A project report on service marketing

TOPICS IN SERVICES MARKETING

S. Section Pages
No.
1 Service Marketing 2-8
2 GAPS Model 9-10
3 Decision making & Evaluation of 11-18
Services
4 Customers Expectation of Service 19-32
5 Building Customer Relationship 33-44
6 Service Blue Printing 45-47
7 Marketing Information System 48-49
8 Employees Role in Service Delivery 50-55
9 Customers Role in Service Delivery 55-60
10 Managing Demand and Supply 60-68
11 Yield Management 68-69
12 Pricing of Services 69-73

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Projectsformba.blogspot.com Services Marketing

SERVICES MARKETING

Services are deeds, processes and performances.

Services include all economic activities whose output is not a physical product or construction, is
generally consumed at the time it is produced, and provides added value in forms (such as convenience,
amusement, timeliness, comfort or health) that are essentially intangible concerns of its first purchaser.

Ex.: Transportation, Communication, Educational services etc.

Services Vs Customer Service

Customer service is the service provided in support of a company’s core products. This core product
could also be a service.

Services tend to be more intangible than manufactured products and manufactured products tend to be
more tangible than services.

31% 24% 46%
1970

36% 26% 38%
1980

1995 41% 31% 31%

2005 61% 19% 20%

SERVICES NDUSTRY AGRICULTURE

% AGE OF GDP IN INDIA

Thus we see in India over the years the services are contributing more towards the GDP as compared to
what it was couple of decades ago.

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Tangibility Spectrum

Salt
Soft drinks
Detergents

Automobiles
Cosmetics

Fast food outlets

Intangible Dominant

Tangible Dominant

Fast food outlets

Advertising
Agencies

Airlines

Investment

Management

Consulting

Teaching

The above diagram shows us that there are no pure products or pure services. Instead services tend to be
more intangible than manufactured products, and manufactured products tend to be more tangible than
services.

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Differences between Goods and Services
________________________________________________________________________________

Goods Services Resulting Implication
________________________________________________________________________________

Tangible Intangible Services cannot be inventoried
Cannot be readily displayed or communicated
Pricing is difficult

Production separate Simultaneous Customers participate in and affect the
from consumption transaction.
Customers affect each other.
Employees affect service outcome.
Decentralization may be essential.
Mass production is difficult.

Standardized Variability/ Heterogeneous Service delivery and customer
satisfaction depend on employees
actions.
Service quality depends on many
uncontrollable factors.
There is no sure knowledge that the
planned and promoted.

Non-perishable Perishable It is difficult to synchronize supply and
demand with services.
Services cannot be returned or resold.

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The Service Marketing Triangle

“Building service relationships: It’s all about promises.”

COMPANY

Internal Marketing
(Enabling promises)
External Marketing
(Making promises)

PROVIDERS CUSTOMERS

Interactive marketing
(Keeping promises)

The Services Triangle and Technology

Company

Technology

Providers Customers

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“Understanding and leveraging the role of customer service in external, interactive and internal
marketing.”

Expanded Marketing Mix for Services

Product Place

Physical Good Features Channel Type
Quality Level Exposure
Accessories Intermediaries
Packaging Outlet Locations
Warranties Transportation
Product Lines Storage
Branding Managing Channels

Promotion Price

Promotion Blend
Flexibility
Sales People: Price Level
Number Terms
Selection Differentiation
Training Discounts
Incentives Allowances
Advertising
Targets
Media Types
Types of Ads
Copy thrust
Sales Promotion
Publicity

People Physical Evidence Process

Employees Facility Design Flow of activities
Recruitment Equipment Standardized
Training Signage Customized
Motivation Employee Dress No. of steps
Rewards Other tangibles Simple
Teamwork Reports Complex
Customers Business cards Customer Involvement
Education Statements
Training Guarantees

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Expanded Mix for Services

Apart from Product, place, promotion and price, for Services we have People, Physical Evidence and
Process

1) People: All human actors who play part in service delivery and thus influence the buyers
perceptions namely, the firms personnel, the customer and other customers in the service
environment.

2) Physical evidence: The environment in which the service is delivered and where the firm and the
customer interact, and any tangible component that facilitate performance or communication of
the service.

3) Process: The actual procedures mechanisms, the flow of activities by which the service is
delivered- the service delivery and operating system.

Marketing of Services: Issues and Challenges

1. Performance itself is the product.
2. Services are produced after they are sold.
3. Core benefit in services is intangible.
4. Producers of service play the dual role of marketers.
5. Differentiating is difficult in services.
6. Service quality has many dimensions.
7. People factor is important.
8. Customer’s behavioral response affects service quality.

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CONTINUUM OF EVALUATION FOR DIFFER TYPES OF PRODUCTS

HIGH IN SEARCH HIGH IN EXPERIENCE HIGH IN CREDENCE
QUALITIES QUALITIES QUALITIES

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GAPS MODEL OF SERVICE QUALITY

EXPECTED
SERVICE

Customer Gap 5
PERCEIVED
SERVICE

GAP 1
SERVICE EXTERNAL
DELIVERY COMMUNICATIONS
TO CUSTOMERS
GAP 3 GAP 4

CUSTOMER- DRIVEN
SERVICE DESIGNS
AND STANDARDS

GAP 2

COMPANY PERCEPTIONS OF
CONSUMER
EXPECTATIONS

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THE CUSTOMER GAP

EXPECTED
SERVICE

CUSTOMER
GAP
PERCEIVED
SERVICE

The Provider Gaps

Gap 1- Not knowing what customers expects.

Gap 2 - Not selecting the right service designs & standards

Gap 3 - Not delivering to service standards

Gap 4 – not matches performance to promises

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CATEGORIES IN CONSUMER DECISION MAKING AND EVALUATION OF SERVICES.

INFORMATION
EVALUATION OF
SEARCH
ALTERNATIVES
USE OF PERSONAL
EVOKED SET
SOURCES
EMOTION AND MOOD
PERCEIVED RISK

CULTURE
Values & Attitudes
Manners & Customs
Material culture
Aesthetics
Educational & social
institution
Language

PURCHASE &
CONSUMPTION POST PURCHASE
SERVICE PROVISIO AS EVALUATION
DRAMA ATTRIBUTION OF
SERVICE ROLES AND DISSATISFACTION
SCRIPTS. INNOVATION DIFFUSION
COMPATABILITY OF BRAND LOYALTY
CUSTOMERS

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SERVICES: CATEGORIES IN THE DECISION-MAKING PROCESS

For Services the sequence of information search, Evaluation of alternatives, Purchase and consumption &
Post purchase evaluation do not occur in a linear sequence the way they most often do in purchase of
goods.

INFORMATION SEARCH: -

• Use of personal source

For purchasing goods use of both personal and non-personal sources is done as both effectively
convey information about search qualities.

For services, consumers rely to a great extent on personal sources for several reasons.

As mass media can convey about search qualities but can communicate little about experience
qualities.

• Perceived risk

Compare to good more risk would be involved in purchase of services.

- Intangible nature
- Since services are non-standardized always more uncertainty would accompany about the
outcome each time it is purchased.
- Services not accompanied by any warranties.

EVALUATION OF SERVICE ALTERNATIVES

EVOKED SET

The evoked set of alternatives –that group of products a consumer considers acceptable options in a given
product category -is likely to be smaller with services than goods.

Reasons

1. Difference in retailing between goods and services

• Retail outlet would display competing brands in close proximity
• To purchase services on other hand, the consumer visits an establishment (e.g. a bank,
a drycleaner or a hair salon) that almost always offer only a single “brand” for sale

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2. Consumers are unlikely to find more than one or two businesses providing the same services in
a given geographic area, whereas they may find numerous retail outlets carrying the identical
manufacture’s product.

3. Difficulty to obtain adequate prepurchase information about services.

4. Or non professional services sometimes the consumer may perform the services for himself
e.g. cleaning homes themselves against hiring housekeepers, tax preparation etc.

Hence customers’ evoked set frequently includes self provision of the service.

SERVICE PURCHASE AND CONSUMPTION

Emotion and mood are feeling states that influence people’s (and therefore customers) perceptions and
evaluations of their experiences.

Moods are transient feeling states that occur at specific time and in specific situations.

Emotions are more intense stable and pervasive.

Any service characterized by human interaction is strongly dependent on the moods and emotions of the
service providers, the service customers and the other customers, and other customers receiving services
at the same time.

Ways in which mood can affect the behavior of service customer

• Positive moods can make customers more obliging and willing to participate in behaviors
that help service encounters succeed.
• Moods and emotions influence service encounters is to bias the way they judge service
encounters and providers. Evaluation of service is consistent with the polarity (positive or
negative) mood or emotion.
• Moods and emotion affect the way information about service is absorbed and retrieved.

Service marketers need to be aware of the moods and emotions of customers and service employees and
should attempt to influence those moods and emotions in positive ways.

SERVICE PROVISION AS DRAMA

Both service provision and drama aim to create and maintain a desirable impression before an audience.
The drama metaphor offers a useful way to conceive of service performances.

Among the aspects of a service that can be considered in this way are:
• Selection of personnel (auditioning the actors)
• Training of the personnel (rehearsing)
• Clearly defining the role (scripting the performance)

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• Creating the service environment (setting the stage)
• Deciding which aspect of the service should be performed in the presence of customer (on stage)
• Which should be performed in the backroom (back stage)

Importance Of Service Actors Increases When:

• Degree of personal contact increases (as in hospital, restaurant or resort)
• Services involve repeat contact and service actors have the discretion in determining the nature
of the service and how it is delivered ( as in education, medical services, legal services)

SERVICES ROLES AND SCRIPTS

Roles are defined as combinations of social clues that guide and direct behaviors in a given setting.
The success of any service performance depends in part on how well the “role set” or players- both
service employees and customers- act out their roles.

Service employees need to perform their roles according to expectations of the customers. The customer’s
role must also be performed well. If customers are informed and educated about the expectations and
requirements of the service.

If customer cooperates with the service provider to deliver the best possible service, the service
performance is likely to be successful.

One of the factors that most influences the effectiveness of role performance is a script.
A script is a coherent sequence of events expected by the individual, involving her either as a participants
or as an observer.

Conformance to scripts is satisfying to the customer while deviations leads to confusion and
dissatisfaction.

THE COMPATIBILITY OF SERVICE CUSTOMERS

The mere presence of customers in churches, restaurants, bars and spectacular sports is important.
If no one else shows up, customers will not get to socialize with others, one of the primary expectations in
these types of services.
However if number of customers becomes so dense that crowding occurs, customers may also be
dissatisfied.
Customers can be incompatible for many reasons –
• Difference in beliefs
• Values
• Experience
• Abilities to pay
• Appearance
• Age, health etc.

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The service marketer must anticipate, acknowledge and deal with heterogeneous customers who have the
potential to be incompatible.

The service marketer can also bring homogeneous customers together and solidify relationships between
them.

Customer compatibility is a factor that influences customer satisfaction, particularly in high contact
service.

POST PURCHASE EVALUATION

• Attribution Of Dissatisfaction

When a customer is dissatisfied with the services they purchased they may attribute their dissatisfaction to
provider and also to themselves (as they participate in the service process)

e.g. disappointed from a haircut ,the customer may blame

-The stylist (for lack of skill)
- Or herself (choosing the wrong style or not communicating her own needs)

The quality of many services depends on the information the customer brings to the service encounter.

e.g. - Doctor’s diagnosis depends greatly on this
- Dry cleaner’s success in removing a spot depends on the customer’s knowledge
of its cause

(Incase of products consumer’s main form of participation is the act of purchase. Consumer may attribute
failure to receive satisfaction to her own decision-making error, but hold the producer responsible for
product performance.)

Hence consumers may complain less frequently about services than about goods.

• Innovation Diffusion

The rate of diffusion of an Innovation depends on the Consumer’s Perceptions of the innovation with
regard to Five Characteristics:

• Relative Advantage
• Compatibility
• Communicability
• Divisibility
• Complexity

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Services as a group are less communicable, less divisible, more complex and probably less compatible
than goods.

Consumers adopt innovations in services more slowly than they adopt innovations of products.

Marketers may need to concentrate on incentives to trial when introducing a new service.

• Brand Loyalty

The degree to which consumers are committed to particular brands of goods or services depends on a
number of factors:
• Cost of changing brands (switching cost)
• Availability of substitutes
• Perceived risk associated with the purchase
• Degree to which they obtained satisfaction in past

Consumers are more brand loyal with services than products.
Brand loyalty has two sides.
The fact that a service provider’s own customers are brand loyal is not a problem.
The fact that customers of the provider’s competition are difficult to capture , however creates special
challenges.

Brand loyalty is described as a “ Means of economizing decision effort by substituting habit for repeated,
deliberate decision.”

This functions as a device for reducing the risk of consumer decision.

The Role Of Culture In Services

Culture is learned, shared, and transmitted from one generation to the next, and is multidimensional.

Culture would include:

1. Language (both verbal and non verbal)
2. Values and attitudes
3. Manners and customs
4. Material culture
5. Aesthetics
6. Education and social institutions

These cultural universals are manifestations of the “way of life” of any group of people.

Service marketers must be particularly sensitive to culture because of customer contact and interaction
with employees.

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Culture is important when we consider international services marketing – taking the service from one
country and offering them in others; but it is also critical within countries.

• VALUES AND ATTITUDES DIFFER ACROSS CULTURES

Values and attitudes help to determine what member of a culture think is right, important, and / or
desirable.

Consumer behaviors flow from values and attitudes; service marketers who want their services
adopted across cultures must understand these differences.

E.g.
US brands have ‘exotic’ appeal to other cultures, but USA cannot take it as a long-term strategy.
As nationalism in some cultures could work against this.

• MANNERS AND CUSTOMS

Manners and customs represent a culture’s views of appropriate ways of behaving.

It is important to monitor differences in manners and customs, because they can have direct affect
on the service customer.

E.g.
Central and western European employees are perplexed by western expectations that unhappy
workers put on a “happy face” when dealing with customers.

• MATERIAL CULTURE

Material culture consists of tangible products of culture. It is “the stuff we own” Why people own
and how they use and display material possessions varies around the world.

E.g.
Zoos in Japan very cramped compared to USA
Mortgages in Japan for houses 100yrs
USA 30yrs
India 20yrs

• AESTHETICS

Aesthetics refers to cultural idea about beauty and good taste. These are reflected in music, art,
drama, and dance as well as appreciation of color and form.

E.g.
Earthy tones of Japanese restaurants as against glossy red evident in their Chinese competitor’s
establishments.

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• EDUCATIONAL AND SOCIAL INSTITUTIONS

Both kinds of institutions are affected by and are transmission agents of culture. Education
includes the process of transmitting skills and knowledge, and thus may take place in school and
in less formal ‘training’ circumstances. The structure and functioning of each are heavily
influenced by culture. Culture manifests itself most dramatically in the people contact or our social
institutions

E.g.
Western way of imparting education in a session whenever you have a doubt you would ask from
the instructor. But in traditional eastern set up the students would learn by being with the
instructor and asking questions was not encouraged.

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CUSTOMER EXPECTATIONS OF SERVICE

Customer expectations are beliefs about service delivery that function as standards or reference
point against which performance is judged. Knowing what customer expects is the first and
possibly most critical step in delivering quality service.

EXPECTED SERVICE: - two levels of expectations

a. Desired service: - the service customer hopes to receive - the “wished for” level of performance.
b. Adequate service: - the level of service the customer will accept.

Desired Service

Zone of
Tolerance

Adequate Service

Dual customer expectation levels & the zone of tolerance

DESIRED SERVICE expectations seem to be the same for that defined by the customer
E.g.
Desired expectation of
1. Expensive restaurant
a. Elegant surroundings
b. Gracious employees
c. Candle light
d. And fine food

2. Fast food restaurant
a. Quick
b. Convenient
c. Tasty food in clean setting

The adequate service expectation level however is likely to vary for different firms within a
category.

E.g.
Within fast food restaurant, a customer may hold higher expectations for Mac Donald’s than for
Wimpy’s.

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ZONE OF TOLERANCE

As service are heterogeneous in that performance may vary across providers, across employees from the
same provider, and even within the same service employee.

The extent to which customer recognizes and are willing to accept this variation is called the zone of
tolerance.

The zone of tolerance can be considered as the range or window in which customers do not particularly
notice service performance. When it falls outside the range (either very low or very high), the services get
customer’s attention in either a positive or negative way.

Note: Marketer must understand not just the size and boundary levels for the zone of tolerance but also
when and how the tolerance zone fluctuates within a give customer.

DIFFERENT CUSTOMERS POSSESS DIFFERENT ZONES OF TOLEREANCE

E.g.
Busy customers who are pressed for the time and therefore desire short wait times in general would also
hold a constrained range for the length of acceptable wait times.

An individual customer’s zone of tolerance increases or decreases depending on a number of factors
including company-controlled factors such as price.

“Price increases don’t really drive up expectations. But tolerance level will become more stringent / less
flexible with the increase.”

ZONES OF TOLERANCE VARY FOR SERVICE DIMENSION

Customer’s tolerance zones also vary for different service attributes or dimensions. The more important
the factor, the narrower the zone of tolerance is likely to be.

In general customers are likely to be less tolerant about unreliable service (broken promises, service
errors) than other service deficiencies.

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Desired Service
Desired Service
Level of
expectatio

Zone of
Tolerance
Zone of
Adequate Service Tolerance

Adequate Service

Most important factors Least important factors

Zone of tolerance for different services

ZONE OF TOLERANCE VARY FOR FIRST-TIMEAND RECOVERY SERVICE

FIRST-TIME SERVICE

Outcome

Process

RECOVERY SERVICE

Outcome

Process

Low High

Expectations

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The fluctuation in the individual customer’s zone of tolerance is more a function of changes in adequate
service level which moves readily up and down due to situational circumstances than in desired service
level, which tends to move upward incrementally due to accumulated experiences.

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Nature & Determinants Of Customer Expectations Of Service

sensitivity to service.
Enduring Service Intensifiers Explicit Service Promises
Derived Expectations Advertising
Personal Service Philosophies Personal Selling
Contacts
Other Communications

Personal needs
Implicit Service Promises
Tangibles
Transitory Service Intensifiers Price
Emergencies
Service Problems
Word Of Mouth
Personal
Perceived Service Alternatives Desired Service “Expert” (Consumer Report
Publicity Consultants)
Self Perceives Service Role Expected Service
Zone of
Tolerance Past Experience

Situational Factors
Bad Weather Adequate Service
Catastrophe Predicted Service
Random Over Demand

Gap 5 (Customer Gap)

Perceived Service

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FACTORS INFLUENCING DESIRED SERVICES

ENDURING SERVICE
INTENSIFIERS
EXPECTED SERVICE

DESIRED SERVICE

PERSONAL NEEDS
ZONE
OF
TOLERANCE

ADEQUATE SERVICE

Personal Needs:- Those states or conditions essential to the physical or psychological well being of
the customer, are pivotal factors that share the level of desired service
Personal needs fall into
Physical, social and psychological functional categories.

Enduring Service Intensifiers:- Are individual stable factors that lead the customer to a
heightened sensitivity to service
Two factors under this are
Derived Service Expectations
Personal Service Philosophy

Derived Service Expectations:- When customer expectations are driven by another person or
group of people

Personal Service Philosophy:- The customer’s underlying generic attitude about the meaning of
services and the proper conduct of service providers

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e.g. Customers who have themselves been in service business would in general have strong
service philosophies.

CUSTOMER PERCEPTIONS OF SERVICE

Perceptions are always considered relative to expectations.

Customers perceive services in terms of the quality of the service and how satisfied they are overall
with their experiences.

Satisfaction is generally viewed as a broader concept while
Service quality assessment focuses on dimensions of service.

Internal and External Customer Perceptions

e.g. A telephone repair person depends on services provided by the dispatchers vehicle
maintenance crew, the repair person is the Internal Customer for the dispatchers and the
vehicle maintenance crew.

Any customer who calls up for the repair of his equipment is the External Customer for the
service repair person.

RELIABILITY

SITUATIONAL
RESPONSIVENESS FACTORS
SERVICE
QUALITY

ASSURANCE

CUSTOMER
PRODUCT SATISFACTION
QUALITY

EMPATHY

TANGIBLES PRICE
PERSONAL
FACTORS

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CUSTOMER PERCEPTIONS OF QUALITY AND CUSTOMER SATISFACTION

CUSTOMER SATISFACTION

Satisfaction of the customer’s evaluation of a product or service in terms of wherher that product or
services has met their needs and expectations.

Failure to meet needs and expectations is assumed to result in dissatisfaction with the product or
service.

CUSTOMER SATISFACTION IS INFLUENCED BY:-

1 PRODUCT AND SERVICE FEATURES:- Influence significantly customers satisfaction.
1.
e.g. For service such as resort hotel, important features might include the pool area, restaurants,
room comfort and privacy, helpfulness and courtesy of staff, room price and so forth

Through focus, companies would determine what the feature and attributes are for their
service and the measure perceptions of those features as well as overall satisfaction level.

Customer would make trade offs among different service features (e.g. price level V/s.
quality V/s. friendliness of personnel) depending on the type of service being evaluated and
the criticality of the service.

2 CONSUMER EMOTIONS:- Consumer’s emotions can also affect their perceptions of
satisfaction with products and services.

These emotions can be stable, pre-existing emotions mood state.

e.g. When you are at a very happy stage in your life (such as when you are on vacation), and
your good happy mood and positive frame of mind has influenced how you feel about the
services you experience.

3. ATTRIBUTIONS FOR SERVICE SUCCESS OR FAILURE:-

Attributions – the perceived causes of events- influence perception of satisfaction as well.

e.g. In a weight loss organization if a customer fails to lose weight as hoped for, she will likely
search for the causes – was it something that she did, was the diet plan ineffective, or did
circumstances simply not allow her to follow the diet regimen.

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For many services, customer’s atleast take partial responsibilities for how things turn out.

4 PERCEPTIONS OF EQUITY OR FAIRNESS:- customer satisfaction is influenced by
perception of equity and fairness.

e.g. Have I been treated fairly compared with other customers?

OUTCOMES OF CUSTOMER SATISFACTION

RELATION SHIP BETWEEN CUSTOMER SATISFACTION AND LOYALTY IN
COMPETITIVE INDUSTRY

100

80

60

40

20

1 2 3 4 5

Very Dissatisfied Neither Satisfied Very
Dissatisfied satisfied nor Satisfied
dissatisfied

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RELATIONSHIP BETWEEN CUSTOMER SATISFACTION AND LOYALTY IN
COMPETITIVE INDUSTRY

SERVICE QUALITY

Service quality is a focused evaluation that reflects the customer’s perception of specific dimensions
of services:- Reliability, Responsiveness, Assurance, Empathy, Tangibles.

PROCESS VERSUS TECHNICAL OUTCOME QUALITY

Ultimately the consumers judge the quality of services on their perceptions of the technical outcome
provided and on how that outcome was delivered.

e.g. Restaurant customer will judge the service on her perceptions of the meal (technical
outcome quality) and on how the meal was served and how the employees interacted wit her
(process quality)

When outcome is difficult to evaluate the customer will base their judgment of quality on process
dimensions

In most of the legal service or service where face to face interaction was their, courtesy was an
extremely powerful signal and the level of courtesy accounted for at least 60% of the variation in
how happy or angry a respondent was with the attorney.

SERVICE QUALITY DIMENSION

Research suggests that customers do not perceive quality as a unidimensional concept. That is,
customer’s assessment of quality include perception of multiple factors.

Researchers have found that consumers consider five dimensions in their assessment of service
quality;

• RELIABILITY:- Ability to perform the promised service dependably and accurately.

• RESPONSIVENESS:- Willingness to help customers and provide prompt service.

• ASSURANCE:- Employee’s knowledge and courtesy and their ability to inspire trust and
confidence

• EMPATHY:- Caring, individualized attention given to customers

• TANGIBLES:- Appearance of physical facilities, equipment, personnel, and written
material

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EXAMPLES OF HOW CUSTOMERS JUDGE THE FIVE DIMENSIONS OF SERVICE
QUALITY

CAR REPAIR INFORMATION
(COMSUMER) PROCESSING(INTERNAL)

Reliability Problem fixed the first time Provides needed information
and ready when promised when requested

Responsiveness Accessible; no waiting; Prompt response to requests;
responds to requests not “Bureaucratic”, deals with
problems promptly

Assurance Knowledge mechanics Knowledge staff: well trained;
credentials

Empathy Acknowledges customers by Knows internal customers as
name; remembers previous individuals; understands
problems and preferences individual and departmental
needs

Tangibles Repair facility; waiting area; Internal reports; office area;
uniforms; equipment dress of employees

BUILDING BLOCKS OF SATISFACTION AND SERVICE QUALITY

The service encounter or the moment of truth.

Interactive marketing

This is where the promises are kept or broken. Real time marketing

It is from these service encounters that customers build their perceptions.

SERVICE ENCOUNTER OR “MOMENTS OF TRUTH”

From a customer’s point of view, the most vivid impression of service occurs in the service
encounter, or the “moment of truth”.

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e.g. For a hotel customer service encounters are checking into the hotel, being taken into the room
by a bell boy, eating a restaurant meal, requesting a wake up call, checking out.

From the organizations point of view, each encounter thus presents an opportunity to prove its
potential as a quality service provider and to increase customer loyalty.

For Disney Amusement park – 74 customer encounters
For Mariott Hotel - 4 of the top 5 factors come into play in the first 10 minutes of the guest stay.

THE IMPORTANCE OF ENCOUNTERS

CHECK IN

BELL PERSON TAKES TO ROOM

RESTAURANT MEAL

WAKE UP CALL

CHECK OUT

A SERVICE ENCOUNTER CASCADE FOR A HOTEL VISIT

TYPES OF SERVICE ENCOUNTERS

A service encounter occurs every time a customer interact with the service organization:
There are three types of service encounters:-

1) REMOTE ENCOUNTER
2) PHONE
3) FACE-TO-FACE

1) REMOTE ENCOUNTER:- Encounters which occur without any direct human contacts (e.g.
ATM, Co having sent a bill).

In this encounters the tangible evidence of the service and the technical process and systems
become primary basis for judging.

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2) PHONE ENCOUNTERS:- There is a greater potential variability in the interaction compared to
remote encounter

Tone of voice, employee knowledge, and effectiveness / efficiency in handling customer issues
become important criteria for judging quality in these encounters.

3) FACE-TO-FACE ENCOUNTERS:- this is direct contact between an employee and a customer.

Determining and understanding service quality issues in face-to-face counters is the most
complex of all. Both verbal and non verbal behaviors are important determinants of quality, as
are tangible cues such as employees dress etc.

SOURCE OF PLEASURE AND DISPLEASURE IN SERVICE ENCOUNTERS

Critical incidence technique is used to get customers and employees to provide verbatim stories
about satisfying and dissatisfying service encounters they have experienced.

With this technique, customers (either internal or external) are asked the following questions:

 Think of a time when, as a customer you had a particularly satisfying (or dissatisfying)
interaction with –

 When did the incidence happen?

 What specific circumstances led up this situation?

 Exactly what did the employee (firm) say or do?

 What resulted that made you feel the interaction was satisfying (or
dissatisfying)?

 What could or should have been done differently?

On this basis of thousands on service encounter stories, four common themes-

1) RECOVERY (after failure)
2) ADAPTABILITY
3) SPONTANIETY
4) COPING

Have been identified as the sources of customer satisfaction / dissatisfaction in memorable service
encounter.

1) RECOVERY : Employee response to service delivery system pailures

2) ADAPTABILITY: Employee response to customer needs and requests

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3) SPONTANEITY: Unprompted and unsolicited employee action

4) COPING: Employee response to problem customers

GENERAL SERVICE BEHAVIORS – DO’S AND DON’T

THEME DO DON’T

Recovery Acknowledge problem Ignore customer blame
explain causes apologize customer leave customer to
“fend for him/herself”

Compensate / upgrade Downgrade
layout options Act as if nothing

Take responsibility “Pass the buck”

Adaptability Recognize the seriousness Ignore
of the need acknowledge
Promise, but fail to follow
Anticipate through show
unwillingness to try
Attempt to accommodate
Embarrass the customer
Adjust the system laugh at the customer
avoid responsibility “pass
Explain rules / policies the buck”
take responsibility

Spontaneity Take time be attentive Exhibit impatience ignore
anticipate needs listen yell / laugh / swear steal
provide information show from customer
empathy discriminate

Coping Listen Take customer’s
dissatisfaction personally

Try to accommodate Let customer’s
dissatisfaction affect others
Explain let go of the
customer

32

BUILDING CUSTOMER RELATIONSHIP

RELATIONSHIP MARKETING

There has been a shift from a transactions to a relationship focus in marketing.

Customers become partners and the firm must make long-term commitments to maintaining those
relationships with quality, service and innovation.

Relationship marketing essentially represents a paradigm shift within marketing-
Away from an acquisitions / transactions focus toward a retention / relationship focus.

Relationship marketing (or relationship management) is a philosophy of doing business, a strategic
orientation, that focuses on keeping and improving current customers, rather than acquiring new
customers.

Historically, marketers have been more concerned with acquisition of customers, so a shift to a
relationship strategy often represents :

• Change in mind set
• Organizational culture
• And employee reward systems.

GOALS OF RELATIONSHIP MARKETING

The primary goal of relationship marketing is to build and maintain a base of committed customers
who are profitable for the organization.

To achieve this goal, the firm will focus on the attraction, retention and enhancement of customer
relationships.

ENHANSING

RETAINING

SATISFYING

ACQUIRING

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CUSTOMER GOALS OF RELATIONSHIP MARKETING

Loyal customers not only provide a solid base for the organization, they may represent growth
potentials.

BENEFITS OF CUSTOMER / FIRM RELATIONSHIPS

Both parties benefit i.e., customer / firm from customer retention. It is not only in the best interest of
the organization to build and maintain a loyal customer base, but customers themselves also benefit
from long-term associations.

BENEFITS FOR CUSTOMERS

Customers will remain loyal to a firm when they receive greater value relative to what they expect
from competing firms

Value represents a trade-off for the consumer between the “given” and the “get” components.

Consumers are more likely to stay in a relationship when the gets (quality, satisfaction, specific
benefits) exceed the gives (monetary and non monetary costs)

Beyond the specific inherent benefits of receiving service value, customers also benefit in other
ways from long term associations with firm.

Research has uncovered specific types of relational benefits, these are:-

• CONFIDENCE BENEFITS
• SOCIAL BENEFITS
• SPECIAL TREATMENT BENEFITS

CONFIDENCE BENEFITS
These benefits comprise feelings of trust or confidence in the providers, alongwith a sense of a
reduced anxiety and comfort in knowing what to expect.

Across all of the services studied in the research just cited, confidence benefits were the most
important to customers.

e.g. Child Care Provider
Once the child care has been identified and established a satisfying relationship with a good
caregiver family stress is reduced and the quality of life improved.

SOCIAL BENEFITS
Overtime, customers develop a sense of familiarity and even a social relationship with their service
providers.

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In some long-term customer / firm relationship a service provider may actually become part of the
customer’s social support system.

A quote from the research where a customer describes her hair stylist: “I like him….. he’s really
funny and always has lots of good jokes. He’s kind of like a friends now…..it’s you’re used to. You
enjoy doing business with them”.

SPECIAL TREAMTEMT BENEFITS

Special treatment includes such things as getting the benefit of doubt, being given a special deal or
price, getting preferential treatment.

e.g. Doctor asking you to come is minutes before starting his consultation with the customers.

BENEFITS FOR THE ORGANISATIONS

The benefits to an organization of maintaining and developing a loyal customer base are numerous.
They can be linked directly to the firm’s bottom line.

• INCREASING PURCHASES
• LOWER COSTS
• FREE ADVERTISING THROUGH WORD OF MOUTH
• EMPLOYEE RETENTION

LIFE TIME VALUE OF A CUSTOMER

Life time value of a customer is a concept or calculation that looks at customer from the point of
view of their lifetime revenue and profitability contributions to a company.

ESTIMATING LIFETIME VALUE

If companies knew how much it really costs to lose a customer, they would be able to make
accurate evaluations of investments designed to retain customers.

e.g. Tom Peters calculated lifetime value of his small firm (20 person office) as a customer of
Federal Express as follows

Business from Tom Peters office per month $ 1500
Assuming a 10-year average lifetime for a customer in the express mail industry, the value $ 1500 /
month x 12 month / year x 10 years = $180000

Going further, a happy customer will create at least one new customer via word of mouth

$ 180,000 x 2 (New customers) = $ 360,000

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Thus the value of his company’s business for Federal Express was about $ 360,000

It is estimated that the average fed ex delivery person stops at 40 business the size of Peter’s
business each day
$ 360,000 / company x 40 companies
$ 14,000,000

Thus the average employee of Federal Express is managing a $ 14,000,000 portfolio of lifetime
business for the company.

THE CUSTOMER ISN’T ALWAYS RIGHT

THE WRONG SEGMENT: A company cannot target its services to all customers; some segments
will be more appropriate than the others. It would not be beneficial to either the company or the
customer to establish a relationship with the customer whose needs the company can’t meet.

e.g; a resort company which gets the old people and young crowd together at the same time at the
resort.

NOT PROFITABLE IN THE LONG TERM : some segments of the customers will not be
profitable for the company even if their needs can be met by the services offered.

e.g; a credit card company will not like deal with the customer who doesn’t pay the bills on time or
someone who doesn’t uses it to an extent the company expect.

DIFFICULT CUSTOMER: some customers put huge demands on the company and as such
company would not be Interested in such customer.
Eg. Some ad agencies say that some clients would make them do lot many presentations and finally
at times award the contracts to someoneelse who is known to them.

36

SERVICE RECOVERY

Service Recovery refers to the action taken by an organization response to a service failure.

Failure occurs for all kinds of reasons

- The service may be unavailable when promised
- It may be delivered late or too slowly
- The outcome may be incorrect or poorly executed
- Employees may be rude or uncaring

All of these types of failures bring about negative feelings and responses for the customers.

Left Unfixed

- They can result in customers leaving
- Telling other customers about their negative experiences
- Even challenging the organization through customers rights organizations or legal channels

Research has shown that resolving customer problems effectively has a strong impact on

- Customer satisfaction
- Loyalty
- Bottom line performance

It has been observed that customers who experience service failures, but are ultimately satisfied
based on recovery efforts by the firm, will be more loyal than those whose problems are not
resolved.

Those who complain and their problems resolved quickly are much more likely to repurchase than
are those whose complaints were not resolved.

Those who never complain are likely least likely to repurchase

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Unhappy Customers 9%
who donot
complain 37%

Unhappy customers
who do complain

19%
Complaints not
resolved 46%

54%

Complaints 70%
resolved

Complaints resolved 82%
quickly
95%

Percentage of Customers who will buy again

38

An effective Service Recovery strategy can

- Increase customer Satisfaction and Loyalty
- Generate positive Word of Mouth

A well designed, well documented services strategy also provides information that can be used to
improve service as part of a continuous improvement effort

Ineffective Service Recovery Strategies can lead to customers who are so dissatisfied they become
“Terrorist”, actively pursuing opportunities to openly criticize the company.

Repeated Service Failures without an effective Recovery Strategy in place can aggravate even the
best employees.

The costs in Employee Morale and even lost employee can be huge.

THE RECOVERY PARADOX

It is suggested that customers who are dissatisfied, but experience a high level of excellent service
recovery, may ultimately be even more satisfied and more likely to repurchase than are those who
were satisfied I the first place.

The logical but not very rational conclusion is that companies should plan to disappoint customers
so that they can recover and gain even greater loyalty from them as a result.

This idea has become known as the RECOVERY PAPADOX.

Recovery Paradox is more complex than it may seem on the surface.

1 It is expensive to fix mistakes.
2 Empirical Research suggests that only under the very highest levels of customers’ Service
Recovery ratings will we observe increased satisfaction and loyalty.

It is safe to say that “ Doing it right the first time “ is still the best and safest strategy.

However, when a failure does occur, then every effort at a superior Recovery should be made to
mitigate its negative effects.

In cases where the failure can be fully overcome, the failure is less critical, or the Recovery Effort is
clearly superlative, it may be possible to observe evidence of the Recovery Paradox.

39

How Customers Respond To Service Failures

Service Failure

Dissatisfaction/
Negative Emotions

Complaint Action No Complaint Action

Complain to Negative word Third Party
Provider of mouth Action

Exit/Switch Stay Exit/Switch Stay

40

Customer Complaint Action Following Service Failure

Variety of negative emotions can occur following a service failure, including such feelings as anger,
discontent, disappointment, self pity and anxiety.

These initial negative responses will affect how customers evaluate the Service Recovery effort and
presumably their ultimate decision to return to the service provider or not.

Many customers are very passive about their dissatisfaction, simply saying or doing nothing.

It is known that those who donot complain are least likely to return.

For companies, customer passivity in the face of dissatisfaction is threat to future success.

TYPES OF CUSTOMER COMPLAINT ACTIONS

If customers initiate actions following service failure , the action can be of various types as shown
in the Fig.

From company’s point of view any customer who complains on the spot is the best case scenario.
Company has the chance to respond immediately.

If they don’t complain immediately, customers may choose to complain later to the provider by
phone or in writing, or even write or call the corporate offices of the company.

In all the above cases, the company has a chance to recover.

These Proactive types of complaining behavior is preferred as voice responses or Seeking Redress.

TYPES OF COMPLAINERS

Four categories on how the customers respond to failures have been identifies.

These categories are:

(1) Passives (2) Voicers (3) Irate (4)Activist

(1) Passives: This group of customers is least likely to take any action .

- They are unlikely to say anything to the provider
- Less likely than others to spread negative Word of Mouth, unlikely to complain to third
party.
- They often doubt the effectiveness of complaining, thinking the consequences will not merit
the time and the effort they will expend.

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(2) Voicers: These customers actively complain to the service provider

- Less likely to spread the negative word of mouth, to switch patronage, or to go to third
parties with their complaints.
- These customers to be viewed as the service providers friend.
- Actively complain and give company a second chance.
- They believe complaining has social benefits and therefore don’t hesitate to voice their
opinion.

(3) Irates: These customers are more likely to engage in negative word of mouth to friends and
relatives and to switch providers than are others.

- They feel alienated from the market place.
- They are angry with the service provider although they do believe that complaining to the
service provider can have a social benefits.
- They are less likely to give the service provide a second chance.

(4) Activists: These consumers are characterized by above average propensity to complain on all
dimensions.

- They will complain to the provider, they will tell others, and they are more likely than
any other group to complain to third parties.
- They have a very optimistic sense of the potential positive consequences of all types of
complaining.

WHY DO ( AND DON’T) PEOPLE COMPLAIN?

The categories just described suggest that some customers are more likely to complain than others.

As individuals, these customers believe that positive consequences may occur and that there are
social benefits of complaining, and their personal norms support their complaining behavior.

They believe they will and should be provided compensation for the service failure in some form.

They believe that fair treatment and an good service are their due, and that in case of service failure,
someone should make good.

In some cases they feel a social obligation to complain – to help others avoid similar situations or to
punish the service provider.

A very small number of consumers have “ complaining” personalities – they just like to complain or
cause trouble.

Those who are unlikely to take any action hold the opposite beliefs.

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They often see complaining as a waste of their effort .

WHEN THEY COMPLAIN, WHAT DO CUSTOMERS EXPECT

Customers want justice and fairness in handling their complaints

Customers are looking for: OUTCAME FAIRNESS
PROCEDURAL FAIRNESS
INTERACTIONAL FAIRNESS

1. Outcome Fairness: They expect equity in the exchange- i.e. they want to feel that the
company has “Paid” for its mistakes in a manner at least equal to what the customer has
suffered.

The company’s “ punishment should fit the crime”.

They also appreciate it when a company gives them choices in terms of compensation. E.g.
A hotel guest should be offered the choice of a refund or free upgrade to a better room in
compensation for a room not being available on arrival.

On the other hand, customers can be comfortable if they are overly compensated. E.g.
Domino’s Pizza offered not to charge if the driver arrived after 30 minutes guarantee
delivery time. Many customers were not comfortable asking for this level of compensation,
especially if the driver was only few minutes late.

2. Procedural Fairness: In addition to fair compensation, customers expect fairness in terms
of policies, rule and timeliness of the complaint process.

They want easy access to the complaint process and they want things handled quickly,
preferably by the first person they contact.

Fair procedures are characterized by clarity, speed and absence of hassles.

Unfair procedures are those that customers perceive as slow, prolonged and inconvenient.

Customers also feel it is unfair if they have to prove their case- when the assumption seems
to be they are wrong or lying until they can prove otherwise.

3. Interactive Fairness: Customers expect to be treated politely, with care and honesty.

This form of fairness can dominate the others if customers feel the company and its
employees have uncaring attitudes and have done little to try to resolve the problem.

Often rude and uncaring behavior of employees is due to lack of training and empowerment-
a frustrated, frontline employee who has no authority to compensate the customer may

43

easily respond in an aloof and uncaring manner, especially if the customer is angry and/or
rude.

SWITCHING VERSUS STAYING FOLLOWING SERVICE RECOVERY

Ultimately, how a Service Recovery failure is handled and the customer’s reaction to
recovery effort can influence future decisions to remain loyal to the service provider or to
switch to another provider.

The more serious the failure, the more likely the customer to switch no matter what the
recovery effort.

The nature of the Customer’s Relationship with the firm may also influence whether the
customer stays or switches providers.

There are three types of relationships viz.

-“True Relationships” where the customer has had repeated contact overtime with the
same service provider.

These customers are more forgiving of poorly handled service failures and are less likely to
switch than others.

- “First Time Encounter” Relationship is where the customer has had only one contact, on
a transaction basis, with the provider.

These customers are more likely to change.

- “Pseudo Relationship” is one where the customer has interacted many times with the
same company, but with different service provider (people) each time.

Individual customer’s attitude towards switching will strongly influence whether he or she
ultimately stays with the provider.

Thus certain customers will have greater propensity to switch service providers no matter
how their Service Failure situations are handled.

Finally, the decision to switch to a different service provider may not occur immediately
following service failure or poor service recovery, but may follow an accumulation of
events.

The service switching can be viewed as a process resulting from a series of decisions and
critical service encounters overtime, rather than one specific moment in time when a
decision is made.

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This process orientation suggests that companies could potentially track customer
interactions and predict the likelihood of defection based on a series of events.

By intervening earlier in the process companies can prevent at time customer’s decision to
switch.

SERVICE BLUEPRINTING

Services commonly lack concrete specifications.

Products on the other hand are produced with concrete and detailed plans, written specifications
and engineering drawings.

A Service ,even a complex one, might be introduced without any formal, objective depiction of
process.

A Service Blueprint is a picture or map that accurately portrays the service system.

This is to assume that the different people involved in providing it can understand and deal with
it objectively regardless of their individual points of view.

Blueprints are particularly useful at the design and redesign stage of development.

A Service Blueprint visually displays the service by simultaneously depicting the process of
service delivery, the points of customer contact, the roles of customers and employees, and the
visible elements of the service.
Process

Service Points of Contacts
Blueprint

Evidence

Service Blueprinting
Blueprint Components

The key components of Service Blueprints are shown in the fig.

They are Customers actions, “ On Stage” Contact Employee Actions, “BackStage” Contact
Employee Action and Support processes.

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Physical Evidence

Customer Actions

Line of Interaction

On Stage Contact

Employees Actions

Line Of Visibility

Back Stage Contact

Employee Actions

Line of Internal Interaction

Support Processes

SERVICE BLUEPRINT COMPONENTS

The customer actions area encompasses the steps, choices, activities and interactions that the
customer performs in the process of purchasing, consuming and evaluating the service.

E.g. Ina legal services the customer actions might include a decision to contact an attorney,
phone calls to the attorney, face to face meetings, receipt of documents and receipt of bill.

Onstage Employee actions are the steps and activities that the contact employee performs that
are visible to the customer.

Backstage employee actions are the steps and actions that occur behind the scenes to support the
on stage activities.

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The support processes cover the internal services, steps and interactions that take place to
support the contact employees in delivering the service.

Line of Interaction represents the direct interactions between the customer and the organization.

Anytime a vertical line crosses the horizontal line of interaction, a direct contact between the
customer and the organization or a service encounter has occurred.

Line of Visibility separates all service activities that are visible to the customer from those that
are not visible.

Line of Internal Interaction separates contact employee activities from those of other service
support activities and people.

Vertical Lines cutting across the line of Internal Interaction represent internal service
encounters.

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MARKETING INFORMATION SYSTEM

Marketing Information System is defined as an assembly of inter-related information subsystems:
receiving, processing and disseminating information on a continued basis to help make marketing
decision.

Type of Research Primary Research Objectives

Complaint solicitation To identify/attend to dissatisfied customers

To identify common service failure points

Critical incident studies To identify “best practices” at transaction level
To identify customers requirements as input for
qualitative studies
To identify systemic strengths and weaknesses
in customer-contact services

Requirements To identify customer requirements as input for
research qualitative research

Trailer calls To obtain immediate feedback on performance
of service transactions
To measure effectiveness of changes in service
delivery
To assess service performance of individuals
and teams
To use as input for process improvements

Service expectation meetings and reviews To create dialogue with important customers
To identify what individual large customers
expect and then to assure that it is delivered
To close the loop with important customers

Process checkpoint evaluations To determine customer perceptions of long term
professional services during service provision
To identify service problems and solve them
early in the service relationship

Market –oriented ethnography To research customers in natural settings
To study customers from cultures other than
your home country

48

Type of Research Primary Research Objectives

Mystery To measure individual employee performance
shopping for evaluation , recognition and rewards
To identify systemic strengths and weaknesses
in customer-contact services

Customer To monitor changing customer expectations
panels To provide a forum for customers to suggest and
evaluate new service ideas

Lost customer research To identify reasons for customer defection

Database marketing research To identify the individual requirements of
customers using information technology and
database information

Future expectations To forecast future expectations of customers
research To develop and test new service ideas

49

EMPLOYEES’ ROLE IN SERVICE DELIVERY

CUSTOMER

Service Delivery
COMPANY
Service
Performance
Gap

Customer-Driven
Service Designs and
Standards

The Critical Importance of Service Employees

It is very important to focus on employees because :

• They are the service
• They are the organization in the customer’s eyes
• They are the brands
• They are the marketers

50

In many cases , the contact employee is the service – there is nothing else. E.g. in most personal and
professional services (like haircutting, physical trainers, child care , cleaning /maintenance etc.) the
contact employees provide s the entire service single handedly. The offering is the employee. Thus
investing in the employee to improve the service parallels making a direct investment in the
improvement of a manufactured product.

Because contact employees represent the organization and can directly influence customer
satisfaction, they perform the role of marketers. They physically embody the product and are the
walking billboards from the promotional point of view.

Whether acknowledged or not , actively selling or not, service employees perform marketing
functions. They can perform these functions well, to the organization’s advantage, or poorly to the
organization’s detriment.

Employee Satisfaction, Customer Satisfaction and Profits

There is a concrete evidence that satisfied employees make for satisfied customers (satisfied
customers can, in turn, reinforce employees’ sense of satisfaction in their jobs). Some have gone so
far as to suggest that unless service employees are happy in their jobs, customer satisfaction will be
difficult to achieve.

Research has shown that both a climate for service and a climate for employee well-being are
highly correlated with overall customer perceptions of service quality.

The Service Profit Chain

BOUNDARY-SPANNING ROLES

The front-line service employees are referred to as boundary spanners because they operate at the
organization’s boundary. They provide link between the external customer and environment and

51

internal operations of the organization. They serve the critical function in understanding , filtering
and interpreting information and resources to and from the organization and external constituencies.

Who are these boundary spanners? What type of people and positions comprise critical boundary-
spanning roles? Their skills and experience cover the full spectrum of jobs and careers.

In industries such as fast food, hotels, telecommunication, and retail, the boundary spanners are the
least skilled, lowest paid employees in the organization. They are order takers, front desk
employees, telephone operators, store clerks, truck drivers, and delivery people.

In other Industries, boundary spanners are well paid, highly educated professionals – for example,
doctors, lawyers, accountants, consultants, architects, and teachers.

No matter what the level of skill or pay, boundary-spanning positions are often high-stress jobs.

These positions require:

• Mental Labor
• Physical Labor
• Emotional Labor

Emotional Labor

This refers to the labor that goes beyond the physical or mental skills needed to deliver quality
service. It means delivering smiles, making eye contact, showing sincere interest, and engaging in
friendly conversation with people who are essentially strangers and who may or may not ever see
again.

Friendliness, courtesy, empathy, and responsiveness directed towards customers all require huge
amount of emotional labor from the front-line employees who shoulder the responsibility for the
organization.

Emotional Labor draws on people’s feeling (often requiring them to suppress their true feelings) to
be effective in their jobs. A front-line service employee who is having a bad day or isn’t feeling just
right is still expected to put on the face of the organization when dealing with customers.

The organizations need to carefully selecting the people who can handle emotional stress, training
them in needed skills (like listening and problem solving), and teaching or giving them coping
abilities and strategies (via job rotation, scheduled breaks, teamwork or other techniques).

SOURCES OF CONFLICT

Front-line employees often face interpersonal and interorganizational conflicts on the job. Their
frustration and confusion can, if left unattended, lead to stress, job dissatisfaction, a diminished
ability to serve customers, and burnout.

52

As these employees represent the customer to the organization and often need to manage a number
of customers simultaneously, front liners inevitably have to deal with conflicts, including
person/role conflicts, organization/client conflict, and inter-client conflicts.

1. Person/Role Conflicts : In some situations the front-line employees feel conflict between what
they are asked to do and their own personalities, orientations, or values.

Person/role conflict also arises when employees are required to wear specific clothing or change
some aspect of their appearance to confirm to the job requirements. E.g A young lawyer, just out of
college may feel an internal conflict with his new role when his employer requires him to cut his
long hair and trade his casual clothes for three piece suit.

2. Organization/Client Conflict : A more common type of conflict for front-line service
employees is the conflict between their two bosses, the organization and the individual customer.
Service employees are typically rewarded for following certain standards , rules, and procedures.

Ideally these rules and standards are customer based. When they are not, or when a customers
makes excessive demand, the employee has to choose whether to follow the rules or satisfy the
demands.

So an employee has two bosses one customer and one in the organization to whom he is reporting.
These conflicts are especially severe when service employees depend directly on the customer for
income. E.g. employees who depend on tips or commissions are likely to face greater levels of
organization/client conflict because they have even greater incentives to identify with the customer.

3. Interclient Conflict : Sometimes conflict occurs for boundary spanners when there are
incompatible expectations and requirements from two or more customers. This occurs most often
when the service provider is serving the customers in turn (a bank teller, a ticketing agent, a doctor)
or is serving many customers simultaneously (teachers, entertainers).

In case of serving customers in turn , the service provider may satisfy one customer by spending
additional time, customizing the service , and being very flexible in meeting the customer’s needs>
Meanwhile, waiting customers are becoming dissatisfied because their needs are not being met in a
timely manner.

Beyond the timing issue, different clients may prefer different modes of service delivery. Having to
serve one client who prefers personal recognition and a degree of familiarity in the presence of
another client who is all business and would prefer little interpersonal interaction can also create
conflict for the employee.

In the case of serving many customers at the same time, it is often difficult or impossible to serve
the full range of needs of a group of heterogeneous customers simultaneously. This type of conflict
is readily apparent in any college classroom where the instructor must meet a multitude of
expectations and different preferences for formats and style.

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Strategies for Closing GAP 3

A complex combination of strategies is needed to ensure that service employees are willing and able
to deliver quality services and that they stay motivated to perform in customer-oriented, service
minded ways. These strategies for enabling service promises are often referred to as internal
marketing .

Even during slow economic times, the importance of attracting, developing, and retaining good
people in knowledge and service based industries cannot be overemphasized.

By approaching human resource decisions and strategies from the point of view that the primary
goal is to motivate and enable employees to deliver customer-oriented promises successfully, an
organization will move towards closing gap3.

To build a customer-oriented ,service-minded workforce, an organization must :

• Hire the right people
• Develop people to deliver service quality
• Provide the needed support systems
• Retain the best people

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HUMAN RESOURCE STRATEGIES FOR CLOSING GAP3

Hire for service
competencies
Compete and service Be the
for the inclination preferred
best employer
people
Measure and Train for
reward strong Hire the right technical and
service people interactive
skills

Develop
Treat Retain the Customer- people to
employees best Oriented deliver Empower
as people Service service employees
customers Delivery quality

Provide needed
Include Promote
support
employees systems teamwork
in the
company’s
vision Develop
service- Provide Measure internal
oriented supportive service quality
internal technology
processes and
equipment

CUSTOMER’S ROLES IN SERVICE DELIVERY

Service customers are often present in the “factory” (the place the service is produced and/or
consumed), interacting with employees and with other customers.

E.g In a classroom or training situation, students (customers) are sitting in the factory interacting
with the instructor and other students as they consume the educational services.

Since these customers are present during service production, customers can contribute to or detract
from the successful delivery of the service and to their own satisfaction.

The Importance of Customers in Service Delivery

Customer participation at some level is inevitable in service delivery. Services are actions or
performances, typically produced and consumed simultaneously. In many situations employees,
customers and even others in the service environment interact to produce the ultimate service
outcome.

55

Because the customers receiving the service participates in the delivery process, he or she can
contribute to gap 3 through appropriate or inappropriate, effective or ineffective , productive or
unproductive behaviors.

Customers who are unprepared in terms of what they want to order can soak up the customer
service representative’s time as they seek advice. Similarly, shoppers who are not prepared with
their credit cards can “put the representative on hold” while they search for their credit cards or go
to another room or even out of their cars to get them. Meanwhile, other customers and calls are left
unattended, causing longer wait times and potential dissatisfaction.

The level of participation – low, medium, high – varies across services. In some cases, all that is
required is the customers physical presence (low level of participation), with the employees of the
firm doing all of the service production work, as in case of a ghazal concert. The listeners must be
present to receive the entertainment service.

In other cases, consumer inputs are required to aid the service organization in creating the service
(moderate level of participation). Inputs can include information, effort or physical possessions.

All three of these are required in case for a CA to prepare a client’s income tax return effectively.
Information in the form of tax history, marital status, and number of dependents. Effort in putting
the information together in a useful fashion. Physical Possessions such as receipts and past tax
returns.

Incase of long term consulting engagements involvement of the customers high as they co create the
service.

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LEVELS OF CUSTOMER PARTICIPATION ACROSS DIFFERENT SERVICES

Low: Consumer Presence Moderate : Consumer High : Customer Concretes the
Required during Service Inputs Required during Service Product
delivery Service Creation

Products are standardized . Client inputs customize a Active client participation
standard service. guides the customized service.

Service is provided regardless Provision for service requires Service cannot be created apart
of any individual purchase. customer purchase. from the customer’s purchase
and active participation

Payment may be the only Customer inputs Customer inputs are mandatory
required customer input. (information, materials) are and concrete the outcome.
necessary for an adequate
outcome, but the service firm
provides the service

End Consumer Examples

Airline travel Haircut Marriage counseling
Motel stay Annual physical test Personal training
Fast-food restaurant Full-service restaurant Weight reduction program
Major illness or surgery

Business-to-Business
Customers examples

Uniform cleaning service Agency-created advertising Management consulting
Pest Control campaign Executive management seminar
Interior greenery maintenance Payroll service Installation of computer
service Freight transportation network

OTHER CUSTOMERS

In many service contexts customers receive the service simultaneously with other customers or must
wait their turn while other customers are being served. In both cases, “other customers” are present
in the service environment and can effect the nature of the service outcome or process. Other
customers can either enhance or detract from customer satisfaction and the perception of quality.

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Some of the ways other customers can negatively affect the service experience are by exhibiting
disruptive behaviors, causing delays, overusing, excessively crowding, and manifesting
incompatible needs.

Sometimes mere presence of other customers enhances the experience. This is true in sporting
events, in movie theatres, and in other entertainment venues. The presence of other patrons is
essential for true enjoyment of the experience. In other cases the customers provide a positive social
dimension to the service experience.

CUSTOMERS’ ROLES

1. Customers as Productive Process

Service customers are referred to as “partial employees” of the organization – human resources who
contribute to the organization’s productive capacity. In other words, if customers contribute effort,
time or other resources to the service production process, they should be considered as part of the
organization.

Customers inputs can affect the organization’s productivity through both quality of what they
contribute and the resulting quality and quantity of output generated. E.g. research suggest that in an
IT consulting context, clients who clearly articulate the solution they desire , provide needed
information in a timely manner , communicate openly, gain the commitment of key internal
stakeholders, and raise the issues during the process before it is too late will get better service.

2. Customers as Contributors to Service Quality and Satisfaction

Another role customers can play in services delivery is that of contributor to their own satisfaction
and the ultimate quality of the services they receive.

Customers may care little that they have increased the productivity of the organization through their
participation, but they likely care a great deal about whether their needs are fulfilled.

Effective customer participation can increase the likelihood that needs are met and that the benefits
the customer seeks are actually attained.

Think about service s such as health care, education, personal fitness, and weight loss, where the
service outcome is highly dependent on the customers participation. In these cases, unless the
customers perform their roles effectively, the desired service outcomes are not possible.

Research has shown that in education , active participation by students – as opposed to passive
listening – increases learning a9the desired service output) significantly.

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WHICH CUSTOMER (A OR B) WILL BE MOST SATISFIED?

For each scenario, ask “Which customer (A or B) will be most satisfied and receive the greatest
quality and value, and why?”

Scenario 1: A Major International Hotel : Guest A called the desk right after check-in to report
that his TV was not working and that the light over the bed was burned out; both problems were
fixed immediately. The hotel staff exchanged his TV for one that worked and fixed the light bulb.
Later they brought him a fruit plate to make up for the inconvenience. Guest B did not communicate
to management until checkout time that his TV did not work he could not read in his bed. His
complaints were over- heard by guests checking in, who wondered whether they had chosen the
right place to stay.

Scenario 2: Office of a Professional Tax Preparer : Client A has organized into categories the
information necessary to do her taxes and has provided all documents requested by the accountant.
Client B has a box full of papers and receipts, many of which are not relevant to her taxes but
which she brought along “just in case.”

Scenario 3: An Airline Right from London to New York : Passenger A arrives for the flight with
a portable tape player and reading material and wearing warm clothes; passenger A also called
ahead to order a special meal. Passenger B who arrives empty-handed, becomes annoyed when the
crew runs out of blankets, complains about the magazine selection and the meal, and starts
fidgeting after the movie.

Scenario 4: Architectural Consultation for Remodeling an Office Building : Client A has invited
the architects to meet with its remodeling and design committee made up of managers, staff, and
customers in order to lay the ground- work for a major remodeling job that will affect everyone
who works in the building as well as customers. The committee has already formulated initial ideas
and surveyed staff and customers for input. Client B has invited architects in following a decision
the week previously to remodel the building; the design committee is two managers who are
preoccupied with other more immediate tasks and have little idea what they need or what customers
and staff would prefer in terms of a redesign of the office space.

3. Customers as Competitors
A final role played by service customers is that of potential competitor. If self-service customers
can be viewed as resources of the firm, or as “partial employees,” self-service customers could in
some cases partially perform the service or perform the entire service for themselves and not need
the provider at all.
Customers thus in that sense are competitors of the companies that supply the service. Whether to
produce a service for themselves (internal exchange) - for example, child care, home maintenance –

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or have someone else provide the service for them (external exchange) is a common dilemma for
consumers.

Similar internal versus external exchange decisions are made by organizations.

Firms frequently choose to outsource service activities such as payroll, data processing, research,
accounting, maintenance, and facilities management. They find that it is advantageous to focus on
their core businesses and leave these essential support services to others with greater expertise.

Alternatively, a firm may decide to stop purchasing services externally and bring the service
production process in-house.

MANAGING DEMAND AND CAPACITY

The fundamental issue underlying supply and demand management in services is the lack of
inventory capability. Unlike manufacturing firms, service firms cannot build up inventories during
peak periods of slow demand to use later when demand increases.

This lack of inventory capability is due to the perishability of services and their simultaneous
production and consumption.

An airline seat that is not sold on a given flight cannot be resold the following day : the productive
capacity of the seat has perished.

The lack of inventory capability combined with the fluctuating demand leads to variety of potential
outcomes.

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Variations in Demand Relative to Capacity

Demand exceeds capacity

VOLUME DEMANDED

(business is lost)
CAPACITY UTILIZED

Maximum Available Demand exceeds
Capacity optimum capacity
(quality declines)
Optimum Capacity
(Demand and Supply
Well Balanced

(wasted resources)
Excess
Low Utilization capacity
(May Send Bad Signals)

TIME CYCLE 1 TIME CYCLE 2

As shown above in the diagram there are four basic scenarios that can result from different
combinations of capacity and demand :

1. Excess Demand : The level of demand exceeds maximum capacity. In this situation some
customers will be turned away, resulting in lost business opportunities.

For the customers who do not receive the service, its quality may not match what was promised
because of crowding or overtaxing of staff and facilities.

2. Demand exceeds optimum capacity : No one is being turned away, but the quality of service
may still suffer because of overuse, crowding, or staff being pushed beyond their abilities to deliver
consistent quality.

3. Demand and supply are balanced at the level of optimum capacity : Staff and facilities are
occupied at an ideal level . No one is overworked, facilities can be maintained , and customers are
receiving quality service without undesirable delays.

4. Excess Capacity : Demand is below optimum capacity. Productive resources in the form of
labor, equipment, and facilities are underutilized, resulting in lost productivity and lower profits.

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Customers may receive excellent service on an individual level because they have the full use of the
facilities, no waiting , and complete attention from the staff. If, however service quality depends on
the presence of other customers, customers may be disappointed or may worry that they have
chosen an inferior service provider.

UNDERSTANDING DEMAND PATTERNS

To manage fluctuating demand in a service business, it is likely to have a clear understanding of
demand patterns, why they wary, and the market segments that comprise demand at different points
in time.

1. Charting Demand Patterns : First, the organization needs to chart the level of demand over
relevant time periods. Organizations that have good computerized customer information systems
can do this very accurately.

The others may need to chart demand patterns more informally.

2. Predictable Cycles : In looking at the graphic representation of demand levels, is there a
predictable cycle daily (variations occur by hours), weekly (variations occur by day), monthly
(variations occur by the month), and/or yearly (variations occur according to months or seasons)?

If there is a predictable cycle , what are the underlying causes? This can help a service provider in
dealing with the customers in a much better way.

3. Random Demand Fluctuations : Sometimes the patterns of demand appear to be random—
there is no apparent predictable cycle. Yet even in this case, causes can often be identified.
For example. day to-day changes in the weather may affect use of recreational, shopping, or
entertainment facilities. Although the weather cannot be predicted far in advance, it may be possible
to anticipate demand a day or two ahead. Health-related events also cannot be predicted. Accidents,
heart attacks, and births all increase demand for hospital services, but the level of demand cannot
generally be determined in advance. Natural disasters such as floods, fires, and hurricanes can
dramatically increase the need for such services as insurance, telecommunications, and health care.
Acts of war and terrorism such as that experienced in the United States on September 11, 2001,
general instantaneous need for services that can’t be predicted.

AT&T was faced with a sudden increase in demand for services to the mi1i during the Gulf War.
During this period, 500,000 U.S. troops were deployed to the Middle East, many without advance
warning. Before their deployment these men and women had little time to attend to personal
business, and all of them left behind concerned family and friends. With mail delivery between the
United States and the Middle East taking more than six weeks, troops needed a quick way to
communicate with their families and to handle personal business. Communications with home were
determined by the military to be essential to troop morale. AT&T’s ingenuity. responsiveness, and
capacities were challenged to meet this unanticipated communication need. During and after the
Gulf War crisis more than 2.5 million calls were placed over temporary public phone installations,
and AT&T sent more than 1.2 million free to family and friends of service men and women.

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4. Demand Patterns by Market Segment :If an organization has detailed records on customer
transactions, it may be able to disaggregate demand by market segment, revealing patterns within
patterns. Or the analysis may reveal that demand from one segment is predictable while demand
from another segment is relatively random.
For example, for a bank, the visits from its commercial accounts may occur daily at a predictable
time, whereas personal account holders may visit the bank at seemingly random intervals. Health
clinics often notice that walk-in or “care needed today” patients tend to concentrate their arrivals on
Mon day, with fewer numbers needing immediate attention on other days of the week. Knowing
that this pattern exists, some clinics schedule more future appointments (which they can control) for
later days of the week, leaving more of Monday available for same-day appointments and walk-ins.

STRATEGIES FOR MATCHING CAPACITY AND DEMAND
When an organization has a clear grasp of its capacity constraints and an understanding of demand
patterns, it is in a good position to develop strategies for matching supply and demand.
There are two general approaches for accomplishing this match.
• The first is to smooth the demand fluctuations themselves by shifting demand to match
existing supply.
• The second general strategy is to adjust capacity to match fluctuations in demand.

Each of these two basic strategies is described next with specific examples.

A. Shifting Demand to Match Capacity :

With this strategy an organization seeks to shift customers away from periods in which demand
exceeds capacity, perhaps by convincing them to use the service during periods of slow demand.
This may be possible for some customers but not for others.
For example, many business travelers are not able to shift their needs for airline, car rental, and
hotel services; pleasure travelers, on the other hand, can often shift the timing of their trips. Those
who can’t shift and can’t be accommodated will represent lost business for the firm.

1. Vary the Service Offering :
One approach is to change the nature of the service offering, depending on the season of the year,
day of the week, or time of day.
For example, Whistler Mountain, a ski re sort in Vancouver, Canada, offers its facilities for
executive development and training programs during the summer when snow skiing is not possible.
A hospital in the Los Angeles area rents use of its facilities to film production crews who need
realistic hospital settings for movies or TV shows.

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Accounting firms focus on tax preparation late in the year and until April 15, when federal taxes are
due in the United States.
During other times of the year they can focus on audits and general consulting activities.
Air lines even change the configuration of their plane seating to match the demand from different
market segments. In some planes there may be no first-class section at all. On routes with a large
demand for first-class seating, a significant proportion of seats may be placed in first class..
Care should be exercised in implementing strategies to change the service offering, because such
changes may easily imply and require alterations in other marketing mix variables—such as
promotion, pricing, and staffing—to match the new offering.
Unless these additional mix variables are altered effectively to support the offering, the strategy
may not work. Even when done well, the downside of such changes can be a confusion in the
organization’s image from the customers’ perspective, or a loss of strategic focus for the
organization and its employees.

2 Communicate with Customers:
Another approach for shifting demand is to communicate with customers, letting them know the
times of peak demand so they can choose to use the service at alternative times and avoid crowding
or delays.
E.g Signs in banks and post offices that let customers know their busiest hours and busiest days of
the week can serve as a warning, al lowing customers to shift their demand to another time if
possible.
Forewarning customers about busy times and possible waits can have added benefits. Many
customer service phone lines provide a similar warning by informing waiting customers of
approximately how long it will be until they are served. Those who don’t want to wait may choose
to call back later when the lines are less busy.
Research in a bank context found that customers who were forewarned about the bank’s busiest
hours were more satisfied even when they had to wait than were customers who were not
forewarned.
In addition to signage communicating peak demand times to customers, advertising and other forms
of promotion can emphasize different service benefits during peak and slow periods. Advertising
and sales messages can also remind customers about peak demand times.

3 Modify Timing and Location of Service Delivery :
Some firms adjust their hours and days of service delivery to more directly reflect customer
demand.
Historically, U.S. banks were open only during “bankers’ hours” from 10 A.M. to 3 P.M. every
weekday. Obviously these hours did not match the times when most people preferred to do their
personal banking. Now U.S. banks open early, stay open until 6 P.M. many days, and are open on
Saturdays, better reflecting customer demand patterns.

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Theaters also accommodate customer schedules by offering matinees on weekends and holidays
when people are free during the day for entertainment. Movie theaters are sometimes rented during
weekdays by business groups—an example of varying the service offering during a period of low
demand.
4. Differentiate on Price :
A common response during slow demand is to discount the price of the service. This strategy relies
on basic economics of supply and demand. To be effective, however, a price differentiation strategy
depends on solid understanding of customer price sensitivity and demand curves.
For example, business travelers are far less price sensitive than are families traveling for pleasure. F
For any hotel, airline, restaurant, or other service establishment, all of the capacity could be filled
with customers if the price were low enough. But the goal is always to ensure the highest level of
capacity utilization without sacrificing profits.
Heavy use of price differentiation to smooth demand can be a risky strategy. Over reliance on price
can result in price wars in an industry where eventually all competitors suffer. Price wars are well
known in the airline industry, where total industry profits suffered as a result of airlines
simultaneously trying to attract customers through price discounting.
Another risk of relying oh price is that customers grow accustomed to the lower price and expect to
get the same deal the next time they use the service. if communications with customers are unclear,
customers may not understand the reasons for the discounts and will expect to pay the same during
peak demand periods.
Overuse or exclusive use of price as a strategy for smoothing demand is also risky due to the
potential impact on the organization’s image and the possibility of attracting un desired market
segments.

B. Flexing Capacity to Meet Demand :
A second strategic approach to matching supply and demand focuses on adjusting or flexing
capacity. The fundamental idea here is to adjust, stretch, and align capacity to match customer
demand (rather than working on shifting demand to match capacity as just described).
During periods of peak demand the organization seeks to stretch or expand its capacity as much as
possible.
During periods of slow demand it tries to shrink capacity so as not to waste resources.
1 Stretch Existing Capacity :
The existing capacity of service resources can often be expanded temporarily to match demand. In
such cases no new resources are added; rather people, facilities, and equipment are asked to work
harder and longer to meet demand.

a. Stretch Time:

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It may be possible to extend the hours of service temporarily to accommodate demand. A health
clinic might stay open longer during flu season, retailers are open longer hours during the Christmas
shopping season, and accountants have extended appointment hours (evenings and Saturdays)
before tax deadlines.
b. Stretch Labor :
In many service organizations, employees are asked to work longer and harder during periods of
peak demand. For example, consulting organizations face extensive peaks and valleys with respect
to demand for their services.
During peak demand, associates are asked to take on additional projects and work longer hours.
And front-line service personnel in banks, tourist attractions, restaurants, and telecommunications
companies are asked to serve more customers per hour during busy times than during hours or days
when demand is low.
c. Stretch Facilities :
Theaters, restaurants, meeting facilities, and classrooms can sometimes be expanded temporarily by
the addition of tables, chairs, or other equipment needed by customers. Or, as in the case of a
commuter train, a car can hold a number of people seated comfortably or can “expand” by
accommodating standing passengers.
d. Stretch Equipment :
Computers, telephone lines, and maintenance equipment can often be stretched beyond what would
be considered the maximum capacity for short periods to accommodate peak demand.
In using these types of “stretch” strategies, the organization needs to recognize the wear and tear on
resources and the potential for inferior quality of service that may go with the use.
These strategies should thus be used for relatively short periods in order to allow for later
maintenance of the facilities and equipment and refreshment of the people who are asked to exceed
their usual capacity.
As noted earlier, sometimes it is difficult to know in advance, particularly in the case of human
resources, when capacity has been stretched too far.
2. Align Capacity with Demand Fluctuations :
This basic strategy is sometimes known as a “chase demand” strategy. By adjusting service
resources creatively, organizations can in effect chase the demand curves to match capacity with
customer demand patterns. Time, labor, facilities, and equipment are again the focus, this time with
an eye toward adjusting the basic mix and use of these resources.
Specific actions might include the following.
a. Use Part-Time Employees :
In this case the organization’s labor resource is being aligned with demand. Retailers hire part-time
employees during the holiday rush, tax accountants engage temporary help during tax season,
tourist resorts bring in extra workers during peak season.
Restaurants often ask employees to work split shifts (work the lunch shift, leave for a few hours,
and come back for the dinner rush) during peak mealtime hours.

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b. Outsourcing :
Firms that find they have a temporary peak in demand for a service that they cannot perform
themselves may choose to outsource the entire service.
For example, in recent years, many firms have found they don’t have the capacity to fulfill their
own needs for technology support, Web design, and software-related services. Rather than try to
hire and train additional employees, these companies look to firms that specialize in outsourcing
these types of functions as a temporary (or sometimes long-term) solution.
c. Rent or Share Facilities or Equipment :
For some organizations it is best to rent additional equipment or facilities during periods of peak
demand.
For example, ex press mail delivery services rent or lease trucks during the peak holiday delivery
sea son. It would not make sense to buy trucks that would sit idle during the rest of the year.
Sometimes organizations with complementary demand patterns can share facilities.
An example is a church that shares its facilities during the week with a Montes son preschool. The
school needs the facilities Monday through Friday during the day; the church needs the facilities
evenings and on the weekend.
d. Schedule Downtime during Periods of Low Demand ;
If people, equipment, and facilities are being used at maximum capacity during peak periods, then it
is imperative to schedule repair, maintenance, and renovations during off-peak periods. This ensures
that the resources are in top condition when they are most needed.
With regard to employees, this means that vacations and training are also scheduled during slow
demand periods.
e. Cross-Train Employees :
If employees are cross-trained, they can shift among tasks, filling in where they are most needed.
This increases the efficiency of the whole system and avoids underutilizing employees in some
areas while others are being over taxed.
Many airlines cross-train their employees to move from ticketing to working the gate counters to
assisting with baggage if needed. In some fast-food restaurants, employees specialize in one task
(like making french fries) during busy hours, and the team of specialists may number 10 people.
During slow hours the team may shrink to three, with each person performing a variety of functions.
Grocery stores also use this strategy, with most employees able to move as needed from cashiering
to stocking shelves to bagging groceries.
f. Modify or Move Facilities and Equipment :
Sometimes it is possible to adjust, move, or creatively modify existing capacity to meet demand
fluctuations. Hotels accomplish this by reconfiguring rooms—two rooms with a locked door
between can be rented to two different parties in high demand times or turned into a suite during
slow demand. The airline industry offers dramatic examples of this type of strategy. Using an
approach known as “demand-driven dispatch,” airlines have begun to experiment with methods that
assign airplanes to flight schedules on the basis of fluctuating market needs.’ The method depends

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on accurate knowledge of demand and the ability to quickly move airplanes with different seating
capacities to flight assignments that match their capacity The Boeing 777 aircraft is so flexible that
it can be reconfigured within hours to vary the number of seats allocated to one, two, or three
classes.’ The plane can thus be quickly modified to match demand from different market segments,
essentially molding capacity to fit demand.
Another strategy may involve moving the service to a new location to meet customer demand or
even bringing the service to customers. Mobile training facilities, libraries, and blood donation
facilities are examples of services that physically follow customers.

YIELD MANAGEMENT: BALANCING CAPACITY UTILIZATION,
PRICING, MARKET SEGMENTATION, AND FINANCIAL RETURN

Yield management is a term that has become attached to a variety of methods, some very
sophisticated, matching demand and supply in capacity-constrained services. Using yield
management models, organizations find the best balance at a particular point in time among the
prices charged, the segments sold to, and the capacity used.
The goal of yield management is to produce the best possible financial return from a limited
available capacity. Specifically, yield management has been defined as “the process of allocating
the right type of capacity to the right kind of customer at the right price so as to maximize revenue
or yield.”
Although the implementation of yield management can involve complex mathematical models and
computer programs, the underlying effectiveness measure is the ratio of actual revenue to potential
revenue for a particular measurement period:

Yield = Actual revenue
Potential revenue

where
Actual revenue = actual capacity used X average actual price
Potential revenue = total capacity X maximum price
The equations indicate that yield is a function of price and capacity used. Recall that capacity
constraints can be in the form of time, labor, equipment, or facilities. Yield is essentially a measure
of the extent to which an organization’s resources (or capacities) are achieving their full revenue-
generating potential. Assuming that total capacity and maximum price cannot be changed, yield
approaches 1 as actual capacity utilization increases or when a higher actual price can be charged
for a given capacity used. For example, in an airline context, a manager could focus on increasing
yield by finding ways to bring in more passengers to fill the capacity, or by finding higher-paying
passengers to fill a more limited capacity. In reality, expert yield managers will work on capacity
and pricing issues simultaneously to maximize revenue across different customer segments.

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Yield Management Example
Take, for example, a hotel that has 200 rooms that it can rent at a rate of $100 per night (potential
revenue of $20,000). One night it rents all of the rooms at a reduced rate of $50 per night, yielding a
revenue of $10,000. Although capacity was used to the maximum level that night, yield was only 50
percent ($l0,000/$20,000). If, on the other hand, the hotel had charged its full rate it might have sold
only 40 percent of its rooms because of customer price sensitivity. The yield under these
circumstances would have been 40 percent ($8,000/$20,000). At the $100 rate the hotel may thus be
maximizing the per-room price but not the potential yield—or revenue generation—for the entire
hotel. Perhaps a combination of the two room rates would be the best solution. If the hotel could fill
40 percent of the rooms at $100 per night and the other 60 percent at $50, the revenue would be
$14,000, resulting in a yield of 70 percent ($14,000/$20,000), clearly better than the other two
alternatives.

PRICING OF SERVICES

Three Key Ways Service Prices Are Different For Consumers
What role does price play in consumer decisions about services? How important is price to potential
buyers compared with other factors and service features? Service companies must understand how
pricing works, but first they must understand how customers perceive prices and price changes. The
three sections that follow describe what we know about the ways customers perceive services, and
each is central to effective pricing.

A. CUSTOMER KNOWLEDGE OF SERVICE PRICES

To what extent do customers use price as a criterion in selecting services? How much do consumers
know about the costs of services?
If you are like many consumers, you feel quite uncertain about your knowledge of the prices of
services, and the reference prices you hold in memory for services are not as accurate as those you
hold for goods.
There are many reasons for this difference.

1. Service heterogeneity limits knowledge:
As services are intangible and are not created on a factory assembly line, service firms have great
flexibility in the con figurations of services they offer. Firms can conceivably offer an infinite
variety of combinations and permutations, leading to complex and complicated pricing structures.
As an example, consider how difficult it is to get comparable price quotes when buying life
insurance. With the multitude of types (such as whole life versus term), features (different
deductibles), variations associated with customers (age, health risk, smoking or nonsmoking), few
insurance companies offer exactly the same features and the same prices. Only an expert customer,

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one who knows enough about insurance to completely specify the options across providers, is likely
to find prices that are directly comparable.
2. Providers are unwilling to estimate prices :
Another reason customers lack accurate reference prices for services is that many providers are
unable or unwilling to estimate price in advance. Consider most medical or legal services. Rarely
are legal or medical service providers willing—or even able—to estimate a price in advance. The
fundamental reason in many cases is that they do not know themselves what the ser vices will
involve until they have fully examined the patient or the client’s situation or until the process of
service delivery (such as an operation in a hospital or a trial) un folds. In a business-to-business
context, companies will obtain bids or estimates for complex services such as consulting or
construction, but this type of price estimation is typically not undertaken with end consumers;
therefore, they often buy without advance knowledge about the final price of the service.
3. Individual customer needs vary :
Another factor that results in the inaccuracy of reference prices is that individual customer needs
vary. Some hairstylists’ service prices vary across customers on the basis of length of hair, type of
haircut, and whether a conditioning treatment and style are included. Therefore, if you were to ask a
friend what a cut costs from a particular stylist, chances are that your cut from the same stylist may
be a different price.
In a similar vein, a service as simple as a hote1 room have prices that vary greatly: by size of room,
time of year, type of room availability, and individual versus group rate.
These two examples are for very simple services.
Now consider a service purchase as idiosyncratic as braces from a dentist or help from a lawyer. In
these and many other services, customer differences in need will play a strong role in the price of
the service.
4. Price information is overwhelming in services :
Still another reason customers lack accurate reference prices for services is that customers feel
overwhelmed with the information they need to gather.
With most goods, retail stores display the products by category to allow customers to compare and
contrast the prices of different brands and sizes.
Rarely is there a similar display of services in a single outlet. If customers want to compare prices
(such as for dry cleaning), they must drive to or call individual outlets.
5. Prices are not visible:
One requirement for the existence of customer reference prices is price visibility - the price cannot
be hidden or implicit.
In many services, particularly financial services, most customers know about only the rate of return
and not the costs they pay in the form of fund and insurance fees.
IDS Financial Services recently discovered how little customers know about prices of the
company’s services. After being told by the independent agents who sell their services to customers
that IDS was priced too high, the company did research to find out how much customers know

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about what they pay for financial services and how much price factors into customer value
assessments.
The study surprised the company by revealing that customers knew even less than expected: not
only did they not understand what they were paying for many of their services, very few consumers
understood how they pay for financial services in general.
Only for financial products where price was visible - such as with securities and term life insurance
—were customers aware of fees.
When price was invisible, such as in certificates, whole-life insurance, and annuities (which have
rear-load charges), customers didn’t know how they were charged and what they paid. Further,
when customers were asked to indicate how important 10 factors (including price) were, price
ranked seventh. Finally, the company found that shopping behavior in the category of financial
services was extremely limited.
Of course in situations of urgency, such as in accident or illness, customers must make the decision
to purchase without respect to cost at all. And if cost is not known to the customer before purchase,
it cannot be used as a key criterion for purchase as it often is for goods.
Price is likely to be an important criterion in repurchase, however. Furthermore, in repurchase
monetary price may be an even more important criterion than in initial purchase

B. THE ROLE OF NONMONETARY COSTS
In recent years economists have recognized that monetary price is not the only sacrifice consumers
make to obtain products and services. Demand, therefore, is not just a function of monetary price
but is influenced by other costs as well. Nonmonetary costs represent other sources of sacrifice
perceived by consumers when buying and using a service. Time costs, search costs, and
psychological costs often enter into the evaluation of whether to buy or rebuy a service, and may at
times be more important concerns than monetary price. Customers will trade money for these other
costs as mentioned below:
1. Time costs:
Most services require direct participation of the consumer and thus consume real time: time waiting
as well as time when the customer interacts with the service provider.
Consider the investment you make to exercise, see a physician, or get through the crowds to watch a
concert or baseball game. Not only are you paying money to receive these services; you’re also
expending time. Time becomes a sacrifice made to receive service in multiple ways. First, because
service providers cannot completely control the number of customers or the length of time it will
take for each customer to be served, customers are likely to expend time waiting to receive the
service.

Waiting time for a service is virtually always longer and less predictable than waiting time to buy
goods.

2. Search costs.:

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Search costs—the effort invested to identify and select among ser vices you desire—are also higher
for services than for physical goods. Prices for services are rarely displayed on shelves of service
establishments for customers to examine as they shop, so these prices are often known only when a
customer has decided to experience the service.
Another factor that increases search costs is that each ser vice establishment typically offers only
one “brand” of a service (with the exception of brokers in insurance or financial services), so a
customer must initiate contact with several different companies to get information across sellers.
3. Convenience costs :
There are also convenience (or perhaps more accurately inconvenience) costs of services. If
customers have to travel to a service, they incur a cost, and the cost becomes greater when travel is
difficult, as it is for elderly persons.
Further, if service hours do not coincide with the customers’ available time, they must arrange their
schedules to correspond to the company’s schedule. And if consumers have to expend effort and
time to prepare to receive a service (such as removing all food from kitchen cabinets in preparation
for an exterminator’s spraying), they make additional sacrifices.
4. Psychological costs:
Often the most painful nonmonetary costs are the psychological costs incurred in receiving some
services.
Fear of not understanding (insurance), fear of rejection (bank loans), fear of uncertainty (including
fear of high cost)— all of these, constitute psychological costs that customers experience as
sacrifices when purchasing and using services.
All change, even positive change, brings about psychological costs that consumers factor into the
purchase of services.
When banks first introduced ATMs, customer resistance was significant, particularly to the idea of
put ting money into a machine: customers felt uncomfortable with the idea of letting go of their
checks and bank cards. Direct deposit, a clear improvement in banking service for the elderly with
limited mobility, was looked on with suspicion until the level of comfort improved.

REDUCING NONMONETARY COSTS

The managerial implications of these other sources of sacrifice are compelling. First, a service firm
may be able to increase monetary price by reducing time and other costs.

E.g. a services marketer can reduce the perceptions of time and convenience costs when use of the
service is embedded in other activities (such as when a convenience store cashes checks, sells
stamps, and serves coffee along with selling products).
Second, customers may be willing to pay to avoid the other costs. Many customers willingly pay
extra to have items delivered to their home—including restaurant meals—rather than transporting
the services and products themselves.

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For reduced waiting time in a professional’s office (as in so-called executive appointments where,
for a premium price, a busy executive comes early in the morning and does not have to wait).
Many other services save time, thus actually allowing the customer to “buy” time. Household
cleaning services, lawn care, babysitting, interactive cable shopping, personal shopper service,
home banking, home delivery of groceries, painting, and car pet c1eaning— of these represent net
gains in the discretionary time of consumers and could effectively be marketed that a that allow the
customer to buy time are likely to have monetary value for busy consumers.

C. PRICE AS AN INDICATOR OF SERVICE QUALITY
One of the intriguing aspects of pricing is that buyers are likely to use price as an indicator of both
service costs and service quality—price is at once an attraction variable and a repellent. Customers’
use of price as an indicator of quality depends on several factors, one of which is the other
information available to them.
When service cues to quality are readily accessible, when brand names provide evidence of a
company’s reputation, or when level of advertising communicates the company’s belief in the
brand, customers may prefer to use those cues instead of price.
In other situations, however, such as when quality is hard to detect or when quality or price varies a
great deal within a class of services, consumers may believe that price is the best indicator of
quality.
Many of these conditions typify situations that face consumers when purchasing services. Another
factor that increases the dependence on price as a quality indicator is the risk associated with the
service purchase. In high-risk situations, many of which involve credence services such as medical
treatment or management consulting, the customer will look to price as a surrogate for quality.
Because customers depend on price as a cue to quality and because price sets expectations of
quality, service prices must be determined carefully. In addition to chosen to cover costs or match
competitors, prices must be chosen to convey appropriate quality signal.
Pricing too low can lead to inaccurate inferences about the quality of the service. Pricing too high
can set expectations that may be difficult to match in service delivery.
Because goods are dominated by search properties, price is not used to judge quality as often as it is
in services, where experience and credence properties dominate. Any services marketer must be
aware of the signals that price conveys about its offerings.

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A project report on service marketing

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A project report on service marketing