Services Marketing Christopher Lovelock
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Transcript of Services Marketing Christopher Lovelock
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 1
Chapter 1
Introduction to
Services Marketing
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 2
How Important is the Service Sector in Our Economy?
� In most countries, services add more economic value than agriculture, raw materials and manufacturing combined
� In developed economies, employment is dominated by service jobs and most new job growth comes from services
� Jobs range from high-paid professionals and technicians to minimum-wage positions
� Service organizations can be any size—from huge global corporations to local small businesses
� Most activities by government agencies and nonprofit organizations involve services
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 3
Services dominate the United States Economy:GDP by Industry, 2001 (Fig. 1.1)
Source: Bureau of Economic Analysis, November 2002
Finance, Insurance, Real Estate
20%
Wholesale and Retail Trade
16%
Transport, Utilities,Communications
8% Health
6%BusinessServices
5%
Other Services 11%
Government(mostly services)
13%
Manufacturing 14%
Agriculture, Forestry,Mining, Construction 8%
SERVICES
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 4
Changing Structure of Employment as Economic Development Evolves (Fig. 1.2)
Time, per Capita Income
Industry
Services
Agriculture
Source: IMF, 1997
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 5
Some Service Industries Profiled by NAICS but Not Identified by SIC Codes
� Casino Hotels
� Continuing Care Retirement Communities
� Diagnostic Imaging Centers
� Diet and Weight Reducing Centers
� Environmental Consulting
� Gold Courses and Country Clubs
� Hazardous Waste Collection
� HMO Medical Centers
� Industrial Design Services
� Investment Banking and Securities Dealing
� Management Consulting Services
� Satellite Telecommunications
� Telemarketing Bureaus
� Temporary Help Services
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 6
Internal Services
� Service elements within an organization that facilitate creation of--or add value to--its final output
� Includes:
�accounting and payroll administration�recruitment and training� legal services�transportation�catering and food services�cleaning and landscaping
� Increasingly, these services are being outsourced
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 7
Major Trends in Service Sector (Fig. 1.3)
� Government Policies (e.g., regulations, trade agreements)
� Social Changes (e.g., affluence, lack of time, desire for experiences)
� Business Trends� Manufacturers offer service
� Growth of chains and franchising
� Pressures to improve productivity and quality
� More strategic alliances
� Marketing emphasis by nonprofits
� Innovative hiring practices
� Advances in IT (e.g., speed, digitization, wireless, Internet)
� Internationalization (travel, transnational companies)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 8
Some Impacts of Technological Change
� Radically alter ways in which service firms do business:
� with customers (new services, more convenience) � behind the scenes (reengineering, new value chains)
� Create relational databases about customer needs and behavior, mine databanks for insights
� Leverage employee capabilities and enhance mobility
� Centralize customer service—faster and more responsive
� Develop national/global delivery systems
� Create new, Internet-based business models
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 9
Marketing Relevant Differences Between Goods and Services
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 10
Defining the Essence of a Service
� An act or performance offered by one party to another
� An economic activity that does not result in ownership
� A process that creates benefits by facilitating a desired change in:
� customers themselves
� physical possessions
� intangible assets
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 11
Distinguishing Characteristics of Services (Table 1.1)
� Customers do not obtain ownership of services
� Service products are ephemeral and cannot be inventoried
� Intangible elements dominate value creation
� Greater involvement of customers in production process
� Other people may form part of product experience
� Greater variability in operational inputs and outputs
� Many services are difficult for customers to evaluate
� Time factor is more important--speed may be key
� Delivery systems include electronic and physical channels
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 12
Marketing Implications - 1
� No ownership
� Customers obtain temporary rentals, hiring of personnel, or access to facilities and systems
� Pricing often based on time
� Customer choice criteria may differ for renting vs. purchase--may include convenience, quality of personnel
� Can’t own people (no slavery!) but can hire expertise and labor
� Services cannot be inventoried after production
� Service performances are ephemeral—transitory, perishableException: some information-based output can be recordedin electronic/printed form and re-used many times
� Balancing demand and supply may be vital marketing strategy
� Key to profits: target right segments at right times at right price
� Need to determine whether benefits are perishable or durable
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 13
Marketing Implications - 2
� Customers may be involved in production process
� Customer involvement includes self-service and cooperation with service personnel
� Think of customers in these settings as “partial employees”
� Customer behavior and competence can help or hinder productivity, so marketers need to educate/train customers
� Changing the delivery process may affect role played by customers
� Design service facilities, equipment, and systems with customers in mind: user-friendly, convenient locations/schedules
� Intangible elements dominate value creation
� Understand value added by labor and expertise of personnel
� Effective HR management is critical to achieve service quality
� Make highly intangible services more “concrete” by creating and communicating physical images or metaphors and tangible clues
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 14
Value Added by Tangible vs Intangible Elements in Goods and Services (Fig. 1.4)
Fast food restaurantPlumbing repair
Office cleaning
Health clubAirline flight
Retail banking
Insurance
Weather forecast
Salt
Soft drinks
CD PlayerGolf clubs
New carTailored clothing
Furniture rental
Lo Hi
Hi
Intangible Elements
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 15
Marketing Implications - 3
� Other people are often part of the service product
� Achieve competitive edge through perceived quality of employees
� Ensure job specs and standards for frontline service personnel reflect both marketing and operational criteria
� Recognize that appearance and behavior of other customers can influence service experience positively or negatively
� Avoid inappropriate mix of customer segments at same time
� Manage customer behavior (the customer is not always right!)
� Greater variability in operational inputs and outputs
� Must work hard to control quality and achieve consistency
� Seek to improve productivity through standardization, and by training both employees and customers
� Need to have effective service recovery policies in place because it is more difficult to shield customers from service failures
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 16
Marketing Implications - 4
� Often difficult for customers to evaluate services� Educate customers to help them make good choices, avoid risk� Tell customers what to expect, what to look for� Create trusted brand with reputation for considerate, ethical behavior� Encourage positive word-of-mouth from satisfied customers
� Time factor assumes great importance� Offer convenience of extended service hours up to 24/7� Understand customers’ time constraints and priorities � Minimize waiting time� Look for ways to compete on speed
� Distribution channels take different forms� Tangible activities must be delivered through physical channels� Use electronic channels to deliver intangible, information-based
elements instantly and expand geographic reach
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 17
Important Differences Exist among Services
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 18
Four Categories of Services Employing Different Underlying Processes (Fig. 1.5)
People Processing Possession Processing
Mental Stimulus
Processing
Information Processing(directed at intangible assets)
e.g., airlines, hospitals,haircutting, restaurants hotels, fitness centers
e.g., freight, repair, cleaning, landscaping,
retailing, recycling
e.g., broadcasting, consulting,education, psychotherapy
e.g., accounting, banking, insurance, legal, research
TANGIBLE ACTS
INTANGIBLEACTS
DIRECTED AT PEOPLE DIRECTED AT POSSESSIONS
What is the Nature of the Service Act?
Who or What is the Direct Recipient of the Service?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 19
Implications of Service Processes (1) Seeking Efficiency May Lower Satisfaction
Processes determine how services are created/delivered—process change may affect customer satisfaction
� Imposing new processes on customers, especially replacing people by machines, may cause dissatisfaction
� New processes that improve efficiency by cutting costs may hurt service quality
� Best new processes deliver benefits desired by customers� Faster
� Simpler
� More conveniently
� Customers may need to be educated about new procedures and how to use them
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 20
Implications of Service Processes: (2) Designing the Service Factory
People-processing services require customers to visit the “service factory,” so:
� Think of facility as a “stage” for service performance
� Design process around customer
� Choose convenient location
� Create pleasing appearance, avoid unwanted noises, smells
� Consider customer needs--info, parking, food, toilets, etc.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 21
Implications of Service Processes: (3) Evaluating Alternative Delivery Channels
For possession-processing, mental-stimulus processing, or information processing services, alternatives include:
1. Customers come to the service factory
2. Customers come to a retail office
3. Service employees visit customer’s home or workplace
4. Business is conducted at arm’s length through
- physical channels (e.g., mail, courier service)- electronic channels (e.g., phone, fax, email, Web site)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 22
Implications of Service Processes: (4) Balancing Demand and Capacity
When capacity to serve islimited and demand varieswidely, problems arise becauseservice output can’t be stored:
1. If demand is high and exceeds supply, business may be lost
2. If demand is low, productive capacity is wasted
Potential solutions:
- Manage demand - Manage capacity
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 23
Implications of Service Processes: (5) Applying Information Technology
All services can benefit from IT,but mental-stimulus processingand information-processingservices have the most to gain:
� Remote delivery of information-based services “anywhere, anytime”
� New service features through websites, email, and internet (e.g., information, reservations)
� More opportunities for self-service
� New types of services
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 24
Implications of Service Processes:(6) Including People as Part of the Product
Involvement in service delivery often entails contact with other people
� Managers should be concerned about employees’ appearance, social skills, technical skills
� Other customers may enhance or detract from service experience--need to manage customer behavior
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 25
The Services
Marketing Mix
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 26
Elements of The Services Marketing Mix:“7Ps” vs. the Traditional “4Ps”
Rethinking the original 4Ps
� Product elements
� Place and time
� Promotion and education
� Price and other user outlays
Adding Three New Elements
� Physical environment
� Process
� People
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 27
The 7Ps: (1) Product Elements
All Aspects of Service Performance that Create Value
� Core product features—both tangible and intangible elements
� Bundle of supplementary service elements
� Performance levels relative to competition
� Benefits delivered to customers (customers don’t buy a hotel room, they buy a good night’s sleep)
� Guarantees
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 28
The 7Ps:(2) Place and Time
Delivery Decisions: Where, When, and How
� Geographic locations served
� Service schedules
� Physical channels
� Electronic channels
� Customer control and convenience
� Channel partners/intermediaries
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 29
The 7Ps:(3) Promotion and Education
Informing, Educating, Persuading, and Reminding Customers
� Marketing communication tools� media elements (print, broadcast, outdoor, retail, Internet, etc.)� personal selling, customer service� sales promotion� publicity/PR
� Imagery and recognition� branding� corporate design
� Content� information, advice� persuasive messages� customer education/training
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 30
The 7Ps:(4) Price and Other User Outlays
Marketers Must Recognize that Customer Outlays Involve
More than the Price Paid to Seller
Traditional Pricing Tasks
� Selling price, discounts, premiums
� Margins for intermediaries (if any)
� Credit terms
Identify and Minimize Other Costs Incurred by Users
� Additional monetary costs associated with service usage (e.g., travel to service location, parking, phone, babysitting,etc.)
� Time expenditures, especially waiting
� Unwanted mental and physical effort
� Negative sensory experiences
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 31
The 7Ps:(5) Physical Environment
Designing the Servicescape and providing tangibleevidence of service performances
� Create and maintaining physical appearances
� buildings/landscaping
� interior design/furnishings
� vehicles/equipment
� staff grooming/clothing
� sounds and smells
� other tangibles
� Select tangible metaphors for use in marketing communications
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 32
7Ps:(6) Process
Method and Sequence in Service Creation and Delivery
� Design of activity flows
� Number and sequence of actions for customers
� Providers of value chain components
� Nature of customer involvement
� Role of contact personnel
� Role of technology, degree of automation
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 33
The 7Ps:(7) People
Managing the Human Side of the Enterprise
� The right customer-contact employees performing tasks well
� job design
� recruiting/selection
� training
� motivation
� evaluation/rewards
� empowerment/teamwork
� The right customers for the firm’s mission
� fit well with product/processes/corporate goals
� appreciate benefits and value offered
� possess (or can be educated to have) needed skills (co-production)
� firm is able to manage customer behavior
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 34
Managing the 7Ps Requires Collaboration between Marketing, Operations, and HR Functions (Fig. 1.7)
Customers
Operations Management
Marketing Management
Human Resources Management
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 35
Chapter 2
Consumer Behavior in Service Encounters
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 36
Where Does the Customer Fit in aService Organization? (Fig. 2.1)
� Consumers rarely involved in manufacture of goods but often participate in service creation and delivery
� Challenge for service marketers is to understand how customers interact with service operations
� Flowcharting clarifies how customer involvement in service encounters varies with type of process - see Fig. 2-1:� People processing (e.g., motel stay): customer is physically involved
throughout entire process
� Possession processing (e.g., DVD repair): involvement may be limited to drop off of physical item/description of problem and subsequent pick up
� Mental stimulus processing (e.g., weather forecast): involvement is mental, not physical; here customer simply receives output and acts on it
� Information processing (e.g., health insurance): involvement is mental -specify information upfront and later receive documentation of coverage
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 37
High-Contact and Low-Contact Services
High Contact Services
� Customers visit service facility and remain throughout service delivery
� Active contact between customers and service personnel
� Includes most people-processing services
Low Contact Services
� Little or no physical contact with service personnel
� Contact usually at arm’s length through electronic or physical distribution channels
� New technologies (e.g. Web) help reduce contact levels
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 38
Levels of Customer Contact with Service Organizations (Fig. 2.2)
Emphasizes encounters
with service personnel
Emphasizes encounters
with equipment
High
Low
Management Consulting
Car Repair
InsuranceMotel
Fast Food
Nursing Home
Airline Travel (Econ.)
Cable TV
Telephone Banking
HairCut
Good Restaurant
4- Star Hotel
Dry Cleaning
Retail Banking
Mail Based Repairs
Internet-basedServices
Movie Theater
• Internet Banking
Subway
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 39
Managing Service Encounters--1
� Service encounter: A period of time during which customers interact directly with a service
� Moments of truth: Defining points in service delivery where customers interact with employees or equipment
� Critical incidents: specific encounters that result in especially satisfying/dissatisfying outcomes for either customers or service employees
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 40
Managing Service Encounters--2
� Service success often rests on performance of junior contact personnel
� Must train, coach, role model desired behavior
� Thoughtless or badly behaved customers can cause problems for service personnel (and other customers)
� Must educate customers, clarify what is expected, manage behavior
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 41
The Purchase Process for Services(Adapted from Fig. 2-3)
Prepurchase Stage
� Awareness of need� Information search� Evaluation of alternative service suppliers
Service Encounter Stage
� Request service from chosen supplier� Service delivery
Postpurchase Stage
� Evaluation of service performance� Future intentions
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 42
Perceived Risks in Purchasing and Using Services (Table 2.1)
� Functional – unsatisfactory performance outcomes
� Financial – monetary loss, unexpected extra costs
� Temporal – wasted time, delays lead to problems
� Physical – personal injury, damage to possessions
� Psychological – fears and negative emotions
� Social – how others may think and react
� Sensory – unwanted impacts to any of five senses
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 43
Factors that Influence Customer Expectations of Services (Fig. 2.4)
Predicted Service
Explicit & Implicit Service Promises
Word-of-Mouth
Past ExperienceDesired Service
ZONE OF
TOLERANCE
Adequate Service
Personal Needs
Beliefs about What Is Possible
Perceived Service Alterations
Situational Factors
Source: Adapted from Zeithaml, Parasuraman & Berry
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 44
Components of Customer Expectations
� Desired Service Level: wished-for level of service quality that customer believes can and should be delivered
� Adequate Service Level: minimum acceptable level of service
� Predicted Service Level: service level that customer believes firm will actually deliver
� Zone of Tolerance: range within which customers are willing to accept variations in service delivery
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 45
Intangible Attributes, Variability, and Quality Control Problems Make Services Hard to Evaluate
� Search attributes – Tangible characteristics that allow customers to evaluate a product before purchase
� Experience attributes – Characteristics that can be experienced when actually using the service
� Credence attributes – Characteristics that are difficult to evaluate confidently even after consumption
� Goods tend to be higher in search attributes, services tend to be higher in experience and credence attributes
� Credence attributes force customers to trust that desired benefits have been delivered
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 46
How Product Attributes Affect Ease of Evaluation) (Fig. 2.5)
Source: Adapted from Zeithaml
Most Goods
High in search attributes
High in experience attributes
High in credenceattributes
Difficultto evaluate
Easy to evaluate
Most Services
Clo
thin
g
Ch
air
Mo
tor
veh
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Fo
od
s
Resta
ura
nt
meals
Law
n f
ert
iliz
er
Hair
cu
t
En
tert
ain
men
t
Co
mp
ute
r re
pair
Leg
al
serv
ices
Co
mp
lex s
urg
ery
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 47
Customer Satisfaction is Central to the Marketing Concept
� Satisfaction defined as attitude-like judgment following a service purchase or series of service interactions
� Customers have expectations prior to consumption, observe service performance, compare it to expectations
� Satisfaction judgments are based on this comparison
� Positive disconfirmation if better than expected
� Confirmation if same as expected
� Negative disconfirmation if worse than expected
� Satisfaction reflects perceived service quality, price/quality tradeoffs, personal and situational factors
� Research shows links between customer satisfaction and a firm’s financial performance
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 48
Customer Delight:Going Beyond Satisfaction
� Research shows that delight is a function of 3 components
�Unexpectedly high levels of performance
�Arousal (e.g., surprise, excitement)
�Positive affect (e.g., pleasure, joy, or happiness)
� Is it possible for customers to be delighted by verymundane services?
� Progressive Insurance has found ways to positively surprisecustomers with customer-friendly innovations andextraordinary customer service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 49
A Service Business is a System Comprising Three Overlapping Subsystems
Service Operations (front stage and backstage)
�Where inputs are processed and service elements created.
� Includes facilities, equipment, and personnel
Service Delivery (front stage)
�Where “final assembly” of service elements takes place and service is delivered to customers
� Includes customer interactions with operations and other customers
Service Marketing (front stage)
� Includes service delivery (as above) and all other contacts between service firm and customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 50
Service Marketing System: (1) High Contact Service--e.g., Hotel (Fig. 2.7)
TheCustomer
TechnicalCore
Interior & Exterior
Facilities
Equipment
Service People
Other
Customers
Other
Customers
Advertising
Sales Calls
Market Research
Surveys
Billing / Statements
Miscellaneous Mail,
Phone Calls, Faxes, etc.
Random Exposure to
Facilities / Vehicles
Chance Encounters
with Service Personnel
Word of Mouth
Service Operations System
Backstage(invisible)
Front Stage(visible)
Service Delivery System Other Contact Points
Service Marketing System
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 51
Service Marketing System: (2) Low Contact Service--e.g., Credit Card (Fig. 2.8)
TechnicalCore
Self Service
Equipment
Phone, Fax,
Web site etc.
The
Customer
Service Operations System
Service Delivery System Other Contact Points
Backstage
(invisible)
Front Stage
(visible)
Advertising
Market ResearchSurveys
Random Exposures
Facilities, Personnel
Word of Mouth
Service Marketing System
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 52
Service as Theater
“ All the world’s a stage and all the men and women merely players. They have their exits and their entrances and each man in his time plays many parts”
William Shakespeare
As You Like It
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 53
The Dramaturgy of Service Delivery
� Service dramas unfold on a “stage”--settings may change as performance unfolds
� Many service dramas are tightly scripted, others improvised
� Front-stage personnel are like members of a cast
� Like actors, employees have roles, may wear special costumes, speak required lines, behave in specific ways
� Support comes from a backstage production team
� Customers are the audience—depending on type of performance, may be passive or active
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 54
Role and Script Theories
� Role: A set of behavior patterns learned through experience and communication
� Role congruence: In service encounters, employees and customers must act out defined roles for good outcomes
� Script: A sequence of behavior to be followed by employees and customers during service delivery
� Some scripts (e.g. teeth cleaning) are routinized, others flexible
� Technology change may require a revised script
� Managers should reexamine existing scripts to find ways to improve delivery, increase productivity, enhance experiences
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 55
Chapter 3
Positioning Services in Competitive Markets
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 56
Search for Competitive Advantage in Services Requires Differentiation and Focus
� Intensifying competition in service sector threatens firms with no distinctive competence and undifferentiated offerings
� Slowing market growth in mature service industries means that only way for a firm to grow is to take share from competitors
� Rather than attempting to compete in an entire market, firm must focus efforts on those customers it can serve best
� Must decide how many service offerings with what distinctive (and desired) characteristics
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 57
Standing Apart from the Competition
A business must set itself apart from its competition. To be successful it must identify and promote itself
as the best provider of attributes that are important to target customers
GEORGE S. DAY
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 58
Basic Focus Strategies for Services (Fig. 3.1)
BREADTH OF SERVICE OFFERINGS
NUMBER OF MARKETS
SERVED
Narrow
Many
Few
Wide
Service Focused
Unfocused (Everything
for everyone)
Market Focused
Fully Focused (Service and
market focused)
Source: Robert Johnston
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 59
Four Principles of Positioning Strategy
1. Must establish position for firm or product in minds of customers
2. Position should be distinctive, providing one simple, consistent message
3. Position must set firm/product apart from competitors
4. Firm cannot be all things to all people--must focus
Jack Trout
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 60
Uses of Positioning in Marketing Management (Table 3.1)
� Understand relationships between products and markets� compare to competition on specific attributes� evaluate product’s ability to meet consumer needs/expectations� predict demand at specific prices/performance levels
� Identify market opportunities� introduce new products� redesign existing products� eliminate non-performing products
� Make marketing mix decisions, respond to competition� distribution/service delivery� pricing� communication
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 61
Possible Dimensions for Developing Positioning Strategies
� Product attributes
� Price/quality relationships
� Reference to competitors (usually shortcomings)
� Usage occasions
� User characteristics
� Product class
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 62
Developing a Market Positioning Strategy (Fig. 3.3)
- Size- Composition- Location- Trends
MarketingAction Plan
MARKET ANALYSIS
INTERNALANALYSIS
- Resources- Reputation- Constraints - Values
COMPETITIVEANALYSIS
- Strengths- Weaknesses- Current
Positioning
Define, AnalyzeMarket Segments
Select Target Segments
To Serve
ArticulateDesired Position
in Market
Select Benefitsto Emphasize to Customers
Analyze Possibilities forDifferentiation
Source: Adapted from Michael R. Pearce
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 63
Positioning of Hotels in Belleville:Price vs. Service Level (Fig. 3.4)
Expensive
Shangri-LaHigh
ServiceModerate Service
Grand
Regency
Sheraton
Italia
CastleAlexander IV
Airport Plaza
PALACE
Atlantic
Less Expensive
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 64
Positioning of Hotels in Belleville: Location vs. Physical Luxury (Fig. 3.5)
High Luxury
Shopping District
and Convention Centre
Shangri-La
Moderate Luxury
Financial District
Inner
Suburbs
GrandRegency
Sheraton
ItaliaCastle
Alexander IV
Airport Plaza
PALACE
Atlantic
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 65
Positioning after New Hotel Construction: Price vs. Service Level (Fig. 3.6)
Expensive
Shangri-LaHigh
ServiceModerate Service
HeritageMandarin
New GrandMarriott
Continental
Regency
Sheraton
Italia
Alexander IVAirport Plaza
PALACE
Atlantic
No action?
Action?
Less Expensive
Castle
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 66
Positioning after New Hotel Construction: Location vs. Physical Luxury (Fig. 3.7)
High Luxury
Shangri-La
Financial District
Inner Suburbs
Heritage
Mandarin
New Grand
MarriottContinental
RegencySheraton
ItaliaAlexander IV
Airport Plaza
PALACE
Atlantic
No action?
Action?
Moderate Luxury
Castle
Shopping District and Convention Centre
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 67
Positioning Maps Help Managers to Visualize Strategy
� Positioning maps display relative performance of competing firms on key attributes
� Research provides inputs to development of positioning maps
� Challenge is to ensure that
�attributes employed in maps are important to target segments
�performance of individual firms on each attribute accurately reflects perceptions of customers in target segments
� Predictions can be made of how positions may change in the light of new developments in the future
� Simple graphic representations are often easier for managers to grasp than tables of data or paragraphs of prose
� Charts and maps can facilitate a “visual awakening” to threats and opportunities and suggest alternative strategic directions
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 68
Chapter 4
Creating the
Service Product
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 69
Key Steps in Service Planning:Matching Opportunities to Resources
� Must relate marketing opportunities to firm’s resources (physical, financial, technological, human)
� Identify, evaluate firm’s marketing assets� Customer portfolio/lifetime value (customer equity)� Market knowledge� Marketing implementation skill� Product line� Competitive positioning strategies� Brand reputation (brand equity)
� Identify, evaluate firm’s operating assets � Physical facilities, equipment� Technology and systems (especially IT)� Human resources (numbers, skills, productivity)� Leverage through alliances and partnerships� Potential for customer self service� Cost structure
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 70
Operating Assets(Facilities/Equipment, IT Systems, People, Op. Skills, Cost Structure)
Service Design Involves Matching Marketing Concept with Operations Concept (Fig. 4.1)
Corporate Objectivesand Resources
Service Delivery Process
Marketing Assets(Customer Base, Mkt. Knowledge,
Implementation Skills, Brand Reput.)
Service Marketing Concept
•Benefits to customer from core/supplementary elements, style, service level, accessibility
•User costs/outlays incurred•Price/other monetary costs•Time•Mental and physical effort•Neg. sensory experiences
Service Operations Concept
•Nature of processes•Geographic scope of ops•Scheduling•Facilities design/layout•HR (numbers, skills)•Leverage (partners, self-service)•Task allocation: front/backstage staff; customers as co-producers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 71
Understanding the Components of the
Augmented Service Product
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 72
Shostack’s Molecular Model of a Total Market Entity - Passenger Airline Service (Fig. 4-2)
DistributionPrice
Marketing Positioning (Weighted toward evidence) Source: Shostack
KEY
Tangible elementsIntangible elements
Service
frequency
Vehicle
Transport
Pre- and post-flight
serviceFood and drink
In-flight service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 73
Core Products and Supplementary Services
� Most firms offer customers a package of benefits:�core product (a good or a service)�supplementary services that add value to the core
� In mature industries, core products often become commodities
� Supplementary services help to differentiate core products and create competitive advantage by:
�facilitating use of the core service�enhancing the value and appeal of the core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 74
Core and Supplementary Product Design: What Do We Offer and How Do We Create and Deliver It?
Core
Scheduling Process
Service Level
CustomerRole
Supplementaryservices offeredand how createdand delivered
Delivery Concept For Core Product
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 75
What Should Be the Core and Supplementary Elements of Our Service Product?
� How is our core product defined and what supplementary elements currently augment this core?
�What product benefits create the most value for customers?
� Is our service package differentiated from the competition in ways that are meaningful to target customers?
�What are current levels of service on the core product and each of the supplementary elements?
� Can we charge more for higher service levels on key attributes (e.g., faster response, better physical amenities, easier access, more staff, superior caliber personnel)?
� Alternatively, should we cut service levels and charge less?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 76
Core and Supplementary Services in a Luxury Hotel (Offering Guests Much More than a Cheap Motel!)
Reservation
ValetParking
Reception
BaggageService
Cocktail Bar
RestaurantEntertainment/
Sports / Exercise
Telephone
Wake-upCall
RoomService
BusinessCenter
Cashier
A Bed for theNight in an
Elegant PrivateRoom with a
Bathroom
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 77
What Happens, When, and in What Sequence? The Time Dimension in the Augmented Service Product
PreVisit
Reservation
USE GUESTROOM OVERNIGHT
Parking Get car
Check in
Porter
USE ROOM
MealPay TV Room service
Phone
Check out
Time Frame of an Overnight Hotel Stay(real-time service use)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 78
The Flower of Service:Categorizing Supplementary Services (Fig. 4-5)
Core
Information
Consultation
Order-Taking
Hospitality
Payment
Billing
Exceptions
SafekeepingFacilitating elements
Enhancing elements
KEY:
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 79
Facilitating Services - Information (Table 4.1)
Core
Customers often requireinformation about how toobtain and use a product orservice. They may alsoneed reminders anddocumentation
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 80
Facilitating Services - Order-Taking(Table 4.2)
Many goods and services must be ordered or reservedin advance. Customers need to know what is available andmay want to secure commitment to delivery
Core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 81
Facilitating Services - Billing(Table 4.3)
“How much do I owe you?”Customers deserve clear, accurate and intelligiblebills and statements
Core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 82
Facilitating Services - Payment(Table 4.4)
Customers may pay faster and more cheerfully if youmake transactions simpleand convenient for them
Core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 83
Enhancing Services - Consultation(Table 4.5)
Value can be added to goods and services byoffering advice andconsultation tailored toeach customer’sneeds and situation
Core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 84
Enhancing Services - Hospitality(Table 4.6)
Customers who invest time and effort in visiting abusiness and using itsservices deserve to betreated as welcome guests (after all, marketing invitedthem there!)
Core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 85
Enhancing Services - Safekeeping(Table 4.7)
Customers prefer not toworry about looking afterthe personal possessions that they bring with themto a service site.
They may also want deliveryand after-sales services forgoods that they purchaseor rent
Core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 86
Enhancing Services - Exceptions(Table 4.8)
Customers appreciate some flexibility in a businesswhen they make special requests. They expect itwhen not everything goesaccording to plan
Core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 87
Branding
Service Products
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 88
Service Branding: Clarifying Distinctive Service Offerings
�Marriott Hotel Brands
�Marriott Hotels
�Marriott Resorts
�Courtyard by Marriott
�Fairfield Inns
�Residence Inns
�SpringHill Suites
�TownePlace Suites
�Marriott Vacation Clubs International
�British Airways Brands
Intercontinental
�First�Club World�World Traveller Plus�World Traveller
European
�Club Europe�Euro-Traveller
UK Domestic
�Shuttle
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 89
Branding a High-Tech, B2B Product Line:A Family of Brands at Sun Microsystems
� Corporate umbrella brand� Sun Microsystems
� Product line brand (system support services)� Sun Spectrum Support
� Sub-brands (4 levels of support service programs)» Platinum
» Gold
» Silver
» Bronze
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 90
Sun Spectrum Support: Sub-branding Highlights Four Service Levels
Sub-branding clarifies service levels offered at different fees
� Platinum: “Mission Critical”
On-site service 24/7, two-hour response; telephone support 24/7, onsite parts replacement; additional services available
� Gold: “Business Critical”
Onsite service Mon-Fri 8am-8pm, four-hour response; telephone support 24/7; onsite parts replacement
� Silver: “Basic Support”
Onsite service Mon-Fri 8am-5pm, four-hour response; telephone support Mon-Fri 8am-8pm; onsite parts replacement
� Bronze: “Self Support”
Phone support Mon-Fri 8am-5pm; parts replacement by courier
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 91
New Service
Development
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 92
New Service Development:A Hierarchy of New Service Categories
� Major service innovations--new core products for previously undefined markets
� Major process innovations--using new processes to deliver existing products and offer extra benefits
� Product line extensions--additions to current product lines
� Process line extensions--alternative delivery procedures
� Supplementary service innovations--adding new or improved facilitating or enhancing elements
� Style changes--visible changes in service design or scripts
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 93
New Service Development: Physical Goods as Source of Service Ideas
� Customers can rent goods—use and return for a fee—instead of purchasing them
� Customers can hire personnel to operate their own or rented equipment
� Any new durable product may create need for after-sales services (possession processing)� Shipping� Installation� Problem-solving and consulting advice� Cleaning � Maintenance� Repair� Upgrading� Disposal
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 94
Creating Services as Substitutes for Owning and/or Using Goods (Fig. 4-7)
Perform the
Work Oneself
Hire Someone
to Do the Work
Own a Physical Good Rent the Use
of a Physical Good
•• Hire a taxi or limousine
•• Send work to secretarial service
• Rent car and drive it
• Rent word processor and type
• Hire chauffeur to drive car
• Hire typist to use word processor
• Drive own car
• Type on own word processor
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 95
Service Development through Delivery Options: Alternative Meal Service Formats (Fig. 4-8)
Home
DeliveryOrder food,
give address
Driver rings
doorbell
Pay driver,
take food EatTelephone
Restaurant
Drive-InRestaurant(Take Out)
See sign Order via
microphone
Get meal at
pickup, payDrive away,
eat laterStop car at
order point
Fast-FoodRestaurant
(Eat In)
See sign Park and
enter
Order meal,
and pay
Pick up
meal
Find table
and eat
Clear table
and leave
HomeCatering
Arrange to meet caterer
Plan meal, pay deposit
Food and staff arrive
Meal ispreparedand served
EatStaff cleans
up; pay
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 96
Elements of a Hotel Offering: Trading off Room Price vs. Features/Services
� External building design and features
� Room features
� Food-related services
� Lounge facilities
� Services (e.g., reception)
� Leisure facilities
� Security—people/systems
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 97
Success Factors in New Service Development
� Market synergy� Good fit between new product and firm’s image/resources� Advantage vs. competition in meeting customers’ needs� Strong support from firm during/after launch� Firm understands customer purchase decision behavior
� Organizational factors� Strong interfunctional cooperation and coordination� Internal marketing to educate staff on new product and its
competition� Employees understand importance of new services to firm
� Market research factors� Scientific studies conducted early in development process� Product concept well defined before undertaking field studies
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 98
Chapter 5
Designing the Communications Mix
for Services
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 99
Advertising Implications for Overcoming Intangibility (Fig. 5-1)
Problem Advertising Strategy
� Generality
- objective claims Document physical system capacity Cite past performance statistics
- subjective claims Present actual service delivery incident
� Nonsearchability Present customer testimonials
Cite independently audited performance
� Abstractness Display typical customers benefiting
� Impalpability Documentary of step-by-step process,
Case history of what firm did for customer
Narration of customer’s subjective experienceSource: Mittal and Baker
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 100
Other Communications Challenges in Services Marketing
� Facilitate customer involvement in production � prepare customers for service experience and demonstrate roles
� teach customers about new technologies, new features
� Help customers to evaluate service offerings� provide tangible or statistical clues to service performance
� highlight quality of equipment and facilities
� emphasize employee qualifications, experience, professionalism
� Simulate or dampen demand to match capacity
� provide information about timing of peak, off-peak periods
� offer promotions to stimulate off-peak demand
� Promote contribution of service personnel
� help customers understand service encounter
� highlight expertise and commitment of backstage personnel
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 101
Setting Clear Objectives: Checklist for Marketing Communications Planning (“5 Ws”)
�Who is our target audience?
�What do we need to communicate and achieve?
� How should we communicate this?
�Where should we communicate this?
�When do communications need to take place?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 102
Common Educational and Promotional Objectives in Service Settings (Table 5-2)
� Create memorable images of specific companies and their brands
� Build awareness/interest for unfamiliar service/brand
� Build preference by communicating brand strengths and benefits
� Compare service with competitors’ offerings and counter their claims
� Reposition service relative to competition
� Stimulate demand in off-peak and discourage during peak
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 103
Educational and Promotional Objectives (cont.)
� Encourage trial by offering promotional incentives
� Reduce uncertainty/perceived risk by providing useful info and advice
� Provide reassurance (e.g., promote service guarantees)
� Familiarize customers with service processes before use
� Teach customers how to use a service to best advantage
� Recognize and reward valued customers and employees
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 104
Word-of-mouth(other customers)
Marketing Communications Mix for Services(Fig. 10.4)
Personal Communications
Selling
Customer service
Training
Advertising
Broadcast
Internet
Outdoor
Direct mail
Sales Promotion
Sampling
Coupons
Sign-up rebates
Gifts
Prize promotions
Publicity &Public Relations
Press releases/kits
Press conferences
Special events
Sponsorship
Instructional Materials
Web sites
Manuals
Brochures
Video-audiocassettes
Software CD-ROM
Voice mail
Signage
Interior decor
Vehicles
Equipment
Stationery
Uniforms
Corporate Design
Telemarketing
Word of mouthTrade Shows,Exhibitions
Media-initiatedcoverage
*
Key: * Denotes communications originating from outside the organization
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 105
Originating Sources of Messages Received by a Target Audience (Fig. 5-5)
Messages originating within the organization
Messages originating outside the organization
Front-line staff
Service outlets
AdvertisingSales promotionsDirect marketingPersonal sellingPublic relations
Word of mouth
Media editorial
AUDIENCE
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 106
What is Brand Equity and Why Does It Matter?(From Berry, “Cultivating Brand Equity”)
Definition: A set of assets and liabilities linked to a brand’s name and symbol that adds to (or subtracts from) the perceived value of the product
Insights
� Brand equity can be positive or negative
� Positive brand equity creates marketing advantage for firm plus value for customer
� Perceived value generates preference and loyalty
� Management of brand equity involves investment to create and enhance assets, remove liabilities
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 107
A Service Branding Model: How Communications + Experience Create Brand Equity
Firm’s Presented Brand (Sales, Advertising, PR)
What Media, Intermediaries,Word-of-Mouth Say re: Firm
Customer’s Experiencewith Firm
Awareness of Firm’s Brand
Meaning AttachedTo Firm’s Brand
Firm’sBrand Equity
Source: Adapted from L. L. Berry ( Fig. 1)
Marketer-controlled communications
Uncontrolled brand communications
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 108
Marketing Communication and the Internet (1)
� International in Scope
� Accessible from almost anywhere in the world� Simplest form of international market entry
� Internet Applications
� Promote consumer awareness and interest� Provide information and consultation� Facilitate 2-way communications through e-mail and chat rooms� Stimulate product trial� Enable customers to place orders� Measure effectiveness of specific advertising/promotional
campaigns
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 109
Marketing Communications and the Internet (2)
�Web Site design considerations � Memorable address that is actively promoted
� Relevant, up-to-date content (text, graphics, photos)
� Contain information that target users will perceive as useful/interesting
� Easy navigation
� Fast download
� Internet advertising� Banners and buttons on portals and other websites seek to draw
online traffic to own site
� Limits to effectiveness—exposure (“eyeballs”) may not lead to increases in awareness/preference/sales
� Hence, advertising contracts may tie fees to marketing relevant behavior (e.g., giving personal info or making purchase)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 110
Chapter 6
Pricing and Revenue Management
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 111
What Makes Service Pricing Strategy Different (and Difficult)?
� No ownership of services--hard for firms to calculate financial costs of creating an intangible performance
� Variability of inputs and outputs--how can firms define a “unit of service” and establish basis for pricing?
� Many services hard for customers to evaluate--what are they getting in return for their money?
� Importance of time factor--same service may have more value to customers when delivered faster
� Delivery through physical or electronic channels--may create differences in perceived value
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 112
Objectives of Pricing Strategies
� Revenue and profit objectives
� Seek profit� Cover costs
� Patronage and user base-related objectives
� Build demand� Build a user base
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 113
The Pricing Tripod (Fig. 6.1)
Pricing Strategy
CostsCompetition
Value to customer
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 114
Three Main Approaches to Pricing
� Cost-Based Pricing
�Set prices relative to financial costs (problem: defining costs)
� Competition-Based Pricing
�Monitor competitors’ pricing strategy (especially if service lacks differentiation)
�Who is the price leader? (one firm sets the pace)
� Value-Based
�Relate price to value perceived by customer
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 115
Activity-Based Costing: Relating Activities to the Resources They Consume
� Managers need to see costs as an integral part of a firm’s effort to create value for customers
�When looking at prices, customers care about value to themselves, not what production costs the firm
� Traditional cost accounting emphasizes expense categories, with arbitrary allocation of overheads
� ABC management systems examine activities needed to create and deliver service (do they add value?)
� Must link resource expenses to:�variety of products produced�complexity of products�demands made by individual customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 116
Perceived
Benefits
Timee
Effort
Net Value = (Benefits – Outlays) (Fig. 6.3)
PerceivedOutlays
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 117
Enhancing Gross Value
� Pricing Strategies to Reduce Uncertainty
� service guarantees� benefit-driven (pricing that aspect of service that creates value)� flat rate (quoting a fixed price in advance)
� Relationship Pricing
� non-price incentives� discounts for volume purchases� discounts for purchasing multiple services
� Low-cost Leadership
� Convince customers not to equate price with quality� Must keep economic costs low to ensure profitability at low price
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 118
Paying for Service:The Customer’s Perspective
Customer “expenditures” on service comprise both
financial and non-financial outlays
� Financial costs:� price of purchasing service� expenses associated with search, purchase activity, usage
� Time expenditures
� Physical effort (e.g., fatigue, discomfort)
� Psychological burdens (mental effort, negative feelings)
� Negative sensory burdens (unpleasant sensations affecting any of the five senses)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 119
Determining the Total Costs of a Service to the Consumer (Fig. 6.4)
Price
Related Monetary Costs
Time Costs
Physical Costs
Psychological Costs
Sensory Costs
Necessary follow-up
Problemsolving
Operating Costs
Incidental Expenses
Purchase andUse Costs
Search Costs
After Costs
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 120
Trading off Monetary and Non- Monetary Costs (Fig. 6.5)
Which clinic would you patronize if you needed a chest x-ray (assuming all three clinics offer good quality) ?
� Price $85� Located 15 min
away by car or transit
� Next available appointment is in 1 week
� Hours: Monday –Friday, 8am – 10pm
� Estimated wait at clinic is about 30 -45 minutes
Clinic B
� Price $125 � Located next to
your office or college
� Next appointment is in 1 day
� Hours: Mo –Sat, 8am – 10pm
� By appointment -estimated wait at clinic is about 0 to 15 minutes
Clinic CClinic A
� Price $45� Located 1 hour away
by car or transit � Next available
appointment is in 3 weeks
� Hours: Monday –Friday, 9am – 5pm
� Estimated wait at clinic is about 2 hours
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 121
Increasing Net Value by Reducing Non-financial Costs of Service
� Reduce time costs of service at each stage
� Minimize unwanted psychological costs of service
� Eliminate unwanted physical costs of service
� Decrease unpleasant sensory costs of service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 122
Revenue Management: Maximizing Revenue from Available Capacity at a Given Time
� Based on price customization - charging different customers (value segments) different prices for same product
� Useful in dynamic markets where demand can be divided into different price buckets according to price sensitivity
� Requires rate fences to prevent customers in one value segment from purchasing more cheaply than willing to pay
� RM uses mathematical models to examine historical data and real time information to determine
�what prices to charge within each price bucket�how many service units) to allocate to each bucket
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 123
The Strategic Levers of Revenue (Yield) Management
Quadrant 4:
Continuing Care
Hospitals
Quadrant 3:
Restaurants
Golf Courses
Unpredictable
Quadrant 2:
Hotel Rooms
Airline Seats
Rental Cars
Cruise Lines
Quadrant 1:
Movies
Stadiums/Arenas
Function Space
Predictable
Du
rati
on
VariableFixed
Price
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 124
Dealing with Common Customer Conflicts Arising from Revenue Management
� Perceived Unfairness & Perceived Financial Risk Associated with Multi-Tier Pricing and Selective Inventory Availability
Customer conflict can arise from: Marketing tools to reduce customer conflicts:
� Unfulfilled Inventory Commitment
� Unfulfilled Demand of Regular Customers
� Unfulfilled Price Expectation of Group Customers
� Change in the Nature of the Service
� Fenced Pricing
� Bundling
� Categorising
� High Published Price
� Well designed Customer Recovery Programme for Oversale
� Preferred Availability Policies
� Offer Lower Displacement Cost Alternatives
� Physical Segregation & Perceptible Extra Service
� Set Optimal Capacity Utilisation Level
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 125
Price Elasticity (Fig. 6.6)
De
De
Di
Di
Price per
unit of
service
Quantity of Units Demanded
De : Demand is price elastic. Small changes in price lead to big changes in demand.
Di : Demand for service is price inelastic. Big changes have little impact on demand.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 126
Key Categories of Rate Fences (Table 6.2)
Rate Fences Examples
Physical (Product-related) Fences
Basic Product �Class of travel (Business/Economy class) �Size and furnishing of a hotel room �Seat location in a theatre
Amenities �Free breakfast at a hotel, airport pick up etc. �Free golf cart at a golf course
Service Level �Priority wait listing�Increase in baggage allowances �Dedicated service hotlines �Dedicated account management team
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 127
Key Categories of Rate Fences (Table 6.2 cont’d)
Non Physical Fences
Transaction Characteristics
Time of booking or reservation
�Requirements for advance purchase �Must pay full fare two weeks before departure
Location of booking or reservation
� Passengers booking air tickets for an identical route in different countries are charged different prices
Flexibility of ticket usage
� Fees/penalties for canceling or changing a reservation (up to loss of entire ticket price)
�Non refundable reservation fees
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 128
Key Categories of Rate Fences (Table 6.2 cont’d)
Non Physical Fences (cont’d)
Consumption Characteristics
Time or duration of use
� Early bird special in restaurant before 6pm�Must stay over on Sat for airline, hotel �Must stay at least five days
Location of consumption
� Price depends on departure location, esp in international travel
� Prices vary by location (between cities, city centre versus edges of city)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 129
Key Categories of Rate Fences (Table 6.2 cont’d)
Non Physical Fences (cont’d)
Buyer Characteristics
Frequency or volume of consumption
�Member of certain loyalty-tier with the firm get priority pricing, discounts or loyalty benefits
Group membership �Child, student, senior citizen discounts � Affiliation with certain groups (e.g. Alumni)
Size of customer group
�Group discounts based on size of group
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 130
Relating Price Buckets and Fences to the Demand Curve (Fig. 6.7)
First Class
Full Fare Economy (No Restrictions)
One-Week Advance Purchase
One-Week Advance Purchase, Saturday Night Stayover
3-Week Advance Purchase, Saturday Night Stayover
3-Wk Adv. Prchs, Sat. Night Stay, No changes/refunds3-Week Adv. Prchs, Sat. Night Stay., $100 for Changes
Late Sales through Consolidators/ Internet, no refunds
Capacity
of Aircraft
No. of Seats Demanded
Capacityof 1st-classCabin
Price per
Seat
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 131
Ethical Concerns in Pricing
� Customers are vulnerable when service is hard to evaluate or they don’t observe work
� Many services have complex pricing schedules� hard to understand � difficult to calculate full costs in advance of service
� Unfairness and misrepresentation in price promotions� misleading advertising� hidden charges
� Too many rules and regulations� customers feel constrained, exploited� customers unfairly penalized when plans change
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 132
Pricing Issues: Putting Strategy into Practice (Table 6.3)
� How much to charge?
� What basis for pricing?
� Who should collect payment?
� Where should payment be made?
� When should payment be made?
� How should payment be made?
� How to communicate prices?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 133
Consumption follows the Timing of Payments (Research Insight 6.1)
Fre
qu
en
cy
of
He
alth
Clu
b V
isits Annual Payment Plan
Semiannual Payment Plan
Fre
qu
en
cy
of
He
alth
Clu
b V
isits
Time Line
Quarterly Payment Plan
Time Line
Monthly Payment Plan
Source: John Gourville and Dilip Soman, “Pricing and the Psychology of Consumption,” Harvard Business Review, September 2002, 90-96.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 134
Chapter 7
Distributing Services
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 135
Applying the Flow Model of Distribution to Services
� Information and promotion flow
� Negotiation flow
� Product flow
Distribution embraced three interrelated elements
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 136
Information and Physical Processes of the Augmented Service Product (Fig. 7.1)
Exceptions
Billing
Payment
InformationProcesses
InformationConsultation
Safekeeping
Physical Processes
Order-Taking
Core
Hospitality
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 137
Using Websites for Service Delivery
SafekeepingTrack package movements
Check repair status
CORE: Use Web to deliver information-based core services
Core
ConsultationConduct e-mail dialogUse expert systems
Order-TakingMake/confirm reservationsSubmit applicationsOrder goods, check status
HospitalityRecord preferences
BillingReceive bill
Make auction bidCheck account status
ExceptionsMake special requests
Resolve problems
PaymentPay by bank card
Direct debit
InformationRead brochure/FAQ; get schedules/
directions; check prices
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 138
Options for Service Delivery
� Customer goes to the service provider (or intermediary)
� Service provider goes to the customer
� Interaction at arm’s length (via the Internet, telephone, fax,
mail, etc.)
There are 3 types of interactions between customers and
service firms
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 139
Method of Service Delivery (Table 7.1)
Availability of Service Outlets
Nature of Interaction between Customer and Service Organization
Single Site Multiple Sites
Customer goes to service organization
�Theater
�Barbershop
�Bus service
�Fast-food chain
Service organization goes to customer
�House painting
�Mobile car wash
�Mail delivery
�Auto club road service
Customer and service organization transact at arm’s length
�Credit card company
�Local TV station
�Broadcast network
�Telephone company
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 140
Place vs. Cyberspace
� Place - customers and suppliers meet in a physical environment
� Cyberspace - customers and suppliers do business electronically in virtual environment created by phone/internet linkages
� Required for people processing services
� Offers live experiences, social interaction, e.g., food services
� More emphasis on eye-catching servicescape, entertainment
� Ideal for info-based services
� Saves time
� Facilitates information gathering
� May use express logistics service to deliver physical core products
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 141
“24/7” - Factors Encouraging Extended Operating Hours (Mgt Memo 7.1)
�Economic pressure from consumers
�Changes in legislation
�Economic incentives to improve asset utilization
�Availability of employees to work nights, weekends
�Automated self-service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 142
Technology Revolutionizes Service Delivery: Some Examples
� Smart mobile telephones to link users to Internet
� Voice recognition software
� Automated kiosks for self-service (e.g. bank ATMs)
�Web sites �provide information�take orders and accept payment�deliver information-based services
� Smart cards that can act as “electronic wallets”
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 143
E-Commerce:Factors that Attract Customers to Virtual Stores
� Convenience (24-hour availability, save time, effort)
� Ease of obtaining information on-line and searching for desired items
� Better prices than in bricks-and-mortar stores
� Broad selection
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 144
Splitting Responsibilities for Delivering Supplementary Services (Fig. 7.2)
As created by originating firm
As enhanced by distributor
As experienced by customer
+Core = Core
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 145
Franchising
� Resources are limited
� Long-term commitment of store managers is crucial
� Local knowledge is important
� Fast growth is necessary to pre-empt competition
Franchising is a fast growth strategy, when
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 146
Service Process and Market Entry
�People Processing Services � Export the service concept � Import customers� Transport customers to new locations
�Possession Processing Services � Most require an ongoing local presence, whether it is the
customers dropping off items or personnel visiting customer sites
� Information Based Services � Export the service to a local service factory � Import customers � Export the information via telecommunications and transform it
locally
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 147
Barriers to International Trade in Services
� Operating successfully in international markets remains difficult for certain services despite efforts of the WTO and control relaxations
� Barriers include �Refusal by immigration offices to issue work permits �Heavy taxes on foreign firms�Domestic preference policies �Legal restrictions �Lack of broadly-agreed accounting standards �Cultural differences (esp. for entertainment industry)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 148
Forces for Internationalization
�Market drivers
�Competition drivers
�Technology drivers
�Cost drivers
�Government drivers
Impact will vary by service type (people, possessions, information)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 149
Modes of Internationalization
� Export information-based services
� transmit via electronic channels � store in physical media, ship as merchandise
� Use third parties to market/deliver service concept
� licensing agents� brokers� franchising� alliance partners� minority joint ventures
� Control service enterprise abroad
� direct investment in new business� buyout of existing business
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 150
Impact of Globalization Drivers on Different Service Categories (Table 7.2)
Globalization Drivers
People Processing
Possession Processing
Information Based
Competition Simultaneity of production and consumption limits leverage of foreign competitive advantage, but management systems can be globalized
Technology drives globalization of competitors with technical edge.
Highly vulnerable to global dominance by competitors with monopoly or competitive advantage in information.
Market People differ economically and culturally, so needs for service and ability to pay may vary.
Level of economic developments impacts demand for services to individually owned goods
Demand for many services is derived to a significant degree from economic and educational levels.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 151
Impact of Globalization Drivers on Different Service Categories (Table 7.2, cont’d)
Globalization Drivers
People Processing
Possession Processing
Information Based
Technology Use of IT for delivery of supplementary services may be a function of ownership and familiarity with technology.
Need for technology-based service delivery systems depends on possessions requiring service and the cost trade-offs in labor substitution
Ability to deliver core services through remote terminals may be a function of investment in computerization etc.
Cost Variable labor rates may impact on pricing in labor-sensitive services.
Variable labor rates may favor low-cost locations.
Major cost elements can be centralized & minor cost elements localized.
Government Social policies (e.g., health) vary widely and may affect labor cost etc.
Policies may decrease/increase cost & encourage/discourage certain activities
Policies may impact demand and supply and distort pricing
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 152
Chapter 8
Designing and Managing Service Processes
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 153
Developing a Blueprint – Some Basic Advice
� Identify key activities in creating and delivering the service
� Distinguish between front stage (what customers experience) and back stage
� Chart activities in sequence
� Show how interactions between customers and employees are supported by backstage activities and systems
� Establish service standards for each step
� Identify potential fail points
� Focus initially on “big picture” (later, can drill down for more detail in specific areas)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 154
Service Blueprinting: Key Components
1. Define standards for frontstage activities
2. Specify physical evidence
3. Identify principal customer actions
4. ------------line of interaction (customers and front stage personnel)--------
5. Front stage actions by customer-contact personnel
6. ------------line of visibility (between front stage and backstage)--------------
7. Backstage actions by customer contact personnel
8. Support processes involving other service personnel
9. Support processes involving IT
Where appropriate, show fail points and risk of excessive waits
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 155
Simplified Example: Blueprinting a Hotel Visit(extract only)
Physical
Evidence
Customer Actions
Employee ActionsFace-to-faceF
ron
t
S
tag
e
Phone Contact
Backsta
ge
Makereservation
Rep.
records,
confirms
Arrive,
valet park
Check-inat reception
Doorman
greets, valet
takes car
Enter
data
Valet
Parks Car
Make up
Room
Register
guest data
Receptionist
verifies, gives
key to room
Go to
room
Hotel exterior, lobby,employees, key
Elevator, corridor,room, bellhop
Line of Interaction
Line of Visibility
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 156
Improving Reliability of Processes by Failure Proofing
� Analysis of reasons for failure often reveals opportunities for failure proofing to reduce/eliminate risk of errors
� Errors include:
� treatment errors—human failures during contact with customers
� tangible errors—failures in physical elements of service
� Fail-safe procedures include measures to prevent omission of tasks or performance of tasks
� incorrectly
� in wrong order
� too slowly
� not needed or specified
� Need fail-safe methods for both employees and customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 157
Process Redesign: Principal Approaches(Table 8-1)
� Eliminating non-value-adding steps
� Shifting to self-service
� Delivering direct service
� Bundling services
� Redesigning physical aspects of service processes
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 158
Customers as Co-Producers:Levels of Participation in Service Production
� Low – Employees and systems do all the work
� Medium – Customer inputs required to assist provider
� Provide needed information, instructions� Make personal effort� May share physical possessions
� High – Customer works actively with provider to co-produce the service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 159
Self Service Technologies (SSTs)
� Self-service is ultimate form of customer involvement in service production
� Customers undertake specific activities using facilities or systems provided by service supplier
� Customer’s time and effort replace those of employees
� Concept is not new—self-serve supermarkets date from 1930s, ATMs and self-serve gas pumps from 1970s
� Today, customers face wide array of SSTs to deliver information-based services, both core and supplementary
� Many companies seek to divert customers from employee contact to Internet-based self-service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 160
Service Firms as Teachers: Well-trained Customers Perform Better
� Firms must teach customers roles as co-producers of service
� Customers need to know how to achieve best results
� Education can be provided through:
� Brochures� Advertising� Posted instructions� Machine-based instructions� Websites, including FAQs� Service providers� Fellow customers
� Employees must be well-trained to help advise, assist customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 161
Managing Customers as Partial Employeesto Increase Productivity and Quality
1. Analyze customers’ present roles in the business and compare to management’s ideal
2. Determine if customers know how to perform and have necessary skills
3. Motivate customers by ensuring that will be rewarded for performing well
4. Regularly appraise customers’ performance; if unsatisfactory, consider changing roles or termination
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 162
The Problem of Customer Misbehavior –Identifying and Managing “Jaycustomers”
What is a jaycustomer?
A customer who behaves in a thoughtless or abusive
fashion, causing problems for the firm itself, employees,
other customers
Why do jaycustomers matter?
� Can disrupt processes
� Affect service quality
� May spoil experience of other customers
What should a firm do about them?
� Try to avoid attracting potential jaycustomers
� Institute preventive measures
� Control abusive behavior quickly
� Take legal action against abusers
� BUT firm must act in ways that don’t alienate other customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 163
Six Types of “Jaycustomer”
� Thief – seeks to avoid paying for service
� Rule breaker – ignores rules of social behavior and/or procedures for safe, efficient use of service
� Belligerent – angrily abuses service personnel (and sometimes other customers) physically and/or emotionally
� Family Feuders – fight with other customers in their party
� Vandal – deliberately damages physical facilities, furnishings, and equipment
� Deadbeat – fails to pay bills on time
Can you think of others?
How should firms deal with each of these problems?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 164
Chapter 9
Balancing Demand
and Capacity
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 165
Relating Demand to Capacity:Four Key Concepts
� Excess demand: too much demand relative to capacity at a given time
� Excess capacity: too much capacity relative to demand at a given time
� Maximum capacity: upper limit to a firm’s ability to meet demand at a given time
� Optimum capacity: point beyond which service quality declines as more customers are serviced
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 166
Variations in Demand Relative to Capacity(Fig. 9-1)
VOLUME DEMANDED
TIME CYCLE 1 TIME CYCLE 2
Maximum Available Capacity
Optimum Capacity (Demand and Supply
Well Balanced
Low Utilization(May Send Bad Signals)
Demand exceeds capacity (business is lost)
Demand exceeds optimum capacity (quality declines)
Excess capacity (wasted resources)
CAPACITY UTILIZED
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 167
Defining Productive Capacity in Services
� Physical facilities to contain customers
� Physical facilities to store or process goods
� Physical equipment to process people, possessions, or information
� Labor used for physical or mental work
� Public/private infrastructure—e.g., highways, airports, electricity
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 168
Alternative Capacity Management Strategies
� Level capacity (fixed level at all times)
� Stretch and shrink� offer inferior extra capacity at peaks (e.g. bus/metro standees)� vary seated space per customer (e.g. elbow room, leg room)� extend/cut hours of service
� Chase demand (adjust capacity to match demand)� schedule downtime in low demand periods � use part-time employees� rent or share extra facilities and equipment� cross-train employees
� Flexible Capacity (vary mix by segment)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 169
Predictable Demand Patterns and Their Underlying Causes (Table 9-1)
Predictable Cycles of Demand Levels
�day�week�month �year�other
Underlying Causes of Cyclical Variations
�employment
�billing or tax payments/refunds
�pay days
�school hours/holidays
�seasonal climate changes
�public/religious holidays
�natural cycles (e.g. coastal tides)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 170
Causes of Seemingly Random Changes in Demand Levels
�Weather
� Health problems
� Accidents, Fires, Crime
� Natural disasters
Question: which of these
events can be predicted?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 171
Alternative Demand Management Strategies (Table 9-2)
� Take no action� let customers sort it out
� Reduce demand � higher prices� communication promoting alternative times
� Increase demand� lower prices� communication, including promotional incentives� vary product features to increase desirability� more convenient delivery times and places
� Inventory demand by reservation system
� Inventory demand by formalized queueing
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 172
Hotel Room Demand Curves by Segment and by Season (Fig. 9-2)
Bh = business travelers in high season
Bl = business travelers in low season
Th = tourist in high season
Tl = tourist in low season
Bh
Bh
Bl
Bl
Th
Th
Tl
Tl
Price per Room Night
Quantity of Rooms Demanded at Each Price by Travelers in Each Segment in Each Season
Note: hypothetical example
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 173
Avoiding Burdensome Waits for Customers
� Add extra capacity so that demand can be met at most times (problem: may add too many costs)
� Rethink design of queuing system to give priority to certain customers or transactions
� Redesign processes to shorten transaction time
� Manage customer behavior and perceptions of wait
� Install a reservations system
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 174
Alternative Queuing Configurations (Fig. 9-4)
Single line, single server, single stage
Single line, single servers at sequential stages
Parallel lines to multiple servers
Designated lines to designated servers
Single line to multiple servers (“snake”)
“Take a number” (single or multiple servers)28
2921
20
24
23
30 25
3126
2732
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 175
Tailoring Queuing Systems to Market Segments: Criteria for Allocation to Designated Lines
� Urgency of job
� emergencies vs. non-emergencies
� Duration of service transaction
� number of items to transact� complexity of task
� Payment of premium price
� First class vs. economy
� Importance of customer
� frequent users/loyal customers vs. others
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 176
Ten Propositions on the Psychology of Waiting Lines (Table 9-3)
1. Unoccupied time feels longer
2. Preprocess/postprocess waiting feel longer than in-process
3. Anxiety makes waiting seem longer
4. Uncertain waiting is longer than known, finite waiting
5. Unexplained waiting seems longer
6. Unfair waiting is longer than equitable waiting
7. People will wait longer for more valuable services
8. Waiting alone feels longer than in groups
9. Physically uncomfortable waiting feels longer
10. Waiting seems longer to new or occasional usersSources: Maister; Davis & Heineke; Jones & Peppiatt
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 177
Benefits of Effective Reservations Systems
� Controls and smoothes demand
� Pre-sells service
� Informs and educates customers in advance of arrival
� Customers avoid waiting in line for service (if service times are honored)
� Data capture helps organizations prepare financial projections
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 178
Characteristics of Well-designed Reservations Systems
� Fast and user friendly for customers and staff
� Can answer customer questions
� Offers options for self service (e.g. Web)
� Accommodates preferences (e.g., room with view)
� Deflects demand from unavailable first choices to alternative times and locations
� Includes strategies for no-shows and overbooking� requiring deposits to discourage no-shows� canceling unpaid bookings after designated time� compensating victims of over-booking
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 179
Setting Capacity Allocation Sales Targets for a Hotel by Segment and Time Period (Fig. 9-5)
Out of commission for renovation
Executive service
guests
Transient guestsWeekend
package
Groups and conventions
Airline contracts
100%
50%
Week 7 (Low Season)
MNights: TuTime
W Th F S Sn
Executive service guests
Transient guests
W/Epackage
Groups (no conventions)
Airline contracts
Week 36 (High Season)
M Tu W Th F S Sn
Capacity (% rooms)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 180
Information Needed for Demand and Capacity Management Strategies
� Historical data on demand level and composition, noting responses to marketing variables
� Demand forecasts by segment under specified conditions
� Fixed and variable cost data, profitability of incremental sales
� Site-by-site demand variations
� Customer attitudes towards queuing
� Customer evaluations of quality at different levels of capacity utilization
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 181
Chapter 10
Planning the
Service Environment
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 182
The Purpose of Service Environments
The service environment influences buyer behaviour in 3 ways
� Message-creating Medium: symbolic cues to communicate the distinctive nature and quality of the service experience.
� Attention-creating Medium: to make the servicescape stand out from other competing establishments, and to attract customers from target segments.
� Effect-creating Medium: colors, textures, sounds, scents and spatial design to enhance the desired service experience, and/or to heighten an appetite for certain goods, services or experiences
Helps the firm to create a distinctive image & positioning that is unique.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 183
Comparison of Hotel Lobbies (Figure 10.1)
Four Seasons Hotel, New York
Orbit Hotel and Hostel, Los Angeles
The servicescape is part of the value proposition!
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 184
The Mehrabian-Russell Stimulus-Response Model (Figure 10.2)
Response Behaviors:
Approach/ Avoidance &
Cognitive Processes
Environmental Stimuli & Cognitive Processes
Dimensions of Affect:
Pleasure and Arousal
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 185
The Mehrabian-Russell Stimulus-Response Model
� Simple and fundamental model of how people respond to environments
� Peoples’ conscious and unconscious perceptions and interpretation of the environment influence how they feel in that environment
� Feelings, rather than perceptions or thoughts drive behavior
� Typical outcome variable is ‘approach’ or ‘avoidance’ of an environment, but other possible outcomes can be added to the model as well
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 186
The Russell Model of Affect
Arousing
Pleasant
Sleepy
Unpleasant
Exciting
RelaxingBoring
Distressing
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 187
The Russell Model of Affect
� Emotional responses to environments can be described along two main dimensions, pleasure and arousal.
� Pleasure is subjective depending on how much the individual likes or dislikes the environment
� Arousal quality of an environment is dependent on its “information load”, i.e., its degree of
� Novelty (unexpected, surprising, new, familiar) and
� Complexity (number of elements, extent of motion or change)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 188
Drivers of Affect
� Affect can be caused by perceptions and cognitive processes of any degree of complexity.
� Simple Cognitive Processes, Perception of Stimuli
�tangible cues (of service quality)�consumer satisfaction
� Complex Cognitive Processes
�affective charged schemata processing�attribution processes
The more complex a cognitive process becomes, the more powerful its potential impact on affect.However, most service encounters are routine. Simple processes can determine affect.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 189
Behavioral Consequence of Affect
� Basically, pleasant environments result in approach, and unpleasant environments result in avoidance
� Arousal acts as an amplifier of the basic effect of pleasure on behavior
� If the environment is pleasant, increasing arousal can lead to excitement and stronger positive consumer response. If the environment is unpleasant, increasing arousal level will move consumers into the Distressing region
� Feelings during the service encounter is also an important driver of customer loyalty
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 190
An Integrated Framework – Bitner’s ServiceScape Model (Figure 10.4)
Environmental Dimensions
Perceived ServiceScape
AmbientConditions
Space/Function
Signs,Symbols & Artefacts
CognitiveEmotional Psychological
Customer Response Moderator
Employee Responses
Approachor
Avoid
Approachor
Avoid
Social Interaction Between Customers & Employees
Holistic Environ-ment
Moderators Internal Responses Behaviour
Customer Responses
EmployeeResponse Moderator
CognitiveEmotional Psychological
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 191
An Integrated Framework – Bitner’s ServiceScape Model(con’t)
� Identifies the main dimensions in a service environment and views them holistically
� Customer and employee responses classified under, cognitive, emotional and psychological which would in turn lead to overt behavior towards the environment
� Key to effective design is how well each individual dimension fits together with everything else
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 192
Dimensions of the Service Environment
� Ambient Conditions
�Music (e.g, fast tempo and high volume increase arousal levels)
�Scent (strong impact on mood, affect and evaluative responses, purchase intention and in-store behavior)
�Color (e.g, warm colors associated with elated mood states and arousal but also increase anxiety, cool colors reduce arousal but can elicit peacefulness and calm)
Service environments are complex and have many design
elements. The main dimensions in the servicescape model
includes:
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 193
Dimensions of the Service Environment (con’t)
� Spatial Layout and Functionality
�Layout refers to size and shape of furnishings and the ways it is arranged
�Functionality is the ability of those items to facilitate performance
� Signs, Symbols and Artifact
�Explicit or implicit signals to communicate the firm’s image, help consumers find their way and to convey the rules of behavior
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 194
Impact of Music on Restaurant Diners (Table 10-2)
Restaurant
Patron
Behavior
Fast-beat
Music
Environment
Slow-beat
Music
Environment
Difference between
Slow and Fast-beat
Environments
Absolute
Difference
%
Difference
Consumer time spent at table
45min 56min +11min +24%
Spending on food
$55.12 $55.81 +$0.69 +1%
Spending on beverages
$21.62 $30.47 +$8.85 +41%
Total spending $76.74 $86.28 +$9.54 +12%
Estimated gross margin
$48.62 $55.82 +$7.20 +15%
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 195
The Effects of Scents on the Perceptions of Store Environments (Table 10-3)
Evaluation Unscented Environment Mean Ratings
Scented Environment Mean Ratings
Difference
Store Evaluation
Negative/positive 4.65 5.24 +0.59
Outdated/modern 3.76 4.72 +0.96
Store Environment
Unattractive/attractive
4.12 4.98 +0.86
Drab/colorful 3.63 4.72 +1.09
Boring/Stimulating 3.75 4.40 +0.65
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 196
The Effects of Scents on the Perceptions of Store Environments (Table 10-3)
Evaluation Unscented Environment Mean Ratings
Scented Environment Mean Ratings
Difference
Merchandise
Outdated/up- to-date style
4.71 5.43 +0.72
Inadequate/adequate 3.80 4.65 +0.85
Low/high quality 4.81 5.48 +0.67
Low/high price 5.20 4.93 -0.27
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 197
Aromatherapy: The Effects of Fragrance on People (Table 10-4)
Fragrance Aromatherapy
Aromatherapy Class
Traditional Use
Potential Psychological Impact on People
Orange Citrus Calming Soothing agent, astringent
Calming and relaxing effect esp. for nervous people
Lavender Herbaceous
Calming, balancing, soothing
Muscle relaxant, soothing agent
Relaxing and calming, helps create a homey and comfortable feel
Jasmine Floral Uplifting, balancing
Emollientsoothing agent
Helps makes people feel refreshed, joyful, comfortable
Peppermint Minty Energizing, stimulating
Skin cleanser
Increase attention level and boosts energy
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 198
Common Associations and Human Responses to Colors (Table 10-5)
Color Degree of Warmth
Nature Symbol
Common Association and Human Responses to Color
Red Warm Earth High energy and passion; can excite, stimulate, and increase arousal and blood pressures
Orange Warmest Sunset Emotions, expressions, and warmth
Green Cool Grass and Trees
Nurturing, healing and unconditional love
Blue Coolest Sky and Ocean
Relaxation, serenity and loyalty
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 199
Selection of Environmental Design Elements
� There is a multitude of research on the perception and impact of environmental stimuli on behaviour, including:
�People density, crowding�Lighting�Sound/noise�Scents and odours�Queues
� No standard formula to designing the perfect combination of these elements.
�Design from the customer’s perspective�Design with a holistic view!
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 200
Tools to Guide in Servicescape Design
� Keen Observation of Customers’ Behavior and Responses
to the service environment by management, supervisors, branch managers, and frontline staff
� Feedback and Ideas from Frontline Staff and Customers
using a broad array of research tools ranging from suggestion boxes to focus groups and surveys.
� Field Experiments can be used to manipulate specific dimensions in an environment and the effects observed.
� Blueprinting or Service Mapping - extended to include the physical evidence in the environment.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 201
Chapter 11
Managing People
for Service Advantage
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 202
Frontline Service Personnel: Source of Customer Loyalty and Competitive Advantage
� Frontline is an important source of differentiation and
competitive advantage. It is:
� a core part of the product � the service firm � the brand
� Frontline also drives customer loyalty, with employees
playing key role in anticipating customer needs,
customizing service delivery and building personalized
relationships
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 203
Boundary Spanning Roles
� Boundary spanners link the inside of the organization to the outside world
� Multiplicity of roles often results in service staff having to pursue both operational and marketing goals
� Consider management expectations of restaurant servers:
� deliver a highly satisfying dining experience to their customers
� be fast and efficient at executing operational task of serving customers
� do selling and cross selling, e.g. “We have some nice desserts to follow your main course”
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 204
Role Stress in the Frontline
� Person vs. Role: Conflicts between what jobs require and employee’s own personality and beliefs
� Organization vs. Customer: Dilemma whether to follow company rules or to satisfy customer demands
� Customer vs. Customer: Conflicts between customers that demand service staff intervention
3 main causes of role stress:
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 205
Emotional Labor
� “The act of expressing socially desired emotions during service transactions” (Hochschild, The Managed Heart)
� Three approaches used by employees
� surface acting � deep acting� spontaneous response
� Performing emotional labor in response to society’s or management’s display rules can be stressful
� Good HR practice emphasizes selective recruitment, training, counseling, strategies to alleviate stress
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 206
The Cycles of Failure, Mediocrity and Success
Too many managers make short-sighted assumptions about
financial implications of:
�Low pay�Low investment (recruitment, training)�High turnover human resource strategies
Often costs of short-sighted policies are ignored:
�Costs of constant recruiting, hiring & training�Lower productivity & lower sales of new workers�Costs of disruptions to a service while a job remains unfilled�Loss of departing person’s knowledge of business and customers�Cost of dissatisfied customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 207
Cycle of Failure (Fig. 11.1)
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
Source: Schlesinger and Heskett
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 208
Service Sabotage (Fig. 11-A)
Customary-Private Service Sabotage
Sporadic-Private Service Sabotage
Customer-Public Service Sabotage
Sporadic-Public Service Sabotage
‘Openness’ of Service Sabotage BehaviorsCovert Overt
‘No
rma
lity
’ o
f S
erv
ice
Sa
bo
tag
e B
eh
av
iors
Routiniz
ed
Inte
rmitte
nt
e.g. Waiters serving smaller servings, bad beer or sour wine
e.g. Talking to guests like young kids and putting them down
e.g. Chef occasionally purposefully slowing down orders
e.g. Waiters spilling soup onto laps, gravy onto sleeves, or hot plates into someone’s hands
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 209
Cycle of Mediocrity (Fig. 11.2)
Good wages/benefits high job
security
Other suppliers (if any) seen as equally poor
Customers trade horror stories
Service not focused on customers’ needs
Employees spendworking life
in environment of mediocrity
Narrow design of jobs
Success = not making mistakes
Complaints met by indifference or
hostility
Employee dissatisfaction
(but can’t easily quit) Emphasison rules
vs. pleasingcustomers
EPromotion and pay
increases basedon longevity,
lack of mistakes
Initiative is discouraged
Jobs are boring and repetitive; employees
unresponsive
Resentment at inflexibility andlack of employee initiative;complaints to employees
No incentive for cooperative relationship to obtain better service
Training emphasizes learning rules
Customer dissatisfaction
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 210
Cycle of Success (Fig. 11.3)
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
Train, empower frontlinepersonnel to control quality
Source: Heskett and Schlesinger
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 211
How to Manage People for Service Advantage?
1. Hire the right people
2. Enable your people
3. Motivate and energize your people
Staff performance is a function of both ability and motivation. How can we get able service employees who are motivated to productively deliver service excellence?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 212
Hire the Right People
“The old saying ‘People are your most
important asset’ is wrong.
The RIGHT people are your most
most important asset.”
Jim Collins
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 213
Recruitment
� The right people are a firm’s most important asset: take a focused, marketing-like approach to recruitment
� Clarify what must be hired versus what can be taught
� Clarify nature of the working environment, corporate values and style, in addition to job specs
� Ensure candidates have/can obtain needed qualifications
� Evaluate candidate’s fit with firm’s culture and values
� Fit personalities, styles, energies to the appropriate jobs
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 214
Select And Hire the Right People: (1) Be the Preferred Employer
Create a large pool: “Compete for Talent Market Share”
� What determines a firm’s applicant pool?
� Positive image in the community as place to work
� Quality of its services
� The firm’s perceived status
� There is no perfect employee
� Different jobs are best filled by people with different skills, styles or personalities
� Hire candidates that fit firm’s core values and culture
� Focus on recruiting naturally warm personalities
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 215
� Observe Behavior
� Hire based on observed behavior, not words you hear
� Best predictor of future behavior is past behavior
� Consider group hiring sessions where candidates given group tasks
� Personality Testing
� Willingness to treat co-workers and customers with courtesy, consideration and tact
� Perceptiveness regarding customer needs
� Ability to communicate accurately and pleasantly
Select and Hire the Right People:(2) How to Identify the Best Candidates
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 216
Select and Hire the Right People:(3) How to Identify the Best Candidates
� Employ Multiple, Structured Interviews
� Use structured interviews built around job requirements
� Use more than one interviewer to reduce similar to me effects
� Give Applicants a Realistic Preview of the Job
� Chance to have “hands-on” with the job
� Assess how the candidates respond to job realities
� Allow candidates to self select themselves out of the job
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 217
� The Organizational Culture, Purpose and Strategy
� Promote core values, get emotional commitment to strategy � Get managers to teach “why”, “what” and “how” of job.
� Interpersonal and Technical Skills
� Both are necessary but neither is sufficient for optimal job performance
� Product/Service Knowledge
� Staff’s product knowledge is a key aspect of service quality � Staff need to be able to explain product features and to position
products correctly
Train Service Employees
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 218
Factors Favoring Employee Empowerment
� Firm’s strategy is based on competitive differentiation and on personalized, customized service
� Emphasis on long-term relationships vs. one-time transactions
� Use of complex and non-routine technologies
� Environment is unpredictable, contains surprises
� Managers are comfortable letting employees work independently for benefit of firm and customers
� Employees seek to deepen skills, like working with others, and are good at group processes
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 219
Control vs. Involvement Model of Management
� Information about operating results and measures of competitive performance
� Rewards based on organizational performance (e.g. profit sharing, stock ownership)
� Knowledge/skills enabling employees to understand and contribute to organizational performance
� Power to influence work procedures and organizational direction (e.g. quality circles, self-managing teams)
Source: Bowen and Lawler
Control concentrates 4 key features at top of organization; Involvement pushes them down:
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 220
� Suggestion involvement � Employee recommendation
� Job involvement� Jobs redesigned � Employees retrained � Supervisors facilitate
� High involvement� Information is shared � Employees skilled in teamwork,
problem solving etc. � Participate in decisions � Profit sharing and stock ownership
Levels of Employee Involvement
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 221
Motivate and Energize the Frontline
� Job content
� Feedback and recognition
� Goal accomplishment
Use the full range of available rewards effectively, including:
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 222
The Inverted Organizational Pyramid (Fig. 11.5)
Frontline Staff
Top Mgmt
Middle Mgmt
Legend: = Service encounters, or ‘Moments of Truth.’
Traditional Organizational Pyramid
Inverted Pyramid with a Customer & Frontline Focus
Customer Base
Frontline Staff
Middle Mgmt & Top Mgmt
Support Frontline
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 223
The Wheel of Successful HR in Service Firms (Fig. 11.6)
Leadership that:
�Focuses the entire organization on supporting the frontline
�Fosters a strong service culture with passion for service and productivity
�Drives values that inspire, energize and guide service providers
1. Hire theRight People
3. Motivate &
Energize Your People
2. Enable Your People
�Be the preferred employer & compete
for talent market share
�Intensify the selection process
�Empower Frontline
�Build high performance service delivery teams
�Extensive Training
�Utilize the full range of rewards
Service Excellence& Productivity
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 224
Chapter 12
Managing Relationships
and Building Loyalty
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 225
Four Stages of Brand Loyalty in a Consumer
� Cognitive loyalty – perception from brand attribute information that one brand is preferable to its alternatives
� Affective loyalty – developing a liking for the brand based on cumulatively satisfying usage occasions
� Conative loyalty – commitment to rebuying the same brand
� Action loyalty – exhibiting consistent repurchase behavior
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 226
Loyalty is Important to Profitability : Index of Customer Profits over Time (Fig. 12.1)
Credit card Industrial laundry Industrial distribution Auto servicing
0
(Year 1=100)
50
250
300
350 –
100
150
200
Year 1 Year 2 Year 3 Year 4 Year 5
Based on data from Reichheld and Sasser
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 227
What Makes Loyal Customers More Profitable?
� Tend to spend more as relationship develops
�customer’s balances may grow�may consolidate purchases to one supplier
� Cost less to serve
� less need for information and assistance�make fewer mistakes
� Recommend new customers to firm (act as unpaid sales people)
� Trust leads to willingness to pay regular prices vs. shopping for discounts
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 228
Analyzing Why Customers Are More Profitable over Time (Fig. 12.2)
1 2 3 4 5 6 7
Year
Profit from price
premium
Profit from references
Profit from reduced
op. costs
Profit from increased
usage
Base Profit
Source: Reichheld and Sasser
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 229
Measuring Customer Equity:Calculating Life Time Value of Each Customer
� Value at Acquisition� revenues (application fee + initial purchase)� Less costs (marketing +credit check + account set up)
� Annual Value (project for each year of relationship)� revenues (annual fee + sales + service fees + value of referrals)� Less costs (account management + cost of sales + write-offs)
� Net Present Value � Determine anticipated customer relationship lifetime� Select appropriate discount figure� Sum anticipated annual values (future profits) at chosen discount
rate
� Customer Equity is total sum of NPVs of all current customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 230
Customer-Firm Relationship
� Database Marketing: Involves the use of technology by delivering differentiated service levels to consumers and subsequently tracking the relationship.
� Interaction Marketing: Usually in B2B context where people and the social process also add mutually beneficial value.
� Network Marketing: Common in B2B context where companies commit resources to develop positions in a network of relationships with the stakeholders and relevant agencies.
Today’s marketers seek to develop long-term relationships with customers. Relationship marketing includes:
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 231
Types of Relationships with Customers (Table 12.1)
Type of Relationship--Firm and Customer
Nature of Service Delivery
“Membership” No formal relationship
Continuous Cable TV Radio station
Insurance Police
College enrollment Lighthouse
Discrete transactions Subscriber phone Pay phone
Theater subscription Movie theater
Warranty repair Public transport
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 232
Basic Segmentation Issues: Building an Appropriate Customer Portfolio
� Target customers whose needs match firm’s capabilities
� Focus on value of prospective customers within each segment, not just numbers
� Avoid targeting customers who might abuse:�our employees, facilities�other customers
� Create a mix of segments to reduce risks of volatility during swings of economic cycles
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 233
Service-Relevant Segmentation Variables
� Timing of service use (e.g., by hour, day, season)
� Level of skill and experience as co-producer/self-server
� Preferred language in face-to-face contact
� Access to electronic delivery systems (e.g., Internet)
� Attitudes toward use of new service technologies
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 234
Identifying and Selecting Target Segments (Mgt Memo 12.2)
User characteristics� demographics
� psychographics
� geographic location
� benefits sought
User behavior � when, where, how services used
� quantity/value of purchases
� frequency of use
� profitability of relationship
� sensitivity to marketing variables
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 235
Portfolio of Professional Assignments (Fig. 12.4)
Analytical Work on Project Data
“Bread and Butter” Projects
Significant Projects
“Pacesetters”
Major, State-of-the-art challenges for the firm’s principals that give the firm high visibility
Demanding client assignments offering a learning experience for the firm’s most experienced associates
Routine client projects sharedamong principals and associates
Entry-level tasks for new associates or for research assistants & paraprofessionals
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 236
The Customer Pyramid (Fig. 12.5)
Lead
Iron
Gold
Which segment sees high value in our offer, spends more with us over time, costs less to maintain, and spreads positive word-of-mouth?
Which segment costs us in time, effort and money, yet does not provide the return we want? Which segment is difficult to do business with?
Platinum
Good Relationship Customers
Poor Relationship Customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 237
How Customers See Relational Benefits in Service Industries (Research Insights 12.1)
� Confidence benefits� less risk of something going wrong, less anxiety� ability to trust provider� know what to expect� get firm’s best service level
� Social benefits� mutual recognition, known by name� friendship, enjoyment of social aspects
� Special treatment benefits� better prices, discounts, special deals unavailable to others� extra services� higher priority with waits, faster service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 238
The Customer Satisfaction-Loyalty Relationship (Fig. 12.6)
0
20
40
60
80
100
1 2 3 4 5
Lo
ya
lty (
Re
ten
tio
n)
Verydissatisfied Dissatisfied
Neithersatisfied
nor dissatisfiedSatisfied
VerySatisfied
Satisfaction
Near Apostle
Zone of Defection
Zone of Indifference
Zone of Affection
Terrorist
Apostle
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 239
The Wheel of Loyalty (Fig. 12.7)
1. Build aFoundationfor Loyalty
2. Create LoyaltyBonds
3. Reduce Churn Drivers
CustomerLoyalty
�Be selective in acquisition
�Conduct churn diagnostic�Segment the market
�Use effective tiering of service.
�Deliver quality service.
�Deepen the relationship
�Give loyalty rewards
�Build higher level bonds
�Implement complaint handling & service recovery
�Address key churn drivers
�Increase switching costs
Enabled through:
� Frontline staff
�Account managers
�Membership programs
�CRM
Systems
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 240
Rewarding Value of Use, Not Just Frequency at British Airways (Best Practice in Action 12.2)
� Dedicated reservations
� Reservations assurance
� Priority waitlist and standby
� Advance notification of delays exceeding 4 hours
� Upgraded check-in
� Preferred boarding
� Special services assistance
� Bonus air miles
� Upgrade for two
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 241
Drivers of Service Switching (Fig. 12.9)
Service
Switching
Service Encounter Failures• Uncaring• Impolite• Unresponsive• Unknowledgeable
Response to Service Failure• Negative Response• No Response• Reluctant Response
Pricing• High Price• Price Increases• Unfair Pricing• Deceptive Pricing
Inconvenience• Location/Hours• Wait for Appointment• Wait for Service
Competition• Found Better Service
Ethical Problems• Cheat• Hard Sell
Involuntary Switching• Customer Moved• Provider Closed
Value Proposition
Others
Service Failure / Recovery
Core Service Failure• Service Mistakes• Billing Errors• Service Catastrophe
• Unsafe• Conflict of Interest
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 242
Common CRM Applications (Mgt Memo 12.2)
� Signifies the whole process by which relationships with customers are built and maintained.
� CRM as an enabler, offering a “unified customer interface” and allow firms to better understand and segment the customers etc. Applications include:
� Data collection
� Data analysis
� Sales force automation
� Marketing automation
� Call center automation
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 243
Customer Relationship Strategies with CRM Systems: Key Questions
� How should our value proposition change to increase customer loyalty?
� How much customization or one-to-one marketing and service delivery is appropriate and profitable?
� What is the incremental profit potential of increasing share of wallet with current customers? How much does this vary by customer tier and/or segment?
� How much time and resource can we allocate to CRM right now?
� If we believe in CRM, why have we not taken steps in that direction before? What can we do today to develop customer relationship without spending on technology?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 244
Chapter 13
Customer Feedback and Service Recovery
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 245
American Customer Satisfaction Index:Selected Industry Scores, 2002
Industry:
8579 80 79
74 71 7166
7076
65 62
0
10
20
30
40
50
60
70
80
90
100
3.7% 1.3% 0.0% 1.3% 2.8% 0.0% 0.0% 8.2% 2.9% -2.6% 4.8% 3.3%% Change 2002 vs 2001
Score
(Max = 100)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 246
Key Questions for Managers to Ask about Customer Complaining Behavior
�Why do customers complain?
�What proportion of unhappy customers complain?
�Why don’t unhappy customers complain?
�Who is most likely to complain?
�Where do customers complain?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 247
Courses of Action Open to a Dissatisfied Customer (Figure 13.1)
Service Encounter is Dissatisfactory
Take some form of public action
Take some form of private action
Take no action
Complain to the service firm
Complain to a third party
Take legal action to seek redress
Defect (switch provider)
Negative word-of-mouth
Any one or a combination of these responses is possible
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 248
Dimensions of Perceived Fairness in Service Recovery Process (Figure 13.2)
Procedural Justice
InteractiveJustice
OutcomeJustice
Complaint Handling & Service Recovery Process
Justice Dimensions of the Service Recovery Process
Customer Satisfaction with the
Service RecoverySource: Tax and Brown
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 249
Proportion of Unhappy Customers Who Buy Again Depending on the Complaint Process
9%
37%
19%
46%54%
70%
82%
95%
0
10
20
30
40
50
60
70
80
90
100
Customer did notcomplain
Complaint wasnot resolved
Complaintwas resolved
Complaint wasresolved quickly
Problem cost > $100 Problem cost $1 - 5
Source: TARP study
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 250
Impact of Effective Service Recovery on Retention
No
Problem
Problem
Unresolved
Customer Retention
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
84%
92%
46%
Source: IBM-Rochester study
Problem, but effectively
resolved
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 251
Components of an Effective Service Recovery System (Figure 13.3)
Learn from the Recovery Experience
Learn from the Recovery Experience
Resolve Complaints Effectively
Resolve Complaints Effectively
Identify Service Complaints
Identify Service Complaints
Effective Complaint Handling
Effective Complaint Handling
�Conduct Root CauseAnalysis
�Conduct Root CauseAnalysis
�Develop Effective System and Training in Complaints Handling
�Develop Effective System and Training in Complaints Handling
�Conduct Research
�Monitor Complaints
�Develop “Complaints as Opportunity” Culture
�Conduct Research
�Monitor Complaints
�Develop “Complaints as Opportunity” Culture
=+
Close the Loop via Feedback
Increased Satisfaction and Loyalty
Increased Satisfaction and Loyalty
Do the Job Right the First Time
Do the Job Right the First Time
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 252
Strategies to Reduce Customer Complaint Barriers (Table 13.1)
Complaint Barriers for Dissatisfied Customers
Strategies to Reduce These Barriers
Inconvenience� Difficult to find the right complaint
procedure.� Effort, e.g., writing a letter.
Make feedback easy and convenient by:� Printing Customer Service Hotline
numbers, e-mail and postal addresses on all customer communications materials.
Doubtful Pay Off� Uncertain whether any action, and
what action will be taken by the firm to address the issue the customer is unhappy with.
Reassure customers that their feedback will be taken seriously and will pay off by:
� Having service recovery procedures in place, and communicating this to customers.
� Featuring service improvements that resulted from customer feedback.
Unpleasantness� Complaining customers fear that
they may be treated rudely,� may have to hassle, or� may feel embarrassed to complain.
Make providing feedback a positive experience:
� Thank customers for their feedback. � Train the frontline not to hassle and make
customers feel comfortable.� Allow for anonymous feedback.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 253
How to Enable Effective Service Recovery
� Be proactive—on the spot, before customers complain
� Plan recovery procedures
� Teach recovery skills to relevant personnel
� Empower personnel to use judgment and skills to develop recovery solutions
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 254
Guidelines for Effective Problem Resolution (Management Memo 13.1)
�Act fast
�Admit mistakes but don’t be defensive
�Understand problem from customer’s viewpoint
�Don’t argue
�Acknowledge customer’s feelings
�Give benefit of doubt
�Clarify steps to solve problem
�Keep customers informed of progress
�Consider compensation
�Persevere to regain goodwill
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 255
Service Guarantees Help Promote and Achieve Service Loyalty
�Force firms to focus on what customers want
�Set clear standards
�Highlights cost of service failures
�Require systems to get & act on, customer feedback
�Reduce risks of purchase and build loyalty
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 256
Types of Service Guarantees
� Single attribute-specific guarantee – one key service attribute is covered
� Multiattribute-specific guarantee – a few important service attributes are covered
� Full-satisfaction guarantee – all service aspects covered with no exceptions
� Combined guarantee – like the full-satisfaction, adding explicit minimum performance standards on important attributes
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 257
The Hampton Inn 100% Satisfaction Guarantee (Figure 13.4)
�What are the benefits of such a guarantee?
� Are there any downsides?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 258
Key Objectives of Effective Customer Feedback Systems
�Assessment and benchmarking of service quality and performance
�Customer-driven learning and improvements
�Creating a customer-oriented service culture
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 259
Building a Customer Feedback System
� Total market surveys
� Post-transaction surveys
� Ongoing customer surveys
� Customer advisory panels
� Employee surveys/panels
� Focus groups
� Mystery shopping
� Complaint analysis
� Capture of service operating data
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 260
Strengths and Weakness of Key Customer Feedback Collection Tools (Table 13.3)
Selection of a cocktail of effective customer feedback collection tools.
Potential for Service Recovery
Collection Tools
Multi-level MeasurementAction-
able
Represen-tative,
Reliable
FirstHand
Learning
Cost EffectiveService
SatisfactionProcess
SatisfactionSpecific
Feedback
Total Market Survey (inclu. competitors)
Annual Survey on overall satisfaction
Transactional Survey (process specific)
Service Feedback Cards (process specific)
Mystery Shopping (service testers)
Unsolicited Feedback Recd(Online feedback system)
Focus Group Discussions
Service Reviews
Meets Requirements: Fully Moderate Little/Not at all
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 261
Entry Points for Unsolicited Feedback
� Employees serving customers face-to-face or by phone
� Intermediaries acting for original supplier
� Managers contacted by customers at head/regional office
� Complaint cards mailed or placed in special box
� Complaints passed to company by third-party recipients
�consumer advocates�trade organizations� legislative agencies�other customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 262
Chapter 14
Improving Service Quality
and Productivity
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 263
Importance of Productivity and Quality for Service Marketers
Productivity
� Helps to keep costs down� lower prices to develop market, compete better� increase margins to permit larger marketing budgets� raise profits to invest in service innovation
� May impact service experience (must avoid negatives)
� May require customer involvement, cooperation
Quality
� Gain competitive advantage, maintain loyalty
� Increase value (may permit higher margins)
� Improve profits
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 264
Perspectives on Service Quality
Transcendental: Quality = excellence. Recognized only through experience
Quality is precise and measurable
Quality lies in the eyes of the beholder
Quality is conformance to the firm’s developed specifications
Quality is a trade-off between price and value
Product-Based:
User-Based:
Manufacturing-
Based:
Value-Based:
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 265
Dimensions of Service Quality
� Tangibles
� Reliability
� Responsiveness
� Assurance� competence,� courtesy� credibility� security
� Empathy
� access� communication� understanding of customer
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 266
Seven Service Quality Gaps (Fig. 14.1)
Customer experience relative to expectations
Advertising and sales promises
Customer interpretation
of communications
1. Knowledge Gap
2. Standards Gap
3. Delivery Gap
5. Perceptions Gap
7. Service Gap
Customer needsand expectations
Management definitionof these needs
Translation into
design/delivery specs
Execution of design/delivery specs
Customer perceptions of product execution
6. Interpretation Gap
4. I.C.Gap
MANAGEMENT
CUSTOMER
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 267
Prescriptions for Closing Service Quality Gaps (Table 14.3)
� Knowledge: Learn what customers expect--conduct research, dialogue, feedback
� Standards: Specify SQ standards that reflect expectations
� Delivery: Ensure service performance matches specs--consider roles of employees, equipment, customers
� Internal communications: Ensure performance levels match marketing promises
� Perceptions: Educate customers to see reality of service delivery
� Interpretation: Pretest communications to make sure message is clear and unambiguous.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 268
Hard and Soft Measures of Service Quality
� Hard measures refer to standards and measures that can be counted, timed or measured through audits
� typically operational processes or outcomes� e.g. how many trains arrived late?
� Soft measures refer to standards and measures that cannot easily be observed and must be collected by talking to customers, employees or others
� e.g. SERVQUAL, surveys, and customer advisory panels.
� Control charts are useful for displaying performance over time against specific quality standards.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 269
Hard Measures of Service Quality
� Control charts to monitor a single variable
� Service quality indexes
� Root cause analysis (fishbone charts)
� Pareto analysis
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 270
Composition e of FedEx’s Service Quality Index (SQI) (Table 14.4)
Late Delivery – Right Day Late Delivery – Wrong DayTracing request unanswered Complaints reopened Missing proofs of delivery Invoice adjustments Missed pickups Lost packages Damaged packages Aircraft Delays (minutes) Overcharged (packages missing label) Abandoned calls
151511101010551
Failure Type
Total Failure Points (SQI) =
Weighting Factor
XXX,XXX
Daily Points
XNo of
Incidents=
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 271
Control Chart: Percent of Flights Leaving within 15 Minutes of Schedule (Fig. 14.2)
J F M A M J J A S O N D
60%
70%
80%
90%
100%
Month
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 272
Tools to Address Service Quality Problems
� Fishbone diagrams: A cause-and-effect diagram to identify potential causes of problems.
� Pareto charts: Separating the trivial from the important. Often, a majority of problems is caused by a minority of causes i.e. the 80/20 rule.
� Blueprinting: A visualization of service delivery. It allows one to identify fail points in both the frontstage and backstage.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 273
Cause and Effect Chart for Airline Departure Delays (Fig. 14.3)
Aircraft late to gate
Late food service
Late fuel
Late cabin cleaners
Poor announcement of departures
Weight and balance sheet late
Delayed Departures
Delayed check-in procedure
Acceptance of late passengers
Facilities, Equipment
Front-StagePersonnel
Procedures
Materials,Supplies
Customers
Gate agents cannot process
fast enough
Late/unavailableairline crew
Arrive lateOversized bags
Weather Air traffic
Frontstage Personnel
Procedure
Materials, Supplies
BackstagePersonnel
Information
Customers
Other Causes
MechanicalFailures
Late pushback
Late baggage
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 274
Analysis of Causes of Flight Departure Delays (Fig. 14.4)
Late passengers
Waiting for pushback
Waiting for fueling
Late weight and balance sheet
Late cabin cleaning / supplies
Other
Newark
All stations, excludingChicago-Midway Hub
Washington Natl.
23.1%23.1%
23.1%15.3%
15.4%
53.3%
15%
11.3%
8.7%
11.7%
33.3%
33.3%19%
9.5%
4.9%
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 275
Return on Quality (ROQ)
� ROQ approach is based on four assumptions:
� Quality is an investment
� Quality efforts must be financially accountable
� It’s possible to spend too much on quality
� Not all quality expenditures are equally valid
� Implication: Quality improvement efforts may benefit from being related to productivity improvement programs
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 276
When Does Improving Service Reliability Become Uneconomical? (Fig. 14.5)
Se
rvic
e R
eli
ab
ilit
y
100%
A B
InvestmentSmall Cost,
Large ImprovementLarge Cost,
Small Improvement
C D
Satisfy Target Customers Through Service Delivery as
Planned
Satisfy Target Customers Through
Service Recovery
Optimal Point of Reliability: Cost of Failure = Service
Recovery
Assumption: Customers are equally (or even more) satisfied with the service recovery provided than with a service that is delivered as planned.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 277
Productivity in a Service Context
� Productivity measures amount of output produced relative to the amount of inputs.
� Improvement in productivity means an improvement in the ratio of outputs to inputs.
� Intangible nature of many service elements makes it hard to measure the productivity of service firms, especially for information based services.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 278
Efficiency, Effectiveness, and Productivity
� Efficiency: comparison to a standard--usually time-based (e.g., how long employee takes to perform specific task)
� Problem: focus on inputs rather than outcomes
� May ignore variations in quality or value of service
� Effectiveness: degree to which firm is meeting its goals
�Cannot divorce productivity from quality/customer satisfaction
� Productivity: financial valuation of outputs to inputs
� Consistent delivery of outcomes desired by customers should command higher prices
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 279
Measuring Service Productivity
� Traditional measures of service output tend to ignore variations in quality or value of service
� That is, they focus on outputs rather than outcomes, and stress efficiency but not effectiveness.
� Firms that are more effective in consistently delivering outcomes desired by customers can command higher prices. Furthermore, loyal customers are more profitable.
� Measures with customers as denominator include:
� profitability by customer� capital employed per customer� shareholder equity per customer
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 280
Questions to Ask When Developing Strategies to Improve Service Productivity
� How to transform inputs into outputs efficiently?
�Will improving productivity hurt quality?
�Will improving quality hurt productivity?
� Are employees or technology the key to productivity?
� Can customers contribute to higher productivity?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 281
Operations-driven vs. Customer-driven Actions to Improve Service Productivity
Operations-driven strategies
�Control costs, reduce waste
�Set productive capacity to match average demand
�Automate labor tasks
�Upgrade equipment and systems
�Train employees
�Leverage less-skilled employees through expert systems
Customer-driven strategies
�Change timing of customer demand
�Involve customers more in production
�Ask customers to use third parties
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 282
Backstage and Frontstage Productivity Changes: Implications for Customers
� Backstage improvements can ripple to the front stage and affect customers
� e.g., new printing peripherals may affect appearance of bank statements.
� Front-stage productivity enhancements are especially visible in high contact services.
� Some may just require passive acceptance by customers
� Others require customers to change their scripts and behavior.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 283
Overcoming Customers’ Reluctance to Accept Changes in Environment and Behavior
� Develop customer trust
� Understand customers’ habits and expectations
� Pretest new procedures and equipment
� Publicize the benefits
� Teach customers to use innovations and promote trial
� Monitor performance, continue to seek improvements
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 284
Six Sigma Methodology to Improve and Redesign Customer Service Processes
Process Improvement Process Design/Redesign
Define �Identify the problem �Define requirements �Set goals
�Identify specific or broad problems �Define goal/change vision �Clarify scope & customer requirements
Measure �Validate problem/process �Refine problem/goal�Measure key steps/inputs
�Measure performance to requirements �Gather process efficiency data
Analyze �Develop causal hypothesis �Identify root causes �Validate hypothesis
�Identify best practices �Assess process design �Refine requirements
Improve �Develop ideas to measure root causes �Test solutions �Measure results
�Design new process �Implement new process, structures and
systems
Control �Establish measures to maintain performance �Correct problems if needed
�Establish measures & reviews to maintain performance�Correct problems if needed
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 285
Chapter 15
Organizing for Service Leadership
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 286
Customer-Led versus Market-OrientedPhilosophies of Management
� Firms may lose market leader position if listen too closely to current customers
� Service leadership requires curiosity, risk taking
� Customer-led businesses focus on understanding expressed desires of customers in currently served markets
� Market-oriented businesses commit to understand current/ latent customer desires plus competitors’ plans, capabilities
� Scan market more broadly, have longer-term focus� Work closely with lead users (windows to future vs. anchors to
past)� Combine traditional research with experimentation, observation
� Conclusion: Pursue customer satisfaction, but set limits on being led by customers, especially during rapid change
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 287
The Service Profit Chain (Fig. 15.1)
Loyalty
Service Quality
Productivity& OutputQuality
EMPLOYEES
Capability
Satisfaction
ServiceValue
CUSTOMERS
Satisfaction Loyalty
RevenueGrowth
Profitability
Operating strategy andservice delivery system
Serviceconcept
Target Market
Internal External
• Workplace design• Job design• Selection and development• Rewards and recognition• Information and communication• Tools for serving customers
Quality and productivityimprovements yieldhigher service qualityand lower costs
• Lifetime value• Retention• Repeat business• Referral
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 288
Causal Links in the Service Profit Chain (Table 15.1)
� Customer loyalty drives profitability and growth
� Customer satisfaction drives customer loyalty
� Value drives customer satisfaction
� Employee productivity and retention drive value
� Employee loyalty drives productivity
� Employee satisfaction drives loyalty and productivity
� Internal quality drives employee satisfaction
� Top management leadership underlies chain’s success
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 289
Integrating Three Functional Imperatives(recap from Chapter 1)
Customers
Marketing
ImperativeHuman Resources
Imperative
Operations Imperative
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 290
Defining Three Functional Imperatives
� Marketing Imperative � Target “right” customers and build relationships
� Offer solutions that meet their needs� Define quality package with competitive advantage
� Operations Imperative� Create, deliver specified service to target customers� Adhere to consistent quality standards� Achieve high productivity to ensure acceptable costs
� Human Resource Imperative� Recruit and retain the best employees for each job � Train and motivate them to work well together� Achieve both productivity and customer satisfaction
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 291
Reducing Intra-Organizational Tension
� Transfers and cross training
� Cross functional taskforces
� New tasks and new people
� Process management teams
� Gain-sharing programs
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 292
The Search for Synergy:A Top Management Perspective
What do we want?
What can we do?
What do our
customers want?
What do our employees,
intermediaries, and
other partners want?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 293
From Losers to Leaders: Moving Up the Service Performance Ladder
��Service LeadersService Leaders� Crème de la crème of their respective industries
� Names synonymous with outstanding service, customer delight
�Service Professionals� Clear positioning strategy
� Sustained reputation for meeting customer expectations
�Service Non-entities� Traditional operations mindset
� Rudimentary marketing, often emphasizing price discounts
� Service Losers� Only survive because of lack of viable alternatives in marketplace
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 294
Achieving Service Leadership by Focusing on Role of Each Functional Area
�Marketing: move from tactical to innovative and strategic
�Operations: move from reactive/cost oriented to focused, innovative, well coordinated with marketing and HR
�Human Resources: move from tight control of low-cost workers to quality of employees as strategic advantage
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 295
Leadership for Change Management Involves Eight Stages
� Create sense of urgency to develop impetus for change
� Put together strong team to direct process
� Create appropriate vision of where organization must go
� Communicate new vision broadly
� Empower employees to act on vision
� Produce sufficient short term results to create credibility
� Build momentum to tackle tougher problems
� Anchor new behaviors in the organizational culture
Source: John Kotter
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 296
Leadership Qualities Needed in Service Organizations
� Vision, charisma, persistence, high expectations, expertise, empathy, persuasiveness, integrity
� Ability to visualize quality of service as foundation for competing
� Believe in people who work for the firm, make good communications a priority
� Possess a natural enthusiasm for the business, teach it to others, pass on nuances, secrets, crafts of operating
� Cultivate leadership qualities of others in organization
� Use values to navigate firms through difficult times
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 297
Transformational Leadership May Require Changing Corporate Culture
� Corporate Culture:
� Shared perceptions regarding what is important� Shared values about what is right and wrong� Shared understanding about what works and what doesn’t� Shared beliefs about why these things are important
� Shared styles of working and relating to others
� Climate for Service--Tangible working environment atop underlying culture. Influential factors include:
� Shared perceptions concerning practices, procedures and types of behaviors that get rewarded
� Clarity about mission and values, level of commitment to common purpose
� Flexibility: freedom to innovate, sense of responsibility, standards