of the communitywithin which the hotel operates. In an underdeveloped area of the country, if aluxury resort is created (it may not be luxury from an industrial and technicalpoint of view, but for the people who live in and around that area where thehotel is being built, it is luxury) it is possible that the community may resent it.This factor dictates a need for good community relations.

Employee Relations/Labour Relations: And finally, an important aspect towhich a great deal of public relations activity, on the part of a hotel, must bedirected, is the group of employees of a hotel. Employees relations or labourrelations is very important because the hotel industry is a service industry, anindustry in which a large proportion of the labour force comes into directcontact with the customers; an industry which depends on the personalised andqualitative aspects of the product. Hence, unless one can generate the fullestenthusiasm, highest loyalty, high sense of motivation, and pride in theorganisation, one’s effort to create consumer satisfaction may very well be

© ALI

© ALI

41

frustrated. So another area to exercise good public relations is employeerelations.

There can be a wide variation in the objectives of PR from one organisation toanother. The nature of the relationship between an organisation and publicvaries, depending on factors such as the size of the organisation and communitywithin which it operates; the product; types of services or faculties offered; thetype of target market segment, etc. Some of the public relations activities all ofwhich may not be applicable in case of a hotel are as follows:

Listening to the public to determine their attitude about the organisation andits policies, programmes, products, personnel and practices.

Satisfying hotel customers or removing guest dissatisfaction through prompthandling of complaints, correcting the causes of the complaint or anyirritants and making need based adjustments in the policies, practices orproducts (as a package of services) of the hotel organisation.

Establishing a customer or travel trade correspondence function to answerenquiries about any matters regarding the hotel or hotel organisation.

Getting feedback and creating/developing promotional material, advertisingappeal, or total advertising campaigns, sales letters, direct mail material, etc.

Training of employees to provide prompt, pleasant, courteous, accurate andfriendly service to anyone who contacts the hotel organisation personally, onphone or through correspondence.

Assisting the managers and employees of the various departments of thehotel in improving their own communication and public relations efforts sothat their is an air of efficiency.

Working with the personnel in advertising (can be the advertising agency),sales promotion and personal sales to create consistent, effective, honest andpersuasive messages for all of the hotel or hotel organisation’s publics.

Establishing open communications with other organisations, governmentagencies, travel agents, tour operators and community leaders on mattersrelating to the organisation and its economic, environmental and socialimpact on the country, local community, and individual consumers.

Conveying to society that the organisation is listening, reacting, adjusting, andprogressing in its attempts to promote optimum satisfaction to its diversepublics.

These are only few samples of the kind of objectives public relations personnelhave established in a hotel or a hotel organisation. Some of these objectivesmay appear to be quite broad in their content and scope for operationalpurposes. If, however, a constant and in-depth attempt is made, these can helpto a great extent in promoting the hotel package of product and service.

4) Publicity

Another aspect of marketing communication is publicity which is the promotionnot necessarily created by the organisation and usually generated by the media.Thus, publicity is not a marketing function like marketing research, productplanning, distribution system, advertising, sales promotion, public relations, etc.,which are the marketing activities/techniques. Publicity is rather an objective ofpublic relations as through good public relations one tries to get publicity andgenerate publicity.

News media in every community do look upon industries, hotels and otherbusiness for news. This occurs because every enterprise has an important andeven direct bearing on the social, economic and sometimes political life of thecommunity. Newspapers present news of public interest to the readers.


© ALI

© ALI


42

Bad publicity is mostly the result of lack of information and often an indifferentattitude towards the press. Hence newsworthy information should be madeavailable to the press. It is in the interest of the organisation to supply thisinformation because it shows a willingness to cooperate. An indifferent attitudemay unfortunately result in damaging coverage through an article, review orappraisal of a situation or condition; or even an unfavourable report that willadversely affect the image and the business of the hotel. A willingness to sharethe news with the media will help a great deal in handling those situationswhere wrong published new would affect the hotel or hotel organisation.

12.8 EXTENDED MARKETING MIX FOR HOTELS

The conceptual framework of the extended marketing mix, as applicable toservices has been discussed in Unit 7. Let us see how these concepts areapplicable in the hospitality sector.

The first element of the extended marketing mix for services is physicalevidence which includes servicescape as well as other tangibles. Tangibles arethose objects and physical clues which might represent the service. Forexample dress code of staff, etc. The servicescape relates to the setting inwhich the service is delivered. Servicescape issues are particularly significant inall services where “customer goes”. (You may be aware that services can beclassified into three broad categories. First are those service organisationswhere customer goes. Like, we go to a hotel, hospital, bank, restaurant,health club, etc. The second is those service organisations which go thecustomer. For example, an AMC provider goes to the customer to servicethe computer hardware. The third type of service organisation are those inwhich neither the customer goes nor the organisation and both transactfrom the distance, like a mobile phone service provider, credit card,insurance services etc.). From Table 12.7, we can identify how theseservicescape elements and physical evidences are relevant in the hospitalityindustry

Table 12.7: Servicescape and Other Tangibles in a Hotel

Servicescape Other Tangibles

Facility exterior Business cardsExterior design StationerySignage Billing statementsHotel gate area ReportsLandscape Employee dressParking UniformsSurrounding environment Brochures

Internet/Web pageFacility interior

Interior design and equipmentsLobby and other waiting areasInterior of roomsRoom sizeTypes of specialty RestaurantsPool areaLayout of the various facilitiesAir quality/temperature

The second element of the extended marketing mix is people. In the serviceorganisations both internal marketing and selection of the right target customersare important. Internal marketing and management of employees are alsoimportant in hospitality sector. It is being said that in hotel organisations theroom to employee ratio is 1:2. This means, a 100 room hotel may have about

© ALI

© ALI

43

200 employees. It is likely that the service may suffer if this ratio is notmaintained. Some hotels have identified alternate options to reduce the labourcost. For example, most hotel guests expect bed-tea and, therefore, roomservice staff requirements are very high. Some hotels provide electric cattle, teabags, sugar and milk powder in the room itself, and they find that their costsare much less than hiring people to deliver bed-tea. Similarly other areas arebeing identified for reducing the man-power costs while maintaining the qualityof services. Integration of information technology is one such method.

The third element of extended marketing mix is the service delivery process.There can’t be any compromise on such issues and we have seen that in someof the excellent properties (hotels), they do not attract many customers becauseof poor service delivery. On the other hand, small and ordinary properties whichare able to compete very well in the market place only on the efficiency inservice delivery and high quality.

Activity 5

a) Compare the servicescape and tangibles of two hotels in your city; oneshould be at the higher end and the other on the lower.

.....................................................................................................................

.....................................................................................................................

.....................................................................................................................

b) Also study the relative importance of those aspects in marketing hospitalityservices.

.....................................................................................................................

.....................................................................................................................

.....................................................................................................................

12.9 MARKETING CONSORTIUM ORCOOPERATIVES

There is need for cooperation among the small and medium independent hoteloperators due to increase in the pressure put on them by chains and also bythe travel and tourism industry as a whole – like, airlines getting into hotel andtravel trade; tour operators getting integrated, etc. So, the marketing of thehotel product has become a problem for the smaller hotel operators. Thesolution to this problem perhaps lies in cooperative marketing efforts whichcould be either ‘group marketing’ or ‘area marketing’.

In ‘group marketing’, the basis of cooperation is similarity in standards – thestandards may be according to ‘Star’ categorisation, similarity of services,similarity of attractions, etc. In group marketing, one way is for hotels tocooperate throughout the country thus offering a total India to a budget touristor group of tourists.

The rationale behind getting together is naturally ‘gain’. A small operatoroperating a small hotel independently in a town cannot really afford to spendeven on the minimum promotional effort that is required of a hotel (assumingthat particular hotel is not in a monopoly situation), on the other hand, if hotelsjoin together they can afford to send their sales representative to the travelagents to sell their hotels abroad. Further, this cooperation can be extended toreferrals and recommendations also.


© ALI

© ALI


44

The other form of cooperation for hotel marketing is called ‘area marketing’.Area marketing could be a ‘cooperative’ of independent hotels in an area ordestination – all hotels of the area get together and attempt to promote themarket or the area together, irrespective of the difference in standards orquality of the hotels. The effort is to attract tourists to a particular destination,which could be a location, a city, a resort, a state or a country.

12.10 SUMMARY

Tourism and Hospitality is one of the major industries today. This unit explainsyou the various marketing aspects related to tourism and hotels. The unit beganwith an understanding of various elements of international tourism industry andthe factors governing demand and supply. You were also explained the majortourist segments and their main marketing characteristics. Subsequentlymarketing issues related to hotels have been discussed. Some of the keydecisions relating to hotel marketing are: the products, the price or tariffs,distribution and marketing communication. Just as the chef prepares varied andtasty dishes with the same basic ingredients, the marketer can also vary thequantum and proportion of the elements of the marketing mix to achieveappropriate marketing goals and sales targets. A hotel where the product isalready designed and fixed, one cannot change the prices quite often and thedistribution is limited to a few selected outlets, it is marketing communicationwhich is the most significant component of the marketing activity. Although thevarious marketing communication activities are undertaken separately, it isnecessary to undertake an interrelated approach so that messages conveyedthrough personal selling, advertising, sales promotion, public relations andpublicity are not at cross-purposes. These may tend to confuse rather thanclarify the single important communication of the hotel, which is the product thehotel offers to the customers it wishes to serve on terms that are bothacceptable to the customers and economically viable for the hotel. In theultimate analysis, the marketing communication effort generates a convictionand confidence whether the hotel is worth patronising or not. It is, therefore,difficult to assess a marketing communication programme in terms of sales andrevenue of t he operating departments, unless the trends of such sales andconnected transactions are monitored carefully over a period of time, especiallyin these days of competition.


1. Describe the main participants in the international tourism process anddiscuss the factors responsible for growth of tourism industry.

2. What is a hotel product? Identify the support and facilitating services for abusiness hotel in a metropolitan city.

3. Do you think that the concept of marketing mix is applicable to the hotelindustry? If yes, how?

4. Explain the distribution strategy you would follow for a budget hotel locatedat a popular hill resort.

5. Recall your experiences of staying in a particular hotel more than once. Didthe “Heterogeneity of Service”, each time you visited, affect yoursatisfaction levels? Would you recommend some practical tips forstandardisation? Also identify the marketing communication mix of the abovehotel and recommend improvements in it.

© ALI

© ALI

45


Apte, G. “Service Marketing”, Oxford University Press, 2004.

Bukart, A.J. and S. Medilik, “Tourism – Past, Present and Future”,Hienemann London, 1975.

Kotas, R. (ed), “Marketing Orientation in the Hotel and Catering Industry”,Surrey Univ. Press, 1985.

Ravi Shanker, “Communication for Confidence”, Asian Panorama, Sept-Oct,1989, pp. 17-23.

Ravi Shanker, “Sales Promotion in Hotel Industry”, Indian Journal ofMarketing, May-August, 1990, Vol. XX, No. 9-12, pp. 2, 28-33.


© ALI

© ALI


46

UNIT 13 HEATH SERVICES

Objectives


describe the types and segments of health services in Indian market,

explain the concept underlying pricing of health services,

understand the strategic considerations in implementing the pricing policy,

explain the service quality issues in health services, and

understand the role of marketing communication for health care services.

Structure

13.1 Introduction

13.2 Types of Health Services

13.3 Pricing of Health Services

13.4 Implementing the Pricing Policy: Strategic Considerations

13.5 Service Quality in Health Care

13.6 Marketing Communication for Health Care Services

13.7 Case Study

13.8 Summary



13.1 INTRODUCTION

The Indian Health Care Market is more of seller’s market. The demand faroutstrips the supply. As in case with any other product or industry in a seller’smarket, the ‘marketing’ aspect in Indian Healthcare market is given a lowlevel of importance. Some of the organisations which have started giving athought to marketing are also more limited to ‘sales’ aspect or ‘image building’exercise and not to total marketing approach.

However, there will be changes in the near future towards acceptance ofmarketing activities as an essential part of health care organisations, though notas much as in developed countries (where demand/supply conditions andpurchasing powers are totally different from ours). The major reasonsnecessitating a shift towards marketing approach in India are:

In certain market segments, competition is becoming more intense.

More consumer awareness.

Setting up of Corporate Hospitals.

Increasing purchasing power.

Need to attract limited available specialists.

In India, where medical care infrastructure is inadequate compared to therequirements, proper attention has be to given to educate people about thenature of illnesses, the facilities available, importance of healthcare and hazardsof ignoring these aspects. An educated citizen would mean better utilization ofavailable facilities as well as prevention of many diseases, thereby easingpressure on the scarce resources.

© ALI

© ALI

47

13.2 TYPES OF HEALTH SERVICES

The type of health services available in India can be broadly categorised intotwo :

a) Government owned

b) Privately owned / commercial

The Government (both Central and State) has a network of institutions atprimary, secondary, and tertiary levels. These include sub-centers, primaryhealth centers, community health centers, rural hospitals and dispensaries inrural areas, sub-divisional and divisional hospitals , medical college hospitals andspecialised hospitals. One important government health care scheme is theEmployee State Insurance scheme designed for industrial workers. The schemeis mainly financed by contributions from employers and employees in theimplemented areas. The scheme provides both medical benefits as well as cashbenefit like sickness benefits, disablement benefit, maternity benefits etc.

During the last couple of decades a lot of private nursing homes, diagnosticcentres and specialty hospitals have come up in urban areas, with their majormarket being middle and high income group people. The healthcare market hasalso witnessed the emergence of ‘Corporate Hospitals’ in India. ApolloHospitals, a Rs. 10.24 crore public limited venture opened at Chennai onSeptember 18,1983 has the distinction of being the first corporate hospital inthe country. Medical care is now emerging as a big industry in the privatesector. This has resulted in some competition and better availability of advancedtechnologies/super specialties, which were so far available in western countriesonly. Since large investments are required for setting up of such hospitals, itwas beyond the scope of an individual and the most viable alternatives was tohave corporate hospitals. However, most the these recent developments areagain mainly targeted at middle and high income groups.

Raju and Joshi have classified the health care needs in India into three maincategories:

1) Emergency Care: As the name suggests, this is required in situations ofdire necessity like accidents, fire, stroke etc. These are the situations whenthe survival of the patient is in question.

2) Routine Care: This refer to periodic patient visits to the medialprofessional involving checkups and for ailments where meeting a doctor isessential but an immediate meeting is not critical.

3) Elective Treatment: This is a medical procedure that a patient chooses toundertake on his or her own initiative. These include ‘Life StageTreatments’ (associated with events which people typically plan for at somestage in their life like permanent birth control procedures, teeth removal inold age etc) and ‘Life Style Treatments’ (associated with activities thatpeople undertake to improve their ‘Self’, boost their image e.g. cosmeticsurgeries, weight reducing treatments, hair implantation etc.). Life StyleTreatment segment is likely to grow in India at a fast rate.

13.3 PRICING OF HEALTH SERVICES

Pricing is one of the most important decisions that you as a provider of healthservices will have to take. The sheer variety of available price levels for similarservices among different providers of medical and health services is indicativeof the differential practices that are being used to arrive at the ultimate pricefor various services.

Health Services

© ALI

© ALI


48

The pricing strategy for any given serivce, medical services included, dependson three basic fundamentals. These are costs, value and competition. Thecosts represent the monetary value of everything that the organisation has toutilize in order to create and offer the service for the patients. In the short runor the long run, all costs must be recovered if the organisation is to earnprofits. Costs thus represent the lowest limit below which in the long run,prices cannot be set. On the other hand, you cannot set the price, beyond thevalue that your customers assign to the service, simply because at that pricelevel, exchanges (or purchse of service) will not take place. Consumer’sperception of value of a given service would thus set the upper limit beyondwhich prices cannot be set. Between these two limits service organisations mayhave the freedom to charge whatever prices they determine, but for thepresence of a third variable, the competition. You are not the only provider ofhealth services in the market. There may be several other providers withsimilar or better services. The prices that your competitors charge for a similarservice will limit your freedom of setting prices between the two limits providedby the costs and the consumer’s concepts of value. The prices being chargedby the competition would thus determine the actual level at which prices for agiven treatment or service may finally be set in between these two limits. Torecapitulate the three basic variables that are fundamental to any pricingdecision are:

how does my consumer define value for a given service.

what are my costs in providing that service.

how does my competitor price the same service.

Activity 1

Identify any basic hospital service like an X-ray analysis, a complete healthcheck examination or a medical consultation for suspected typhoid in threemedical establishments in your city. Do you find any price variatins? What inyour view are the reasons for these variations?

............................................................................................................................

............................................................................................................................

............................................................................................................................

Why is Pricing for Medical/Hospital Services Different from Pricingfor Goods

In order to realistically set your prices, you should be able to have anappreciation of what role does price play in the customers’ decisions to avail agiven medical service or health plan. Health providers must, therefore, have aclear idea about how their prospective client population perceive prices andprice changes of various medical services offered by them. The three basicways, in which pricing for hospital/clinical/medical services differ from pricingfor goods are the issue of customer’s knowledge of prices, the role of prices inindicating quality of services and the issue of non-monetary costs.

a) Prices of Hospital Services and Customer Knowledge: How importantis price to the customer when he/she tries to select a particular hospital/practitioner for a particular treatment? Do customers have any idea at all aboutthe costs associated with such services? Do customers really have clearawareness about the exact prices they would be required to pay for a giventreatment before they decide to avail of a given treatment? Let us briefly lookat these issues and their implication for pricing of health services. To take asimple exercise, ask adult people around you a few questions about healthservices and their prices. For example, what is the price for a medical checkupin your city? What is the price for a service like a root canal operation, or a

© ALI

© ALI

49

simple tooth extraction? What is the price one is likely to pay for a bonesetting process after a fracture and so on. You will find that few people will beable to answer accurately on the basis of their memory alone, because clearideas about such prices are not available. The price point in our memory for aproduct or service is called the ‘reference price’ for that product or service.Very few prospective patients have a clear reference price for the range ofhealth services provided by hospitals and clinics. Let us examine some of thereasons for this phenomenon.

Health services are intangible, and can be offered in a variety of configurationswith variation in accompanying services. Hospitals, therefore, are able to createa number of permutations and combinations of a given treatment package,resulting in complex pricing structures. If a prospective customer wanted tohave comparative assessments of prices for a Ceaserian section, she/he wouldfind that the type of package varies (length of stay, associated servicesprovided), patient particulars may vary and necessitate price variation(complexities, age, medical condition), the level of services may vary (single vs.double room, patient to nurse ratio etc.) Few hospitals would offer exactly thesame features or package of services. Prices are, therefore, not strictlycomparable.

The problem becomes compounded on account of the fact that in quite a fewcases medical providers may be unable to give an accurate price figure inadvance as they may not, at the very outset know what a given treatmentwould ultimately involve. In case of health services, customer’s individualsneeds also result in different prices being charged. Previous history, generalmedical condition, age related health complications etc. may often determinethe course of action that would need to be taken for a given patient, finalprices, therefore, may also be a function of individual needs of differentpatients.

It is also comparatively difficult to gather accurate pricing information of allcomparable hospitals, because unlike retail outlets displaying prices on theirmerchandise, prices of health services are not really displayed except forroutine services and consultation charges.

It must now be clear to you that prospective customers often possessinaccurate information about prices of health services. The implication of thefact for your pricing strategy are important. The first implication is thatconsumer uncertainty can be reduced by finding some ways of communicatingprices at least for all routine services; creating of price visibility is an issue thatmany hospitals consider seriously.

The second implication is that while the customer may not ‘know’ the finalprice until after he has been in the service transaction for sometime for hisinitial treatment, prices become an important criterion for repurchase of theservice as the customers’ knowledge of the service costs has now becomemore accurate.

b) Prices and Quality of Health Services: One of the interesting thingsabout service prices is that because other cues to quality of service are seldomavailable, customers tend to use prices as indicators of service quality. In caseof goods, the tangible nature of the product and the possibility of physicalexamination by touching, smelling, feeling enables a customer to have anassessment of the quality of the product before he buys it. In case of serviceswhich are intangible, such pre-purchase assessment is difficult. Research showsthat in case of most services, because other tangible indications to assessquality are not available, consumers use physical evidence and price as

Health Services

© ALI

© ALI


50

surrogate indicators of service quality. Wherever pre-purchase assessment ofquality is not easily assessable high prices in the consumer mind get associatedwith high perceived quality. Medical services are among the services which arehigh on credence qualities, where evaluation of service quality even afterexperiencing a given service (for example a by pass surgery) is difficult tomake. In such situation consumers depend on prices as a cue to quality. Pricesfor medical services, therefore, must be determined keeping in mind the factthat price and quality for such services are positively associated. In addition tocost coverage and/or meeting the competition, prices must be set to convey anappropriate and desired quality image.

c) Costs other than the Monetary Cost: There is an increasing realisationon part of service providers that apart from the monetary cost, customers haveto bear several non monetary costs also while availaing a given service.Sometimes these costs affect consumer valuation and affect his choice ofalternative service offers. These costs include time costs, search costs andpsychic costs.

Health services require direct participation of the patient and thus require himto spend both waiting time and interaction time with the hospital subsystems –registration, specific tests and of course the doctors. For any given appointmenthis time spent may comprise both waiting time and time with the doctor. Timespent in availing a given service represents a specific cost to the customer.Some health services, specially the costlier ones like a by pass surgery requirethe customers to go through a lot of information search to identify the bestpossible alternative offers are comparable, one variable may include apart fromthe prices, the expertise of the doctors, facilities offered, location etc., suchcosts are sometimes considerable and also have to be borne by the customer.Sensory costs are the other class of costs that may make a difference.Unpleasant sounds, noise, crowds are some of the sensations that most peopleare uncomfortable with. In hospitals that are located in crowded or squalidneighbourhoods, or are overcrowded customers may have to bear these costs.If there are alternatives which are comparable on other variables mentionedearlier, customer may like to avoid the sensory costs, even if they have to paya little higher.

For health services, one of the most potent costs are the psychic costs – notunderstanding the service, fear of uncertainty, fear of undesirable consequenceslike pain, disability or loss of control are very important in the customer’sdecision to avail or postpone a given medical transaction. Providers of healthservices, therefore, must be aware of not only the monetary costs like cost oftime, cost of search, sensory and psyche costs because there costs offsetconsumer valuation significantly and should this be an input in pricingconsideration.

Activity 2

Talk to two patients of a premium private clinic/hospital in your town and totwo patients from the Government hospital. Discuss with them their reason forselecting the hospital they chose. From the former, try to find out, why inspiteof high price, was their choice made in favour of this hospital. How does theiranswer reflect the concepts studied above?

............................................................................................................................

............................................................................................................................

............................................................................................................................

© ALI

© ALI

51

13.4 IMPLEMENTING THE PRICING POLICY:STRATEGIC CONSIDERATIONS

In addition to variables like costs, demand and competition and theconsiderations of your own objectives in arriving at a pricing figure, there arecertain issues which demand decision before you can implement and administera pricing strategy. Lovclock has clearly focussed on these issues in terms ofkey questions that must be addressed while determining the pricing strategies.The following discussion highlights these issues and the underlying decision thatmust be made in order to be able to define and implement your pricingstrategy.

i) How Much to Charge: The issue of costs is important for the pricingdecision. The health service provider, however, would need to decide upon therelevant costs that must be considered while arriving at the pricing decision. Isthe hospital trying to cover only the variable costs or all the costs, whether ithas decided to allocate a share of the fixed costs across all priced services andis seeking to get them also covered? Is there a way in which costs of fixedgoods such as land and building can be spread over all services or over aperiod of few years? Should the hospital have a basic package of core servicespriced at a certain level and then keep on adding to the price depending uponthe combination of value added services availed along with the core service?Answers to these questions would depend upon the choices you make and willthus determine the actual figure you want to finalise as the price for a givenservice.

For the market/markets that you cater to, you would also need to assess theprospective customers’ sensitivity to prices. While for a lot of health services,because of their necessity and expediency nature, customer do not display highlevels of price sensitivity, yet for frequently availed routine services like medicalcheckups, ultrasounds, dental fillings etc. wide price differential may makecustomers go to alternative providers unless they are supported by superiorvalue through accompanying services.

Price discounts should be carefully used. All discounts affect the overall totalrevenue to the organisations and reduce the contribution margin from eachtransaction. While offering specific price discounts to attract a given segmentmay create marketing opportunities in new segments, heavy discounting mayactually interfere with the valuation of the service in the eyes of the highpaying customers. Discounting over time, however is prevalent in the healthsector, where understanding the customer reluctances to stay in a hospital overweekends some hospitals offset the dip in weekend utilisation of operating andpost-operating services by offering substantial discount on operations during theweekend.

Advocates of psychological pricing suggest that when prices of services are interm of an odd figure e.g. a sonography costing Rs. 490.95 as opposed toRs. 500, it gives the consumer the feeling of paying “somewhere around 400”rather than almost 500. Since people rarely carry an absolute figure in theirmind as the price for a given service this perception of the price as“somewhere around 400” is likely to give a substantial competitive pricing edgeto your prices if odd pricing or psychological pricing is used. Hospitaladministrators on the other hand and sometimes customer as well may actuallywelcome the convenience of round price figures.

ii) On What Basis should Prices be Charged: As a complete serviceprovider, you will need to identify the basis on which prices would be charged

Health Services

© ALI

© ALI


52

in your hospital. You would recognise that in your case, there could be actuallymore than one basis on which price could be charged. For example, fee couldbe charged for admission (or registration) and then on a time basis (duration ofstay on a per day basis in the hospital) or on the basis of resources consumed(additional nurses hired for round the clock care). Different establishments alsovary in their practices as to whether they should bill each element of thetreatment separately or charge a single ‘package price’ for the whole transaction.It is however a good practice to have a price figure for each service element,even though the policy is to quote a package price to the customer.

iii) Where should Payment be Made: You must clearly indicate the paymentprocedures in terms of whether the payments should be made and receiptscollected at the reception counter or at the Accounts and Billing department ifyou have a separate section like that. Increasingly consumers today are usingtheir credit cards to make payments, where customers simply give their cardnumber and ask for their account be billed directly. Policies allowing chequepayments for government employees may allow greater willingness for patientsto choose one particular hospital over another. All these are example offacilitation provided especially if the payments are large.

iv) Where and How should the Payment be Made: The two alternativeoptions that service organisations use are asking the customers to pay inadvance or to ask for payment once the treatment is completed. Mostprevalent in case of medical care is the practice of asking the customer for aninitial advance deposit, with the balance being billed later as the treatmentprogresses or is completed. This practice makes sense because specialistservices or time of specialists may need to be allocated or services brought in,expensive resources may need to be appointed and scheduled in advance of theacutal treatment. In addition, very often in the beginning of the treatment, theservice provider is rarely ever completely sure as to what costs the treatmentwill actually entail, the complication that may arise, the additional services thatmay need to be provided. It is, therefore, prudent to ask for an initial depositand then identify the billing inputs as they accrue.

v) How should Prices be Communicated: Once the decision on how mucha charge and how the payments are taken, the hospital must at a policy leveldecide how the prices are to be communicated to the customers. Since pricesconstitute an important input in the purchase of at least some of the medicalservices, creating information acces to prices can enable customer to minimisesome of the uncertainty in decision making. Not only do customers need tohave some information on prices in advance, they also need to have informationon how and when would they be required to pay. It is, therefore, advisable toinstitutionally decide, how much information on prices is to be communicatedand how? Should rate lists for various services be on display or the rate cardsbe given to customers once they seek that information. Decision on how publicshould know pricing information needs to be institutionally taken and then clearunambiguous communication of prices needs to be managed.

To define the term in the most comprehensive way we can say value to thecustomer is the sum total of all perceived benefits minus the sum of all theperceived costs. Looking at this concept of value, it must be clear to you thatthe larger the gap between perceived total benefits and perceived total costs,the greater is the value that the customer would perceive in a given service.To enhance this perception of value in a given price category, therefore, as aprovider of health services you may follow two alternative strategies or followa combination of both. Value can be enhanced by increasing the benefits thatyou give to your customers or by rendering costs. On the side of costs, apartfrom the monetary costs, in services like health, other costs like cost of time

© ALI

© ALI

53

(waiting in the reception, waiting for an appointment), cost of effort (in termsof access to location), cost on account of stress and sensory costs like fear arevery relevant. If the provider can manage to reduce some of these costs, hecan alter the customers perception of value of his own service. What you mustappreciate is that while comparing alternative providers of health services,customers use this perception of ‘net’ value i.e. the difference betweenperceived benefits and perceived costs, rather than just the figure of monetaryprices. You must, therefore, consider carefully the perceived benefits that areassociated with your hospital services and the perceived costs that the customerhas to bear, before arriving at a monetary price figure for your services.

Activity 3

Based on your knowledge of practices regarding communication of prices byclinics/hospitals, prepare a note on what needs to be done further looking at thecustomers need for information on the one hand and the peculiar nature of thehealth service on the other hand.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

13.5 SERVICE QUALITY IN HEALTH CARE

As discussed in Unit 8, Gronroos suggested that the quality of service as it isperceived by consumer has two dimensions – a technical or outcome dimensionand a functional or process related dimension. That means, the consumer judgesthe quality not only on the basis of what is being delivered but also how thatoutcome is delivered. For example for consumer of health care services theprimary expectation is related to the response to the illness–‘cure’. The processof achieving this end is characterized by the delivery of service experience –‘care’. As health care services are rich in credence qualities and, therefore, thetechnical outcome is dfficult to evaluate, consumer would tend to make theassessment of the technically complex cure dimensions on the basis of themore familiar ‘care’ experience. Gabbott and Hogg suggest that evaluation ofthe clinical aspect of the service is particularly complex for individual patientsbut the impact of it upon overall satisfaction is unquestionable i.e. if the patientconsiders the medical response to have been inadequate, aspects of care can’tcompensate sufficiently to result in overall satisfaction. However, given thedifficulties in adequately evaluating “cure” and the investment that a patient hasin believing in the doctor’s ability to treat illness, it is suggested that patientstake this aspect of the service for granted and evaluate their service provisionon the other aspects of service delivery.

Recollect the five dimensions of service quality developed by Parasuraman,Zeithaml and Berry as discussed in unit 8. Let us apply them to the health careservices.

Reliability: Ability to perform the promised service dependably and accurately(example – doctor keeps the appointment on schedule, diagnosis prove to beaccurate).

Responsiveness: Willingness to help customers and provide prompt service(example – no waiting, doctor’s willingness to listen).

Assurance: Employees’ knowledge and courtesy and their ability to inspiretrust and confidence (Example – reputation, credentials and skills.

Health Services

© ALI

© ALI


54

Empathy: Caring individualized attention given to customers (Example –acknowledging patient as a person, remembers previous problems, patience).

Tangibles: Appearance of physical facilities, equipment, personnel and writtenmaterials (Example – waiting room, examination room, equipment, report cards).

Zeithaml and Bitner suggest that since health care services involve someamount of uncertainty/high risk, assurance dimension would be of greatimportance to the consumers. In the early stages of relationship, the consumermay use tangible evidence to assess the assurance dimensions. Visible evidenceof degree, honours and awards and special certifications may give newcustomer confidence in a professional service provider.

Raju and Joshi suggest that the hospitality level offered by the healthcareprovider is more important for life stage and life style treatments and goes along way in making the patient feel safe and secure about undergoing aprocedure, as well as assuring that the hospital would provide all the requisiteservices prior to and after the treatment. Also patients from different strata ofsociety are starting to have differing expectations from hospitals about the levelof service they should be provided while being treated. Some providers have,therefore, developed capabilities for providing differential levels of service atregular, premium and luxury levels. For this health care providers should useresearch techniques to map out the consumer decision making process and therelative importance consumers assign to expertise and hospitality. The nextlogical step would be to understand service features that relate to consumerperceptions of expertise and hospitality. Finally, the provider should understandthe cost implications of making changes in these features and their relativeimpact on consumer choice and revenues.

Poor service quality can be caused by a number of factors. These includeorganisations’s lack of understanding of customers expectations; not selectingthe right service design and standards; inability or unwillingness to meet thestandards i.e. not delivering as per the service standards; not matchingperformance to premises. To provide quality services, an organisation shouldfirst learn about consumer expectations through market research. Even in thedeveloped countries, in the not-too distant past, health care organisations hadlittle first hand familiarity with marketing research. (Marketing Research is theobjective and systematic process of gathering, analyzing and interpreting datarelevant to a specific situation or problem facing an institution). However, ashospitals increasingly have adopted a marketing orientation, they are choosing touse marketing research to help them understand marketing problems andopportunities. Loubean and Jantzen (1998) conducted a survey of 230 hospitalexecutives in USA to assess the kind of marketing research activities beingconducted by hospitals. Hospital’s administrators reported that satisfactionsurveys of both inpatients and outpatients are the most widely used researchapplications with more than 80% of the respondents reported usage of thesetwo methods within the last year. Of the surveyed respondents 48% performeda competitive analysis of other institution within the last year and 78%performed the analysis within the last three years. The researchers go on tosuggest that “hospitals seeking effective marketing strategies need to recognizethat a broad array of marketing research information is available to them.Research is not inexpensive, but it can be one of the hospital’s best valuesbecause, if done properly, it leads to better decision making. Hospitals shoulddevelop and fund annual research activities’.

Activity 4

Talk to different consumers of health care services and determine the relativeimportance of the five service quality dimensions as perceived by them.

© ALI

© ALI

55

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

Internal Marketing and Service Quality

As you would have noticed earlier in the service marketing triangle (unit 1) thatinternal marketing plays a critical role in services marketing. Also internalmarketing was discussed in detail in Unit 7. It enables the employees to keepthe promises that have been made to customers. Internal marketing can beviewed as the building of customer orientation among employees by training andmotivating both customer-contact and support staff to work as a team. The roleof employees in a service organisation is very dramatically highlighted by HalRosenbluth; owner of a chain of successful travel agencies, in his book titled“The Customer Comes Second” wherein he argues that a company’s first focusshould be on its employees. “Only when people know what it feels like to befirst in someone else’s eyes can they sincerely share that feeling with them”.Similarly Benoy mentions that for service business such as health care that arelabour intensive and demand high levels of personal contact between theservice provider and the customer, no marketing plan can be consideredcomplete unless it includes strategies for reaching and winning over its internalcustomers. He further goes on to define internal marketing as “the applicationof marketing, human resources management and allied theories, techniques andprinciples to motivate, mobilize, co-opt and manage employees at all levels ofthe organisation to continuously improve the way they serve external customersand each other. Effective internal marketing responds to employee needs as itadvances the organisation’s missions and goals.” The activities involved ininternal marketing income competing for the talent, training employees,empowerment, knowing employee needs, good internal communication,measuring and rewarding quality. You will study more about some of theseaspects in the section on Human Resources Mangement.

Knowledge is empowering. When customers and visitors ask, the employees knowwhat is going on and why. They feel they are the hospital, rather than answering.“They tell me nothing!” If you don’t tell them, if they don’t know, then distortedrumours start circulating. Worse yet, they feel excluded and not a true part of thehospital. Employees, in general, are well motivated and want to do well. Furthermore, no one knows the job better than individual employees themselves.Therefore, if you create an environment in which they feel comfortable enough,knowledgeable enough, about the business to feel that they own the business ina sense, they will contribute – providing, of course, that their capacity tocontribute is enhanced by a responsive upper structure of the organisation.(Rabkin and Avakian, 1991)

13.6 MARKETING COMMUNICATION FOR HEALTHCARE SERVICES

Communication is an essential part of marketing. In fact it is one of theelements of marketing mix i.e., promotion. Few goods or services, despite beingwell developed, priced and distributed can sustain the market place withouteffective promotion. Promotion can broadly be understood as “communicationby marketers that informs, persuades and reminds potential buyers of a productto influence an opinion or elicit a response.” The various elements ofpromotional mix are advertising, sales promotion, public relations and personalselling.

However, in this section we are going to focus on word of mouthcommunication, since in case of services, especially services which involve

Health Services

© ALI

© ALI


56

some amount of uncertainty or risk (like health services), consumers tend torely more on information from personal sources (e.g. friends) than from non-personal sources (e.g. mass media). Therefore, word of mouth (w.o.m.)communication becomes a critical part of health care marketing. Before movingfurther let us study a definition of w.o.m. communication. It may be defined as“Oral, person-to-person communication between a receiver and communicatorwhom the receiver perceives as non commercial regarding a brand, a productor a service.” Though not under the direct control of marketer, they can stillinfluence it. A health care marketer might ask how favourable word of mouthcan be prompted, unfavourable word of mouth reduced – and since eithereffort will likely require marketing expenditures, what results can be expected.Besty and Madeline have highlighted a number of issues regarding w.o.m.communication in health care marketing:

i) Word of mouth is more effective than advertising. And in the health carefield, the difference is even more striking than in other purchasecategories.

ii) The effectiveness of word of mouth applies across the board in terms ofthe kinds of responses marketers traditionally seek. Word of mouthcommunication not only increases awareness and knowledge, but is alsopersuades and lead to action, such as actually choosing the provider onehas heard about.

iii) Favourable w.o.m. communication can’t overcome personal negativeexperience.

iv) Health care organisations should encourage its employees, their spousesto become involved in community and neighbourhood groups and toeducate them on what to say when they get there, in the hope that asource of word of mouth communication is listening.

v) Word of mouth increases as the level of satisfaction increases. Anemotionally positive experience with a health care provider increasesw.o.m. and satisfaction which in turn, raises the odds that w.o.m. will bepositive. A marketer, therefore, has an opportunity to enhance experiencethat leads to positive w.o.m. So, health care marketers should seek amandate to provide emotional highs to the patients and prevent strongemotional negatives, even if these goals involve serious trade-off.

vi) Consumers of medical care are more likely to engage in negative w.o.m.than they are to complain to their health care provider. Health careproviders, therefore, must make a greater effort than marketers in otherindustries to make complaining easy and acceptable.

Activity 5

Find out the information acquisition activities undertaken by consumers forselecting a health care provider.

..........................................................................................................................

..........................................................................................................................

..........................................................................................................................

..........................................................................................................................

Advertising

Though advertising is not being used substantially by hospitals in India, it can bea significant means of communication to the customer. Clow suggests that byincorporating the five dimensions of service quality (discussed earlier in thisunit) – assurance, reliability, empathy, responsiveness and tangibles into theiradvertising, health care providers can increase the level of perceived qualityand thereby reducing the perceived risk. To be effective, health care

© ALI

© ALI

57

advertisements must contain one or more of these dimensions in the form ofheadlines, copy or captions. Pictures and drawings can also be used. Toprevent clutter and confusion, an advertisement should focus on only one ortwo clues; more can be used by cycling several advertisements.

13.7 CASE STUDY

Marketing of Cardiac Care at Ehirc

Escorts Heart Institute and Research Centre (EHIRC) is the firstcomprehensive research facility dedicated to the study, treatment and preventionof heart diseases in India. It has been truly a quantum leap in the cardiac carefield of health care in India. Heart disease is recognised as one of the world’slargest killers. In India, the incidence of heart disease is rising at an alarmingrate. As compared to western countries, the type of coronary artery disease inIndia differs in its patterns. Even the age of onset of coronary artery disease ismuch lower so that many Indians are getting heart attacks at as young an ageas 30 to 40 years. It has been proved that adequate preventive measures andearly detection is extremely successful in reducing the incidence of heartattacks.

Since the research data generated in the West is not totally applicable to thecauses and factors of heart disease in India, in-depth investigation on a nationallevel is vital, so that our own environment, dietary, socio-economic, ethnicfactors, etc. can be modified to reduce heart attacks in our country. Toaccomplish this goal, EHIRC was setup in 1988 at a cost of Rs. 20 crores andhas undergone a major expansion recently .

The costs of surgery and investigations in India are a fraction of costs incurredfor similar services abroad. Today, an open heart operation inclusive of allhospital costs, an attendant’s fare, boarding etc., for the three weeks wouldcost at least 6 to 8 times in USA as compared to the cost at the institute,with the added advantage of continued after-care as well as cardiac patientbeing in his or her own environment and among his or her relatives. The costsof other services like angiography, angioplasty, examinations, etc. aresignificantly lower than in any foreign country.

The Health Care Industry in USA has become very competitive and it isbecoming increasingly more competitive. This has necessitated each hospital toidentify and develop any function or service which can provide a competitiveedge. As a result, many health care providers are now recognizing theimportant role that the sales function can play as an integral part of the totalmarketing mix.

We in India, to some extent, feel uncomfortable in selling hospital services. Thisis due to our culture and heritage. This need not be so. Patients need education.They need information. And each person is a patient! So the task of a salesmanfor health services is unlimited. This is what marketing can do, and will do.

The following can be used effectively in this regard :

patient educational folders and leaflets which are interesting to read andabsorb, well-illustrated using Indian scenarios.

regular patient clinics in satellite towns to educate and inform and toencourage to get the comprehensive cardiac check-up done.

use of TV, CCTV and video films to inform the educated people andpromote the institute.

Health Services

© ALI

© ALI


58

spread of insurance idea.

health clinics and camps in companies, colleges, schools, and similarorganisations.

informing physicians, primary and secondary health centres in regard tofacilities available.

educational write ups in main line and regional newspapers to increaseawareness of cardiac ailments.

mass contact programmes – arranging public lectures by medical superstars.

Twelve Noble ways to get More Patients

1. Put yourself in your patient’s shoes: It is a basic and commonsensicalconcept . Sometime should be spent every day thinking from the patient’s pointof view. It may be difficult but it will mean more sales of hospital services.

Listen to the patients

Ask questions from them

Do something extra for each patient

Admit mistakes to the patients gracefully.

2. Patient Satisfaction: A patient can take away his business to a hospitalwherever he gets better value for his money and better service. He does nothave to give reasons for his action. It is his money and he can spend it wherehe likes or the way he likes. Technicians and assistants in the hospitals arepeople and if they are not satisfied, one can never have satisfied patients. Thisis simple but often ignored fact. Many hospitals have succeeded withoutproper medical facilities, none without proper technicians. Employees withaverage intelligence and initiative, when treated with respect and dignity asindividuals, given training and motivation will turn out to be good technicians.

3. Continuous communication with the patients: Communication with theprospects and the patients is the core of good marketing. How to achieve it?There is no magic wand in the world that will help achieve it; only patienceand persistence pays. Each employee should be trained to be good listener tothe patients when they come into the hospital or when they write to thehospital. This includes encouraging the patients to open up and expressthemselves clearly.

In our country with so many festivals for Devis and Devtaas, a health providerhas several ‘excuses’ to send a postcard to his patients. The postcards cancontain simple messages to help the patients. And when a patient comes in, heshould really be helped, otherwise it will result in stinking publicity. Apromotional mailer can be so fine tuned that it can reach the individual on hisbirthday, on his anniversary and so on.

4. Patient oriented hospital: It is not a simple task, but can be done byfollowing the patient by patient approach. When does a hospital becomespatient oriented? As soon as the facility starts rendering, through thoughts andactions, the best possible service to each of its patients. This way a hospitalbecomes great for its patients. Patients do not like to come to a big hospitalwhere they get lost, but they love coming to a great hospital where they willbe given the best possible attention. Also a big hospital does not necessarilymake more profits than a great hospital.

5. Patient oriented polices and procedures: A hospital exists so long as thepatients keep on coming. Hospital policies and procedures, even if they have

© ALI

© ALI

59

been given by the best business management professor, are suicidal if theyinconvenience the patients.

6. Patients must be given the best possible services: Patients should begiven “USA” - Unique Service Advantage – and once they get it, they willbecome repeat patients and bring more patients. It simply means some extraand individual care to show that the business of patients mattes a lot for thehospital. May be the best equipment can be installed, hospital be opened forlonger hours for the convenience of patients, and so on. It also involvesstudying the competitors and to start serving the patients better.

7. Patients want answers to their problems; they are not impressed bythe 3 Cs: A hospital where the patients get answers to their problems is abetter “mousetrap” than a hospital where the patient’s problems don’t getsolved. Patients are not impressed by the carpets, chrome and chandeliers(3Cs) in the hospital. Patients will flock to that hospital which follows a morehelpful attitude. The 3Cs won’t help if they are shown the rules and regulationswhenever they come with problems. A health provider should not only workharder to satisfy his patients but must also appear to be doing so. Patients withcomplaints must immediately get the feeling that they are still welcome – rathermore welcome- than when they had come in the first place. A bit of additionalconsideration is all that is required to convince the patients that they arewanted at the hospital.

8. Listen, listen , listen …… to your patients: The patients should begiven a proper hearing. Very often, their complaints are like burning embers andif ignored, may become huge fires, or on the other hand can be turned intoashes by merely dropping a few drops of cold water in the form of an instanthelpful attitude. If properly attended to, complaints can be turned intoopportunities. A health facility that wants to earn a good reputation in the longrun also ensures that the patients are encouraged to lodge complaints and eachcomplaints is fully investigated.

9. Each of the employees should visit patients: In a health facility , everyemployee does something – directly or indirectly for the patients. Otherwise,he does not have a right to be on the payroll of hospital. If so, how is it thatsome of employees never see the faces of their patients, as least, not awayform the hospital. In the hospital , a selling atmosphere should be createdwherein every employee gets an opportunity to market the services.

10. Checking with patients about employees attitude: Why customers(patients) quit?

1% Die

3% Move away

5% Form other friendships

9% For competitive reasons

14% Because of product dissatisfaction

68% Quit because of attitude of indifference towards customer by someemployees

Notice the last line carefully. A continuous follow up , therefore, should be donewith the patients to find out how they feel about the hospital employees andhow they are treated by them.

11. Solve the small problems of patients today: A hospital is not a bedof roses. Of course, most of us feel that it is a bed of roses when we see it

Health Services

© ALI

© ALI


60

from a distance. It is only when we touch the bush to pluck the roses that weget pricked by the thorns too. And every hospital must learn how to handledifficult patients with extra care. A difficult patient is like a dark cloud with asilver lining. He presents an opportunity in disguise to test the hospital’sorientation to him. Fortunately, patients are people and the rule of 80:20 appliesto them too, i.e. 80 percent of patients are reasonable and they forgive veryquickly while it is only 20 per cent who carry their grievances on and on.

12. Dissatisfied patients are best teacher: One can never please 100percent of patients, 100 percent of the times and 100 per cent of the days. Ifone can do so it is either a sellers market or he is a genius or he is not takingtakeable risks. Generally for an average hospital one-third of patients are verysatisfied, another one-third are reasonably satisfied and the balance one thirdare not fully satisfied and, in fact may be 10 percent are fully dissatisfied.These dissatisfied patients should be searched for and once they are located,one- third of the problems are solved. Close attention should be paid to everyword they say and it should be noted down. This conveys that personal interestis being taken in the matter. The objective is not to win the argument but tocome to an agreement that satisfies a dissatisfied patient.

13.8 SUMMARY

Application of marketing concepts in health care services in India is gainingwidespread importance. This has happened because of a number of changestaking place like setting up of corporate hospitals, growing consumer awareness,increasing purchasing power, growing market for elective treatment. Pricing isone of the crucial issues in healthcare marketing. In this unit you have studiedthe basis for pricing and the ways in which pricing for health services differfrom pricing for goods. The various strategic considerations in implementing thepricing policy have also been explained to you. For health care marketers it iscrucial to appreciate the importance of not only what is being delivered but alsohow it is being delivered. That is, they have to take care of the ‘cure’ as wellas the ‘care’ aspects. Further, for health care services, which involve someamount of uncertainty or risk from customers’ point of view, word of mouthcommunication plays an important role.


1. Why is pricing for health services unlike the pricing of a product? Whatdifficulties can be envisaged while pricing health services? Discuss with thehelp of examples.

2. ‘Pricing strategy includes much more than determining what to charge’.Examine the statement with regards to pricing of health services.

3. What are the components of service quality? How would you apply these tohealth care services?

4. Discuss the importance of word of mouth communication for health care services.

5. What changes do you envisage in the Indian health care market with theemergence of corporate hospitals?


Benoy, J.W. (1996) “Internal Marketing Builds Service Quality”, MarketingHealth Services, Chicago, Vol. 16, Issue 1, p. 54.

© ALI

© ALI

61

Besty, G. and Madeline, J. (1995) “Word of Mouth Communication: Causesand Consequences”, Marketing Health Services, Chicago, Vol. 15, Issue 3.

Clow, K.E. (1995) “Advertising Health Care Services”, Marketing HealthServices, Chicago, Vol. 15, Issue 2.

Engelberg, M. and Neubrand, S. (1997) “Building Sensible SegmentationStrategies in Managed Care Setting”, Marketing Health Services, Chicago,Vol. 17, Issue 2, p. 50-55.

Gabbott, M. and Hogg, G. (1996) “The Glory of Stories: Using CriticalIncidents to Understand Service Evaluation in the Primary Health CareContext”, Journal of Marketing Management, 12, p. 490-503.

Glynn, W.J. and Barnes, J.G. (1995) (Ed.) “Understanding ServiceManagement”, John Wiley & Sons.

Gronroos, C. (1990) “Service Management and Marketing”, Lexington Booksp. 37-39.

Loubean, P.R. and Jantzen, R. (1998) “Marketing Research Activities inHospitals”, Marketing Health Services, Chicago, Vol. 18, Issue 1, p. 12-17.

Rabkin, M.T. and Avakain, L. (1992) “Participatory Management at Boston’sBeth Israel Hospital”, Academic Medicine, Vol. 67, May, p. 289-294.

Raju, J. and Joshi Y. “Come Health or High Water.” Brand Equity, TheEconomic Times, 25 June 2003.

Rust, R.T., Zohorik, A.J. and Keiningham, T.L. (1996) “Services Marketing”,Harper Collins College Publishing.

Zeithaml, V.A., and Bitner, M.J. (1996), “Services Marketing”, McGraw HillInternational, p. 117-122.

Zeithaml, V.A., Parasuraman A. and Berry, L.L. (1998) “Delivering QualityService: Balancing Customers Perceptions and Expectations”, Free Press,NY.

Zeithaml, V.A., Parasuraman A. and Berry, L.L. (1985) “Problems andStrategies in Services Marketing”, Journal of Marketing, Spring, p. 33-46.

Health Services

© ALI

© ALI


62

UNIT 14 CASE STUDY :SERVING THE GLOBAL INDIAN*

Objectives

This unit is a case study on financial services marketing and relates to variousissues concerning the banking industry in India. After studying this case, youshould be able to :

understand the changes coming out in the Indian Banking Sector,

examine different products being offered in retail as well as corporatesegments of the banking industry, and

explore strategies for globalization of Indian Banks.

Structure

14.1 Introduction

14.2 Changing Face of Indian Banking Industry

14.3 Transformation in the Indian Banking Sector

14.4 ICICI Bank Ltd

14.5 Retail Banking Business of ICICI Bank

14.6 Corporate Banking Business of ICICI Bank

14.7 Organisation Structure of ICICI Bank

14.8 The Global Growth Strategies of ICICI Bank

14.9 Discussion Questions

14.10 Appendix

14.1 INTRODUCTION

Mr. Bhargava Dasgupta heads the international business operations of ICICIbank and he has to travel a lot these days. He is busy in building the ICICIbank’s next big platform- globalization. He feels that it is impossible to reach tothe clients everywhere across the world physically for providing the financialservices, so it will be strategically sound to leverage the relationships with otherbanks in serving the global consumer. The success of the bank in the domesticmarket is largely credited to the customer orientation, high quality of customerservice, innovative financial product introductions and active involvement inserving the emerging and latent needs of the Indian consumer.

They want to take their domestic market success to the global level. Therecent spot of operations by the bank is an indicator of becoming a globalfinancial service provider. ICICI bank has opened its first overseas branch inSingapore in 2003; in mid 2003, they opened the representative offices inLondon. They are close to acquire properties by the year 2003 end in Pundongand have already procured properties in East London to start their businessoperations including strategies to open offices in Toronto and Bahrain.

They have to decide about how to reach out to the global Indian in the largepart of the globe within their financial limits compared to global giants like ABN

* This case has been developed for academic purpose, for the students to have anunderstanding of financial services marketing. It has been prepared from the data availablefrom public domain and interviews conducted in the bank by the author. This case is not toillustrate effective or ineffective handling of administrative situation.

© ALI

© ALI

63

AMRO, Citi Bank and other banks. Their global rollout expenditures are aroundRs. 450 crores (100 Million USD) which they can fund from the domesticbalance sheet. The subsidiaries in Canada and England have already used70 million USD of this capita.

They are also toying with an idea that some of the representative offices canbe converted to subsidiaries where they will be looking for their own capital foroperation in future period than relying on the parent company capital.Mr. Dasgupta is of the opinion that the entry strategy in different countries is afunction of the local regulations. Many countries have the rules to run the bankas a representative office offshore branch before they are permitted to be asubsidiary of the parent company.

ICICI bank’s biggest business was in the area of industrial lending and fewyears before they have derisked the portfolio in entering into the consumerfinance business quite aggressively. They are in the process of next growthopportunity by serving the financial needs of the global Indian consumer. Thebanks target is to make this SBU (global business) contributing one third of thebank’s business in the coming five years (by 2008). Mr. Bhargav Dasgupta waspulled from the Venture capital subsidiary to head this global financial serviceinitiative. Mr. Dasgupta is scheduled to give a presentation to the board aboutthe strategy to make this initiative achieve its goal. Prior to preparing his planfor the proposed meeting, he thought of giving a bird’s eye view on the bank’semergence and growth as a strong player in the domestic market and alsoevaluating the possible alternatives before him for serving the global Indianconsumer.

14.2 CHANGING FACE OF INDIAN BANKINGINDUSTRY

Financial sector reforms were initiated in India in early 90s with a view toimproving efficiency in the process of financial intermediation; these reformshave facilitated greater choice for consumers, who have become morediscerning and demanding, compelling banks to offer a broader range ofproducts through diverse distribution channels. The traditional face of banks asmere financial intermediaries has since altered and risk management hasemerged as their defining attribute.

The Indian financial system is identified with two set of institutions viz.regulators and intermediaries. Regulatory Institutions are statutory bodiesassigned with the job of monitoring and controlling different segments of theIndian Financial System (IFS). These Institutions are given adequate powersthrough the vehicle of their respective Acts to enable them to supervise thesegments assigned to them. It is the job of the regulator to ensure that theplayers in the segment work within recognized business parameters maintainsufficient level of disclosure and transparency of operations and do not actagainst the national interests. At present, there are two regulators directlyconnected to Indian financial system. They are Reserve Bank of India andSecurity and Exchange Board of India. Intermediary financial institutions includebanking and non banking financial institutions.

The banking financial institutions participate in the economy’s paymentsmechanism, i.e., they provide transaction services, their deposit liabilitiesconstitute a major part of the national money supply, and they can, as a whole,create deposits or credit, which is money. Banks, subject to legal reserverequirements, can advance credit by creating claims against themselves. Other

Case Study:Serving the Global Indian

© ALI

© ALI


64

financial institutions can lend only out of resources put at their disposal by thesavers.

Financial institutions are the primary source of long term lending for largeprojects. Conventionally, they raised their resources in the form of bondssubscribed by RBI, Public Sector Enterprises, Banks and others. With thedrying up of concessional long term operations funds from the Reserve Bank inthe early 1990s, financial institutions have increasingly raised resources at theshort end of the deposit market.

The Banking Segment in India functions under the regulation of Reserve Bankof India. This segment broadly consists of commercial banks and co-operativebanks. Non-banking Financial Institutions carry out financing activities but theirresources are not directly obtained from the savers as debt. Instead, theseInstitutions mobilize the public savings for rendering other financial servicesincluding investment. All such Institutions are financial intermediaries and whenthey lend, they are known as non-banking financial intermediaries (NBFIs) orinvestment institutions. Some of the major non-banking financial intermediariesinclude Unit Trust Of India, Life Insurance Corporation (LIC) and GeneralInsurance Corporation (GIC). Apart from these NBFIs, another part of Indianfinancial system consists of a large number of privately owned, decentralized,and relatively small-sized financial intermediaries. Most work in different,miniscule niches and make the market more broad-based and competitive.While some of them restrict themselves to fund-based business, many othersprovide financial services of various types. The entities of the former type aretermed as “non-bank financial companies (NBFCs)”. The latter type is called“non-bank financial services companies (NBFSCs)”.

The commercial banking structure in India consists of two major set of playersscheduled commercial banks and unscheduled banks. The scheduled commercialbanks constitute those banks which have been included in the Second Scheduleof Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only thosebanks in this schedule which satisfy the criteria laid down vide section 42 (60)of the Act. This sub sector broadly consists of private sector banks, foreignbanks. The banking sector is dominated by Scheduled Commercial Banks(SCBs). As at end-March 2002, there were 296 Commercial banks operating inIndia. This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and196 Regional Rural Banks. Also, there were 67 scheduled co-operative banksconsisting of 51 scheduled urban co-operative banks and 16 scheduled stateco-operative banks.

14.3 TRANSFORMATION IN THE INDIAN BANKINGSECTOR

Financial sector reforms were initiated in India in early 90s with a view toimproving efficiency in the process of financial intermediation, enhancing theeffectiveness in the conduct of monetary policy and creating conditions forintegration of the domestic financial sector with the global financial system. Thefirst phase of reforms had an approach of ensuring that ‘the financial servicesindustry operates on the basis of operational flexibility and functional autonomywith a view to enhancing efficiency, productivity and profitability’. The secondphase, guided by Narasimham Committee II, focused on strengthening thefoundations of the banking system and bringing about structural improvements.Among others, the important issues relate to corporate governance, reform ofthe capital structure (in the context of Basel II norms), retail banking, riskmanagement technology and human resources development

© ALI

© ALI

65

The significant transformation of the banking industry in India is evident fromthe changes that have occurred in the financial markets, institutions andproducts. While deregulation has opened up new vistas for banks to augmentrevenues, it has entailed greater competition and consequently greater risks.Cross-border flows and entry of new products, particularly derivativeinstruments, have affected significantly on the domestic banking sector, forcingbanks to adjust the product mix, as also to effect rapid changes in theirprocesses and operations in order to remain competitive in the globalenvironment. These developments have facilitated greater choice for consumers,who have become more discerning and demanding compelling banks to offer abroader range of products through diverse distribution channels. The traditionalface of banks as mere financial intermediaries has since altered and riskmanagement has emerged as their defining attribute.

The Growth of Universal Banking

A universal bank is a supermarket for financial products. Under one roof,corporate can get loans and avail of other services, while individuals can bankand borrow. To convert itself into a universal bank, an entity has to negotiateseveral regulatory requirements. Therefore, universal banks in the Indian contexthave been in the form of a group offering a variety of services under anumbrella brand such as ICICI or HDFC. In universal banking, large banksoperate extensive networks of branches, provide many different services, holdseveral claims on firms (including equity and debt), and participate directly inthe corporate governance of firms that rely on the banks for funding or asinsurance underwriters.

14.4 ICICI BANK LTD

ICICI Bank is India’s second-largest bank with total assets of about Rs. 1trillion and a network of about 540 branches and offices and over 1,000 ATMs.ICICI Bank offers a wide range of banking products and financial services tocorporate and retail customers through a variety of delivery channels andthrough its specialized subsidiaries and affiliates in the areas of investmentbanking, life and non-life insurance, venture capital, asset management andinformation technology.

ICICI Bank’s equity shares are listed in India on stock exchanges at Chennai,Delhi, Kolkata and Vadodara, the Stock Exchange, Mumbai and the NationalStock Exchange of India Limited and its American Depositary Receipts (ADRs)are listed on the New York Stock Exchange (NYSE).

One of the biggest mergers in the Indian financial system has been the mergerof the ICICI with ICICI bank, which helped them move towards the universalbanking. The management was of the view that the merger of ICICI withICICI Bank would create the optimal legal structure for the ICICI group’suniversal banking strategy. The merger would enhance value for ICICIshareholders through the merged entity’s access to low-cost deposits, greateropportunities for earning fee-based income and the ability to participate in thepayments system and provide transaction-banking services. The merger wouldenhance value for ICICI Bank shareholders through a large capital base andscale of operations, seamless access to ICICI’s strong corporate relationshipsbuilt up over five decades, entry into new business segments, higher marketshare in various business segments including fee-based services and access tothe vast talent pool of ICICI and its subsidiaries.


© ALI

© ALI


66

In October 2001, the Boards of Directors of ICICI and ICICI Bank approvedthe merger of ICICI and two of its wholly owned retail finance subsidiaries,ICICI Personal Financial Services Limited and ICICI Capital Services Limited,Shareholders of ICICI and ICICI Bank approved the merger in January 2002,the high court of Gujrat in March 2002 and the High Court of Judicature atMumbai and the Reserve Bank of India in April 2002. Consequent to themerger, the ICICI group’s financing and banking operations, both wholesale andretail are integrated as single entity.

14.5 RETAIL BANKING BUSINESS OF ICICI BANK

Retail banking is a key element of ICICI’s growth strategy. With upwardmigration of household income levels, increasing affordability of retail financeand acceptance of use of credit to finance purchases, retail credit has emergedas a rapidly growing opportunity for banks that have the necessary skills andinfrastructure to succeed in this business. ICICI Bank has capitalized on thegrowing retail opportunity in India and has emerged as a market leader in retailcredit. The dimensions of the retail strategy include innovative products, paritypricing, customer convenience, strong processes and customer focus.

Cross-selling of the entire range of credit and investment products and bankingservices to customers is a critical aspect of ICICI’s retail strategy. ICICI Bankoffers a wide range of retail credit products. It has expanded the marketsignificantly over the last few years by taking organized retail credit to a largenumber of high-potential markets in India, by penetrating deeper into existingmarkets and by offering customized solutions to meet the varying credit needsof the Indian consumer.

ICICI Bank is one of the leading providers of mortgage loans, two-wheelerloans, commercial vehicle loans and personal unsecured loans, and continues tomaintain leadership in automobile finance. ICICI Bank’s total retaildisbursements in fiscal 2003 are approximately Rs. 200 billion. Retail creditconstituted 18% of ICICI Bank’s balance sheet at March 31, 2003, comparedto only 6% at March 31, 2002.

Cross selling has emerged as one of the significant drivers of retail creditgrowth. In fiscal 2003, cross selling accounted for about 20% of mortgageloans and auto loans and about 25% of credit cards issued. In May 2003,ICICI Bank acquired the entire paid-up capital of Transamerica AppleDistribution Finance Private Limited (TADFL), which is renamed as ICICIDistribution Finance Private Limited (IDFL). IDFL is primarily engaged inproviding distribution financing in the two-wheeler segment. The acquisition isexpected to supplement the Bank’s retail franchise, especially in thetwo-wheeler segment.

Retail Deposits

During fiscal 2003, ICICI continued its focus on retail deposits. This hasreduced its funding cost and has enabled it to create a stable funding base,with over 4.7 million deposit customers. Following a life stage segmentationstrategy, ICICI Bank offers differentiated liability products to various categoriesof customers depending on their age group (Young Star Accounts for childrenbelow the age of 18 years, Student Banking Services for students, SalaryAccounts for salaried employees, Roaming Current Accounts for businessmen,Private Banking for high net worth individuals and Senior Citizens Accounts forindividuals above the age of 60 years). ICICI Bank has further micro-segmented various categories of customers in order to offer products cateringto specific needs of each customer segment, like defence banking services for

© ALI

© ALI

67

defence personnel. This strategy has contributed significantly to the rapidgrowth in the retail liability base.

Credit Cards

ICICI Bank is also the largest incremental issuer of cards (including both debitand credit cards) in India. At March 31, 2003, ICICI Bank had issued over 3.4million debit cards and 1.0 million credit cards. Its multi-channel distributionstrategy provides its customers 24%7 accesses to banking services. Thisdistribution strategy not only offers enhanced convenience and mobility to thecustomer but also supports its customer acquisition and channel migrationefforts.

Electronic Channels

During the year, ICICI has expanded its electronic channels and migrated largevolumes of customer transactions to these channels. Seventy percent ofcustomer induced transactions take place through electronic channels.

ATMs

During fiscal 2003, the Bank significantly strengthened its ATM network, takingthe total number of ICICI Bank ATMs to 1,675. ICICI Bank has alsopioneered the concept of mobile ATMs to reach out to remote/rural areas.Other facilities offered through multilingual screen ATMs include bill paymentsand prepaid mobile card recharge facility. ICICI bank is also planning to sharethe network with other key players in financial services market to give a wideraccess to its customers.

Internet Banking

ICICI Bank has about 3.4 million customers with Internet banking access, whocan undertake all their banking transactions (other than physical cashtransactions) on the Internet. ICICI Bank’s Internet banking customers can alsopay their bills for more than 45 billers and shop on 85 online shopping portals.

Phone Banking

ICICI Bank considers phone banking to be a key channel of service deliveryand cross-sell. ICICI Bank’s 1,750-seat call centre, the largest domestic callcentre in India, can now be accessed by customers in over 355 cities acrossthe country. The call centre handles more than 2.5 million customer contactsper month. The call centre services all retail customers across the ICICI group.The call center uses state-of-the-art voice-over-Internet-protocol technology andcutting-edge desktop applications to provide a single view of the customer’srelationship.

Mobile Banking

ICICI Bank’s mobile banking services provide the latest information on accountbalances, previous transactions, credit card outstanding and payment status andallow customers to request a cheque book or account statement. ICICI Bankhas now extended its mobile banking services to all cellular service providersacross the country and NRI customers in the United States, United Kingdom,Middle East and Singapore.

Service Delivery through Multi Channel Distribution Network

With the foundation of a strong multi-channel distribution network, it hassuccessfully developed a robust model for distribution of third party productslike mutual funds, Reserve Bank of India (RBI) relief bonds, and insuranceproducts, with market leadership in these areas. This model also allows it to


© ALI

© ALI


68

meet all customer needs by offering the customer the complete basket offinancial products, while leveraging its distribution capability to earn fee incomefrom third parties.

Online Trading

ICICI direct (www.icicidirect.com) is the market leader in Internet based sharetrading, with complete end-to-end integration for seamless electronic trading onstock exchanges. ICICIdirect has a rating of “TXA1” from CRISIL, indicatinghighest ability to service broking transactions. During the year, ICICIdirectlaunched online trading in the derivatives segment of the NSE.

14.6 CORPORATE BANKING BUSINESS OF ICICIBANK

ICICI Bank provides innovative financial solutions to its corporate clients,tailored to meet their requirements, while diversifying its revenue streams andgenerating adequate return on risk capital through risk-based pricing models andproactive portfolio management.

Its focus in the financial year 2003 is on technology-driven enhancement ofdelivery capabilities to offer improved service levels to clients. It set up centralizedprocessing facilities for back office operations where technology is leveraged tobenefit from economies of scale arising out of large transaction volumes.During the year it continued to expand the scope of its Web-based services.

ICICI Bank provides corporate internet banking services throughICICIebusiness.com, a single point web-based interface for all corporateproducts. The portal enables clients to conduct their banking business withICICI Bank through the Internet in a secure environment. ICICI Bank offersonline foreign exchange and debt securities trading services.

A dedicated product and technology group develops and manages back-officeprocessing and delivery systems. Dedicated relationship groups for corporateclients and the government sector focusses on expanding the range and depthof its relationships in these sectors. In the corporate segment, it focusses onleveraging its relationships to expand the range of products and services tochannel finance, transaction banking and non-fund based products.

ICICI Bank has strong relationships with several large public sector companiesand state governments and it is leveraging these relationships to expand therange of transaction banking services. It has already been empanelled forcollection of sales tax in eight states. It continued to focus on corporate lendingtransactions including working capital finance to highly rated corporate,structured transactions and channel financing. It also focused on leveraging itsskills in originating and structuring transactions as well as on its ability to takelarge exposures to adopt an originate-and-sell-down strategy.

This not only increased the risk-adjusted return on the capital employed but alsoenabled it to offer a comprehensive solution to its corporate clients. ICICIBank’s dedicated structured finance, credit and markets group, with expertise infinancial structuring and related legal, accounting and tax issues, actively supportsthe business groups in designing financial products and solutions. This group isalso responsible for managing the asset portfolio by structuring portfolio buy outsand sell-downs with a view to increase the risk-adjusted return on the capital.

During fiscal 2003, ICICI Bank focused on the agri-financing segment anddeveloped several innovative structures for agri-business, including dairy

© ALI

© ALI

69

farming, farmer financing and warehouse-receipt-based financing. It achievedrobust growth in this segment and is working with state governments and agri-based corporate to evolve viable and sustainable systems for financingagriculture. It has also integrated its rural banking, micro-finance and agri-financing activity to offer integrated banking services in rural areas.

Treasury

The principal responsibilities of the Treasury included management of liquidityand exposure to market risks, mobilization of resources from domesticinstitutions and banks and international multilateral and bilateral institutions andbanks, and proprietary trading. Further, the treasury leveraged its strongrelationships with financial sector players to provide a wide range of bankingservices in addition to its liability products. In fiscal 2003, the balance sheetmanagement function within treasury, managed interest-rate sensitivity byactively using rupee-interest-rate swaps as well as by adjusting the duration ofthe Government securities portfolio held for compliance with Statutory LiquidityReserve (SLR) norms. Further, efforts are undertaken to make the banking-book-interest-rate positions more liquid by selling illiquid loans and substitutingthem with marketable securities.

The focus of trading operations was active, broad-based market making in keymarkets including corporate bonds, government securities, interest-rate swap andforeign exchange markets. A focus area in fiscal 2003 is the delivery of marketsolutions to corporate clients in various areas such as foreign exchange, fixedincome and swaps. There is a significant increase in both the volumes andprofits from foreign exchange transactions, swaps and loan syndication. As oneof the largest players in the corporate debt market, it offered two-way quotesfor many corporate debt papers, thereby increasing the liquidity and depth ofthe market. Effective fiscal 2004, it has restructured its treasury operations toseparate the balance-sheet management function (which now forms part of thefinance group), the corporate markets business (which has been integrated intothe structured finance, credit & markets group) and the proprietary tradingactivity (which is now housed in a separate proprietary trading group).

14.7 ORGANIZATION STRUCTURE OF ICICI BANK

ICICI Bank’s organizational structure is designed to support its business goals,and is flexible while at the same time seeking to ensure effective control,supervision, and consistency in standards across business groups. Theorganization structure is divided into five principal groups namely Retail Banking,Wholesale Banking, Project Finance & Special Assets Management,International Business and Corporate Centre.

The Retail Banking Group comprises ICICI Bank’s retail assets businessincluding various retail credit products, retail liabilities (including own depositaccounts and services as well as distribution of third party liability products),and credit products and banking services for the small enterprises segment.

The Wholesale Banking Group comprises ICICI Bank’s corporate bankingbusiness including credit products and banking services, with dedicatedgroups for corporate clients, Government sector clients, financial institutionsand rural and micro-banking and agri-business. Structured finance, creditportfolio management and proprietary trading also form part of this group.

The Project Finance Group comprises our project finance operations forinfrastructure, oil & gas and manufacturing sectors. The Special AssetsManagement Group is responsible for large non-performing and restructuredloans.


© ALI

© ALI


70

The International Business Group is responsible for ICICI Bank’sinternational operations, including its entry into various geographies as wellas products and services for non-resident Indians (NRIs).

The Corporate Centre comprises all shared services and corporate functions,including finance and balance sheet management, secretarial, investorrelations, risk management, legal, human resources and corporate brandingand communications.

14.8 THE GLOBAL GROWTH STRATEGIES OFICICI BANK

Mr. Dasgupta was looking at the future proposition of earning one third of thetotal revenue from the international business operations by the year 2008. Thereare four alternative strategies available for ICICI bank to provide financialservices to the global Indian.

The first strategy is to build a regional base in neighboring countries like Nepal,Bangladesh and Sri Lanka. Some of the banks have followed this strategy inthe past. Standard Bank had used this strategy to expand its business in Africa,but the neighbours around India are not economic powerhouses for which theopportunity to grow in these markets are limited.

The second strategy is to enter growth markets aggressively through theprocess of acquisitions. Mr Rana Talwar of Standard Chartered Bank followedthis strategy by buying banks in Asia and Latin America. There is a riskinvolved in the acquisition process in the foreign country from two points. Thelegal procedures for acquisitions varies from country to country and secondlythe issue of non performing assets of the existing banks may create problem tothe ambitious growth plan of the bank. But he was sure some of these banksmay serve as gold mine with higher return potential in developing nations. Thisalso needs a bigger balance sheet that the current balance sheet of ICICI bankfor a high level of acquisition.

The third strategy is to take a strong product and make it global. Identificationof a core competitive advantage and then building a strategy on this particularadvantage may also bring success to the banks global vision. Citibank expandedin the recent decades by following such a strategy of building the credit cardbusiness as its core competency for entering in to new markets. The complexfinancial service mix as well as the rapid change in level and type of technologyas the enabler to the service provider brings doubt about such a strategy.However, ICICI bank has a set of successful products but they do not have asolid financial product as the unique selling proposition for the global market.

The fourth strategy is to follow the customer. Many Spanish banks followedthis strategy to enter in to the Latina American market. The non residentIndian business is growing in countries like Dubai and Bahrain, there is a Sino-Indian trade boom which can be financed from the Shanghai operations, thegrowing link with the ASEAN nations can be serviced from Singapore. Thereare also traditional business interests in countries like USA and UK but thereare also potential risks involved in the form of operating with internationalpartners for some period until they establish the offshore subsidiaries. Similarlyselected market coverage may limit the scope and image of the bank as aglobal financial service provider.

Mr. Dasgupta has to consider other issues. ICICI bank is still the number twobank in the country with ample scope for growing its business in the domesticmarket. The internationalization of other global players have come only after

© ALI

© ALI

71

securing the home business and channelizing the liquid funds from the domesticmarket for international operations. HSBC bank moved out of Hong Kong whenit had a substantial position in the domestic market for international shores.

Many financial experts are still of the opinion that the balance sheet of ICICIbank is still weighed down by problem loans to industries such as textiles, steeland telecom. The NRI as a business proposition has to be evaluated. Therecent spike in the NRI deposits is because of the higher interest rates in Indiacompared to global rates. As Reserve Bank of India is cutting down theinterest rates to make it at par with global rates, it may hit the whole businessproposition. Mr. K.V. Kamath, the CEO of the company thinks that the globalIndian consumer is not bothered about the exchange rate risks and NRIremittances can be a good business proposition with a mix of portfoliomanagement to mortgages rather than ordinary deposits.

Mr. Dasgupta believes that it is right time to go global as major economies arestill recovering from a recession. Therefore, an opportunity for cheaper dealsand quality recruitment exists for the bank. The decisions to enter in toInternational operation seem very complex for the bank. In addition, he has todecide about the strategies to handle global risk in the business and thestructure of the global organization, as he has to operate in a multi culturalenvironment. He was sure that one of the strategic options explained abovecould take ICICI bank to the global platform as a financial service provider. Hewas not sure which one.

One thing he was sure about the future of the International operations. ICICIbank is going to concentrate on India related business in all these places ratherthan competing with global players with higher financial muscles and betterservice offers. ICICI is there to look after the Indian companies that arerapidly globalizing their operations. The motto should be to serve the customersat anywhere in the world with a correspondent relationship with other banks.

14.9 DISCUSSION QUESTIONS

1. What problem Mr. Bhargava Dasgupta is facing in this case?

2. What are the strategic alternatives available for Mr. Dasgupta to serve theGlobal Indian Consumer?

3. What do you mean by originate-and-sell-down strategy?

4. Explain the financial service mix portfolio of ICICI bank in retail sector? Incorporate sector?

5. What recommendations will you make to Mr. Bhargava Dasgupta? Shouldhe go global? Give your reasons.

ICICI Bank: Sales and Profit Analysis

Operating NetYear Sales Profit Profit

1998 1666.40 723.70 421.00

1999 6972.20 867.00 732.60

2000 8730.00 1465.10 1107.00

2001 14745.90 2908.70 2014.20

2002 69340.40 4556.00 8685.00

14.10 APPENDIX


© ALI

© ALI


72

Ratio Analysis of ICICI and Other Players

Bank SBI ICICI HDFC UTI Bank

CAPITAL 13.50 11.10 11.12 9.00ADEQUACY RATIO

EARNING RATIOS

Fund based 91.75 93.37 89.91 92.26income as a %of Op Income

Fee based income 8.24 6.62 10.08 7.73as a % of OpIncome

PROFITABILITY RATIOS

Cost of Funds 6.91 9.63 4.83 6.46Ratio

Net Profit 8.43 9.62 15.53 10.23Margin

Return on Net 18.05 17.49 17.21 21.09Worth

DEPOSIT RATIOS

Demand Deposit 15.11 7.65 22.12 14.65of Total Deposits

Saving Deposit 22.21 7.87 20.83 8.38of Total Deposits

Time Deposit of 62.66 84.46 57.03 76.95Total Deposits

Deposits within 97.54 100.00 100.00 100.00India as % toTotal Deposits

PER BRANCH RATIOS

Operating Income 40.28 120.39 105.70 133.95Per Branch

Operating Profit 8.83 45.78 33.08 32.79Per Branch

Net Profit Per 3.42 27.80 16.73 13.84Branch

Personnel 6.26 6.04 6.58 6.09Expenses PerBranch

Borrowings 10.25 100.43 98.90 51.38Per Branch

Deposits Per 326.09 1,325.87 968.66 1,211.77Branch

PER EMPLOYEERATIOS

(Rs. in Units)

Operating Income 1,749,960.13 11,285,851.51 5,096,576.92 8,021,214.71Income PerEmployee

Operating Profit 383,526.38 2,370,995.47 1,594,907.12 1,963,259.20Per Employee

Personnel 272,189.95 380,211.89 317,157.17 364,542.34Expenses PerEmployee

Deposits Per 14,168,713.69 45,442,741.79 46,704,383.22 72,560,821.21Employee

© ALI

© ALI

73

Pro

du

ct M

ix W

idth

(P

erso

nal

Fin

ance

)B

ank

ing

Loa

nsO

nli

ne

Ser

vice

sN

RI

Serv

ice

Inve

stm

ents

Car

dsD

emat

Mob

ile B

anki

ng

Sav

ings

Acc

ount

Hom

e L

oan

Bill

Pay

men

tR

upee

Sav

ings

ICIC

I B

ank

Bon

dsC

redi

t Cre

dit

Ban

king

Ale

rts

Acc

ount

Fix

ed D

epos

itP

erso

nal

Loa

nS

hopp

ing

Hig

h in

tere

stG

I B

onds

Deb

it c

umC

redi

t Car

d A

lert

Fix

ed D

epos

its

AT

M c

ard

Eas

y F

DC

ar L

oan

Sha

re T

radi

ngA

ccou

nt f

orM

utua

l F

unds

Ret

urni

ng I

ndia

ns

Rec

urri

ng D

epos

itTw

o W

heel

er L

oan

Cha

rity

Mon

ey2I

ndia

IPO

Pri

vate

Ban

king

Com

mer

cial

Any

whe

re B

anki

ngD

onat

e2In

dia

Veh

icle

Loa

n

Roa

min

g C

urre

ntL

oans

aga

inst

Hom

e L

oans

Acc

ount

Secu

ritie

s

You

ng S

tars

Farm

Equ

ipm

ent

Hom

e S

earc

hL

oans

Ban

k@ca

mpu

sC

onst

ruct

ion

Onl

ine

Sto

ck

Sal

ary

Acc

ount

Off

ice

Equ

ipm

ent

Inve

stm

ent

Wom

enM

edic

alC

usto

mer

Ser

vice

EE

FC (E

xcha

nge)

Con

sum

erTa

x qu

erie

sD

urab

les

and

answ

ered

Res

iden

t F

orei

gnC

urre

ncy

(Dom

estic

)

P r o d u c t L i n e L e n g t h


© ALI

© ALI


74

Pro

du

ct M

ix W

idth

(C

orp

orat

e F

inan

ce)

Tra

nsac

tion

Tre

asu

ry S

olu

tion

sIn

vesm

ent

Cap

ital

mar

kets

Sec

uri

ties

Inte

rnat

iona

lA

gri

bu

sin

ess

Cor

pora

te &

Ban

king

Solu

tion

sM

anag

emen

tB

ank

ing

Ser

vice

sb

usi

nes

sSt

ruct

ured

Ser

vice

sF

inan

ce

Cas

h m

anag

emen

tFo

rex

mar

kets

Cen

tral

Gov

ernm

ent

Col

lect

ing

Ban

kers

Equ

ities

Aut

omat

ed I

NR

Wor

king

cap

ital

Wor

king

Cap

ital

serv

ices

Secu

ritie

sP

aym

ent

Ser

vice

sfi

nanc

eF

inan

cing

Gen

eral

Ban

king

Bon

d m

arke

tsT

reas

ury

Bil

ls –

Esc

row

& P

ayin

gE

quit

y D

eriv

ativ

esV

OS

TR

O A

ccou

nts

Term

loa

nsA

uto

Loa

n(T

-Bill

s)B

anke

rsR

ecei

vabl

es

Tra

de f

inan

ceC

omm

odity

mar

kets

Cal

l Mon

ey/N

otic

eIn

itial

Pub

lic O

ffer

GD

R/A

DR

/Eur

oC

ross

Bor

der

Fore

xC

redi

t Car

dM

oney

, Ter

m(I

PO

) F

undi

ngIs

sues

and

Tra

de S

ervi

ces

Rec

eiva

bles

Mon

ey a

nd F

ixed

arbi

trag

eD

epos

it

Len

ding

rat

esR

epos

/Rev

erse

Cle

arin

g &

Deb

tT

rust

& R

eten

tion

Fert

ilize

r Su

bsid

yR

epos

Set

tlem

ent B

anke

rsA

ccou

nt S

ervi

ces

Rec

eiva

bles

Bon

ds a

ndB

ank

Gua

rant

ees

SG

L s

ettle

men

tsIN

R A

genc

yE

xpor

t Rec

eiva

bles

Deb

entu

res

thro

ugh

Cle

arin

g S

ervi

ces

Con

stit

uent

acco

unt

wit

hIC

ICI B

ank

Inte

r C

orpo

rate

Ove

rdra

ft A

gain

stD

eale

r fi

nanc

ing

Dep

osit

sS

hare

s

Cer

tifi

cate

s of

DV

P F

undi

ngE

PC C

ontr

act

Dep

osit

Fina

ncin

g

Com

mer

cial

Pap

erIn

tra

Day

Fun

ding

Inve

stm

ent

Mon

etis

atio

n

Bil

ls R

edis

coun

ting

Tem

pora

ryT

rade

fin

anci

ngSc

hem

e (B

RD

S)O

verd

raft

s(l

ong

term

)

(RE

IT) /

(RE

MIC

)st

ruct

ures

Bra

nd f

inan

cing

Ven

dor

fina

ncin

g,T

rans

port

erfi

nanc

ing

P r o d u c t L i n e L e n g t h

© ALI

© ALI

75

PROFIT AND LOSS ACCOUNT

Schedule (Rs.in '000s) As on 31.03.2002I. INCOME

Interest earned 13 93,680,561 21,519,297Other Income 14 19,677,741 5,746,598Profit on sale of shares ofICICI Bank Ltd heldby erstwhile ICICI Ltd 11,910,517 -

TOTAL 125, 268, 819 27, 265, 895

II. EXPENDITURE

Interest expended 15 79,439,989 15,589,235Operating expenses 16 20,116,900 6,225,770Provisions and contingencies 17 13,650,139 2,867,900

TOTAL 113, 207, 028 24, 682, 905

III. PROFIT/LOSS

Net profit for the year 12,061,791 2,582,990Profit brought forward 195,614 8,294

TOTAL 12, 257, 405 2, 591, 284

IV. APPROPRIATES/TRANSFERS

Statutory Reserve 3,020,000 650,000Transfer from Debenture Redemption Reserve (100,000) --Capital Reserves 2,000,000 --Investments Fluctuations Reserve 1,000,000 160,000Special Reserve 500,000 140,000Revenue and other Reserves 600,000 960,000Proposed equity share Dividend 4,597,758 --Proposed preference share Dividend 35 --Interim dividend paid -- 440,717Corporate dividend tax 589,092 44,953Balance carried over to Balance sheet 50,520 195,614

TOTAL 12, 257, 405 2, 591, 284

Significant Accounting Policies andNotes to Accounts 18Cash Flow statement 19

Earning per share (Refer Note B.9)

Basic (Rs.) 19.68 11.61Diluted (Rs.) 19.65 11.61


© ALI

© ALI


76

BALANCE SHEET

Schedule (Rs.in '000s) As on 31.03.2002

CAPITAL AND LIABILITIES

Capital 1 9,626,600 9,625,472Reserves and Surplus 2 63,206,538 56,324,080Deposits 3 481,693,063 320,851,111Borrowings 4 343,024,203 492,186,592Other liabilities and provisions 5 170,569,258 162,075,756

TOTAL 1, 068, 119, 662 1, 041, 063, 011

ASSETS

Cash and balance with Reserve Bank of India 6 48,861,445 17,744,682Balances with banks and money at call andshort notice 7 16,028,581 110,118,817Investments 8 354,623,002 358,910,797Advances 9 532,794,144 470,348,661Fixed Assets 10 40,607,274 42,393,443Other Assets 11 75,505,216 41,546,611

TOTAL 1, 068, 119, 662 1, 041, 063, 011

Contingent liabilities 12 894,385,070 394,465,858Bills for collection 13,367,843 13,234,184Significant Accounting Policies andNotes Accounts 18Cash Flow Statement

© ALI

© ALI

1



Block

5SECTORAL APPLICATIONS-IIUNIT 15

Educational Services 5

UNIT 16

Professional Support Services: Advertising Agencies 21

UNIT 17

Telecommunication Services 31

UNIT 18

Product Support Services 47

UNIT 19

Case Studies 59© ALI

© ALI

Sectoral Applications-II

2



IGNOU, New Delhi













ISBN-81-266-1276-2






Printed at:

Print Production


© ALI

© ALI

3

BLOCK 5 SECTORAL APPLICATIONS-II

In the previous block (Block 4) we have discussed marketing issues related tothree specific service sectors namely ‘financial services’, ‘hospitality andtourism services’ and ‘health services’. In this last block of the course we willcover four more service sectors. Unit 15 on ‘Educational Services’ gives youan indepth exposure to the concept of education as a service, the marketingimplications of service characteristics in the context of education, marketingstrategy issues, and planning of the marketing mix for education. Unit 16 on‘Professional Support Services’ relates to one of the vital support services tocommercial world i.e. advertising. It discusses in detail services marketingapplications for advertising agencies, various marketing options that can beexercised by agencies and the positioning strategies.

Unit 17 covers the ‘Telecommunication Services’, which have witnessed arevolution in the last few years. The unit covers the growth of telecom sectorin India, regulatory framework, the changing market structure, tariff issues andservice quality parameters. You will appreciate that services marketing is notonly relevant to services sector but to goods manufacturers as well. Unit 18titled ‘Product Support Services’ explains the concept of product supportservices and describes the different categories of these services. The unit alsoincludes a case study. The last unit of the block contains two small CaseStudies. The first case presents an interesting study on customer expectationand customer orientation in an insurance company. The second case relates toservice concept and distribution aspects.

© ALI

© ALI

5

UNIT 15 EDUCATIONAL SERVICES

Objectives


classify education as a service along the various classification schemes;

describe the marketing implications of service characteristics in the contextof educational services;

analyse the issues to be addressed in service strategy formulation foreducation;

discuss the service mix elements for educational services and drawgeneralisations for design of educational service;

apply the concepts developed for pricing, promoting, designing anddelivering educational products.

Structure

15.1 Introduction

15.2 Service Classification and Education

15.3 Service Characteristics and Implications for Marketing of Education

15.4 Marketing Strategy and Education

15.5 The Marketing Mix

15.6 Conclusion



15.9 References

15.1 INTRODUCTION

Marketing of education is a subject with very wide coverage if one considersthat formal education begins at the school age and depending upon the choice,vocation and circumstance of the persuants, matures into intermediate andhigher levels of learning including professional and specialised fields. Apparently,benefits sought from higher and professional or vocational courses are moretangible or measurable in terms of entry qualifications to a chosen profession,certification to enable practicing a profession or relative ease of access to asuitable form of livelihood. Not attempting to cover the marketing of educationper se, the scope of this unit is limited to the post school or higher education.Table 15.1 gives the details of growth in higher education in India.

Table 15.1: College Education in India

(Nos.)2001-02 2000-01 1999-00 1990-91

General Education 8, 361 7, 834 7, 782 4, 862Colleges

Professional Colleges* 2, 340 2, 169 2, 124 886

Universities+ 261 251 244 184

* Medicine, Engg. & Technology and Architecture, Teachers training colleges only+ Including deemed universities and institutions of national importanceSource : Statistical Outline of India 2003-2004, Tata Services Ltd; p.215

© ALI

© ALI


6

Without making specific commends about any particular discipline, the unitdeliberately seeks to keep the treatment of the subject general, as the objectiveis to develop a basic understanding of the concepts involved in the marketing ofeducation as a special case of marketing of services.

Interestingly, the need to ‘market’ their services has not really been felt by theeducation sector, as educational institutions, be they colleges or Universities orinstitutions catering to specific fields like ours, have faced more demand thanthey could cope with. For specialised fields like management and computereducation, where attractive market potential has increasingly caused more andmore institutions to be set up, competitive situation is changing. Even theinstitutions facing heavy demand have been confronted with the question ofbeing able to choose the desired target customers, and therefore face issueslike product differentiation, product extention, diversification and serviceintegration. There is a basic concern with building and retaining organisationalreputation for creating a ‘pull’ in the market. All this has activated someinterest in the hitherto neglected area of marketing of education services. Letus try to understand some of the basic services marketing concepts, relevant tomarketing of education.

Before going into the subject of education services marketing it is important tounderstand the concept of education as a service. Going by the AMA definition“services are those separately identifiable, essentially intangible activities, whichprovide want satisfaction and are not necessarily tied to the sale of a productor another service”1. Providing a service may or may not require the use oftangible goods. However, when such use is required, there is no ownershiptransfer of these tangible goods in service buying transaction. Education as aservice, then, can be said to be fulfilling the need for learning, acquiringknowledge-providing an intangible benefit (increment in knowledge, professionalexpertise, skills) produced with the help of a set of tangible (infrastructure) andintangible components (faculty expertise and learning), where the buyer of theservice does not get any ownership. He may have tangible physical evidence toshow for the service exchange transaction but the actual benefit accrued ispurely intangible in nature.

15.2 SERVICE CLASSIFICATION AND EDUCATION

A number of classification schemes have been developed to classify the wholearray of services according to some chosen variables. One of the simplestschemes classifies services as consumer, intermediate and industrial service.Education is a service that is geared primarily to the consumer market,therefore it can be classified as a consumer service rather than an intermediateor industrial service, though packages of industrial training are also designed forthe organisational customers.

On the basis of the way in which services have been bought, education,depending upon the type and level can be classified both as a shopping serviceand as a speciality service. Swan and Pruden have suggested that establishingwhether service is bought for instrumental motives (i.e. as a means to an end)or an expressive motive (as an end in itself) provides a useful framework forservice designers.2 For majority of customers education may fulfill theinstrumental function, but there is always a category of customer from whomeducation and the pursuit of knowledge are expressive motives.

Another classification scheme categorises services as equipment based andpeople based services, depending upon which resource is primarily used in theproduction of the service.3 By its very nature, education is essentially a people

© ALI

© ALI

7

based service though some service delivery systems may make heavy use oftechnology and equipment. Services have also been classified on the level ofpersonal contact as low contact or high contact services.4 Recent developmentsin open and distance learning systems have successfully countered the challengeof constantly maintaining high levels of contact, by creating specialised kinds ofuser friendly course material and using multi-media technology to gain access tostudents. Shostack, who in her studies has stressed the intangibilitycharacteristic of services has classified services on the bases of dominance oftangibility/intangibility, along a continuum of a pure tangible product with hightangibility dominance to a pure service with intangibility dominance.5 Accordinglyeducation can be classified as a pure service with dominant intangibility content.

15.3 SERVICE CHARACTERISTICS ANDIMPLICATIONS FOR MARKETING OFEDUCATION

1. Intangibility

Education like most ‘pure’ services is an intangible dominant service, impossibleto touch, see or feel. Evaluation of this service however can be obtained byjudging service content (curricula, course material, student workload, constituentfaculty) and the service delivery system. The consumer, based on theseevaluations, has a number of alternative choices before him and may makeselection on the basis of his own evaluation referrals, opinions sought fromothers and of course a brand or corporate image of the organisation providingeducation. At the end of the service experience, the consumer gets somethingtangible to show for his efforts i.e. a certificate or a grade card denoting hislevel of proficiency at the given course/programme. According to Bateson, finerdistinction of intangibility into palpable and mental intangibility, has implicationsfor the marketing of the educational services.6 For reasons of both mental andpalpable intangibility:

Education cannot be seen or touched and is often difficult toevaluate: It is therefore, imperative to build in “service differentaition” inthe basic product to enable competitive positioning.

Precise standardisation is difficult: For educational packages of samelevels and bearing similar certification (e.g. B.A., B.Sc., and B.Com.degree programmes, postgraduate commerce and science programmes,management diploma and degree programmes) across universities andcolleges, it is often difficult to bring about standardisation of course designas resources/needs/objectives of different institutions may differ. Institutionslike Universities, though, try to manage equivalence in standards throughBoards of Studies which are generally inter-university bodies. Technicaleducation is sought to be standardised through bodies like the All IndiaCouncil for Technical Education. Interestingly, the lack of standardisationalso opens up the marketing opportunity of creating highly differentiated,need based course packages, suited to chosen target groups of customersor serving specialised/localised needs.

Education as a service cannot be patented: This feature implies thatcourses designed or developed at one institution can be replicated andoffered at other institutions. It also implies that as far as the serviceproduct features are concerned, all advantages of a given competitor havean essentially perishable character. Only those discernible strengths whichhave their basis in the people resource, cannot be easily replicated. Hence,the added importance of faculty selection and motivation for educationalinstitutions.

Educational Services

© ALI

© ALI


8

As these implications of intangibility become apparent to the service productdesigners and providers in the field of education, the following pointers tomarketing planning emerge:

i) Focus on account of intangibility should increasingly be on benefitsdelivered by the service system and the uniqueness of the package thatis being offered. The benefit accruing to the student may emanate fromthe service product-its depth, width, level or variety or from theuniqueness of the delivery system, the evaluation system or the extremelyhigh goodwill enjoyed by the institution.

ii) Education, like most other pure services, should be tangibalised so thatthe beneficiary has some physical evidence to show for hisachievements. Certifications for various levels of attainment, citations andseparate certificates for any special achievements or activities should beduly prepared and delivered in time to be meaningful.

iii) Branding through effective use of Institute/University acronym, to aidinstant identification and recognition should be practiced. Concertedefforts at building up organisation’s reputation through performanceas well as through skillful use of communication tools would need tobe carried out to associate this ‘brand name’ with a desired ‘brandimage’.

2. Perishability

Services are perishable and cannot be stored. To an extent, education displaysthis characteristic which results in certain features.

Production and consumption are simultaneous activities: This is trueof most conventional teaching institutions where face to face teachingnecessitates simultaneous production and consumption. Open and distancelearning systems which make substantial use of technology, however, havemade it possible for production and consumption of the service to becarried out at different times-the use of audio-video units and preparationof course materials sent to the students across the consumer population,are designed to meet the challenge posed by the perishability character ofservices.

No inventories can be build up: This is true of most services, as wellas education, as an unutilised service like a course on offer, or a lecturescheduled to be delivered, cannot be stored, if there are no studentsenrolling for the course or to attend the lecture. This factor opens up thechallenge of managing the service in the face of fluctuating demand.Nearly all universities at one time or the other have faced the problem ofoverstaffing, when certain disciplines went out of vogue, like pure sciencesand post graduate courses in languages. The marketing implications ofperishability necessitate that a better match between supply and demandfor educational packages would need to be made. Course design andcourse offers need to be preceded by a need analysis of the targetpopulation before the decision to launch them is made. This points towardsthe use of marketing research techniques for service development(designing the course concept) and planning, but more than that itnecessitates a shift from ‘institution orientation’ to a student or ‘customerorientation’. Courses need not be offered because the institutions haveavailable expertise in an area or it is something that the institution has beentraditionally doing. In consonance with the marketing concept, the capabilityof finding a better fit between the needs of the society and the design ofthe offering, would define the difference between an effective and a noneffective institution.

© ALI

© ALI

9

3. Inseparability

Services are also characterised by the factor of inseparability in the sense thatit is usually impossible to separate a service from the person of the provider. Inthe context of education, this translates into the need for the presence of theperformer (the instructor) when the service is to be performed and consumed.This necessarily limits the scale of operations to the number of instructorsavailable, it also means that the distribution mode is more often than not directin the sense that no intermediaries are involved; the transfer of knowledge isdirectly from the provider to the learner. As noted before, open learningsystems have overcome the characteristic of inseparability by incorporating theteacher into the material and bringing about a separation between the producerand the service. A direct marketing implication of this inseparability is the needfor obtaining/training more service providers as well as the need for moreeffective scheduling of operations.

4. Heterogenity

Heterogenity in the context of services means that unlike product manufacturingsituations where design specifications can be minutely standardised andfollowed, the standards of services, educational services included, would dependupon who provides the service and how. This heterogenity of performancerenders service offers for the same basic “service product” from differentinstitutes vastly different from each other. Even though standardisation ofcourses according to some prescribed norms may be attained, it is difficult to‘standardise’ individual performance i.e. that of the faculty resource person.That, perhaps, is not even a desirable goal in education, but maintenance of acertain quality standard across ‘performers’ certainly is. In the absence ofaccepted quality standardisation mechanisms in this context, it is the marketforces alone, which would force quality standards on education. Dwindlingregistrations in institutions, snatching away of “market shares” by moreeffective competitors is what is making institutions take a renewed look atquality of service delivery and mechanisms for maintenance of standards.

In terms of marketing implications, the hetrogenity characteristic of educationalservices, necessitates careful personnel selection and planning, constant andcareful monitoring of standards which can provide cues to the prospectivecustomers to aid choice of institutions. Examples of these cues could besuccess rates of the placement programme, the absorption of the institutionsproduct in the job market, or the performance of the pass-outs at othercompetitive examinations.

5. Ownership

Ownership or the lack of it also characterises service. In the context ofeducation, the customer only buys access to education, or derives the learningbenefit from the services provided. There is no transfer of the ownership oftangibles and intangibles which have gone into creation of the service product.Payment of fees (price for the service) is just the consideration for access toknowledge and for the use of facilities for a given tenure.

Activity 1

Study a few educational institutions around you, if possible let these include aUniversity, a professional institution and a private college. How do theseinstitutions address the issue of standardisation of services? Do the processes toachieve standardisation vary with the type of institution?

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................


© ALI

© ALI


10

15.4 MARKETING STRATEGY AND EDUCATION

It has been pointed out in almost all studies on the subject of servicesmarketing that strategic management and marketing strategy for eachorganisation needs to be unique in itself as it is organisation and situationspecific. Some directions for marketing strategy for education may, however, bedrawn keeping in mind the special characteristics of education as an intangibledominant, people based, high contact consumer service. These are outlinedbelow.

1. The dominantly intangible nature of education service may make theconsumer’s choice of competitive offers more difficult.

2. In case of delivery systems where the performance of the servicedemands the presence of the instructor, marketing of education would needto be localised and offer the consumer a more restricted choice. Ofcourse, as institutions build up their “pull” in the market, consumers arewilling to relocate themselves to avail of the service.

3. Perishability may prevent storage of the service product and may add riskand uncertainty to the marketing of education, specially in the event offluctuating demand for courses/instructors/disciplines.

The basic question for strategic marketing planning that need to be answered are:

i) What business are we in? In order to properly define the mission andthe overall objective of the organisation it is essential to define whatbusiness we are in. Are we in the business of transmission andpropagation of knowledge? Are we in the business of creating newknowledge? Are we in the business of developing professional skills? Arewe in the business of creating special skills or preparing people for aspecific vocation? Or are we there to provide basic knowledge and trainingto people which will enable them to reach a level where they can makefurther choices? Answers to these questions will lead the institution toidentify what it holds to itself as the organisational mission and overallobjective.

ii) Who are our customers and what benefits do they seek?Identification of target markets and understanding the needs of customers,as well as the criteria they use to make choices, represents an importantstep in marketing strategy formulation. For an educational institution, thetask translates to determining what is the nature of the benefits sought byits set of ‘customers’. Are they merely seeking a certification, ordevelopment of a specific kind of expertise or is accumulation ofknowledge the real value sought? Since the purchaser of the educationalservice is primarily buying the expertise or knowledge he believes that theinstitution has at its disposal, it is important for the institution to be able todefine the kind of expertise it is capable of producing. It is also importantto develop an understanding of the criteria prospective students apply whenthey choose between competing institutions. A study in the Indian context,for managment education, reveals that some of the criteria used bystudents to choose between institutions were:

a) reputation of the institution,

b) number of applicants keen to enroll in the course,

c) past success rate of placement,

d) faculty expertise,

e) width of specialisation offered,

f) infrastructural facilities, and

g) fees.

© ALI

© ALI

11

Identification of criteria used to differentiate between competing offers maylead institutions to lay emphasis on developing competing strengths and creatingperceived differences between their offers and the competitor’s offer.

Activity 2

Talk to ten students of a computer education programme or institute, to find outwhat are the precise benefits that each seeks from the experience. Then, studythe programme/institute to find out how well the service product design anddelivery at the institute are capable of delivering these benefits sought.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

iii) How can we build or defend own competitive position? Everyorganisation has to consider an entry strategy into a market and thencreation and protection of a competitive position. Though a number ofalternative positioning choices are possible for educational institutions, taskof positioning is a slightly more difficult proposition here, because of theabsence of a strong tangible core to the service offer. One of the basicways to achieve a strong competitive position is to build up strong servicedifferentiation which can generate a clearly focused organisational andproduct image in the consumer’s mind. Examples can be found in the caseof NIIT which identified the need for computer education and training inthe Indian market and built up expertise to cater to clearly defined needsegments in terms of basic learners, job aspirants, people needing to updatetheir knowledge, organisational customers needing customised packages andso on. Another example is that of Indian Institute of Management,Ahmedabad, which through development and nurturance of highlyspecialised faculty resource and excellent industry interaction has built upformidable barriers to competition. These clearly differentiated positionsenable these institutions to generate large number of aspirants and selectthe desirable quality of students.

iv) How should we offer new service offers that help/strengthen thecompetitive position? As needs and wants of the consumer populationchange, existing course packages or delivery systems may cease to satisfythem. A preemptive approach to education planning suggests that‘satisfiers’ to such needs be preemptively developed and offered before theneed really becomes apparent to the consumers themselves. Sinceeducation to an extent, represents a derived demand dependent upon thefinal demand for desired qualifications for employment, changing jobscenarios, industry requirements and consequent need for qualifications maybe one indicator to watch, for generation of new service offer ideas.Though a highly structured approach to research and development in a newservice may be difficult, there is no reason why systematic organisationalprocesses for generating and testing new course package concepts andweeding out old and unprofitable services shoud not be designed.

Activity 3

Identify educational institutions in your area which can be termed ‘highlysuccessful’. What are the ingredients of their competitive strength?

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................


© ALI

© ALI


12

15.5 THE MARKETING MIX

As you know the traditional 4 P concept developed for marketing of productshas been conceptually extended by Booms and Bitner to include 3 more Ps i.e.People, Physical evidence and Process.

Developing the right marketing mix for marketing of education would meanconstantly fashioning and reshaping the components of the mix into the mosteffective combination of the components at any point of time. Let us, byconsidering these components, try to study what considerations do educationplanners and dispensers need to keep in mind, with respect to these elementsof services marketing. We shall mainly concentrate on the aspects of theservice product and promotion, as concepts of process and people have beenintegrated in the concept of the augmented service product. Considerations ofprice and place have also been discussed.

1. The Service Product-The Education Package

While deciding on the education packages to be offered to a consumerpopulation, the starting point obviously has to be the consumer. It in imperativeat the very outset of deciding the service product, to outline the distinctionbetween what an educational institution offers in terms of its service and whatbenefit does its larger population derive from it. Central to the idea of a serviceproduct, are the consumer benefit concept, the service concept, the serviceoffer and the service delivery system. While the consumer benefit conceptdefines what benefits do consumer derive from a particular educational packageoffered, the service concept is concerned with the definition of the generalbenefit the service organisation offers on the basis of the consumer benefitssought. Thus at the very basic stage of the design of the education offer,marketing orientation suggests that the offer should be fashioned as a responseto the identification of the consumer benefits sought.

According to Groonroos, the service concept has to be defined at two levels8.The general service concept refers to the essential utility being offered (acomputer training organisation offers solution to the problem of keeping up todate information flows within the organisation) while at the core of the serviceoffer are specific offers (software training packages for bank employees). Letus try to elaborate the concept of service offer a little more as it has specificimplications for marketing of education. Developing the education product,according to the conceptualisation developed by Groonroos entails:

developing the service concept,

developing a basic service package,

developing an augmented service offering and finally, and

managing image and communication.

(As explained in Unit 5 also)

As already noted, the service concept defines the intentions of the organisationin respect of offering a certain benefit to the consumers. The ‘basic servicepackage’ described the bundle of services that are needed to fulfill the needsof the target market. Extending this to the education sector, the basic servicepackage determines the entire package offer which is a designed to fulfill thelearning needs of a target population. For decision making purposes it is essentialto recognise this basic package as consisting of three elements. These are:

the core service,

the facilitating service (and goods), and

the supporting service

© ALI

© ALI

13

The core service is the reason for being in the market. A management instituteexists because it equips people with skills and abilities to manage organisations.Faculty expertise and the accumulated experience at the institute represent thecore resource for supplying this benefit. However, in order to make it possiblefor students to avail these services, additional services are required. Aregistration and admission service, class schedules, counselling service, enablingstudents to make relevant specialisation choices, and library facility are requiredso that the students are facilitated in deriving the benefits of the core servicei.e. the learning. These services are called the facilitating services. It isimportant for the planners to realise that if the facilitating services are notadequately provided, the core benefit cannot be consumed. Sometimes tangiblegoods are also required to avail the benefit of the core service. Coursematerial, in the form of books and prepared course notes, instruction manuals,computers, classrooms and class equipments are examples of facilitating goodsthat help access the core benefit.

The third element of service that goes to make the basic service package isthe supporting services. Like facilitating services, they are also auxiliary to thecore benefit but their objective does not lie in facilitating the use of coreservice, rather they are used to enhance the value of the core product and todifferentiate the service offer from other comparable offers. An efficientplacement cell in the above mentioned example, high quality residential facilities,good network of exchange relationships with business organisations, do notfacilitate the learning process but add value to the service offer by adding tothe utility derived from the total offer.

From a managerial viewpoint, it is important to make a distinction betweenfacilitating and supporting services. In order to effectively access the corepackage, the facilitating services are necessary and the service package wouldcollapse, if the facilitating services are not provided. The marketing strategydirective that can be developed here is that for highly intangible core serviceproducts like education, facilitating services should aspire to attain a quality levelwhich enables them to become a competitive strength. Supporting serviceswhich are essentially designed as a means of competition, diminish the value ofthe package if they are lacking. The core benefit, learning however, can still bederived if the supporting services are deficient or absent.

The basic service package, however, is not equal to the service perceived bythe consumer. An excellent basic education package, along with its facilitatingand support service elements may be made ineffective by the way students arehandled or student interactions are managed. How the whole service offer isperceived forms an integral part of the total product. The basic service packageand the elements that go into the service perception form what has beentermed as the augmented service product. The Augmented Service Productintegrates the concept of service process with the services offer. Three distinctelements which along with the basic offer go into the creation of theaugmented service product as components of the perceived service process are:

i) accessibility of the service,

ii) interactions with the service organisation, and

iii) consumer participation.

Taking the example of a university, accessibility of the service would dependupon:

The number and skills of the persons associated with providing the core,facilitating, and supporting service.

Office hours, class and seminar schedules, time used for other services


© ALI

© ALI


14

Exterior and interior of offices, classrooms, facilities.

Tools, equipments, study materials etc.

The number, quantity and aptitude levels of students involved in thelearning process.

The interaction between the service provider (the University) and its customercan be in terms of :

Interaction with resource faculty (their expertise, skill, attention, attitudes)

Interaction with other service interfaces (admission, evaluation, studentsinquiries, students welfare office, office staff, hostel wardens and proctors.Reception-attitudes and willingness of response, accurate answers.)

Interaction with the physical environment (space, cleanliness, maintenance,noise levels)

Interaction with accessory service system (waiting line for admission,results, enquiries, payment receipts etc.)

Interaction between students and,

Interaction of the various subsystems with each other (faculty, facilities,office personnel, other service departments).

Customer participation is a concept which identifies the impact the receiver ofthe benefit has on the service he perceives. In the above example the studentis expected to fill in various forms, exercise choices of disciplines and subjectcombinations and participate in the learning process through interaction andattention. The service rendered by the University would be dependent upon thequality of student participation in the above and allied activities. Specifically theaspect of student participation that are relevant are :

Are students knowledgeable enough to identify their need or problem, andto exercise choice options offered by the University?

Are they reasonably aware of the time and flexibility dimensions offered tothem?

Are they prepared and willing to share information and feed back?

Are there any quicker and more efficient ways of motivating participation?

The augmented service offer can be diagramatically represented as shown inFigure 16.1

Figure 16.1: The Augmented Service Offer

Source: Groonroos, C. “Services Management and Marketing”, Lexington Books,Lexington 1990.

The Service Concept

The Core Service

Accessibilityof the Service

FacilitatingServices

SupportingServices

Interaction

Consumer Participation

© ALI

© ALI

15

In planning the total educational package offer, therefore the focus of theconcern is not the course alone, the package has to be seen as a total offeralong with its facilitating and supporting services. As planners identify thatconsumer perceptions are also affected by inputs other than the core service,attention needs to be focused on the accessibility, interaction and consumerparticipation aspects as well as the basic service offer, so that the augmentededucation service offering can be effectively created and positioned.

Activity 4

For the following products, on account of your familiarity with them identify thecore service, the facilitating and the support services, in each case :

(a) the university/college that you attended for your degree level;

(b) the training programmes offered to various cadres in your organisation;

(c) the distance learning programme that you are undergoing now.

...................................................................................................................

...................................................................................................................

...................................................................................................................

...................................................................................................................

2. Pricing of the Education Service

Pricing decisions for the service offer are of a major importance and shoudideally be related to achievement of marketing and organizational goals. Pricingof the educational offer however, typically represented as ‘tution fees’, issubject to certain constraints and characteristics.

Most educational institutions, in fact all public institutions like the Universities,institutes of technology, medical and engineering colleges, come under thecategory of services where price are subject to public regulation. In all suchcases the price element is not controllable by the marketer, instead it becomesa subject matter of public policy, where political, environmental and socialconsiderations take priority over purely economic considerations. Prices may bebased on the ability to pay (fee structure relating to parents’ income in case ofUniversities) or some socially desirable goals (total fee exemption for womencandidates in states like Rajasthan and Gujarat). Autonomous institutions alsosubject themselves to formal self regulation of price for example, the institutionslike AICWA, and AICA are subject to institutional regulations relating to feestructures which they decide for themselves. On the other hand privateinstitutions, typically in specialised fields like medicine, engineering, computersand management tend to price their services on what the mrket would bear. Asmost of these institutions operate in subject fields where demand far exceedssupply, prices charged depend upon economic condition, consumer feelings aboutprices, buyer need urgency, competition in the market place, level of demandetc.

Heterogenity of services and different pricing considerations used by differenttypes of institutions make price a less important determinant of consumerchoice in educational services.

The more the services are homogenous (undergraduate, graduate courses in thebasic disciplines) the more competitive would tend to be the pricing. Anothergeneralisation that can be drawn from product marketing is that the moreunique the education service offer, the greater would be the ability of theproviders to vary prices according to the buying capacity of the consumerpopulation.


© ALI

© ALI


16

Differential pricing, based on the consumer’s willingness to pay may also beutilized for the education service. The practice of charging different fees forthe sponsored candidates and the non sponsored ones is common inprofessional courses, so is the practice of charging differential fees from fulltime and part time evening participants of the study programme.

3. Promotion and the Education Services Offer

The objective of promotion in education services is akin to its role in othermarketing endeavours. Accordingly, the basic objective that promotion as amarketing tools is expected to play for marketing of education would include:

Building awareness of the education offer package and organisationproviding it.

Creating and sustaining differentiation of the organisation and its offer fromits competitors.

Communicating and portraing the benefits to be provided.

Building and maintaining overall image and reputation of the serviceorganisation.

Persuading customers to use or buy the service.

Generating detailed information about core, facilitating, supporting andaugmented service offer.

Advising existing and potential customers of any special offers ormodifications or new service offer packages.

Eliminating perceived misconception.

Educational institutions however, have not been able to use promotional toolseffectively because of certain perceived notional barriers. Some of thesebarriers are:

i) Most educational institutions are product oriented rather than market orstudent oriented. They perceive themselves as producers of certaineducational programmes, rather than as satisfiers of certain learningneeds. This lack of marketing orientation, keeps those managingeducational institutions from realising and exploiting the role thatpromotion could play in attaining their organisational objectives.

ii) Professional and ethical considerations may prevent the use of certainforms of promotion. Established educational institutions may regard theuse of mass media advertising and sales promotion as being in bad taste.

iii) The nature of competition in case of educational institutions likeUniversities, technology and management institutes is such that they areunable to cope with their present demands and work loads. Theytherefore may not feel the need to promote for demand generationpurposes. What has to be realised however, is that even such institutionsneed to use promotion for image creation and to sustain as well tomaintain a secure market position, and to improve the quality ofcustomers (students) seeking their services.

iv) The nature of consumer attitudes regarding education and their perceptionof mass media information sources may sometimes preclude the use ofintensive promotion. For making their choices regarding a particularinstitution or a course package, prospective students rely mostly onsubjective impressions of the institution, or use surrogate indicators ofquality like the provider’s reputation or image. They also tend to relyheavily on word of mouth referrals rather than published literature ormaterial supplied by the institution.

© ALI

© ALI

17

Due to some of the above considerations, as also because of prevailing‘industry tradition,’ promotion of educational service has tended to rely moreheavily on the component of publicity rather than any other element.

Studies in the field of marketing of services indicate that the reluctance towardsusing mass media advertising or sales promotion is partly due to the inherentpsychological barrier and partly due to the misunderstood role of these tools.

Restrictions on advertising for several professional services are being slowlyrelaxed. Growing competition and the threat of losing market shares hasawakened many a institution to realise the importance of mass media tools likeadvertising for organizational as well as service offer promotion. Someguidelines that can be used while applying this powerful tool for generatingawareness, interest and enrollment are summarised below:

a) Create Clear, Simple Messages

The real challenge in advertising educational services lies in communicating therange, depth, quality and level of service offers by a given institution, in simple,unambiguous form. The need of giving pertinent information has to be balancedagainst the need to avoid wordy copy.

b) Emphasise Service Benefits

Based on an identification of benefits sought, advertising for the educationalproduct should emphasise the benefits to be provided rather than the technicaldetails of the offer.

c) Make Realistic, Attainable Promises

Education by its very nature is a high reliability service, where expectations arehigh. Unfulfilled promises create dissonnance. Promises in terms ofperformance of services therefore should be realistic.

d) Build on Word of Mouth Communication and Referrals

As noted earlier, non marketer dominated sources in case of educationmarketing may be more important to the consumer. Educational organisationalshould therefore build upon the importance of word of mouth communication by

persuading satisfied consumers to share their sense of satisfaction withothers;

directing ad campaigns at opinion leaders; and

encouraging potential consumers to talk to existing consumers.

e) Provide Tangible Clues

In terms of certification, records of attainments and past success figures,provide the prospective target population with tangible clues to enable them tomake choices.

f) Develop Continuity in Advertising

Most successful institutions position themselves in different ways, so that theirimages are discernibly different in the eyes of the consumer population.Positions could be built around innovative teaching methods, faculty expertise,research and development possibilities, international orientation, tradition ofquality, range and depth of specialisations offered, progressiveness, deliverysystem, flexibility, supporting services or a combination of any of the above.Once a theme has been identified, consistent use of themes, formats, symbolsand images enables recognition of the organisation and its association with thedesired values.


© ALI

© ALI


18

4. Place Decision and the Education Service

In most cases the educational services represent the single location and directdistribution processes with no intermediary between the producer and theconsumers of the service. The learning process is usually accomplished by theuser of the service going to the service provider. However, because of buyerneed urgency and the nature of the utility derived, accessibility and conveniencefor educational service location are not as critical a factor as in case of, say, abanking service. Depending upon the competitive situation, the factors that havemarketing implications in terms of location are:

a) What is the market demand? Will the purchase of service be postponedor negated if the institution is not conveniently located? How critical areaccessibility and convenience in service choice decision?

b) Are competitors finding alternative ways to reach to the markets? (fore.g. distance learning in education) Can some competitive advantage begained by developing alternate/different norms of service location anddelivery?

c) How do flexibility, being technology or people based, affect theeducational service offer in terms of flexibility in location and relocation?

d) Is there an obligation on part of the institution to be located in aconvenient site? (e.g. public health education centres, family planningtraining centres, vocational training centres etc.)

e) How critical are complementary services to the location decision?(Transport to and fro, residential and canteen facilities and so on)

Answers to issues like the above underline the critical importance of thelocation decision and may result in more systematic approaches than in thepast.

Activity 5

Promotional activity in most educational institutions barring the private ones isnoticeable by its absence. Most of the public institutions, however have a publicrelations office. Talk to the public relations officer of a few public institutions tofind out the type of ‘communication-mix’ used by the institutions. Also, try toexplore in each case why mass media advertising is not being used for marketcultivation?

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

15.6 CONCLUSION

In the present era, it is not natural resources or natural wealth whichdistinguish an affluent society from a backward one, it is the accumulation anddevelopment of the knowledge resource. Education was never as important autility as it is today. People however differ in the benefits they seek from theeducational services offered to them. It is important, then, in order to be ableto satisfy these needs and wants effectively, that a marketing orientation beapplied to the conceptualisation, design and delivery of educational service. Thisis even more imperative in a developing country like India, where resources arescarce and a better match between needs and services provided needs to beattained. Education planners, in order to plan the service offer well and deliverit effectively, need to understand the behaviour of the target population, and thecriteria they use to exercise choice. The key to better delivery of the education

© ALI

© ALI

19

service is not that it is performed by people but that it is performed for people.People therefore represent the starting point for analysis to precedeconceptualising the service offer and developing it into a marketable servicepackage. The education service offered by the institution must reflect theorganisational response to the identified needs and wants of the target segment,in a given socio-economic context.


1) What are the marketing implications of intangibility, inseparability,perishability and heterogenity for education services? Discuss with the helpof suitable examples.

2) Using the criteria of different benefits sought by target customers, how caneducational institutions build or defend competitive positions. Use examplesto support your answer.

3) What are the levels at which a service concept has to be defined?Applying the generalisation developed by Groonroos, define the generalservice concept and specific service offer for

a) A computer institute

b) An in-house training programme for sales personnel

c) Refresher courses for senior executives

4) What are the implications of core, facilitating and supporting services formarketers of education? Discuss the concept of an augmented serviceproducts with the help of examples from the educational services.

5) The interaction between the provider of an educational service and itscustomers can be at various levels and in different forms. Describe thecomponents of this ‘interaction’ for any educational institution of yourchoice.

6) What are the major promotion objectives that an education service providermay seek? Are these objectives in any way different from those sought byproduct marketers? Comment.

7) Identify the major barriers to effective use of promotion by educationalinstitutions. What steps do you suggest could be taken to overcome thesebarriers?

8) Evaluate the criticality of the location decision for educational service.Does the significance of location decision vary over types of educationalservices? Justify your answer with the help of examples.


1) Kotler, Philip, Marketing for Non-Profit Organisations (Englewood Cliffs,N.J., Prentice Hall, 1982).

2) Wilson, Aubrey, The Marketing of Professional Service (London : McGrawHill 1972).

3) Gummersson, Evert, Toward a Theory of Professional ServiceMarketing (Industrial Marketing Management, Vol. 7, 1978).

15.9 REFERENCES

1) AMA Definition of ‘Service’ as quoted in, Stanton, W.J., Fundamentals ofMarketing, McGraw Hill, New York, 1981, p. 441.

2) Swan J.E. and Pruden H.O., Marketing Insights from a Classification ofServices, American Journal of Small Business, july, 1977 Vol 11, no 1.


© ALI

© ALI


20

3) Classification by Thomas T. from Levelock C.H., Classifying Services to GainStrategic Marketing Insights, Journal of Marketing, Summer pp. 11-12, 1983.

4) Kotler, Philip, 1986 Marketing Management, Analysis Planning Implementationand Control. Prentice. Hall of India, New Delhi.

5) Shostack G.L., Breaking free from Product Marketing, Journal of Marketing,Vol 41, no. 2, April 1971, p. 77.

6) Bateson, J., Do we Need Service Marketing? Marketing Consumer Services:New Insights, Report 75-115, Marketing Science Institute, Boston 1977.

7) Booms, B.H. and Bitner M.J., Marketing Strategics and Organisation Structurefor Service firms in Donnelly J. and George W.R., (Eds), Marketing of ServicesAMA, 1981.

8) Grooroos, C., Services Management and Marketing, Lexington Books,Lexington 1990.

9) Cowell, D., The Marketing of Services. William Heinemann, London, 1984.

© ALI

© ALI

21

UNIT 16 PROFESSIONAL SUPPORTSERVICES : ADVERTISINGAGENCIES

Objectives


evaluate the importance of marketing applications to advertising agencies;

apply the general concepts of marketing, to advertising industry;

identify the various styles of growth in the context of advertising agencies;

discuss the content of growth strategies for advertising agencies;

explain the positioning and competitive strategies for advertising agencies.

Structure

16.1 Introduction

16.2 Application of the General Concepts of Marketing to an Agency Setup

16.3 Agency Growth : Its Style and Content

16.4 Agency Positioning

16.5 How Does Strategy Vary with the Size of the Client?

16.6 How Does Strategy Vary According to Size of Agency?

16.7 Conclusion



16.1 INTRODUCTION

The growth of study of modern medicine around 1700 witnessed a movementfrom panaceas to specific diagnosis and the search for specific remediesagainst specific ills. Similarly the study of services marketing can benefit moreby concentrating on specifics, focussing at smaller sub-groups of servicesbusiness and identifying what can be done with the marketing variables in eachof these fields.

With the advertising business in India growing rapidly, with many new smallagencies entering the market, some even closing shop and brand casualtiesincreasing, the need to look at the marketing concepts that apply in this industryis stronger than ever before. If advertising is looked upon as the brand buildingactivity, then future brands need to be invested in by studying the marketing ofprofessional advertising services. An attempt in this direction is being made inthis unit.

This attempt shall be broken up into three parts.

a) Application of the general concepts of marketing of services to theadvertising industry.

b) Identifying the style & content of agency growth.

c) Understanding Agency Positioning & Strategy.

© ALI

© ALI


22

16.2 APPLICATION OF THE GENERAL CONCEPTSOF MARKETING TO AN AGENCY SET UP

i) The 4 Ps : Kotler defines a generic marketeer as one creating valuethrough configuration, valuation, symbolisation & facilitation. In anadvertising agency scenario this includes the design of the advertisingservices package, whether the services offered are inhouse or fromfreelancers, the range of services offered and the intensity of serviceoffering of each of the services in the range. Valuation is the mediacommission earnings of an agency which are fixed at 15% (until anagency offers unethical discounts). However, valuation of other services inits package can vary as can its art charges. Symbolisation is what theagency is perceived as by its target audience. Alternate sysmbolisationalternatives can include positioning by size, by creative talent, by auxiliaryservices, by markets etc. Facilitation has more to do with accessibility ofservice and ease with which client can tap each of the service offerings ofthe agency. The production consumption interaction in advertising allows fordirect distrubution only.

ii) Three More Ps : The above four concepts corresponds broadly with thefour Ps of marketing. However, in the marketing of services 3 more Psare important. These are personnel, physical facilities and processmanagement. Though these three Ps deal with the preparation of theservice, they are as important as the other 4Ps. This is so because theconsumer is very often taking part in the shaping of the service offering.The production and consumption interaction is a unique characteristic of theservice industry. Consumers can influence not only accessibility of aservice but also communication about it. A dissatisfied consumer, researchproves, will influence a large number of people to abstain from using theservice. The process management and physical facilities are critical as theywork together every time to prepare the service for the consumer.

iii) Service : A Non-standardised Product : Factories have set formulasfor ingredients so that the consumer knows exactly the type of product heis going to consume. For an advertising agency, there is usually nostandardised product. When an agency is called by client for consultationon a problem, the solution to the client’s problem may well lie with thethree other Ps (Product, Price, Place), than with promotion. Interactionbetween client and agency may bring out the fact that advertising is notthe right tool to use at this point of time. Should the client’s problem lie inthe area of promotion, the solution may demand market research or it mayneed a direct marketing campaign instead of media releases. Hence a goodclient servicing person in an advertising agency can not be given a pre-determined product to sell.

iv) Service : Where Product Quality needs Renewal on EveryPurchase : While all products produced by a factory may meet pre-determined quality norms, in the service industry giving the consumerconsistent quality may not be as easy. This is because the service has tobe renewed with every purchase.

Because a service has to be created every time the customer demands it,there is a production consumption interaction while the demand is beingfulfilled. As service is usually given personally, the interpersonnel dynamicsbetween the people offering the service and the consumer has to benurtured so that the renewal of the service meets certain norms of bothservice quality and consumer satisfaction. In advertising, agencies givinggood creative inputs may also be changed by clients because servicing maynot be able to create a positive experience in the client’s mind. Theproduction consumption interaction in such a case does not meet client’s

© ALI

© ALI

23

demand of service quality, hence consumer dissatisfaction is expressed. Anappreciation of the renewal aspect of service brings out the importance ofpeople and process (Two of the three new Ps.)

v) Service : An Intangible : With no physical ownership rights existing onthe offering to the customer, no transfer of ownership can take place as ina tangible product. Also, unlike a physical product, they can’t be evaluatedeasily by taste, smell, feel etc. While the agency’s output may help to sellphysical products (sometimes services too) of the client, the agency has nophysical product itself to sell. Its physical products at best may beartworks, which by themselves have no value. Alternatively the agencycould be considered as selling time and space on the air and in the press.Evaluation of its service, however, can only be done overtime by theresponse it generates. There are no tangible ways of measuring it today.

Activity 1

Visit an advertising agency and collect information to analyse the way the 7Pshave been applied to the service.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

16.3 AGENCY GROWTH: ITS STYLE AND CONTENT

A) Content/philosophy of Growth

Agency growth is a dependent variable. The business philosophy of a goodagency defines its growth, as a dependent variable of the client’s growth. Thusthe primary task of an agency is to make its client’s products grow. In the longrun when planning for growth of the agency, it becomes very important todevelop skills that nurture and foster the growth of the client organisatioin.

Though physically agencies may execute artworks, write copy, producefilms, plan for media buying and provide routine servicing to clients, this isonly the outer manifestation of its real business.

The real job of the agency is to build brands, increase market shares,penetrate new markets, influence product development and planning,understand, participate in and may be, even influence marketing strategies.The job again may not end here.

A client organisation is different from a brand. It may have needs ofcorporate communication which may have to be identified and then fulfilled.

The client as a corporate identity may be evolving. The agency couldparticipate in its process of identifying new markets, new products and newbusiness. Thus an agency should grow not only with the brands that ithelps to build but also evolve and grow with its client organisations.

B) Style of growth

As with marketing of any business firm, there are three objectives thatprofessional firms also seek: sufficient demand, sustained growth and profitablevolume.

To achieve these objectives professional firms need to market themselves. Thethree styles of marketing for an agency (as for any professional firm) can be:minimal, hard-sell and professional marketing.

Professional SupportServices : Advertising

Agencies

© ALI

© ALI


24

Minimal Marketing : Minimal marketing is practiced by many firms offeringprofessional services. These firms dislike thinking of themselves asbusinessmen, instead state that they are motivated by service. They think ofmarketing as a salesman’s job and look down on business solicitation. Theybelieve that their good work will get more clients.

Hard Sell Marketing : Hard sell marketing is at the opposite end of thespectrum to minimal marketing. It reflects a total sales orientation, offeringprice discounts, bad mouthing competition, offering referral commissions andindulging in practices bordering on violating professional codes of ethics. Thisapproach forgets like any sales oriented approach, that there is more tobusiness than attracting clients. Marketing involves a discipline of identifyingand cultivating a market, choosing targets, developing services, formulating plansetc.

Professional Marketing : This approach to marketing of professional servicesis in consonance with the professional code of ethics. Such an approachinvolves:

planning for long-range marketing objectives and works out strategies tomatch;

training staff to improve the efficiency and effectiveness of marketing andpersonal selling;

allocating time and budget to support marketing activity; and

ensuring that quality of professional services offered currently does notsuffer as marketing activity is increased.

Such effort is usually preceeded by gathering data about the market. Strategiesare evolved thereafter. These strategies may include “service” or “market”sepecialisation. Specialisation in any particular service/range of services maygive and agency a cutting edge with clients who are looking for those services.Similarly specialising in certain type of markets (say “public issues” market)may pre-empt segments of the market to the agency. Another strategy may beof expanding services to current clients.

Activity 2

Study the advertising scene in India by looking at agency profiles reported inmagazines like A & M, Business Today, Business India, etc. Analyse thepatterns of agency growth to give examples of minimal marketing, hardsellmarketing and professional marketing.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

16.4 AGENCY POSITIONING

One way of defining Positioning of an advertising agency could be:

“Bringing the right people together and making them work effectively for abrand”. This is an incomplete definition for it ignores the ‘consumer benefit’approach or the client’s point of view. Clients have specific needs whensearching for agencies. Agencies have more strengths in certain areas.Symbolisation (or positioning) is the ‘value added’ dimension agencies give tothese strengths so that the client perceives them as fulfilling his specific needs.

© ALI

© ALI

25

Positioning by Size

A client may be looking at a “big” or a “small” agency. The positioningstatement for a “big” agency includes “full infrastructural back up, manybranches, the ability to think and act big, benefit of experience of handlingmany product categories etc.” Positioning staement for a “small” agencyincludes “flexibility, personalised service and attention, innovation, quickturnaround time and ability to go that extra mile for a client and his productetc.”

Positioning by Talent

It must be remembered here that an agency has to offer full fledged services.However its positioning may be decided by the strength it creates in oneparticular area.

Creative oriented : The client may be looking for agencies which arecapable of delivering strikingly different creative output. This positioning cancut across the size barrier. The “small” agency too can position itself inthis slot, earning the label as “creatives hot shot” for itself. Clients mayfind strikingly different creative output very suitable in product categorieswhere technology has matured and no distinct product advantages exist. Aclient may need to bank upon creative to create a “communicationdifference”.

Marketing input oriented : Some agencies may have strengths of havinggood brand thinkers. This, then, becomes the point of differentiation for theagency. Clients, too, may look for such agencies with whom they candiscuss marketing strategies. The benefit offered by this positioning tothe client is a better interpretation of the marketing concept intoadvertising.

Others : Other alternatives could be based on talent in the agency. Forexample an agency may be able to offer good “servicing input”, anothermay have excellent “media planning” skills etc.

Positioning by Auxiliary Services

Agencies can position themselves by offering additional services like in-house“market research” services. Further alternatives are “Direct Marketing”, “PublicRelations” etc. These package of services can help give and agency the extraedge with clients whose usage level of such services are high. The synergy ofadvertising with market research or direct marketing is the consumer benefitoffered by agencies choosing this positioning alternative.

Positioning by Markets

It is possible for an agency to position itself by markets, too. Some agencies inIndia specialise in “public issue” advertising. Their positioning in this segment isso strong that few consumer product launches are done by these agencieswhile the bulk of the public issues business in the country is diverted to them.There are also some agencies whose bulk business comes through publishing“Tender Notices” of public sector undertakings. This is another example ofspecialisation by markets. It is possible for agencies to specialise in industrialproducts advertising or retail advertising.

Positioning by Price

Though professional code of ethics do not allow any discounting practices onmedia commission earnings, some agencies position themselves by offeringdiscounts to clients.


Agencies

© ALI

© ALI


26

Activity 3

Look at the advertising agency that you studied for Activity 1. Can you analysethe positioning the agency has sought to achieve? What are the alternativepositions for this agency, looking at its infrastructure, resources and markets?

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

16.5 HOW DOES STRATEGY VARY WITH THE SIZEOF THE CLIENT?

The nature of inputs required from an agency vary with the size of the clientand the brand. Different expectations from agency in enterpreneurial, mediumsize and dominant brand positions are discussed here.

a) Client: Enterpreneurial

Agency Task: “Nurturing of new brand”, “Create positioning”

When the client is young and small and is launching a new product, this is anenterpreneurial phase for the client. The services the client demands of theagency must be able to comprehend the growth pangs of an enterpreneurialorganisation and even though such brands usually bring low levels of billing, anagency must devote time to their needs which are usually unique and requirean enterpreneurial decision making streak in the agency as well. Quickdecisions and quick reflexes of an agency are critical as enterprenuerialmarketing is like guerilla warfare. Such tactics, if backed by sound marketingthinking at client/agency end usually lead to success and rising brand shares.The basic agency task is however to create a brand positioning strategy for theclient. Quick responses of client and agency as they fine tune the positioning inthe market place are critical.

The demands from various departments of the agency for an enterpreneurialclient are as follows:

Servicing: Personalised to the enterpreneur. Decision Making: Quick, based ongut feel.

Servicing person: Should be senior, capable of thinking on his feet. Must haveknowledge of Account Planning.

Media Planning: Should focus on low cost, unconventional media.

Account Planning: Should be capable of evaluating if client’s gut feel meets marketinglogic.

Creative: Should never let the focus shift from the brand positioning in theflood or ideas coming in.

Client Focus: In early enterpreneurial phase may be survival. Agency shouldunderstand this.

b) Client: Medium Size

Agency Task: “Strengthen brand positioning” to build brand leader.

Two scenarios are discussed here:

i) When client’s growth is faster than the market growth

Here the focus moves to one of strategic planning for a brand to becomea leader. Even when a brand has succeeded in an enterpreneurial set-up,

© ALI

© ALI

27

the agency for its next phase of growth may have to alter its style as theclient may enter new markets and segments by now and even thoughservicing may still be personalised, account planning will need to be moreformalised keeping many more variables in mind, which, at anenterpreneurial risk-taking stage may have been ignored. The basic agencytask here is to sterngthen brand positioning to build a brand leader.

ii) When market growth is faster than client’s growth rate.

Where a medium-size brand has been dormant for a long period of time ina market which is otherwise growing at a healthy rate, it may be usefulfor the agency to use some enterpreneurial concepts in both product andpromotion design to make the brand an active player again. Repositioningof a brand becomes the major brand building task of the agency. The clientshould be motivated to relook at pricing and distribution strategies by theagency.

The focus for different departments of the agency for a medium size client areas follows:

Servicing: May be personalised still. But agency should meet second linemarketing people to receive market feedback directly (In non-enterpreneurial situation: It is heirarchial and partly personalised).

Decision Making: Agency should promote formalised decision making based onAccount Planning recommendations, to dilute focus on gut feelonly.

Media planning: Has to think of using mass media judiciously. For building brandleaders, Media Dominance Strategy has to be worked out.

Account planning: Should be the key agency focus so as to heighten brandpositioning or to “reposition”a slow moving brand.

Creative: To make brand distinction totally different from others, it should usemedia differently or design the message differently.

Client focus: It must be made long term here by agency advice.

c) Client: Market Leader

Agency Task: “Maintaining” dominant brands

When brands are dominating ones in their product category, and market sharecan be increased only marginally, with the category itself nearing maturity stage,the key function is of maintaining brand shares. The focus is on “pre-emptive”strategies and not “attacking” strategies. Competitors’ strategies have to bepreempted and defensive mechanisms worked out. Aggressive strategies at thisstage may drain more financial resources than they can generate. The brandpositioning has to be guarded here against imitators.

The focus of various departments of the agency for a large size client isoutlined below:

Servicing: Formal, following heirarchial structure.

Decision Making: Formalised

Account planning: The key input to strategy here is Market Intelligence (what thecompetitors plan to do) as as to pre-empt. Client’s marketing has toparticipate in this.

Creative: Defensive strategy for brand position.

Media Planning: Focussed for those target audiences which competitors are planningto tap. In other media, reminder level to be maintained.

Client focus: Defensive for brand position and share, offensive for competitivethreats.


Agencies

© ALI

© ALI


28

Viewing the above analysis according to the stage of the product life cycle ofthe product would generate the following conclusion:

A. “Create Brand Positioning”

Enterpreneurial needs in servicing, planning & execution.

B. “Strenghten Brand Position”

Account planning needs dominant.

Or

If brand not moving well: “Reposition” it.

C. “Guard Positioning”

Maintenence for dominant brands.

Activity 4

Select an agency which caters to several clients. Analyse the‘Agency Task’with respect to each type of client. How would you say the task variesbetween clients, if at all.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

16.6 HOW DOES STRATEGY VARY ACCORDINGTO SIZE OF AGENCY?

The strategy options for small, medium & large size agencies are discussedhere.

i) The Small Size Agency

Small agencies by their very size usually do not have very large brands towork on. The agency focus then largely becomes enterpreneurial, where theagency should have an ability to select clients whose products have a USPwhich is capable of becoming a benefit, highly desirable to a particular targetaudience in the market. At this stage, agency strategy involves a search forthe right clients i.e. the agency should catch the enterpreneur who has agood product. The success of the brand then becomes the sucess of theagency. However, faulty selection and non-payment by the client is a risk.Hence mortality rate of small agencies is higher than for medium and largescale agencies. The other alternative strategy for a small size agency could beto offer some specialised services. Clients, irrespective of size, needingstrengths in certain service areas would find such agencies useful. For example,agencies having good studio facilities could cater to clients who have needs ofprinting or other work requiring high quality artwork.

In case a small agency has a large brand, its revenues become largelydependent on the brand. This is both a constraint and an opportunity. Theconstraint is that the brand portfolio of the agency is very narrow. Hence theagency could become overdependent on the brand. Such dependence mayhamper giving professional advice, especially when it is unpleasant for theclient. The opportunity is that the success of the brand is the key of theagency’s success. If the agency realises this fully and establishes a healthyprofessional working relationship with the client it could be mutually verybeneficial. The agency would devote its fullest energies to the success of thebrand, giving a growing brand the attention it deserves. In the long run, it

© ALI

© ALI

29

would be advisable for the agency to diversify its client mix, for recessionarymarket conditions in the agency’s major brands market and a subsequentfinancial involvement would be unmanageable for a small agency.

ii) Medium Size Agencies

A medium size agency should invest in tomorrow with small brands that itbuilds into leaders. It should have a balanced client mix. With more than acouple of brand leaders bringing the front, half a dozen or more, major brandplayers in their market and a handful of small clients who have a potential forbecoming leaders tomorrow. The advantage of the medium size agency is clear.it is neither too big to be unaffected by a change in any client’s health neitheris it too small to avoid offering comprehensive advertising services. Its productportfolio, should consist of “today’s bread winners” who are some large brandsas well as “tomorrows bread winners” which are small brands the agency isnurturing to become brand leaders. The key benefit a medium size agencyoffers its clients (its positioning statement) is that it is not too big for its clientsto lack personalised agency attention. Neither is it too small to avoid investingin full fledged infrustructural support services. Therefore it can claim to offerthe best of both worlds to a client.

iii) Large size agencies

A large agency must heighten its positioning as a leader. This can be done bysetting industry standards. A leading agency, for example, produced anUrban Market Index and Rural Market Index which not only helps otheragencies but also clients in their planning. “Another strategy is to help increating better training facilities to train professionals for advertising. Thiscreates goodwill as many students may move to client organisations. It alsohelps to attract the best talent, hence preserving the pre-eminent place for theagency in the long run. This could also be done through organising seminars forboth agencies and clients. Yet another strategy could be to create industrystandards in auxiliary services like market reserach by setting upindependent companies to handle these services. Such services can be used byboth, clients and other agencies. Hence a large agency’s client list reads like awho’s who of brands. The advantages of such a scenario are obvious. Thedisadvantages need looking at. Due to the size of such agencies, it becomesunviable to handle brands which generate turnovers below a certain size. Thisleads the “innovator enterpreneurs” who are creating new product categoriesand attacking new markets to look elsewhere. It therefore makes eminentsense for large agencies to set up smaller “sister” agencies who can notonly handle such clients but can also pick up competitive brands to the parentagency’s brands. The latter is identical to a “multi branding” strategy used bydominant companies to maximise market share in large markets. The launchstrategy for these “sister” agencies could well be a positioning stance that isthe antithesis to the larger parent agency. If the larger agency is perceived asone following classical rules of advertising, the sister agency could well be amaverick. This would get both type of clients and brands and diversify theproduct/client mix of the group. Such an anti-thesis positioning would be usefulwhen a larger growing segment of brands have a potential of succeeding usingsuch a positioning stance. Usually the anit-thesis positioning of the smalleragency is “better servicing”, “more time for client” etc. The positioning alsoreflects itself in clients chosen: they could be smaller say retail v/s.manufacturers etc.

16.7 CONCLUSION

In short, unlike factories, which have standardised products, advertising is adynamic situation where every output of the agency is different from theprevious one. The production consumption interaction not only calls for direct


Agencies

© ALI

© ALI


30

distribution but is the prime determinant of the output. Advertising is a businessof managing people: clients, on one hand and agency personnel on the other.The key task is to maintain enthusiasm and a desire for excellence among allof them. Advertising is a game of bringing out the differences among twoproducts, and creating a USP for a brand. An agency must develop this abilityto make a difference for a brand and therefore for itself. That is whatsuccessful agency positioning and agency growth are all about. An agency, inthe final analysis is known by the brands it builds.


1) How do the marketing mix elements relate to advertising agencies? Explainby giving specific examples.

2) What is the significance of service characteristics like non-standardisation,perishability and intangibility for ad agencies? Explain in detail.

3) Contrast the minimal marketing, hardsell marketing and professionalmarketing approaches in the context of ad agencies. Which of them doyou consider most relevant looking at the advertising scene in India today?

4) What do you understand by ‘Positioning’? What are the positioningalternatives for ad agencies? Explain with the help of examples.

5) How do strategies and client focus vary according to the type of client andthe agency size? Illustrate your answer with suitable examples.


1) Maister David H., Professional Service Firm Management, 4th ed.,(Boston, MA: Maister Associates, 1989)

2) Wilson, Aubrey, The Marketing of Professional Service (London :McGraw Hill, 1972)

3) Philip Kotler and Paul N. Bloom, Marketing Professional Services(Englewood Cliffs, N.J. : Prentice-Hall, 1984).© A

LI© A

LI

31

UNIT 17 TELECOMMUNICATIONSERVICES

Objectives


understand the growth trends in the telecom sector in India;

highlight the competitive structure in the telecom industry;

understand the key issues related to pricing of telecom services;

describe the service quality parameters for telecom service providers.

Structure

17.1 Introduction

17.2 Growth of Telecom Sector in India

17.3 Tariff Issues

17.4 Sector Dynamics and Implications for Firm Level Competition

17.5 The Changing Market Structure

17.6 Service Quality

17.7 Summary


17.9 Appendix

Appendix 1 : Chronology of Indian Telecom Deregulation

Appendix 2 : Key Features of NTP 99

17.1 INTRODUCTION

The telecom sector in India has witnessed rapid changes in the last few years.There have been far reaching developments in Information Technology (IT),consumer electronics and media industries across the globe. The Governmentof India has recognized that provision of world-class telecommunicationsinfrastructure and information is the key to rapid economic and socialdevelopment of the country. This will not only help in the development of theIT industry, but will also provide for widespread spillover benefits to othersectors of the economy.

The first step in this direction was the announcement of the National TelecomPolicy in 1994 (NTP 94). This provided for opening up the telecom sector tocompetition in Basic Services as well as Value Added Services like CellularMobile Services, Radio Paging, VSAT Services, etc. It also set targets forprovision of telephone on demand and opening up of long-distance telephony.This was followed by a New Telecom Policy declaration in March 1999 (NTP99) to remove some of the bottlenecks and push the liberalization processforward.

The policy maker for India’s telecommunications sector is the Ministry ofCommunications and Information Technology, which operates through twogovernment bodies — the Telecom Commission and the Department ofTelecommunications (DoT). The Telecom Regulatory Authority of India (TRAI)is an independent regulator that reports to Parliament through the Minister.The Telecom Commission performs the executive and policy-making function,the DoT is the executive and policy-implementing body while the TRAI

© ALI

© ALI


32

performs the function of an independent regulator. Secretary, DOT, is the ex-officio Chairman of the Telecom Commission.

17.2 GROWTH OF TELECOM SECTOR IN INDIA

Telecommunications was not perceived as one of the key infrastructure sectorsfor rapid economic development during the formative years of the Indianeconomy. The relatively low levels of investment in this sector affected thequality, quantity and range of services provided. In 1998, number of phoneconnections per 100 persons in India was 2.2 while the world average was14.26 (World Telecommunication Development Report, ITU, 1999).According to a report by Ernst and Young (E&Y) this teledensity is expectedto cross 20 percent by 2008. According to the report the total telecomrevenues in India are expected to almost triple from $9 billion in 2002 to $23-25 billion by 2007. As in the other parts of the world, the global wirelessrevolution has been the principal growth engine in India.

For the provision of basic services (fixed line), the entire country is dividedinto 21 telecom circles, excluding Delhi and Mumbai. Bharat Sanchar NigamLimited i.e. BSNL (erstwhile Department of Telecommunications (DoT))provides basic services in the 21 telecom circles, while Mahanagar TelephoneNigam Limited (MTNL) serves Delhi and Mumbai, which are two metrolicense areas. Table 17.1 shows the list of basic services operators in India ,while Table 17.2 presents the subscriber base corresponding to each operator.BSNL’s market share has increased from about 80 per cent to 84 per centbetween March, 1997 and March, 2003, while the share for MTNL hasdropped considerably.

Table 17.1: List of Basic Service Providers and their Area of Operation

Area of Operation Name of Service Provider

All over India Department of Telecommunications, now BSNL

Delhi & Mumbai MTNL

M.P., Delhi, Haryana, Bharti Telenet Ltd.Karnataka, TN

Maharashtra Tata Teleservices Pvt. Ltd. (earlier Hughes IspatLtd.)

A.P., Delhi, Gujarat, Tata Teleservices Pvt. Ltd.Karnataka, TN

Gujarat, AP, Bihar, Delhi, Reliance Telecom Pvt. Ltd.Haryana, HP, Karnataka, Kerala,MP, Mah., Orissa, Punjab,Rajasthan , TN, UP(E),UP(W), WB

Punjab HFCL

Rajasthan Shyam Telelink Ltd.

In the early years after liberalization, India restricted the number of licensesawarded for basic services. The market was divided into separate circles andthe policy admitted one private operator in each to compete with the incumbentDoT (now BSNL) and MTNL. New entrants were allowed to offer intra-circlelong distance services, but DoT maintained its monopoly on inter-circle NationalLong Distance (NLD) telephony. Initially, the bidding process led to six newentrants in basic services. In the year 2001, the policy was changed to allowunlimited entry into each circle for basic services and subsequently 22 additional

© ALI

© ALI

33

license agreements have been signed. For the list of basic service providersand their area of operation refer to Table 17.1. As of December 31, 2003BSNL controlled 84.8%, MTNL 10.6% and other private operators 4.6% of thefixed service market.

Table 17.2: Subscriber Base – Basic Services

Service 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03Provider

DoT/BSNL 11,530,276 14,394,956 17,927,526 22,479,721 28,108,976 33,218,498 35,932,877

MTNL 3,012,324 3,406,740 3,653,913 4,031,624 4,327,158 4,629,709 4,690,080

Bharti Nil Nil 13,980 91,967 115,212 180,989 370,973Telenet Ltd.

Hughes Nil Nil 6,070 22,110 69,599 160,672 233,397Ispat Ltd.

Tata Tele- Nil Nil Nil 26,713 58,736 150,400 365,190services

Reliance Nil Nil Nil Nil 109 140 958,534

STL Nil Nil Nil Nil 8,998 27,150 82,265

HFCL Nil Nil Nil Nil 13,441 64,926 111,647

Total 14,542,600 17,801,696 21,601,489 26,652,135 32,702,229 38,432,484 42,744,963

In the year 2003-04 while the fixed lines including WLL (F) showed anincrease of 3% over the previous year, during the same period the mobileservices including Cellular and WLL (M) showed a spectacular growth of160% i.e. from 13 million to 33.58 million subscribers. This trend is not uniqueto India. Worldwide trends also confirm the same results i.e. higher growth inthe mobile sector.

Figure 17.1 shows the prediction made by International TelecommunicationsUnion (ITU) that mobile will overtake fixed worldwide, perhaps by 2005.Interestingly, this has already happened in a few countries. In India, it isenvisaged that by 2007 mobile phones will surpass fixed phones. However,with the current structural changes in the telecom sector including the movetowards unified licensing it is more than likely that this will happen earlier.

Private participation in the cellular-mobile market in India has been verysuccessful. Eight cellular licenses, two in each of the four metros, wereawarded in October 1994. Subsequently, bidding resulted in the award oflicenses in 18 Circles. (Circles have been classified as category A, B and Cbased on market characteristics and telephony potential in diminishing order ofattractiveness). For two circles, Jammu and Kashmir, and Andaman andNicobar Islands, no bids were received, while for West Bengal and Assam,only one bid each was made. A list of existing cellular operators and their areaof operation is provided in Table 17.3. The subscriber base crossed 3.5 million

Mobile has ov ertake n fixed-lines i n Ca mbodia, Finla nd, I tal y, Korea

Mobile s ubscri bers to ov ertake fixed-line worl dwi de be fore 20 05?

Mobile rev enue to ov ertake fixed-line after 2004?

Fastes t gr owth i n dev eloping countries 0

500

1'000

1'500

2'000

1990 2000 2010

Fixed

Mobile

Figure 17.1: Actual and projected subscriber growth, fixed-lines andmobile, millions, 1990-2010

TelecommunicationServices

Source: 1990-1998 data from ITU World Telecommunication Indicators Database. 1999-2010 ITU

� Mobile has overtakenfixed-lines in Cambodia,Finland, Italy, Korea

� Mobile subscribers toovertake fixed-lineworldwide before 2005?

� Mobile revenue toovertake fixed-line after2004?

� Fastest growth indeveloping countries © A

LI© A

LI


34

by the last quarter of 2001, at the end of March, 2003 it reached to about 13million and was more than 33 million by the end of March 2004. (Cellular andWLL – M combined). The top five mobile operators (Cellular and WLL-Mcombined) as of December 2003 in terms of market shares were Reliance(21.9%), Bharti (19.34%), BSNL (17.34 %), Hutchison (13.26%) and Idea(7.88%). Table 17.4 gives the details of growth in subscriber base for cellularservices.

Table 17.3: List of Cellular Service Providers and their Area of Operation

Category City/Circle Operator 1 Operator 2 Operator 3 Operator 4

Metros Delhi Bharti Hutch MTNL Batata

Mumbai BPL HMTL MTNL Bharti

Chennai RPG Bharti BSNL Hutch

Kolkatta Bharti Hutch BSNL Reliance

A’ Circle Maharashtra BPL IDEA BSNL Bharti

Gujarat Hutch IDEA BSNL Bharti

A.P. IDEA Bharti BSNL Hutch

Karnatka Bharti Spice Comm BSNL Hutch

T.N. BPL Aircel BSNL Bharti

B’ Circle Kerala Escotel BPL BSNL Bharti

Punjab Spice Comm - BSNL Escotel

Haryana Escotel ADL BSNL Bharti

U.P.(W) Escotel - BSNL Bharti

U.P.(E) ADL - BSNL Escotel

Rajasthan ADL Hexacom BSNL Escotel

M.P. IDEA Reliance BSNL Bharti

W.B. Reliance - BSNL -

C’ Circle H.P. Bharti Reliance BSNL Escotel

Bihar - Reliance BSNL -

Orissa - Reliance BSNL -

Assam Reliance - BSNL -

N.E. Reliance - BSNL -

J&K - - BSNL -

Source: www.coai.com

Table 17.4: Subscriber Base – Cellular Services

Category March March March March March March March March'97 '98 '99 '00 '01 '02 '03 '04

All Metros 325,967 551,757 519,543 795,931 1,362,592 2,567,757 4,439,524 7,941,766

‘A’ Circle 9,698 176,954 354,799 585,653 1,165,778 2,134,333 4,364,943 9,698,299

‘B’ Circle 3,000 138,309 284,189 460,094 932,685 1,501,151 3,374,538 7,402,067

‘C’ Circle 366 15,296 36,915 42,633 116,040 227,573 508,632 1,112,273

All India 339,031 882,316 1,195,446 1,884,311 3,577,095 6,430,814 12,687,637 26,154,405

Source: www.coai.com

© ALI

© ALI

35

Activity 1

Visit the website www.coai.com and find out the market positions of thevarious cellular service providers.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

17.3 TARIFF ISSUES

It is now widely recognized that enhancing efficiency and investment in telecomrequires the introduction of competition, which in turn needs a regulatorymechanism to facilitate competition. An essential ingredient of transition from aprotected market to competition is alignment of prices to costs (i.e., cost-oriented or cost-based prices), so that prices better reflect their likely levels ina competitive environment. In basic telecom, for example, a major departure inpricing of services involves cross-subsidization. Cross subsidization involvesproviding one service such as monthly rental below cost and another such asDomestic Long Distance (DLD) and International Long Distance (ILD) abovecost to recover cost and also to generate surplus for investment. Table 17.5shows that in 1998, 70 per cent of BSNL’s (then DoT) revenue was due toonly 13 percent of the subscribers. This can be estimated by calculating thecumulative distribution of subscribers and revenues from Table 17.5. Forexample, 2.7% of subscribers contributed 46.1% of revenue. The next 2.5% ofsubscribers contributed 9.8% of revenue, implying that 5.2% of subscriberscontribute 55.9% of revenue and so on. One reason for this was the very highprice of long distance calls compared to local calls. The considerabledifference between the price of a local call and that of DLD and ILD callswas policy driven. Empirical evidence shows that it was 90 times moreexpensive to make a long distance call from Delhi to Mumbai in 1998compared to local call and the corresponding ratio for an ILD call to USA.This implies that those who made long distance calls were cross subsidizingthose who used the telephone for only local calling.

Table 17.5: Revenue Contribution by Different Subscriber Groups

Share of Total Subscribers The Contribution of TheseSubscribers to Call Revenue

2.7 % (those making more than 10,000 call bi-monthly) 46.1 %

2.5 % (those making between 5001 and 10,000 call bi-monthly 9.8 %

7.9 % (those making between 2,001 and 5,000 calls bi-monthly) 13.4 %

14 % (those making between 1,001 and 2,000 calls bi-monthly) 11.6 %

21.3 % (those making between 501 and 1,000 calls bi-monthly) 10 %

51.7 % (those making 0 to 500 calls bi-monthly) 8.1 %

Source: Telecom Regulatory Authority of India (TRAI). 1999, “Telecommunication TariffOrder.”

Traditionally, BSNL (DoT earlier) tariffs cross-subsidized the cost of access (asreflected by rentals) by domestic and international long-distance usage charges.In order to promote desired efficiencies, ‘re-balancing’ of tariffs is a necessity,and, therefore an important policy issue. Re-balancing of tariffs involvesreducing tariffs that are above costs while increasing those below costs. Thus,re-balancing implies a reduction in the extent of cross-subsidisation in the fixed-services sector. Such a rationalization is required as a condition precedent to


© ALI

© ALI


36

the conversion of a single operator system to a multi-operator one. A smallproportion of the subscribers account for a major share of call revenue, andthese subscribers would be the subject of competitive churn when privatesector operators enter the market. For example, Hughes teleservices (nowTATA) targeted the high revenue paying subscribers when it entered themarket in Mumbai and made attractive offers to corporates and potential clientsin the rich districts of Nariman point and Colaba. Similarly, Bharti in MadhyaPradesh acted likewise in the cities of Indore and Bhopal when it newlyentered the market in 1996. Such cream skimming or cherry picking is acommonly adopted pricing strategy for new entrants in telecommunicationmarkets when facing entrenched incumbents. Loss of high revenue customerswill have a significant effect on the revenue situation of the incumbent, makingit difficult to meet its revenue objectives. Thus, while tariffs have to be reducedfor the services that are priced much above cost (e.g., long distance andinternational calls), tariffs for below-cost items need to be increased. Such are-balancing exercise is common when preparing the situation for competition.Otherwise, competition will result in a decline in above cost prices without anycompensating charge in the below cost prices. Cost-based prices restrict thepossibility of cream skimming by operators.

The methodology of specifying tariffs included the following feature to impartflexibility. For certain services, TRAI specified particular tariff levels while forseveral others it allowed forbearance. Forbearance is a feature that permitsservice providers to set their own tariffs without approval from the regulator.Usually it is a practice followed in markets where there is substantial oradequate competition. Even for those services for which tariff levels arespecified, the framework includes the possibility of providing alternative tariffs.The tariffs specified by TRAI form a package that is termed the “standardtariff package.” This package must always be provided to the customer. Inaddition, the service provider is left free to provide any “alternative tariffpackage.” Since the standard tariff package is always available to thecustomer, any alternative tariff package has to be better in order to attract anycustomer. Therefore, the standard tariff package provides a minimumguarantee to the customer. In one sense, it specifies the peak expenditurelevel for the customer, with the alternative tariff packages being attractive onlyif the expenditure involved in them is lower than that for the standard tariffpackage. This method of flexibility was adopted because of the growingtendency in telecom markets to provide different tariff combinations for variousbaskets of services. Thus the standard tariff package could be viewed as aceiling tariff, with operators free to provide alternative tariffs that were belowthis level. For cellular mobile, tariffs were restructured because the prevailingrentals were low and call charges were high. This resulted in a tariff structurethat dissuaded usage and loaded the subscriber base. Thus, call charges werereduced and rentals were increased. The methodology clearly included licensefee as costs and showed that a high license fee translates into higher tariffs.Standard monthly rental for mobile cellular was increased from Rs 156 toRs. 600, but the maximum call charge was reduced from a peak of Rs. 16.80per minute to Rs. 6 per minute. The service providers were allowed to givealternative tariff packages which resulted in lower tariffs.

The possibility of giving alternative tariffs provided a means of addressingseveral concerns. Over time, with greater competition in the market, tariffs forlong distance calls and for cellular mobile have seen dramatic declines withinsuch a framework. The reduction in tariffs has also been spurred by theintroduction of wireless in local loop (with limited mobility) and the major costreduction due to technological change. With the new service providers relyingon more recent, cost efficient technologies, Indian telecom market is emergingwith very strong competitive pressure.

© ALI

© ALI

37

The basic driving force of growing competition in what was once thought to bea natural monopoly is the increasing versatility with which services can beprovided, based on the digitisation of all signal-transfer technology. As themanner in which signals are transferred from one location to another becomescommon, it is possible for a service provider in one segment oftelecommunication, say network television services, to perform the functions ofanother, say, the local phone company. Efforts to maintain barriers across suchsegments will eventually be overwhelmed by technology. Regulation will followconvergence rather than the other way around. Convergence will eliminate theexisting barriers between different types of services, for example, betweenbasic and cellular and allow service providers and, thus, consumers to benefitfrom scale and scope economies. This has already been initiated in India witha move towards unifying the licenses for Basic and Cellular services.

17.4 SECTOR DYNAMICS AND IMPLICATIONS FORFIRM LEVEL COMPETITION

a) Basic Services

After NTP 1994 was announced, move was made to include privateparticipation in providing telecom services. During September 1994 guidelineswere issued for private sector participation in basic services. In January 1995tenders (circle-wise) were invited for the 2nd operator in Basic service. In theyear 1997 private operators started providing basic services.

Table 17.6: Extent of Competition as on 31st March 1997

Circle/City Number of Basic players Number of Cellular players

A&N 1 0AP 1 1Assam 1 0Bihar 1 0Gujarat 1 2Haryana 1 2H P 1 1J & K 1 0Kerala 1 0Karnataka 1 0Maharashtra 1 0M P 1 0N E 1 0Orissa 1 0Punjab 1 0Rajasthan 1 0T N 1 0U P (E) 1 0U P (W) 1 0W B 1 0Mumbai 1 2Kalkatu 1 2Delhi 1 2Chennai 1 2

b) Cellular Services

Licences were issued for Cellular Services for metros in November 1994. InDecember 1994 tenders were invited for 19 circles apart from 4 metros. Inmost of the circles/metros two operators began service, making the market aduopoly.


© ALI

© ALI


38

c) State of Telecom Market as on 31st March 1997

Basic subscriber base 14.54 MillionCellular Subscriber base 0.34 MillionTeledensity 1.56

Number of NLD players: 1 (BSNL)

Number of ILD players: 1 (VSNL)

The data shown above demonstrates that the telecom sector in 1997 wasdominated by the government owned monopoly, with a few private operators inthe cellular mobile segment. Teledensity was low and prices were relativelyhigh. Although the market had been opened to competition in the basic andcellular segments, the structure remained concentrated i.e. the market wasfairly monopolistic.

In the year 1999, NTP-99 was announced. Its main objectives are shown inAppendix 2. In 1999, DoT was divided into DTS (Department of TelecomServices) for service provision and DoT for policy making. In the year 2000DTS was corporatised as BSNL, which is the name under which it operatestoday. Until June 2001, there were only 6 private operators in operationapart from BSNL (operating all over India except Delhi and Mumbai) andMTNL (operating in Delhi and Mumbai). During this period, existence ofprivate operators did not provide adequate competition to force downprices. There was virtually no competition in Basic services. As on 31stDecember 2003, share of private operator in basic service market was lessthan 5%.

Licence for 3rd Cellular operator was granted to the Government ownedservice providers, BSNL & MTNL. MTNL started its Cellular services in2001 while BSNL started its services in 2002. An interesting development incellular tariffs was witnessed at this time. There was a steep and suddendecline in tariffs by the private operators in anticipation of entry of 3rd cellularservice provider. However, an analysis of market shares of cellular operatorsshows that MTNL has not been able to make a significant impact in theCellular Market. At the end of September 2003, MTNL’s share in Delhi was6% and 8% in Mumbai. An interesting fact is that the private operator thatentered the markets of Delhi and Mumbai almost a year after MTNL, hasacquired a larger share of the market. Whereas, BSNL as the 3rd entrant hashad relatively more success achieving a 22% market share on an all India basisas of September 2003 (operating in 19 circles). The fourth Cellular operatoralso started service along with BSNL in the year 2002. As one would expect,the entry of competition in cellular mobile has provided a boost to the market interms of subscriber acquisition, tariff changes and value added services likeroaming, SMS, cricket updates, stock market news etc. Based on the prevailingtariffs in the market, costs and extent of competition, TRAI decided tointroduce forbearance in the year 2002. Thus cellular service providers are nowfree to determine the price of tariff offerings to subscribers.

17.5 THE CHANGING MARKET STRUCTURE

Several parts of the sector have been liberalised and along with reforms themarket structure has also undergone a significant change. Unlimited entry ofnew players has been allowed in basic, NLD, ILD, ISP and infrastructurebusinesses. Cellular mobile has upto 4 operators in each service area. As aresult of these changes, the sector presents a very different picture from theone that obtained in 1997. There are 8 different operators in certain lucrative

© ALI

© ALI

39

service areas such as Delhi, Chennai, Karnataka etc. There are 4 NLD and 5ILD operators in India.

The way in which the structure of the industry is changing at a phenomenalspeed seems unending at the moment. The Reliance launch has been a catalystnot just in the ensuing price competition but even more significantly inattempting to alter the mindset of all the stake holders of the telecom business.One early casualty is going to be the most conventional way of looking at thebusiness: henceforth the services and the tariff on offer cannot be fitted soeasily into neat compartments such as basic telephone services, mobile servicesor local calls, STD calls and so on. Bundling, which is examined later in thissection is one example of this.

Three to four leading private players are likely to emerge as competition to theincumbents, BSNL and MTNL, which have a significant presence across thevalue chain. The Tata Group, Reliance Infocom and Bharti Televentures haveannounced plans to emerge as integrated telecom companies offeringend-to-end services to customers. Hutchison, on the other hand, appears to befocused on cellular services, with no stated intention of entering otherbusinesses.

The VSNL acquisition has catapulted the Tata Group to the leading positionamong private Indian telecom players. With a 100 per cent share in thelucrative ILD business, a leading share in Internet services, and a favourableNLD license, VSNL fits in perfectly with the group’s plans of providingintegrated telecom solutions. The Tata-VSNL team will now embark on its nextchallenge - ensuring a smooth transition at VSNL and integrating business plansfor ILD, NLD and Internet/data services to enhance value for its customersand shareholders.

This increase in competition has not only increased the market size for telecom,but has also resulted in substantial tariff declines. The next section analysesthis phenomena.

a) Trend in tariffs

There can be no question about the direction of change in average tariff in thesector. The trend has been consistently downward. There are many ways toestimate the decline in tariffs for telecom services and some may be subjective.While different methods may result in different estimates, the message thatcomes through is that substantial declines in tariffs have occurred that can onlybe attributed to the intense competition in the market.

The reason why estimates of tariff declines could vary is because prices varydepending on the nature of usage and the package of services viz. local NLD,ILD, value added services etc. chosen by the subscriber. Another complexityin telecom is the widespread use of multi part pricing i.e. a fixed monthly rentalfor access to the service and a variable charge depending upon usage and thenature of calls. Moreover service providers have attempted to segment themarket according to subscriber types and have tried to customize tariffofferings to best meet the needs of different subscribers. Thus a number oftariff plans are available which subscribers choose according to theirrequirements.

In September 2003, TRAI did a study on trends in tariffs for Fixed, Cellularand WLL (M) services. The following graph shows the results of thatstudy.


© ALI

© ALI


40

MOU: Minutes of Use

The above graph is based on the calculations performed on the minimum tariffsprevailing in the market at various points of time for average local usage of400 minutes (outgoing + incoming). As stated above, tariff decreases havebeen an unmistakable feature of the telecom market in India over the last fewyears, although different analysts could come up with different estimatesdepending on the methodology adopted for the purpose.

b) Innovations in Tariff offerings

Technological progress has blurred the boundaries between different platformsfor access services. Thus, competition is not only within the service but alsobetween the services, viz, cellular and WLL (M). One manifestation of thiscompetition has been examined in the previous section on tariff declines.Another is the frequency of change in tariff plans offered by operators. Notonly is the frequency of change high, service providers are also designinginnovative tariff plans to attract subscribers. Further, service providers arestriving to lock their customers for a longer period of time to prevent churn.Acquiring subscribers is passé; customer retention has become vital.

c) Bundling of services

Another interesting change in the sector is the multiple licenses owned by asingle company. As stated earlier, India has issued separate licenses for Basic,Cellular, NLD, ILD, ISP services. In view of the fact that a single operatorhas acquired multiple licenses and can thus offer multiple services, one of theinnovations that have occurred relates to bundled offers. An integratedoperator (Integrated operator means that one business house possesses cellularor basic i.e. access, NLD, ILD and ISP license. This enables the serviceprovider to offer end-to-end services to the customer under its own brandname) can design more bundles and innovative schemes compared to a stand-alone operator. Some of the bundled offers are described below.

CUG (Closed User Group) : Forming a group of customers where thecalls within group are either not charged or are charged very low and thecalls made outside the group are charged higher.

Friends and Family : Unlimited free talktime to a selected number for acost of a fixed monthly charge.

Comparison of effective charge per minute for 400 MOU/month (Rs.)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Fixed 0.69 0.69 0.69 0.69 0.69 0.69 0.69 0.69 0.69 0.78 WLL(M) 1.25 1.37 1.37 1.37 1.37 1.37 0.71 0.71 0.71 0.67 Cellular 2.42 2.41 2.06 2.06 1.89 1.89 1.70 1.70 1.63 1.12

Mar.-01 Jun.-01 Sep.-01 Dec.-01 Mar.-02 Jun.-02 Sep.-02 Dec.-02 Mar.-03 Jun.-03

© ALI

© ALI

41

Free VAS (Value Added Services): such as SMS, CLIP free withcertain tariff plans.

Unlimited usage free: Tariffs with high monthly rental and unlimited freeusage. This may attract the high callers and this type of packages alsoensures a minimum ARPU (Average Revenue per User) to the serviceprovider.

Zero Rental: Packages with no or zero rental and high calls charges. Thistype of package may attract very low users, who want to own a phonebut use it very rarely.

Prepaid plans with no administrative charges or plan fee: Thisensures a fixed ARPU to the service provider. Also, customer gets achance to use his net payout to the fullest.

Plans to lock customers for a longer period of time: Tariff plan forminimum commitment of 3 years. Although it provides a facility to thecustomer to exit the plan but at a very high cost, which discourages thecustomer from exiting the plan.

Plans with very low rental but outgoing calls are barred: At a verylow monthly cost ranging between Rs. 70 to Rs. 150, customer can receiveany number of calls. Also if someone wants to make outgoing calls, he canuse VCC (Virtual Calling Card). It is a perfect substitute of pager or maybe one step ahead.

The intense competition witnessed in telecommunications has severalimplications that go well beyond the immediate sectoral interests. Suchcompetition has been price-driven; with the existing service providers hoping toretain their market share through tariff cuts in the wake of strong emergingchallenge. The immediate gainers are the consumers, especially users of mobile.

Activity 2

Try to find out examples of bundling in other industries (sectors) in India.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

17.6 SERVICE QUALITY

The Telecom. Regulatory Authority of India Act 1997 11(1) (b) (v) as amendedby TRAI (Amendment Act, 2000) mandates TRAI to “lay down the standardof quality of service (QOS) to be provided by the service provider and ensurethe Quality of Service and conduct the periodical survey of such serviceprovided by the service providers so as to protect interest of the consumer ofTelecom Services”. One could argue that in a competitive environment,Regulator need not bother about QOS Parameters and competition willautomatically take care of it. Unfortunately, in reality it is not so. Even in thecountries, where there has been competition in various telecom services for along time, the QOS is a major concern to protect consumer interest.

After going through a consultation process through written comments and openhouse discussions, TRAI issued a QOS Regulation on 5th July, 2000 both forBasic as well as Cellular Services. This Regulation has laid down benchmarksfor various QOS parameters with the following objectives:


© ALI

© ALI


42

i) Create conditions for customer satisfaction by making known the qualityof service which the service provider is required to provide and the userhas a right to expect.

ii) Measure the Quality of Service provided by the Service Providers fromtime to time and to compare them with the norms so as to assess thelevel of performance.

iii) To generally protect the interests of consumers of telecommunicationservices.

QOS Parameters for Basic Telecom Services

The following key benchmarks have been set for basic services

i) Provision of a telephone after registration of demand for exchange areasdeclared on demand : 100% within 7 days.

ii) Fault incidences (No. of faults / 100 subscribers / month): <3

iii) Fault repair by next working day: >90%

iv) Mean Time To Repair (MTTR): <8 hours

v) Call Completion Rate within a local network: >65%

vi) Metering and billing credibility: Not more than 0.1% of bills should bedisputed.

vii) Operator Assisted Trunk Calls: Urgent <1 hour, ordinary <2 hours

viii) Customer Care (Promptness in attending to customers requests) 95% ofrequests: a) Shifts : <3 days b) Closures: <24 hours c) Additionalfacility : < 24 hours

ix) Percentage of repeat faults: <1%

QOS Parameters for Cellular Services

On similar basis QOS Regulation have been laid out along with the benchmarksfor cellular services.

A) Fault incidence and Repair

i) Fault incidence (Number of faults /100 subscribers/month): <1

ii) Faults cleared with 24 hours : 100%

iii) Accumulated down time of Community isolation: <24 hours

B) Network Performance

i) Call Success Rate (within licensees own network): >99%

ii) Service Access Delay : Between 9 to 20

iii) Call Drop Rate : <3%

iv) Percentage of connections with good voice quality : >95%

C) Billing Complaints

i) Billing complaints per 100 bills issues: <0.1%

ii) Percentage of billing complaints resolved within 4 weeks: 100%

iii) Period of all refunds/payments due to customers from the date ofresolution of complaints as in (ii) above: <4 weeks

In a survey conducted by IMRB on behalf of TRAI to assess the quality ofservices provided by the service providers (for the period Oct. – Dec. 2003)following issues emerged.

a) The basic services being provided are not upto the desired standards. Thesituation is particularly bad in respect of provision of new connection within7 days, number of faults per 100 subscribers per month, time taken torepair faults, and time taken to shift connections and closures.

© ALI

© ALI

43

b) Cellular operators are providing much better quality of service than theirbasic counterparts. Fierce competition in the cellular market has forcedoperators to constantly keep improving their networks, resulting inacceptable levels of service. The key concern areas for CDMA operatorsare billing complaint incidence, billing complaint resolution and faultincidence, in that order. The performance of the CDMA operators onthe remaining parameters is good.

The details of QOS regulation and detailed reports on surveys conducted areavailable on TRAI’s website : www.trai.gov.in

Activity 3

As a user of telecom services, try to evaluate the service quality of yourservice provider(s) based on the parameters given in this section.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

17.7 SUMMARY

This unit gave you an overview of fixed line and cellular mobile industry inIndia. There has been a significant growth in the Indian telecom market duringthe last few years. A number of steps have been taken by the Indiangovernment which have resulted in a dynamic change in the competitivestructure of the industry. The unit outlines the steps taken and analyses thecompetitive structure prevailing in the industry. Issues related to pricing (tariffs)have been discussed in detail. The unit ends with the service quality parametersrelevant to telecom service providers.


1. Discuss the major trends in the growth of telecom sector in India duringthe last few years.

2. What are the important issues that should be kept in mind while decidingon the pricing issues for telecom services?

3. Explain the nature of competition prevailing in the telecom industry in India.What are its implications for the telecom firms?

4. What is bundling? Why do you think bundling has emerged as an importantaspect of customer pricing, especially in context of telecom serviceprovision inIndia. Do you think bundling is always in customer interest?Give Reasons.

5. What are the service quality parameters for basic telecom services and forcellular mobile services? Why have such parameters been introduced bythe regulatory authority?


© ALI

© ALI


44

17.9 APPENDIX

Appendix 1 : Chronology of Indian Telecom De-regulation

Year Event

1992 Bids invited for radio paging services in 27 cities

Bids invited for cellular mobile services in four metro cities

1994 National Telecom Policy announced

Radio paging, V-SAT data services, electronic mail services, voice – mailand video – text services opened to private providers

DoT guidelines for private sector entry into basic telecom services in thecountry

Eight cellular licensees for four metros finalized after over two years oflitigation

1995 DoT calls for proposal to operate basic, cellular telecom services andpublic mobile radio trunked (PMRT) services

DoT receives bids for basic, cellular and PMRT services

Most cellular operators in circles sign license agreements

DoT announces cap on the number of circles basic operators can roll outservices in. Licensees selected for five circles.

1996 After setting reserve prices for circles, DoT invites fresh bids for basicservices in 13 circles

Five successful bidders short-listed for providing basic services

Poor response to third round of basic telecom bidding. Only on companybids - for Madhya Pradesh.

Selected bidder of first round refuses to extend bank guarantees for itsfour circles. Challenges in court DoT move to encash guarantees.

Three more companies move court against DoT move to encashguarantees.

1997 Telecom Regulatory Authority of India (TRAI) formed.

First basic telecom service company signs license and interconnectagreements with DoT for Madhya Pradesh

Second basic service provider signs basic telecom license pact for Gujarat

TRAI quashes DoT move to increase tariffs for calls from fixed-linetelephone to cellular phones

VSNL calls for global tenders to find a partner for its South Asianregional hub project

Internet Policy cleared; license agreement for basic services inMaharashtra also becomes operational

Basic service licensees for Andhra Pradesh and Punjab sign basic telecomagreements with DoT.

1999 TRAI Issued First Tariff Order.

New Telecom Policy announced.

TRAI Issues First Regulation on Interconnection and Usage Charge

Conditions for migration to revenue sharing from fixed license fee regimeissued

Cellular operators allowed the use of any digital technology;MTNLgiven a license to provide cellular mobile service under these flexibletechnology conditions.

2000 Ordinance promulgated divesting TRAI of adjudicatory role. TDSATcreated to settle disputes between licensor and licensee. Appeals againstTRAI decisions to be heard by TDSAT.

TRAI implements second phase of tariff re-balancing

© ALI

© ALI

45

Policies announced for easier entry/operation of new service providers inthe various sectors, e.g., VSAT, PMRTS, Radio Paging, Unified Messaging,Voice Mail

Government has allowed the setting up of international gateways toprivate internet operators

Guidelines for Issue of Licence for National Long Distance Service

Guidelines for Issue of Licence for Cellular Mobile Telephone Service

2001 Guidelines for Issue of Licence for Basic Telephone

Convergence Commission of India Bill laid in Parliament.

Open competition policy announced for International Telephony Service

Usage of Voice Over Internet Protocol permitted for international telephonyservice

First License for National Long Distance service signed

Launch of WLL(M) services by Basic service provider in the market

2002 Guidelines for Issue of International Long Distance Licence

First License for International Long Distance service signed

First private operator begins ILD service

TRAI revises tariffs for WLL(M)

TRAI leaves Cellular tariffs to market forces, service providers to notifytheir Reference Tariff plans

TRAI introduces the Reference Interconnect Offer (RIO) regulation

TRAI introduces Regulation on Quality of Service For VOIP BasedInternational Long Distance Service

2003 TRAI introduces the Telecommunication INTERCONNECTION USAGECHARGES (IUC) Regulation

TRAI leaves NLD sector left under forbearance subject to a ceiling tariff

TRAI leaves ILD sector left under forbearance

TRAI mandates Basic Service Operators (BSO) to be non-discriminatory inprovision of Infrastructure facilities to ISPs

TRAI gives its recommendations on unified licensing for basic and cellularmobile services

TRAI gives its recommendations on “WLL(M) Issues Pertaining To TRAIBased On HON’BLE TDSAT’S Order

TRAI Forbears Basic Service Tariffs Except Rural Tariffs


© ALI

© ALI


46

Appendix 2 : Key Features of NTP 99

Some of the notable advances marked by the NTP 99 are as follows:

Speeding up competition in long distance, including usage of the existingbackbone network of public and private entities in Rail transport, Powerand Energy sectors for data (immediately) and for domestic, long-distancevoice communication when the latter is opened to competition fromJanuary 2000. This increases the scope for entry of a new category of‘infrastructure providers’ or ‘carrier’s carrier’.

Fixed Service Providers (FSP) shall be freely permitted to establish ‘last-mile’ linkages to provide fixed services and carry long-distance trafficwithin their service area without seeking an additional licence. Directinterconnectivity between FSPs and any other type of service provider(including another FSP) in their area of operation and sharing ofinfrastructure with any other type of service provider shall be permitted.

Policy to convert Public Call Offices (PCOs), wherever justified, intoPublic Teleinfo centres having multimedia capability like Integrated ServicesDigital Network (ISDN) services, remote database access, government andcommunity information systems etc.

Transforming, in a time-bound manner, the telecommunications sector to agreater competitive environment in both urban and rural areas providingequal opportunities and level playing field for all players.

Strengthening research and development efforts in the country and providean impetus to build world-class manufacturing capabilities.

Achieving efficiency and transparency in spectrum management.

Commitment to restructure DoT.

Interconnect between private-service providers in the same Circle andbetween service provider and VSNL along with introduction of competitionin Domestic Long Distance.

Undertaking to review interconnectivity between private-service providersof different service areas, in consultation with TRAI.

Permission for ‘resale’ of domestic telephony.

Clarity regarding number of licenses that each operator may be granted.(This could lead to consolidation of industry operators over the long term).

Emphasis on certain other issues including Standardisation, HumanResource Development and Training, Disaster Management and Change inLegislation.

© ALI

© ALI

47

UNIT 18 PRODUCT SUPPORT SERVICES

Objectives


understand the concept of product support services;

describe the different categories of product support services;

explain the service quality issues related to product support services; and

apply the key learning to the case study given at the end of the unit.

Structure

18.1 Introduction

18.2 Characteristics of Product Support Services

18.3 Classification of Product Support Services

18.4 Goal of Product Support Services: Customer Satisfaction

18.5 Summary


18.7 Case Study

18.1 INTRODUCTION

In this unit, you will be able to understand the concept of product supportservices which is important for goods as well as services marketers. Aftersales Service is normally referred as customer service. Customer service is aphilosophy in which all employees feel and act accountable for creating satisfiedcustomer. Value added customer service is the responsibility of all theemployees of the organization. Accountability is vital to customer service and ina successful service oriented organization every one is accountable for thecustomer satisfaction. It is the job of every marketer to create satisfiedcustomer.

In many organizations product support service or customer service is adepartment or a section where customers with complains are guided for areactionary solution to the problem that he experiences with the use of theproduct. Customer services or after sales service should be an attitude of theorganization. It should become a part of the corporate culture .It should be thefundamental aspect of a business philosophy and should be a commitment toensure that customers leave more excited than when they walked in the door.A popular saying is that advertising brings customers to the stores where aspoor customer service takes them away from the store and the brand.

The product support service is a value-added service to match the customerexpectations. It is also necessary to know what consumer’s value in theproduct support services. They can be grouped as quality, availability, knowledgeof the people with whom they work, ease of doing business, support services,performance of the product, follow through by the people with whom they dealand the price. All these elements are more important to the consumer than theelement of price in a post purchase situation. So though the performance of theproduct support service staff one can also increase the profitability and profitpotential of the organization.

There are various myths about product support services and their lesserrelevance in the Indian context. They are because Indian marketers think thatgood customer service is time consuming. The research speaks otherwise. It

© ALI

© ALI


48

says that getting a new customer takes more time than getting more businessout of an existing and satisfied customer. Some people are of the opinion thatserving existing customers is expensive. Quality gurus are of the opinion that35% of the customer complaints are about the poor quality of the servicedelivery than the customer complaints on product performance or the price ofthe product. There is a high sense of gratification among managers and theyoften tend to forget that the expectation of the customers increase over aperiod of time. It is always prudent to benchmark against evolving customerservice expectations than benchmarking against competitors in the industry. In asurplus demand market, the marketer does not care for the concept ofcustomer service as he realizes that the customers are going to come to themanyway. A strategic outlook to the business will always goad managers to lookat customer service as a strategic tool than a complaint management system inthe organization.

Many a times companies have a philosophy of properly serviced. It means:

Identify customer service needs requirements.

Develop appropriate products and services to meet those needs which areconsistent with your business strategy and profit objectives.

Match the product to the needs, with appropriate prices, channels ofdelivery, presentation and communication to the consumers.

Develop and maintenance a continuous service process for the targetcustomers.

Activity 1

Visit an after sales service station of any consumer durable, and conduct an indepth interview of the customers on what constitutes ‘after sales service’ andhow are they satisfied with their products

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

18.2 CHARACTERISTICS OF PRODUCT SUPPORTSERVICES

Most companies in manufacturing and service business offer their customers apackage of a product called a solution, which is a combination of the coreproduct and a variety of service related activities. These services provide thedifferentiation that separates successful firms from the also-rans. Performingwell in service delivery requires modern marketers to understand.

What action and reaction consumer expect from the organization.

Grouping of these actions in to core and support service elements.

Evaluate how well the organization is performing on each one.

Redesign existing service packages in order to offer customers in eachtarget market segment a product offering and delivery system that meetstheir expectations for performance and value within the constraints of aprice that will allow the service provider to have an allowable profit.

The concept of an augmented product is an explanation of the package ofservices that are bundled with the core and tangible product as a completeoffer to the consumer. According to Theodore Levitt “ We live in an age in

© ALI

© ALI

49

which our thinking about what a product or a service is must be quite differentfrom what it ever was before. It is not so much the basic, generic central thingwe are selling that counts, but the whole cluster of satisfactions with which wesurround it.” According to Levitt, the total product concept consists of core orgeneric product; the inner band surrounding this core is termed as expectedproduct, representing customer’s minimal expectations, It includes pricing,delivery, appearance of facilities and personnel, personality of the service peopleand so forth. The next encircling band is called the augmented product whichincludes further benefits, added to enhance the appeal of the product; as themarket becomes accustomed to specific augmentations, these may eventuallyturn to the expected product level. The area encircling the outermost concentricband is called the potential product. Which consists of everything potentiallyfeasible to attract and hold customers in contrast to the augmented product thatmeans everything that has already been done to the product.

Shostack distinguished between the tangible and intangible elements involved inservice delivery. For example in an airline business, the intangible elementsinclude transportation itself, service frequency and preflight, in-flight and postflight services. The aircraft, food and drinks that are served are tangible. Byhighlighting the tangible components marketers can determine whether theorganization is tangible dominant or intangible dominant. The performance ofeach service influences the quality of the others, the product support servicesshould contribute to the over all service perception. It is necessary to obtaininformation about consumers over all satisfaction on core as well as splitservices. Management must decide what is the right set of support services tobe offered to the customers. Decisions can also be made to unbundle theprices by charging for each set of services after the period of warranty is overfor an extended product support service.

18.3 CLASSIFICATION OF PRODUCT SUPPORTSERVICES

Product support services are broadly classified in to the following eightcategories.

Product Support Services

1. Information: New customers and prospects need information to makedecisions about a product. They want to know what product will best meettheir needs. The existing customers also need information regarding theusage, maintenance of the product during the life of the product. Theprospects in on line buying also need information that will guide them tomove to the site that will provide information to them. Traditional ways toprovide information is through the support literature, printed notices, flyers,brochures and instruction books. Current methods include videotapes,compact disks, software driven tutorials, touch screen video display,computer accessed bulletin boards and menu driven recorded telephonemessages.

Information Consultation Ordering Hospitality

Safekeeping Exceptions Billing Payments

Product SupportServices

© ALI

© ALI


50

2. Consultation: Providing information suggests a simple response tocustomers’ questions. Consultations involve dialogue to probe customerrequirements and then develop a tailored solution. The services underconsulting covers advice, auditing, personal counseling, tutoring and trainingin product usage, managing or technical consulting. The solution sellingapproaches by software measures is an example of technical consulting insoftware markets.

3. Order Taking: Once the selling process is over, acceptance ofapplications, orders, reservations are components of order taking. Unlessthe service organization is accessible to its customers the real businessmay not happen. Some service providers establish formal memberrelationships with customers like Insurance companies and utilities, creditcard companies and clubs. A reservation is a special type of order takingwhich entitles customers to a special type of order taking. Examplesinclude the airlines, cinema halls, and restaurant tables.

4. Hospitality: Certain service requires customers to enter the servicefactory and stay there till service delivery is complete. Well-managedbusinesses try to treat the customers as guests. Examples of hospitalityelements include greeting, food and beverages, toilets and wash rooms,bathroom kits, waiting facilities and amenities, including lounges, waitingareas, seating facility, weather protection, magazines, entertainment andnewspapers, transportation and securities. Airlines, Service stations,personal service providers follow this kind of an orientation in business.

5. Safekeeping: While visiting a service site customers want assistance withtheir personal possessions. Unless certain care taking services are provided,they might find the support services infeasible. The examples ofsafekeeping include provisions for the coatrooms, baggage transport,handling and storage, safekeeping of the valuables and childcare and petcare. The second category of safekeeping involved the physical delivery ofgoods when the consumers buy them over phone or Internet. Supportservices of this nature may include packaging; pick up, delivery, assembly,installation, cleaning and inspection. Customers buying consumer durableare also looking for safekeeping in the form of maintenance and warrantyand whether they can purchase the maintenance contract as a part ofinsurance.

6. Exceptions: It includes a group of services that fall outside the routine ofthe normal service delivery. The exceptions include special request whereindividual or corporate customer may request some degree of customizedtreatment that requires a departure from the normal operating procedures.Advance requests include personal concerns related to stages in life cycleor personal disabilities. Problem Solving involves situations when normalservice delivery fails to run smoothly as a result of accidents, delays,equipment failures or customers experiencing difficulty in using the product.Handling of complaints/suggestions/complements requires well-definedprocedures. When the consumer wants to express dissatisfaction, offersuggestions for improvement, or pass on compliments, it should be easy forthe customer to do so and the service provider should be able to respondat the earliest to these problems. Restitution is the process by which thecustomers are redressed. Customers expect to be compensated for seriousperformance failures. This compensation may take the form of repairsunder warranty, legal settlements, refunds, an offer of free service in thefuture or other forms of payments in kind.

7. Billing: It is common to almost all services unless the service is providedfree or as a part of the deal. Inaccurate, illegible or incomplete bills offeran opportunity to disappoint customers. Billing should be also done timelyso that it will result in faster payments. Various forms of billing proceduresexist including verbal billing practices to machine driven billing procedures

© ALI

© ALI

51

and online billing procedures. Different kind of billing services includeperiodic statement of account activities, invoices for individual transactions,verbal statements of amount due, machine display of amount due, self-billing by the customer and the online billing.

8. Payments: A bill requires a customer to take action on payment either onpersonal basis or through the bank advice. Customers expect ease andconvenience of payment including credit when purchasing goods. Thepayment elements include self service, direct to payee or intermediary,automatic deductions from financial deposits and control and verifications.The self service include exact change in machine, cash in machine withchange returned, insertion of prepayment cards, insertions of tokens,electronic fund transfer, mail a check. Direct to payee or intermediariesinclude cash handling and change giving, check handling, credit charge,debit card handling, coupon redemption, tokens and vouchers etc. Controland verification include automated systems like machine-readable tickets atentry gates and personal systems like gate controllers and ticket inspectors.

You will appreciate that the eight product support services explained above areimportant not only for the services marketers but for the marketers of tangiblesgoods as well (Also, It is possible to outsource many of these services). Inmature industries the core product becomes a commodity. The competitiveadvantage is derived out of value creating support services that surround thecore product and is used for creating differentiation. Customer satisfaction isthe measure and goal of an effective customer service program.

18.4 GOAL OF PRODUCT SUPPORT SERVICES-CUSTOMER SATISFACTION

Customer satisfaction occurs when the performance meets customerexpectations. In a competitive environment, with frequent new productintroduction, merely meeting expectation may not be sufficient Organizationsthat challenge themselves to exceed rather than meet expectations are morelikely to pleasantly surprise their customers, cement loyalties, and invest indeveloping new products and processes that enhance customer value. The‘exceed’ definition is compatible with the definition of customer satisfaction –meeting the customer’s stated and latent requirements. Customer expectationsare a function of the past experience with the company’s products andcompetitor’s products and communication messages from the company and itscompetitors. If expectations are hard to match then performance is much morewithin the company’s control for managing customer satisfaction level. Theorganization first identifies the components of product or service performancethat are especially valued by its target customers and then deliver superiorsatisfaction on those dimensions.

Activity 2

It is said that most of the Indian organizations provide very poor quality of aftersales service. Make it a point to visit a petrol pump, a multi brand outlet ofrefrigerators and a company showroom of a motor cycle company and conductan interview with each of the service managers by asking a question “what isthe meaning of customer satisfaction for their organization and how do theymeasure it with their customers.”

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................


© ALI

© ALI


52

Quality is a concept related to the attitude of the customers and theircomprehensive evaluation of the product support services. It is built up from aseries of evaluative experiences of the service delivery of the organization tothe customers. The quality of a product support service can be only accessedafter the service is consumed. The assessment of the quality of the service ismade during the delivery of the service and encounter of the customer with theservice personnel. Customer satisfaction with service quality can be defined bycomparing perceptions of service received with expectations of service desiredby the consumers. When the expectations exceeded, service is perceived to beof exceptional quality and also to be a pleasant surprise. So dimensions ofservice quality refers to process quality as judged by consumers during serviceand output quality judged after a service is performed. Parasuraman, Zeithamland Berry suggested that the criteria used by consumers that are important inmolding their expectations and perceptions have five dimensions viz. Reliability,Assurance, Responsiveness, Empathy and Tangibles. These have beendiscussed in detail in Unit 8 on Service Quality.

There are four key factors that can influence a customer’s expectations, whichmay help customers in shaping their expectations of a support service

Word of Mouth Communication: This is the communication that flowsfrom one person to another in a social loop and helps in formulatingservice quality perceptions.

Personal Needs and Preferences: The relative importance that theperson gives to the product support service as an essential part of theoffer also influences the service perception

Past Experience: The customer expectations also depend upon pastexperiences with the service provider of the customer.

External Communications: External communication like advertising, publicrelation and other publicity tools also influence the quality of serviceperception

There are various issues involved in the quality of product support serviceproductivity. The managerial task is to transform the service inputs in tooutputs, to bring a balance between the productivity of services and quality ofservices. If the productivity will increase then there is a chance that the qualitywill be compromised. Productivity helps to keep the costs down as loweringprices helps in building the market and compete better. Higher productivityhelps in generating additional revenue that helps in enhancing marketing budgetand program and rising profits helps in investing in innovative product supportprograms. Quality helps in gaining competitive advantage particularly in acommodity market where every product looks similar. It also helps in increasingcustomer value that contributes towards improving the bottom line. The qualityof the product support service is measured by three parameters. They areefficiency, effectiveness and productivity. Efficiency is a comparison to astandard, which is usually a time-based phenomenon that explains how long theemployee, takes to perform the service function. Effectiveness is the degree towhich the firm is meeting its goals where as productivity is the financialvaluation of output to inputs i.e. consistent delivery of output desired bycustomers should command higher price.

Leading service and consumer durable companies measure the gap between thecustomer’s expected supports services against the perceived services as aroutine feed back process. Zeithaml, Parasuraman and Berry developed amodel which suggest that customers becomes dissatisfied when theirperceptions about service performance don’t match their expectations and themodel explains five gaps that can lead to customer dissatisfaction. The GapsModel has been explained to you in Unit 8 (Block 3).

© ALI

© ALI

53

Activity 3

From the activity 1 and activity 2 study build up the service quality diagram ofthe automobile company and identify the key gaps for the dealer.

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

...........................................................................................................................

18.5 SUMMARY

In this unit we have essentially looked in to the issue of product supportservices for the organizations. The complete product solution constitutes anintangible component to augment the physical product in the form of productsupport service. The objective of any product support service is to create asatisfied and loyal set of customers who will rebuy the product as well as getinvolved in cross selling and up selling. These customers will also play the roleof an advocate for the product. Product support services augment the coreproduct by delivering higher quality. There are various types of product supportservices like information, ordering, hospitality, safekeeping, exceptions, billing andpayments. These services help in building higher level of customer satisfaction.The level of satisfaction largely depends on the type and quality of servicesprovided to the customer. Research has identified five key and independentdimensions of service quality. They are reliability, responsiveness, assurances,empathy and tangibility of services. A service provider has to give attention tothese dimensions failing which there can be service quality delivery gaps.. Asuitable understanding of the service quality gaps can help a manager todevelop strategies to maintain service quality and achieve greater customersatisfaction.


1. Describe the concept of product support services? What is the importanceof these services for marketers of tangibles?

2. What are the various kinds of product support services? Discuss with thehelp of examples.

3. What is the goal of any product support services and what dimensions canlead to an effective service quality delivery?

18.7 CASE STUDY

Customer Satisfaction ProgramOf DBCL

DBCL is a multi crore company in Indian market. The company markets awide variety of products in the market. It started as a small company duringpre-independence India and was marketing locks for the mass market. Over theyears the company has grown into a large corporate house and markets arange of products starting from the locks to refrigerators, edible oil, officeequipments and furniture, manual and electronic typewriters, store wells andcomputers in Indian market. The company has a sister concern whichconcentrates in to soaps only and is a leading player in the Indian soap market.They manufacture and market both washing soaps and bathing soaps. Thecompany has its headquarter in Mumbai, the commercial capital of India.


© ALI

© ALI


54

Mr Chintamani Rao is the CEO of the computer and office equipment division.Recently the company has conducted a study and has identified thatmultinationals and some Indian joint ventures are making inroads in to itsoffice equipment and furniture division. Traditionally they were the marketleader in this segment and for long they have a premium image as thequality producer and supplier of the office equipments and furniture. Theywere the number one player in the typewriter market, be it electronic ormanual but due to rapid adoption of computers, the typewriter market hasundergone a change and there is a large-scale switch to computer typing andprinting from the traditional typewriters. The company could foresee this well inadvance and decided to launch computer and office equipments for thisemerging market segment in Indian market. They started an ambitious programto become the market leader in the office equipment and computer business inthe early 1999.

They could find out from customer survey that the erstwhile customers arefrustrated with the quality of services provided by the product support servicestaff in the company. They lost significant amount of the market share to thenew multinationals like IBM, Compaq, HCL, Zenith and some localmanufacturers. Taking quality and customer satisfaction as the strategic goaland undertaking cost reductions, restructuring of the organization andintroduction of new products, DBCL could fight back the market share warand increased market share by 7% in the office equipment and computersdivision in three years period of time. They were in the process of gainingalmost 2% market share every year since 1999. Leadership through qualityservice has been the motto of the company and customer satisfaction hasbecome the mascot of the company over these years reflected in all theactivities in the organization, be it strategic or tactical. In June 2003 MrChintamani was reviewing the customer satisfaction program at DBCL andwas seriously considering with ideas to make changes in the existing productsupport service and consumer satisfaction program or modify any of theexisting programs for better service delivery.

The Office Computer Market In India

The penetration of personal computers in Indian market has been very slow atthe household level. The total sales were confined to the upper class Indians.Various factors are attributed to this phenomenon. The disposable income levelof average Indian, the concentration of the purchasing power in urban centers,the level of adoption of computer education in the school and college curricula,the career opportunities in the filed of computers, application of computers andcomputer related technology in the business domain are some of the factorsthat contributed to the poor penetration of personal computers at the householdlevel. However there was a big change happening in the business area.Companies were eager to leverage the benefits of the liberalization and workingvery fast to catch up business to cater to the global volumes. Manymultinationals entered in to the Indian market through both organic andinorganic route. There were takeovers and buyouts in Indian markets where themultinationals were buying Indian companies with substantial business presencefor inorganic growth.

Large corporate houses were either undergoing joint ventures or increasing theirmarket presence by expanding and restructuring their organizations to suit tothe liberalized competition. These kinds of anthromorphic changes made thecompanies to invest substantially in information technology infrastructure. Therewere two kinds of investments seen in the organizations viz. huge investmentsin procuring the hardware and also for procurement of software.

© ALI

© ALI

55

Market Segments and their Characteristics

It was this kind of investment on hardware where DBCL saw an opportunity togrow with its office equipment and computer business. The total market foroffice equipment was largely divided in to three tiers. The low tier representedthe market where people were buying computers to support their business.These are the people who were in to the business of providing services oftypewriting, photocopying and was a captive market for DBCL for a long time.But this market was price sensitive and gave lesser value to the concept ofproduct support services. So local small time vendors who were doing assemblyof components and selling computers at a lower rate and providing after salesservice locally were a big threat to the DBCL market which was sellingproducts with a higher price tag compared to the assemblers in the localmarkets.

The mid tier consisted of offices whose requirements were more than ten butless than twenty-five personal computers. These business houses wereconscious about quality but were not ready to depart a large sum for theconcept of product quality and superior service. Mostly, industry treated themas also ran customers. There were low end players like Zenith, Piramals inwestern Indian market, Monosoft in the eastern Indian markets and few of theKorean majors (other than LG and Samsung) playing a mid price and averageservice game in this market. These players targeted majority of small andmedium business. There was a price advantage in these markets for themedium operators where their brand name did not play any role.

The top tier consisted of large corporate houses who were going for a largescale investment and information technology restructuring in their organizations,not only by buying hardware but also investing substantially on software,operating systems, servers and solution providers like SAP and other supplychain and customer relationship management software. The companies wereinvesting heavily and they were quality conscious. They were giving highimportance to the product support services in their purchase decision due to thesimple fact that their business model was more driven on informationtechnology platform, so a longer downtime of the systems means loss ofbusiness and chaos in business operations.

The companies were looking for quality product support services as the keydifferentiation in business due to high level of commoditization in the hardwareproduct market. Profit margins in this market were quite high, so also thedemands of product support services. Many companies were providing differentkind of warranty schemes also to attract the customers including onsite serviceby the vendors. DBCL looked in to this market for quality hardware providerbecause the company was perceived as a quality player when there were nocomputers in the office equipment market.

The Nature of Competition

The market was highly competitive. At the low end were the unbranded localplayers who were providing excellent support services due to the small marketsize and closeness with the customer and the price advantage. On the midsegment the customers were bargain hunters and expect everything under thesun as a part of the deal. A large number of national and Indian players wereoperating in this segment. This market was purely a commodity market anddecisions were made on the basis of price though they valued customer serviceand after sales support as important. The top end of the market was qualityconscious and was mostly dominated by players like IBM, Compaq, Apple, Dell,LG, Samsung, HCL and of course DBCL. The customers were more sensitiveto services and valued the quality and type of service as the key differentiatorbefore making a purchase decision.


© ALI

© ALI


56

DBCL saw an opportunity to grow in this market and regain its market sharebut Mr Chintamani from his market visits was not sure about the perception ofcustomers about the product support services provided by DBCL to the existingcustomers. He was of the opinion that the best way to enter in to this marketis to provide the computer related products to the existing customers who areusing DBCL products in their offices. He was sure they can use the sameconcept of “office face lift” that they were using for marketing office furnitureincluding and cabinets and separators with a proposition of giving a modernlook to the office for marketing computers.

He had a faint idea that the customers don’t perceive the company was qualityservice provider. He was curious to know what were the reasons for whichDBCL was perceived the way it was. He decided to conduct a marketingresearch on these issues and in order to get a neutral view contacted ProfTapan K.Panda (TKP) of Indian Institute of Management Kozhikode (IIMK) toconduct a survey on the perception of customers on DBCL as a quality serviceprovider. The research report revealed horrible stories about the company.People perceived DBCL as a traditional organization still living in the pre-liberalization era. They are of the opinion that customer care department wasnot prompt enough to respond to their complains and the grievances wereredressed after a long period of time. This has spoiled the goodwill of thecompany as a good service provider. Historically the low wend of the marketwas serviced by the dealers and distributors and the high end of the market bythe company service personnel. The perception of the customers about DBCLas a quality service provider has eroded over years.

So the priorities for the company in its new vision statement was to achieve ahigher return on investment, market share and customer satisfaction. The earliercustomer satisfaction program brought this into light that customer satisfactionwas not a priority of the company as they were operating in the same mindsetof pre-liberalized era. Mr Chintamani was convinced that customer satisfactiongoal can itself bring more closer to the other two objectives. He announcedcustomer satisfaction as the sole goal of the organization in a series ofmeetings and discussions platforms in the organization. He issued a set ofguidelines and requirements to make customer satisfaction as the key goal ofthe organization, to all its operating units. Operating units were asked toprepare their own strategies to achieve the goal of customer satisfactionthrough voluntary quality circles. He insisted that a common and uniformmeasure should be used across the country for measurement of customersatisfaction.

The units were allowed to conduct their own market survey, asking differentquestions on the dimensions of service quality as briefed by Zeithaml,Parasuraman and Berry (See Unit 8). The external corporate goal was to crossall the competitive benchmarks in the industry and the internal goal was toimprove the service quality five times over two years from the current level onall the dimensions of quality. The top managers were trained to become qualityleaders and role models for the subordinates on service behavior to thecustomer. They should personally take the lead and satisfy customerrequirements and resolve customer complaints by themselves.

It was also the responsibility of all the executives in the hierarchy to develop aresponsive mechanism and attitude at each level towards customer problems.Each customer interaction was treated as an opportunity to enhance theexperience of customers with DBCL. Customer relations groups were initiatedat each level to have direct customer contact and do the follow up for findingout reasons of customer dissatisfaction and to resolve customer objections atthe earliest. The perceived benefits of the customer relations groups were to

© ALI

© ALI

57

stay closer to the customers, having a cross functional outlook to customerissues and having a closed loop process to identify problems, to conduct a rootcause analysis, and provide recommendations for avoidance and elimination ofthe customer problem. The staffs at the local level were empowered to takecollective action for enhancing customer satisfaction.

Attempts were also made to establish customer support teams for post salesfollow up and customer complaint management systems across the organization.The customer satisfaction were measured by the external customer satisfactiondata collected through a mail questionnaire method from the customers who hadobtained services in a month time from the service personnel and internalquality workshop improvement programs done at various levels of theorganization. The external data collection was done through periodic survey,new establishment surveys, opinion of the decision makers as well as that ofthe users of the products collected across the industries to measure theuniversal application of the customer satisfaction program. The internal measureof the customer satisfaction and service delivery was done by analyzing andbench marking the processes and standards set for the purpose. All theresearch results were made available to the service employees to build theirawareness and commitment to the customer satisfaction program and invitetheir recommendations to bring improvements in the level of customersatisfaction.

Summer of 2003 and The Future

Mr Chintamani could find out that the customer satisfaction program in DBCLhas brought very good results but he was planning to take the strategy furtherand delight the customer by outsmarting the competitive benchmarks throughthe introduction of a new customer guarantee program. This satisfactionguarantee program will lead to greater customer satisfaction and higher loyaltyrate among its existing customers helping them for cross selling and up sellingthe new innovative products of the office equipment division. It wanted to comeout with a guarantee program that will be difficult for the competitors tocompete. (You may also refer to Unit 10 wherein issues related to serviceguarantees have been discussed)

Many senior managers are of the opinion that they should come out withmoney back guarantee program, which is based on a proposition that if one isnot satisfied with the product or service, he can return the product, and takeback the money.

Others are of the opinion that service guarantee will be a better option which isbased on a proposition that if the machines are not operating as per thepromise then the customer will receive five to fifteen percent off in the nextdeal.

The third option is a product performance guarantee in which the proposition isthat if the machine does not perform as per the specifications for the period ofwarranty, then the whole unit shall be replaced at no charge.

The fourth option is a product fit guarantee in which the proposition is that ifthe product does not fit to the promised level during the period of warrantythen the customers can trade it in for full credit towards any other product asdesired by the customers.

All these options were quite unique in the Indian market and if the customersatisfaction programs are not properly executed then may cost very heavily tothe company. Yet Mr Chintamani was sure that the board will definitelyapprove the idea that quality of the customer service should be the


© ALI

© ALI


58

differentiator in the market where customers are quality conscious and marketis slowly moving towards commoditization. It is the over all experience of thesolution and not the physical features of the product that will drive the brandvalue and business profit in the future.

IIMK conducted research for DBCL on the above propositions. Theyconducted both qualitative research through focus group and in depth interviewof the existing customers and a personal survey in selected cities of Indiahaving corporate headquarters of large concerns. Some key issues came out ofthe study that include the credibility of a guarantee program. Customers are ofthe opinion that any body can offer a guarantee program but customers willlook at the credibility of the organization offering the guarantee in terms of itscapability in delivering it and its past practices and intentions in delivering it tothe customers. The length of the guarantee is also an important factor. If theguarantee is for a year or two then in a durable like computers and officeequipments, it is treated as a sales plea. If it is offered for a longer period oftime then the customer must be indirectly paying a premium for the purchase.For the service guarantee, the time taken to respond to the customer’s problemand the down time of the machine at the customer’s point will be the decidingfactor. The money back guarantee is a low commitment from the supplier asthe supplier wants to escape the route of providing the quality after salesservice through paying the cash back to the consumers than solving theproblem. Again the dissatisfied customer will walk to the competitor with thecash for a deal and companies will lose the opportunity of generating businessfrom the customers. The product performance guarantee should be provided atthe customer’s request than by the company policy and company should notask any questions for the same service. The product fit guarantee was notfound suitable among many customers, as they do not want a machinereplacement rather, they prefer the machines to function properly and withoutmuch trouble to the organization.

Mr. Chintamani dropped the idea of money back guarantee as it shows a lowercommitment to the service quality and he also decided against the product fitas it was not preferred by customers. A guarantee program should not be areplacement program. It should be a strategy of building relationship andcommitment being responsive to the customer problems. The service guaranteeshould be linked to the response time and the performance guarantee to deciderof the product performance standard. In majority of the Indian organizations,the performance guarantee was decided by the supplier and manufacturer, MrChintamani is thinking whether this can be left to the consumer to decide thelevel of the performance guarantee, which can be put to the market as a valuedifferentiator for higher customer satisfaction. He has to suggest what kind ofcustomer guarantee program DBCL should offer to the market.

Questions

1. What problem DBCL is facing in this case? What factors have contributedto such a situation for the company?

2. Evaluate the options available to Mr. Chintamani for developing thecustomer guarantee program?

3. Should Mr Chintamani decide in favor of performance guarantee program?If yes then develop a customer guarantee program for DBCL?

4. What kind of internal orientation is necessary in the product supportservice department for making your suggestion a successful strategy inbuilding customer loyalty and goodwill for DBCL?

© ALI

© ALI

59

UNIT 19 CASE STUDIES

This unit consists of two cases- ‘Is the Customer Always Right?’ and DosaKing’.

CASE 1: IS THE CUSTOMER ALWAYS RIGHT?

Objectives

After going through this case you should be able to:

identify the main issue in the case;

analyse the facts of the case to comment upon the issue in the case;

provide suggestions for decision making in relation to the main andattendent issues in the case.

After reading the case, try to attempt the following.

Discussion Questions

1) Do you think the customer in this case is justified in making the kind ofcomplaints he did? How do you interpret the difference between theaccounts rendered by the customer and the Assistant Branch Manager?

2) Give suggestions to resolve the matter between the customer and theinsurance company.

Case

On August 28, Mr. Gurucharan Singh joined as Regional Manager, ABCInsurance Company (AIC), Chandigarh. As he had risen through the ranks, hehad a lot of experience behind him. His recent two visits abroad hadcompletely changed his perspective of services marketing. “There is a lot to bedone in the service sector in India” - was his conviction. With this objective inmind - the day he joined as the Regional Manager, he called a meeting of allDivisional and Branch Managers, to share his views on “Challenges forInsurance Industry”. Since then, all was going fine until he received an angryletter (Exhibit 1) from Mr. Chawla who was disgusted with the working of thecompany and with the behaviour of an Assistant Branch Manager (ABM) ofone of the branches of ABC Insurance Company. To respond the customercomplaint he marked the letter to the ABM for his comments. The reply cameback (Exhibit 2). After reading the observations made by the ABM he raiseshis head and wonders–who is right? Where should the company draw the lineon compensation and service? What is the best way to handle cases ofcomplaining customers? He thinks for a while and then reacts. He has a fewchallenges ahead.

EXHIBIT 1

The Regional ManagerABC Insurance Company Ltd.Chandigarh.

Sir,

I am angry, frustrated and a disappointed ex-customer of your company. Priorto the recent set of events, which have really put me off, I viewed yourcompany to be the best. Hence, although your company’s Branch Office is faroff from my place I opted doing business with you. Not only have I insured my

© ALI

© ALI


60

vehicles—a car and a scooter—with your company, but am also a holder ofyour household and mediclaim policies.

It all happened this way:

July 28: Your Development Officer, Mr. R.K. Singh came to my place andinformed me that the insurance policies of my car and scooter expire on July30, hence, have to be renewed. As I was satisfied with the service of yourcompany I drew post dated cheques of July 30 in favour of the BranchManager, AIC, and handed it over to Mr. R.K. Singh. I also requested Mr.Singh to hand over the cover note of the policy to my son as I was to be outof station between July 30 and August 5.

August 6: On my return to Chandigarh on 6th evening I enquired from myson about the cover note of my renewed policy. I was told that he has notreceived any policy or a cover note from Mr. R.K. Singh.

August 7: On August 7 I rang up your branch office and enquired forMr. R.K. Singh. I was told that Mr. Singh is in the field and the BranchManager is on one month leave ending on August 30. The same day my sonmet with an accident. Although he escaped unhurt, my scooter was badlydamaged. As Mr. Singh had neither given us the covernote of our renewedinsurance policy nor had he intimated us anything about it, my worry now was-whether my scooter was insured on July 30 or not?

August 8: I did not attend my office and went to your branch office. I waitedthere for two hours until Mr. R.K. Singh showed up. On enquiring whether myvehicles were insured on the 30th of July or not, he very apologeticallyinformed me that although the policy was drawn on the 30th of last month itcould not be delivered, as he was extremely busy with his sister’s marriage. Ithanked my stars that the policy was issued prior to the accident. I appraisedMr. Singh of the accident and requested him to send his surveyor to assess theloss. Mr. Singh assured me that the surveyor will reach my place the sameevening. Sir, the surveyor did not come. Promise was not kept.

Augst 9: Saturday (Holiday) Surveyor did not come.

August 10: Sunday (Holiday) Surveyor did not come.

August 11: I visited your branch office again and met the Assistant Branch Manager.

He was aware of the accident. Sir, if at all he was aware of the accident whydid he not send the surveyor in the last three days? Anyway, he assured me thatthe surveyor will visit my place the same evening and the surveyor did come.

August 20: I called the Assistant Branch Manager from work and enquiredabout the progress made in my case. I was told that the surveyor has not yetsubmitted his report.

August 27: I again rang up the Assistant Branch Manager and enquired aboutthe progress. He informed me that although the surveyor has not yet submittedthe report but has informed him that the loss is to the tune of Rs. 800/-. Youknow sir, I was shocked. I was shocked because any one could look at myscooter and assess the loss to be over Rs. 800/. Our mechanic had estimatedthe loss well over Rs. 1500/. Can you understand my frustration? With a viewto discuss the issue in detail I suggested a meeting with the ABM at 3 p.m.the same day. He said he was busy that day, and suggested the next morning10.30 A.M. He also promised to get the surveyor’s report by then. I agreed toit.

© ALI

© ALI

61

August 28: Instead of attending to my office I reached the branch office at10.30 AM sharp only to be told the ABM is away to the Regional Office andshall be back soon. Frustrated and irritated, I waited for him for about an hourand then left for my office. In the afternoon, I again rang up your branchoffice. The ABM was not there. I left a message for him that he should speakto me on 25468 the moment he is back. No call came from the ABM.

August 29: Instead of going to my office I again visited your branch officeand fortunately met the ABM. I expressed my displeasure at the treatmentmeted to me at his hands the day before. Shockingly, instead of beingapologetic for his conduct he told me that since the surveyor had not yetsubmitted the report he could not do anything about my problem of claimassessment. Sir, is it the way that your company treats customers? If he couldnot get the surveyor’s report by then and could do nothing about my problemwhy did he agree to meet me and waste my time the earlier day and this day?When I insisted that I must speak to his superior he said—I could meet theBranch Manager as he was joining on the 31st but he will also not be able todo anything about it. Your ABM was so unprofessional, that he also remarkedthat “all customers estimate their losses on the higher side”. What did he meanby this statement? Do you think we are swindlers who earn profit out of ourinsurance policies? Over the years I have done Rs. 20,000 worth of businesswith your company and I have never made a claim. I was so disgusted withyour ABM that I could do nothing else but walk out of his office, with a hopeto meet the Branch Manager on Monday the September 1.

September 1: I met the Branch Manager. He was understanding and gave mea patient hearing. He suggested that since he was away for long he does notknow anything about this case, hence, it would be better if I could contact himthe day after.

September 3: I called the Branch Manager from work. He informed me thatthe actual loss assessed by the surveyor is Rs. 1,300/ and not Rs. 800/. Iblessed my stars. Thank God, something was moving in the positive direction.Even though I was sure Rs. 1,300/ shall not meet the actual expenses onrepairs I agreed for the settlement of claim at Rs. 1300/. The Branch Managerasked me to go ahead with the repairs and submit all bills in original.

September 15: I went to your branch office with required relevant documentsfor my claim. In the mean time I got my scooter repaired which had actuallycost me Rs. 2,200/. The BM informed me that it would take 15 days toprocess my papers and for the funds to come, hence, it would be better if Icollected my claims cheque in the first week of October.

October 5: When I reached your office on October 5 there were lot ofbombshells in store for me. My misery had not ended. It was just the beginningof it.

1. I was told that the Branch Manager has gone on a three week trainingprogram to Calcutta and much against my wishes I had to meet the ABM.

2. Your ABM informs me that the claim could not be settled as it had to bereassessed.

Sir, I lost my temper and enquired your ABM about the whole reassessmentbusiness—“Office confidentials can not be shared with customers” was yourABM’s reply. Helpless and frustrated as I was—I left his office telling him thatif he wants my business back he’d better contact me.

Sir, that was more than two weeks ago and I haven’t heard from your ABM. I

Case Studies

© ALI

© ALI


62

am outraged at this entire episode, by the way your company treats itscustomers, by ABM’s conduct, by the lack of communication and by theridiculous system of working you have. If you want me back as your customerI expect full claim of Rs. 2200/- (for which I have documents) and apologyfrom your ABM, or else you can kiss our business good-bye, along with that ofour friends and colleagues at work, who would soon hear all about the AICway of doing business.

Yours Sincerely

Rajesh Chawla

EXHIBIT 2

The Regional Manager,ABC Insurance Company Ltd.,Chandigarh.

Sir,

This is in response to your letter requesting detailed information on customercomplaint of Mr. Rajesh Chawla. I read Mr. Chawla’s letter and reviewed thewhole case. I am convinced that this office made all efforts to set things rightfor Mr. Chawla, although he may not accept it. Nevertheless, should you feelthat we have fallen short of company’s expectations we shall love to beportrayed as bad boys in the eyes of the customer, if it helps in any way.

However, I deem it fit to make you aware of some mitigating circumstanceswhich I can share only with you and not with the customer. Unfolding theseshall help you understand the case more accurately and fully.

1. That the customer received the covernote of his insurance policy a weeklate is a news for me. He never mentioned about this delay to me. Thenhow could I react to his problem unaware? However, I agree Sir, it was alapse on our part. Hence, after receiving the letter and knowing about thislapse we have instructed the Development Officers accordingly.

2. Although, the company should not appoint surveyors of customer’s choice,after years of experience we have all realized that the customers get onlymore dissatisfied if we appoint surveyors against their wish. We appointedMr. Jaiswal as surveyor on August 8 (Friday) to assess Mr. Chawla’s losson the following grounds.

a. Mr. Chawla expressed his wish to our Development Officer (Mr. R.K.Singh) that if possible Mr. Jaiswal be appointed as the surveyor.

b. As Mr. Jaiswal and Mr. Chawla stay in the same colony, I felt thatthe proximity of their residence shall enable Mr. Jaiswal to completethe survey early and to the customer’s satisfaction.

3. Why Mr. Jaiswal could not perform survey on August 8, 9, and 10 (Fri,Sat and Sun) needs some explanation.

On August 8, the day Mr. Chawla intimated Mr. Singh (Development Officer),about the accident I called Mr. Jaiswal’s residence. I was informed by his wifethat Mr. Jaiswal is away to Pathankot and will be back by 6 p.m. the sameevening. I left clear instructions with her for Mr. Jaiswal that he has toperform a survey the moment he is back. I also left Mr. Chawla’s addresswith her. As a follow up measure when I rang up Mr. Jaiswal’s residence onAug 9 (holiday) I learnt that he shall be back from Pathankot only by Monday

© ALI

© ALI

63

morning. At this, I could have appointed some other surveyor even on aholiday—but would Mr. Chawla have liked it? In his letter Sir, Mr. Chawla hasconveniently not mentioned that Mr. Jaiswal was his choice.

4. Much of Mr. Chawla’s gripe concerns with my absence from office onAugust 28 when he had come to meet me. If you recall Sir, on August 27evening-following the traditions of the company we had a welcome partyfor you. In the party Sir, you had wished to meet all Divisional and BranchManagers the following day at 10 am, in your office. As I was acting BMthen, I had to set priorities—either to attend the meeting or to attend toMr. Chawla. I chose the former as it was your first day in office asRegional Manager and the first formal meeting with you.Nevertheless,before leaving for your office on August 28, I made attempts to contactMr. Chawla and inform him about the change in my program.Unfortunately, the office neither had Mr. Chawla’s contact number nor washe listed in the telephone directory. Hence, I could do nothing else butleave instructions with my office to request Mr. Chawla to wait as Iexpected the meeting to be over soon. The meeting got stretched and I gotdelayed in reaching my office. By that time Mr. Chawla had already leftafter creating a scene in the office. The same afternoon while I was awayto meet a client, Mr. Chawla rings up at our office at about 4 p.m. Notfinding me he left his telephone number which I presume is his officenumber. When I reached back office at 5.30 p.m. I tried my best tocontact him but in vain. Probably his office was closed by then.

5. Sir, as you can tell from the tone of Mr. Chawla’s letter, he is a verydemanding, persistent individual. What his letter does not tell you, however,is that he inundated us with the sheer volume of calls between August 20and 27. Given the number of calls, there was no way for me todemonstrate progress in his case, when he called again on August 27, butto mention my casual conversation with Mr. Jaiswal that he expects theloss to be to the tune of Rs. 800/ to Rs. 1000/. Agreed, I failed in gettingthe surveyors report by Aug 28 as promised. But that was because Mr.Jaiswal fell ill and could not prepare the report. Necessary to mention thatMr. Jaiswal submitted his report on Sept 1 while he was still down withflu, only on my insistence.

6. With regard to reassessment, we have just followed company’s standingpolicy. As Mr. Jaiswal was black listed as a surveyor by our regionaloffice on October 1 we have sent all pending claims assessed byMr. Jaiswal for reassessment.

7. Mr. Chawla’s letter has several misstatement of facts. While there is nopoint in disputing these with him, you would like to know the following.

a. I never said that neither the BM nor can I do anything about hisproblem of claim assessment. My statement was — “Although we donot interfere with the surveyor’s report because it reflects upon ourprofessional integrity, but I shall speak to the surveyor and see whatcan be done about it. However, no one can do anything till we receiveMr. Jaiswal’s report”.

b. No way did I give an impression that Mr. Chawla is a swindler. I justappraised him of the fact that when customers assess their loss theydo not deduct depreciation and accessory losses out of the total loss.Hence, the actual assessment is always lesser than the actual loss.

c. With regard to the reassessment Sir, I never said “office confidentialscan not be shared with customers”. My statement was “although thereis nothing confidential, we do not generally share such information withcustomers”. Above all, I made it clear to Mr. Chawla that Mr. Jaiswalis blacklisted.

Case Studies

© ALI

© ALI


64

7. Agreed, I have maintained silence for two weeks since his last visit to ouroffice. This is because I strongly believed that:

a. Mr. Chawla just did not want to see me—he also makes mention ofthis in his letter.

b. I would have hurt him more with the reassessment business.

c. Mr. Chawla had more confidence in the BM. Hence, I felt it would bebetter that the BM comes back from his training and sorts out theissue.

If Mr. Chawla is unhappy with the idea of reassessment and delay in his claimsettlement, I can suggest nothing to rebuild his confidence in us. His demand torecover Rs. 2200/ is a bit far fetched. For apology I am always there.

Sir, this brings up two questions: While protecting the interests of the customershould we also not protect the interest of the company? Should we mind losingbusiness of such customers?

With regards,

Sincerely yours

(A.B.M.)

CASE 2 DOSA KING

Objectives

The learning objectives of this small case study are to enable you to

understand the service offer concept behind the proposed new service;

explain the service process, as applicable to the service in question;

analyse the issues of distribution and delivery as relevant to this service.

After going through the case you are expected to

define the basic issues in the case;

analyse the information given in the case to attempt the following.

Discussion Questions

1) Comment upon the service offer as conceptualised by Mr. Narayanan.How are the issues of service product standardisation and service qualityaddressed by the service concept?

2) Suggest possible launch strategy for Dosa King.

3) Evaluate the price and distribution strategies decided by Mr. Narayanan.Do you think he should go ahead with the franchising option? Give reasonsfor your answer.

4) How do you assess the success of this service concept?

5) What do you think would be a better course of action for Mr. Narayanan,allowing Dosa King machines to be operated from established restuarantsor insisting upon separate booths independent of the restaurants.

Case

In 1989, Mr. Narayanan, Chief Executive and Promoter of Gum India Limited(makers of Big Fun & Champs Chewing Gum) came up with the concept of achain of Masala Dosa outlets serving a standardised, economically pricedmasala dosa in a “fast food” environment.

© ALI

© ALI

65

Starting with this concept, he conceptualised a machine that would manufacturedosas automatically. A company was registered under the name and style of“Indian Food Fermentations Limited” and work commenced upon developing theautomatic Dosa Maker.

A year later, after over 5000 man hours of R & D effort, a machine wasevolved which could make dosas automatically. In this electrically operatedmachine, a dollop of batter would drop on the heated tawa; once the dosa wasready, a dollop of masala would drop onto the dosa and the dosa would beautomatically folded and picked up and inserted into a paper bag for handingover to the customer. The batter and masala mix would be manufactured in acentral plant at Nagpur and supplied to the numerous outlets all over India.

The company plans to give the dosa making machines on lease to franchiseesall over India and eventually also enter markets in the Gulf and SE Asia wherelarge Indian ethnic communities exist. A promotion is planned on a co-operativebasis with the franchisees.

Mr. Narayanan is confident that his Dosa King dosas shall be of uniform,standardised quality and taste at all outlets and can be marketed at a veryreasonable price of Rs. 4.00 per dosa leaving a 20% margin for the franchisee.He hopes to have 100 outlets in selected cities by mid 1992 and to enter about50 towns with a network of 500 outlets by end 1993. Now Mr. Narayanan iswondering which market/town he should select for his test marketing. He alsohas to decide whether he should give higher priority to launching Dosa Kingfranchise in Metros or mini Metros or whether he should go first to statecapitals and other large to medium cities. He has also to decide whether hisinitial foray should be in North, East or Western India. He has ruled out SouthIndia as he feels the customers are likely to be very discriminating and mightnot accept his machine made dosa. Further more, he felt a dosa was not asmuch of a “fun” or “speciality” or “eating out” food in the South as in the restof India.

Recently, Mr. Narayanan was beset with another dilemma. Although the DosaKing machine requires only a 8 sq. ft booth for operating and can therefore beinstalled just about anywhere, he has been approached by a few restaurantoperators who want to instal it because of its novelty appeal. He has to decidewhether to insist upon a separate booth independent of any restaurant or allowhis machines to be operated from established restaurants.

Case Studies

© ALI

© ALI

MS-65MARKETING OF SERVICES

Indira Gandhi National Open UniversitySchool of Management Studies

1Marketing of Services: An Introduction

© ALI

© ALI

Services Marketing

Documents

Transcript of Services Marketing