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Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 1 Chapter 1 Introduction to Services Marketing.

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Presentation on theme: "Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 1 - 1 Chapter 1 Introduction to Services Marketing."— Presentation transcript:

1 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 1 Introduction to Services Marketing

2 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E How Important is the Service Sector in Our Economy? In most countries, services add more economic value than agriculture, raw materials and manufacturing combined In developed economies, employment is dominated by service jobs and most new job growth comes from services Jobs range from high-paid professionals and technicians to minimum-wage positions Service organizations can be any sizefrom huge global corporations to local small businesses Most activities by government agencies and nonprofit organizations involve services

3 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Services dominate the United States Economy: GDP by Industry, 2001 (Fig. 1.1) Source: Bureau of Economic Analysis, November 2002 Finance, Insurance, Real Estate 20% Wholesale and Retail Trade 16% Transport, Utilities, Communications 8% Health 6% Business Services 5% Other Services 11% Government (mostly services) 13% Manufacturing 14% Agriculture, Forestry, Mining, Construction 8% SERVICES

4 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Changing Structure of Employment as Economic Development Evolves (Fig. 1.2) Time, per Capita Income Share of Employment Industry Services Agriculture Source: IMF, 1997

5 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Some Service Industries Profiled by NAICS but Not Identified by SIC Codes Casino Hotels Continuing Care Retirement Communities Diagnostic Imaging Centers Diet and Weight Reducing Centers Environmental Consulting Gold Courses and Country Clubs Hazardous Waste Collection HMO Medical Centers Industrial Design Services Investment Banking and Securities Dealing Management Consulting Services Satellite Telecommunications Telemarketing Bureaus Temporary Help Services

6 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Internal Services Service elements within an organization that facilitate creation of--or add value to--its final output Includes: accounting and payroll administration recruitment and training legal services transportation catering and food services cleaning and landscaping Increasingly, these services are being outsourced

7 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Major Trends in Service Sector (Fig. 1.3) Government Policies (e.g., regulations, trade agreements) Social Changes (e.g., affluence, lack of time, desire for experiences) Business Trends Manufacturers offer service Growth of chains and franchising Pressures to improve productivity and quality More strategic alliances Marketing emphasis by nonprofits Innovative hiring practices Advances in IT (e.g., speed, digitization, wireless, Internet) Internationalization (travel, transnational companies)

8 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Some Impacts of Technological Change Radically alter ways in which service firms do business: with customers (new services, more convenience) behind the scenes (reengineering, new value chains) Create relational databases about customer needs and behavior, mine databanks for insights Leverage employee capabilities and enhance mobility Centralize customer servicefaster and more responsive Develop national/global delivery systems Create new, Internet-based business models

9 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Marketing Relevant Differences Between Goods and Services

10 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Defining the Essence of a Service An act or performance offered by one party to another An economic activity that does not result in ownership A process that creates benefits by facilitating a desired change in: customers themselves physical possessions intangible assets

11 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Distinguishing Characteristics of Services (Table 1.1) Customers do not obtain ownership of services Service products are ephemeral and cannot be inventoried Intangible elements dominate value creation Greater involvement of customers in production process Other people may form part of product experience Greater variability in operational inputs and outputs Many services are difficult for customers to evaluate Time factor is more important--speed may be key Delivery systems include electronic and physical channels

12 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Marketing Implications - 1 No ownership Customers obtain temporary rentals, hiring of personnel, or access to facilities and systems Pricing often based on time Customer choice criteria may differ for renting vs. purchase--may include convenience, quality of personnel Cant own people (no slavery!) but can hire expertise and labor Services cannot be inventoried after production Service performances are ephemeraltransitory, perishable Exception: some information-based output can be recorded in electronic/printed form and re-used many times Balancing demand and supply may be vital marketing strategy Key to profits: target right segments at right times at right price Need to determine whether benefits are perishable or durable

13 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Marketing Implications - 2 Customers may be involved in production process Customer involvement includes self-service and cooperation with service personnel Think of customers in these settings as partial employees Customer behavior and competence can help or hinder productivity, so marketers need to educate/train customers Changing the delivery process may affect role played by customers Design service facilities, equipment, and systems with customers in mind: user-friendly, convenient locations/schedules Intangible elements dominate value creation Understand value added by labor and expertise of personnel Effective HR management is critical to achieve service quality Make highly intangible services more concrete by creating and communicating physical images or metaphors and tangible clues

14 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Value Added by Tangible vs Intangible Elements in Goods and Services (Fig. 1.4) Fast food restaurant Plumbing repair Office cleaning Health club Airline flight Retail banking Insurance Weather forecast Salt Soft drinks CD Player Golf clubs New car Tailored clothing Furniture rental Lo Hi Tangible Elements Intangible Elements

15 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Marketing Implications - 3 Other people are often part of the service product Achieve competitive edge through perceived quality of employees Ensure job specs and standards for frontline service personnel reflect both marketing and operational criteria Recognize that appearance and behavior of other customers can influence service experience positively or negatively Avoid inappropriate mix of customer segments at same time Manage customer behavior (the customer is not always right!) Greater variability in operational inputs and outputs Must work hard to control quality and achieve consistency Seek to improve productivity through standardization, and by training both employees and customers Need to have effective service recovery policies in place because it is more difficult to shield customers from service failures

16 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Marketing Implications - 4 Often difficult for customers to evaluate services Educate customers to help them make good choices, avoid risk Tell customers what to expect, what to look for Create trusted brand with reputation for considerate, ethical behavior Encourage positive word-of-mouth from satisfied customers Time factor assumes great importance Offer convenience of extended service hours up to 24/7 Understand customers time constraints and priorities Minimize waiting time Look for ways to compete on speed Distribution channels take different forms Tangible activities must be delivered through physical channels Use electronic channels to deliver intangible, information-based elements instantly and expand geographic reach

17 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Important Differences Exist among Services

18 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Four Categories of Services Employing Different Underlying Processes (Fig. 1.5) People Processing Possession Processing Mental Stimulus Processing Information Processing (directed at intangible assets) e.g., airlines, hospitals, haircutting, restaurants hotels, fitness centers e.g., freight, repair, cleaning, landscaping, retailing, recycling e.g., broadcasting, consulting, education, psychotherapy e.g., accounting, banking, insurance, legal, research TANGIBLE ACTS INTANGIBLE ACTS DIRECTED AT PEOPLEDIRECTED AT POSSESSIONS What is the Nature of the Service Act? Who or What is the Direct Recipient of the Service?

19 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Implications of Service Processes (1) Seeking Efficiency May Lower Satisfaction Processes determine how services are created/delivered process change may affect customer satisfaction Imposing new processes on customers, especially replacing people by machines, may cause dissatisfaction New processes that improve efficiency by cutting costs may hurt service quality Best new processes deliver benefits desired by customers Faster Simpler More conveniently Customers may need to be educated about new procedures and how to use them

20 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Implications of Service Processes: (2) Designing the Service Factory People-processing services require customers to visit the service factory, so: Think of facility as a stage for service performance Design process around customer Choose convenient location Create pleasing appearance, avoid unwanted noises, smells Consider customer needs--info, parking, food, toilets, etc.

21 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Implications of Service Processes: (3) Evaluating Alternative Delivery Channels For possession-processing, mental-stimulus processing, or information processing services, alternatives include: 1. Customers come to the service factory 2. Customers come to a retail office 3. Service employees visit customers home or workplace 4. Business is conducted at arms length through - physical channels (e.g., mail, courier service) - electronic channels (e.g., phone, fax, , Web site)

22 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Implications of Service Processes: (4) Balancing Demand and Capacity When capacity to serve is limited and demand varies widely, problems arise because service output cant be stored: 1. If demand is high and exceeds supply, business may be lost 2. If demand is low, productive capacity is wasted Potential solutions: - Manage demand - Manage capacity

23 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Implications of Service Processes: (5) Applying Information Technology All services can benefit from IT, but mental-stimulus processing and information-processing services have the most to gain: Remote delivery of information- based services anywhere, anytime New service features through websites, , and internet (e.g., information, reservations) More opportunities for self-service New types of services

24 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Implications of Service Processes: (6) Including People as Part of the Product Involvement in service delivery often entails contact with other people Managers should be concerned about employees appearance, social skills, technical skills Other customers may enhance or detract from service experience--need to manage customer behavior

25 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Services Marketing Mix

26 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Elements of The Services Marketing Mix: 7Ps vs. the Traditional 4Ps Rethinking the original 4Ps Product elements Place and time Promotion and education Price and other user outlays Adding Three New Elements Physical environment Process People

27 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The 7Ps: (1) Product Elements All Aspects of Service Performance that Create Value Core product featuresboth tangible and intangible elements Bundle of supplementary service elements Performance levels relative to competition Benefits delivered to customers (customers dont buy a hotel room, they buy a good nights sleep) Guarantees

28 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The 7Ps: (2) Place and Time Delivery Decisions: Where, When, and How Geographic locations served Service schedules Physical channels Electronic channels Customer control and convenience Channel partners/intermediaries

29 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The 7Ps: (3) Promotion and Education Informing, Educating, Persuading, and Reminding Customers Marketing communication tools media elements (print, broadcast, outdoor, retail, Internet, etc.) personal selling, customer service sales promotion publicity/PR Imagery and recognition branding corporate design Content information, advice persuasive messages customer education/training

30 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The 7Ps: (4) Price and Other User Outlays Marketers Must Recognize that Customer Outlays Involve More than the Price Paid to Seller Traditional Pricing Tasks Selling price, discounts, premiums Margins for intermediaries (if any) Credit terms Identify and Minimize Other Costs Incurred by Users Additional monetary costs associated with service usage (e.g., travel to service location, parking, phone, babysitting,etc.) Time expenditures, especially waiting Unwanted mental and physical effort Negative sensory experiences

31 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The 7Ps: (5) Physical Environment Designing the Servicescape and providing tangible evidence of service performances Create and maintaining physical appearances buildings/landscaping interior design/furnishings vehicles/equipment staff grooming/clothing sounds and smells other tangibles Select tangible metaphors for use in marketing communications

32 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Ps: (6) Process Method and Sequence in Service Creation and Delivery Design of activity flows Number and sequence of actions for customers Providers of value chain components Nature of customer involvement Role of contact personnel Role of technology, degree of automation

33 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The 7Ps: (7) People Managing the Human Side of the Enterprise The right customer-contact employees performing tasks well job design recruiting/selection training motivation evaluation/rewards empowerment/teamwork The right customers for the firms mission fit well with product/processes/corporate goals appreciate benefits and value offered possess (or can be educated to have) needed skills (co-production) firm is able to manage customer behavior

34 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Managing the 7Ps Requires Collaboration between Marketing, Operations, and HR Functions (Fig. 1.7) Customers Operations Management Marketing Management Human Resources Management

35 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 2 Consumer Behavior in Service Encounters

36 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Where Does the Customer Fit in a Service Organization? (Fig. 2.1) Consumers rarely involved in manufacture of goods but often participate in service creation and delivery Challenge for service marketers is to understand how customers interact with service operations Flowcharting clarifies how customer involvement in service encounters varies with type of process - see Fig. 2-1: People processing (e.g., motel stay): customer is physically involved throughout entire process Possession processing (e.g., DVD repair): involvement may be limited to drop off of physical item/description of problem and subsequent pick up Mental stimulus processing (e.g., weather forecast): involvement is mental, not physical; here customer simply receives output and acts on it Information processing (e.g., health insurance): involvement is mental - specify information upfront and later receive documentation of coverage

37 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E High-Contact and Low-Contact Services High Contact Services Customers visit service facility and remain throughout service delivery Active contact between customers and service personnel Includes most people-processing services Low Contact Services Little or no physical contact with service personnel Contact usually at arms length through electronic or physical distribution channels New technologies (e.g. Web) help reduce contact levels

38 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Levels of Customer Contact with Service Organizations (Fig. 2.2) Emphasizes encounters with service personnel Emphasizes encounters with equipment High Low Internet Banking Subway

39 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Managing Service Encounters--1 Service encounter: A period of time during which customers interact directly with a service Moments of truth: Defining points in service delivery where customers interact with employees or equipment Critical incidents: specific encounters that result in especially satisfying/dissatisfying outcomes for either customers or service employees

40 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Managing Service Encounters--2 Service success often rests on performance of junior contact personnel Must train, coach, role model desired behavior Thoughtless or badly behaved customers can cause problems for service personnel (and other customers) Must educate customers, clarify what is expected, manage behavior

41 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Purchase Process for Services (Adapted from Fig. 2-3) Prepurchase Stage Awareness of need Information search Evaluation of alternative service suppliers Service Encounter Stage Request service from chosen supplier Service delivery Postpurchase Stage Evaluation of service performance Future intentions

42 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Perceived Risks in Purchasing and Using Services (Table 2.1) Functional – unsatisfactory performance outcomes Financial – monetary loss, unexpected extra costs Temporal – wasted time, delays lead to problems Physical – personal injury, damage to possessions Psychological – fears and negative emotions Social – how others may think and react Sensory – unwanted impacts to any of five senses

43 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Factors that Influence Customer Expectations of Services (Fig. 2.4) Predicted Service Explicit & Implicit Service Promises Word-of-Mouth Past Experience Desired Service ZONE OF TOLERANCE Adequate Service Personal Needs Beliefs about What Is Possible Perceived Service Alterations Situational Factors Source: Adapted from Zeithaml, Parasuraman & Berry

44 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Components of Customer Expectations Desired Service Level: wished-for level of service quality that customer believes can and should be delivered Adequate Service Level: minimum acceptable level of service Predicted Service Level: service level that customer believes firm will actually deliver Zone of Tolerance: range within which customers are willing to accept variations in service delivery

45 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Intangible Attributes, Variability, and Quality Control Problems Make Services Hard to Evaluate Search attributes – Tangible characteristics that allow customers to evaluate a product before purchase Experience attributes – Characteristics that can be experienced when actually using the service Credence attributes – Characteristics that are difficult to evaluate confidently even after consumption Goods tend to be higher in search attributes, services tend to be higher in experience and credence attributes Credence attributes force customers to trust that desired benefits have been delivered

46 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E How Product Attributes Affect Ease of Evaluation ) (Fig. 2.5) Source: Adapted from Zeithaml Most Goods High in search attributes High in experience attributes High in credence attributes Difficult to evaluate Easy to evaluate Most Services Clothing Chair Motor vehicle Foods Restaurant meals Lawn fertilizer Haircut Entertainment Computer repair Legal services Complex surgery Education

47 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Customer Satisfaction is Central to the Marketing Concept Satisfaction defined as attitude-like judgment following a service purchase or series of service interactions Customers have expectations prior to consumption, observe service performance, compare it to expectations Satisfaction judgments are based on this comparison Positive disconfirmation if better than expected Confirmation if same as expected Negative disconfirmation if worse than expected Satisfaction reflects perceived service quality, price/quality tradeoffs, personal and situational factors Research shows links between customer satisfaction and a firms financial performance

48 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Customer Delight: Going Beyond Satisfaction Research shows that delight is a function of 3 components Unexpectedly high levels of performance Arousal (e.g., surprise, excitement) Positive affect (e.g., pleasure, joy, or happiness) Is it possible for customers to be delighted by very mundane services? Progressive Insurance has found ways to positively surprise customers with customer-friendly innovations and extraordinary customer service

49 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E A Service Business is a System Comprising Three Overlapping Subsystems Service Operations (front stage and backstage) Where inputs are processed and service elements created. Includes facilities, equipment, and personnel Service Delivery (front stage) Where final assembly of service elements takes place and service is delivered to customers Includes customer interactions with operations and other customers Service Marketing (front stage) Includes service delivery (as above) and all other contacts between service firm and customers

50 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Service Marketing System: (1) High Contact Service--e.g., Hotel (Fig. 2.7) Service Operations System Backstage (invisible) Front Stage (visible) Service Delivery System Other Contact Points Service Marketing System

51 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Service Marketing System: (2) Low Contact Service--e.g., Credit Card (Fig. 2.8) Technical Core Mail Self Service Equipment Phone, Fax, Web site etc. The Customer Service Operations System Service Delivery SystemOther Contact Points Backstage (invisible) Front Stage (visible) Advertising Market Research Surveys Random Exposures Facilities, Personnel Word of Mouth Service Marketing System

52 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Service as Theater All the worlds a stage and all the men and women merely players. They have their exits and their entrances and each man in his time plays many parts William Shakespeare As You Like It

53 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Dramaturgy of Service Delivery Service dramas unfold on a stage--settings may change as performance unfolds Many service dramas are tightly scripted, others improvised Front-stage personnel are like members of a cast Like actors, employees have roles, may wear special costumes, speak required lines, behave in specific ways Support comes from a backstage production team Customers are the audiencedepending on type of performance, may be passive or active

54 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Role and Script Theories Role: A set of behavior patterns learned through experience and communication Role congruence: In service encounters, employees and customers must act out defined roles for good outcomes Script: A sequence of behavior to be followed by employees and customers during service delivery Some scripts (e.g. teeth cleaning) are routinized, others flexible Technology change may require a revised script Managers should reexamine existing scripts to find ways to improve delivery, increase productivity, enhance experiences

55 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 3 Positioning Services in Competitive Markets

56 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Search for Competitive Advantage in Services Requires Differentiation and Focus Intensifying competition in service sector threatens firms with no distinctive competence and undifferentiated offerings Slowing market growth in mature service industries means that only way for a firm to grow is to take share from competitors Rather than attempting to compete in an entire market, firm must focus efforts on those customers it can serve best Must decide how many service offerings with what distinctive (and desired) characteristics

57 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Standing Apart from the Competition A business must set itself apart from its competition. To be successful it must identify and promote itself as the best provider of attributes that are important to target customers GEORGE S. DAY

58 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Basic Focus Strategies for Services (Fig. 3.1) BREADTH OF SERVICE OFFERINGS NUMBER OF MARKETS SERVED Narrow Many Few Wide Service Focused Unfocused (Everything for everyone) Market Focused Fully Focused (Service and market focused) Source: Robert Johnston

59 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Four Principles of Positioning Strategy 1. Must establish position for firm or product in minds of customers 2. Position should be distinctive, providing one simple, consistent message 3. Position must set firm/product apart from competitors 4. Firm cannot be all things to all people--must focus Jack Trout

60 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Uses of Positioning in Marketing Management (Table 3.1) Understand relationships between products and markets compare to competition on specific attributes evaluate products ability to meet consumer needs/expectations predict demand at specific prices/performance levels Identify market opportunities introduce new products redesign existing products eliminate non-performing products Make marketing mix decisions, respond to competition distribution/service delivery pricing communication

61 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Possible Dimensions for Developing Positioning Strategies Product attributes Price/quality relationships Reference to competitors (usually shortcomings) Usage occasions User characteristics Product class

62 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Developing a Market Positioning Strategy (Fig. 3.3) - Size - Composition - Location - Trends Marketing Action Plan MARKET ANALYSIS INTERNAL ANALYSIS - Resources - Reputation - Constraints - Values COMPETITIVE ANALYSIS - Strengths - Weaknesses - Current Positioning Define, Analyze Market Segments Select Target Segments To Serve Articulate Desired Position in Market Select Benefits to Emphasize to Customers Analyze Possibilities for Differentiation Source: Adapted from Michael R. Pearce

63 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Positioning of Hotels in Belleville: Price vs. Service Level (Fig. 3.4) Expensive Shangri-La High Service Moderate Service Grand Regency Sheraton Italia Castle Alexander IV Airport Plaza PALACE Atlantic Less Expensive

64 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Positioning of Hotels in Belleville: Location vs. Physical Luxury (Fig. 3.5) High Luxury Shopping District and Convention Centre Shangri-La Moderate Luxury Financial District Inner Suburbs Grand Regency Sheraton Italia Castle Alexander IV Airport Plaza PALACE Atlantic

65 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Positioning after New Hotel Construction: Price vs. Service Level (Fig. 3.6) Expensive Shangri-La High Service Moderate Service Heritage Mandarin New Grand Marriott Continental Regency Sheraton Italia Alexander IV Airport Plaza PALACE Atlantic No action? Action? Less Expensive Castle

66 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Positioning after New Hotel Construction: Location vs. Physical Luxury (Fig. 3.7) High Luxury Shangri-La Financial District Inner Suburbs Heritage Mandarin New Grand Marriott Continental Regency Sheraton Italia Alexander IV Airport Plaza PALACE Atlantic No action? Action? Moderate Luxury Castle Shopping District and Convention Centre

67 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Positioning Maps Help Managers to Visualize Strategy Positioning maps display relative performance of competing firms on key attributes Research provides inputs to development of positioning maps Challenge is to ensure that attributes employed in maps are important to target segments performance of individual firms on each attribute accurately reflects perceptions of customers in target segments Predictions can be made of how positions may change in the light of new developments in the future Simple graphic representations are often easier for managers to grasp than tables of data or paragraphs of prose Charts and maps can facilitate a visual awakening to threats and opportunities and suggest alternative strategic directions

68 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 4 Creating the Service Product

69 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Key Steps in Service Planning: Matching Opportunities to Resources Must relate marketing opportunities to firms resources (physical, financial, technological, human) Identify, evaluate firms marketing assets Customer portfolio/lifetime value (customer equity) Market knowledge Marketing implementation skill Product line Competitive positioning strategies Brand reputation (brand equity) Identify, evaluate firms operating assets Physical facilities, equipment Technology and systems (especially IT) Human resources (numbers, skills, productivity) Leverage through alliances and partnerships Potential for customer self service Cost structure

70 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Operating Assets (Facilities/Equipment, IT Systems, People, Op. Skills, Cost Structure) Service Design Involves Matching Marketing Concept with Operations Concept (Fig. 4.1) Corporate Objectives and Resources Service Delivery Process Marketing Assets (Customer Base, Mkt. Knowledge, Implementation Skills, Brand Reput.) Service Marketing Concept Benefits to customer from core/ supplementary elements, style, service level, accessibility User costs/outlays incurred Price/other monetary costs Time Mental and physical effort Neg. sensory experiences Service Operations Concept Nature of processes Geographic scope of ops Scheduling Facilities design/layout HR (numbers, skills) Leverage (partners, self-service) Task allocation: front/backstage staff; customers as co-producers

71 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Understanding the Components of the Augmented Service Product

72 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Shostacks Molecular Model of a Total Market Entity - Passenger Airline Service (Fig. 4-2) Distribution Price Marketing Positioning (Weighted toward evidence) Source: Shostack KEY Tangible elements Intangible elements Service frequency Vehicle Transport Pre- and post-flight service Food and drink In-flight service

73 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Core Products and Supplementary Services Most firms offer customers a package of benefits: core product (a good or a service) supplementary services that add value to the core In mature industries, core products often become commodities Supplementary services help to differentiate core products and create competitive advantage by: facilitating use of the core service enhancing the value and appeal of the core

74 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Core and Supplementary Product Design: What Do We Offer and How Do We Create and Deliver It? Core Scheduling Process Service Level Customer Role Supplementary services offered and how created and delivered Delivery Concept For Core Product

75 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E What Should Be the Core and Supplementary Elements of Our Service Product? How is our core product defined and what supplementary elements currently augment this core? What product benefits create the most value for customers? Is our service package differentiated from the competition in ways that are meaningful to target customers? What are current levels of service on the core product and each of the supplementary elements? Can we charge more for higher service levels on key attributes (e.g., faster response, better physical amenities, easier access, more staff, superior caliber personnel)? Alternatively, should we cut service levels and charge less?

76 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Core and Supplementary Services in a Luxury Hotel (Offering Guests Much More than a Cheap Motel!)

77 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E What Happens, When, and in What Sequence? The Time Dimension in the Augmented Service Product Pre Visit Reservation USE GUESTROOM OVERNIGHT Parking Get car Check in Porter USE ROOM Meal Pay TV Room service Phone Check out Time Frame of an Overnight Hotel Stay (real-time service use)

78 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Flower of Service: Categorizing Supplementary Services (Fig. 4-5) Core Information Consultation Order-Taking Hospitality Payment Billing Exceptions Safekeeping Facilitating elements Enhancing elements KEY :

79 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Facilitating Services - Information (Table 4.1) Core Customers often require information about how to obtain and use a product or service. They may also need reminders and documentation

80 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Facilitating Services - Order-Taking (Table 4.2) Many goods and services must be ordered or reserved in advance. Customers need to know what is available and may want to secure commitment to delivery Core

81 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Facilitating Services - Billing (Table 4.3) How much do I owe you? Customers deserve clear, accurate and intelligible bills and statements Core

82 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Facilitating Services - Payment (Table 4.4) Customers may pay faster and more cheerfully if you make transactions simple and convenient for them Core

83 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Enhancing Services - Consultation (Table 4.5) Value can be added to goods and services by offering advice and consultation tailored to each customers needs and situation Core

84 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Enhancing Services - Hospitality (Table 4.6) Customers who invest time and effort in visiting a business and using its services deserve to be treated as welcome guests (after all, marketing invited them there!) Core

85 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Enhancing Services - Safekeeping (Table 4.7) Customers prefer not to worry about looking after the personal possessions that they bring with them to a service site. They may also want delivery and after-sales services for goods that they purchase or rent Core

86 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Enhancing Services - Exceptions (Table 4.8) Customers appreciate some flexibility in a business when they make special requests. They expect it when not everything goes according to plan Core

87 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Branding Service Products

88 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Service Branding: Clarifying Distinctive Service Offerings Marriott Hotel Brands Marriott Hotels Marriott Resorts Courtyard by Marriott Fairfield Inns Residence Inns SpringHill Suites TownePlace Suites Marriott Vacation Clubs International British Airways Brands Intercontinental First Club World World Traveller Plus World Traveller European Club Europe Euro-Traveller UK Domestic Shuttle

89 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Branding a High-Tech, B2B Product Line: A Family of Brands at Sun Microsystems Corporate umbrella brand Sun Microsystems Product line brand (system support services) Sun Spectrum Support Sub-brands (4 levels of support service programs) »Platinum »Gold »Silver »Bronze

90 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Sun Spectrum Support: Sub-branding Highlights Four Service Levels Sub-branding clarifies service levels offered at different fees Platinum: Mission Critical On-site service 24/7, two-hour response; telephone support 24/7, onsite parts replacement; additional services available Gold: Business Critical Onsite service Mon-Fri 8am-8pm, four-hour response; telephone support 24/7; onsite parts replacement Silver: Basic Support Onsite service Mon-Fri 8am-5pm, four - hour response; telephone support Mon-Fri 8am-8pm; onsite parts replacement Bronze: Self Support Phone support Mon-Fri 8am-5pm; parts replacement by courier

91 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E New Service Development

92 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E New Service Development: A Hierarchy of New Service Categories Major service innovations--new core products for previously undefined markets Major process innovations--using new processes to deliver existing products and offer extra benefits Product line extensions--additions to current product lines Process line extensions--alternative delivery procedures Supplementary service innovations--adding new or improved facilitating or enhancing elements Style changes--visible changes in service design or scripts

93 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E New Service Development: Physical Goods as Source of Service Ideas Customers can rent goodsuse and return for a fee instead of purchasing them Customers can hire personnel to operate their own or rented equipment Any new durable product may create need for after-sales services (possession processing) Shipping Installation Problem-solving and consulting advice Cleaning Maintenance Repair Upgrading Disposal

94 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Creating Services as Substitutes for Owning and/or Using Goods (Fig. 4-7) Perform the Work Oneself Hire Someone to Do the Work Own a Physical GoodRent the Use of a Physical Good Hire a taxi or limousine Send work to secretarial service Rent car and drive it Rent word processor and type Hire chauffeur to drive car Hire typist to use word processor Drive own car Type on own word processor

95 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Service Development through Delivery Options: Alternative Meal Service Formats (Fig. 4-8) Home Delivery Order food, give address Driver rings doorbell Pay driver, take food Eat Telephone Restaurant Drive-In Restaurant (Take Out ) See sign Order via microphone Get meal at pickup, pay Drive away, eat later Stop car at order point Fast-Food Restaurant (Eat In) See sign Park and enter Order meal, and pay Pick up meal Find table and eat Clear table and leave Home Catering Arrange to meet caterer Plan meal, pay deposit Food and staff arrive Meal is prepared and served Eat Staff cleans up; pay

96 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Elements of a Hotel Offering: Trading off Room Price vs. Features/Services External building design and features Room features Food-related services Lounge facilities Services (e.g., reception) Leisure facilities Securitypeople/systems

97 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Success Factors in New Service Development Market synergy Good fit between new product and firms image/resources Advantage vs. competition in meeting customers needs Strong support from firm during/after launch Firm understands customer purchase decision behavior Organizational factors Strong interfunctional cooperation and coordination Internal marketing to educate staff on new product and its competition Employees understand importance of new services to firm Market research factors Scientific studies conducted early in development process Product concept well defined before undertaking field studies

98 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 5 Designing the Communications Mix for Services

99 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Advertising Implications for Overcoming Intangibility (Fig. 5-1) Problem Advertising Strategy Generality - objective claimsDocument physical system capacity Cite past performance statistics - subjective claimsPresent actual service delivery incident NonsearchabilityPresent customer testimonials Cite independently audited performance AbstractnessDisplay typical customers benefiting ImpalpabilityDocumentary of step-by-step process, Case history of what firm did for customer Narration of customers subjective experience Source: Mittal and Baker

100 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Other Communications Challenges in Services Marketing Facilitate customer involvement in production prepare customers for service experience and demonstrate roles teach customers about new technologies, new features Help customers to evaluate service offerings provide tangible or statistical clues to service performance highlight quality of equipment and facilities emphasize employee qualifications, experience, professionalism Simulate or dampen demand to match capacity provide information about timing of peak, off-peak periods offer promotions to stimulate off-peak demand Promote contribution of service personnel help customers understand service encounter highlight expertise and commitment of backstage personnel

101 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Setting Clear Objectives: Checklist for Marketing Communications Planning (5 Ws) Who is our target audience? What do we need to communicate and achieve? How should we communicate this? Where should we communicate this? When do communications need to take place?

102 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Common Educational and Promotional Objectives in Service Settings (Table 5-2) Create memorable images of specific companies and their brands Build awareness/interest for unfamiliar service/brand Build preference by communicating brand strengths and benefits Compare service with competitors offerings and counter their claims Reposition service relative to competition Stimulate demand in off-peak and discourage during peak

103 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Educational and Promotional Objectives (cont.) Encourage trial by offering promotional incentives Reduce uncertainty/perceived risk by providing useful info and advice Provide reassurance (e.g., promote service guarantees) Familiarize customers with service processes before use Teach customers how to use a service to best advantage Recognize and reward valued customers and employees

104 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Word-of-mouth (other customers) Marketing Communications Mix for Services (Fig. 10.4) Personal Communications Selling Customer service Training Advertising Broadcast Print Internet Outdoor Direct mail Sales Promotion Sampling Coupons Sign-up rebates Gifts Prize promotions Publicity & Public Relations Press releases/kits Press conferences Special events Sponsorship Instructional Materials Web sites Manuals Brochures Video- audiocassettes Software CD-ROM Voice mail Signage Interior decor Vehicles Equipment Stationery Uniforms Corporate Design Telemarketing Word of mouth Trade Shows, Exhibitions Media-initiated coverage * Key: * Denotes communications originating from outside the organization

105 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Originating Sources of Messages Received by a Target Audience (Fig. 5-5) Messages originating within the organization Messages originating outside the organization Production Channels Marketing Channels Front-line staff Service outlets Advertising Sales promotions Direct marketing Personal selling Public relations Word of mouth Media editorial A U D I E N C E

106 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E What is Brand Equity and Why Does It Matter? (From Berry, Cultivating Brand Equity) Definition: A set of assets and liabilities linked to a brands name and symbol that adds to (or subtracts from) the perceived value of the product Insights Brand equity can be positive or negative Positive brand equity creates marketing advantage for firm plus value for customer Perceived value generates preference and loyalty Management of brand equity involves investment to create and enhance assets, remove liabilities

107 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E A Service Branding Model: How Communications + Experience Create Brand Equity Firms Presented Brand (Sales, Advertising, PR) What Media, Intermediaries, Word-of-Mouth Say re: Firm Customers Experience with Firm Awareness of Firms Brand Meaning Attached To Firms Brand Firms Brand Equity Source: Adapted from L. L. Berry ( Fig. 1) Marketer-controlled communications Uncontrolled brand communications

108 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Marketing Communication and the Internet (1) International in Scope Accessible from almost anywhere in the world Simplest form of international market entry Internet Applications Promote consumer awareness and interest Provide information and consultation Facilitate 2-way communications through and chat rooms Stimulate product trial Enable customers to place orders Measure effectiveness of specific advertising/promotional campaigns

109 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Marketing Communications and the Internet (2) Web Site design considerations Memorable address that is actively promoted Relevant, up-to-date content (text, graphics, photos) Contain information that target users will perceive as useful/interesting Easy navigation Fast download Internet advertising Banners and buttons on portals and other websites seek to draw online traffic to own site Limits to effectivenessexposure (eyeballs) may not lead to increases in awareness/preference/sales Hence, advertising contracts may tie fees to marketing relevant behavior (e.g., giving personal info or making purchase)

110 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 6 Pricing and Revenue Management

111 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E What Makes Service Pricing Strategy Different (and Difficult)? No ownership of services--hard for firms to calculate financial costs of creating an intangible performance Variability of inputs and outputs--how can firms define a unit of service and establish basis for pricing? Many services hard for customers to evaluate--what are they getting in return for their money? Importance of time factor--same service may have more value to customers when delivered faster Delivery through physical or electronic channels--may create differences in perceived value

112 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Objectives of Pricing Strategies Revenue and profit objectives Seek profit Cover costs Patronage and user base-related objectives Build demand Build a user base

113 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Pricing Tripod (Fig. 6.1) PricingStrategy Costs Competition Value to customer

114 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Three Main Approaches to Pricing Cost-Based Pricing Set prices relative to financial costs (problem: defining costs) Competition-Based Pricing Monitor competitors pricing strategy (especially if service lacks differentiation) Who is the price leader? (one firm sets the pace) Value-Based Relate price to value perceived by customer

115 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Activity-Based Costing: Relating Activities to the Resources They Consume Managers need to see costs as an integral part of a firms effort to create value for customers When looking at prices, customers care about value to themselves, not what production costs the firm Traditional cost accounting emphasizes expense categories, with arbitrary allocation of overheads ABC management systems examine activities needed to create and deliver service (do they add value?) Must link resource expenses to: variety of products produced complexity of products demands made by individual customers

116 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Perceived Benefits Time e Effort Net Value = (Benefits – Outlays) (Fig. 6.3) Perceived Outlays

117 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Enhancing Gross Value Pricing Strategies to Reduce Uncertainty service guarantees benefit-driven (pricing that aspect of service that creates value) flat rate (quoting a fixed price in advance) Relationship Pricing non-price incentives discounts for volume purchases discounts for purchasing multiple services Low-cost Leadership Convince customers not to equate price with quality Must keep economic costs low to ensure profitability at low price

118 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Paying for Service: The Customers Perspective Customer expenditures on service comprise both financial and non-financial outlays Financial costs: price of purchasing service expenses associated with search, purchase activity, usage Time expenditures Physical effort (e.g., fatigue, discomfort) Psychological burdens (mental effort, negative feelings) Negative sensory burdens (unpleasant sensations affecting any of the five senses)

119 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Determining the Total Costs of a Service to the Consumer (Fig. 6.4) Price Related Monetary Costs Time Costs Physical Costs Psychological Costs Sensory Costs Necessary follow-up Problem solving Operating Costs Incidental Expenses Purchase and Use Costs Search Costs After Costs

120 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Trading off Monetary and Non- Monetary Costs (Fig. 6.5) Which clinic would you patronize if you needed a chest x-ray (assuming all three clinics offer good quality) ? Price $85 Located 15 min away by car or transit Next available appointment is in 1 week Hours: Monday – Friday, 8am – 10pm Estimated wait at clinic is about minutes Price $85 Located 15 min away by car or transit Next available appointment is in 1 week Hours: Monday – Friday, 8am – 10pm Estimated wait at clinic is about minutes Clinic B Price $125 Located next to your office or college Next appointment is in 1 day Hours: Mo –Sat, 8am – 10pm By appointment - estimated wait at clinic is about 0 to 15 minutes Price $125 Located next to your office or college Next appointment is in 1 day Hours: Mo –Sat, 8am – 10pm By appointment - estimated wait at clinic is about 0 to 15 minutes Clinic C Clinic A Price $45 Located 1 hour away by car or transit Next available appointment is in 3 weeks Hours: Monday – Friday, 9am – 5pm Estimated wait at clinic is about 2 hours Price $45 Located 1 hour away by car or transit Next available appointment is in 3 weeks Hours: Monday – Friday, 9am – 5pm Estimated wait at clinic is about 2 hours

121 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Increasing Net Value by Reducing Non-financial Costs of Service Reduce time costs of service at each stage Minimize unwanted psychological costs of service Eliminate unwanted physical costs of service Decrease unpleasant sensory costs of service

122 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Revenue Management: Maximizing Revenue from Available Capacity at a Given Time Based on price customization - charging different customers (value segments) different prices for same product Useful in dynamic markets where demand can be divided into different price buckets according to price sensitivity Requires rate fences to prevent customers in one value segment from purchasing more cheaply than willing to pay RM uses mathematical models to examine historical data and real time information to determine what prices to charge within each price bucket how many service units) to allocate to each bucket

123 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Strategic Levers of Revenue (Yield) Management Quadrant 4: Continuing Care Hospitals Quadrant 3: Restaurants Golf Courses Unpredictable Quadrant 2: Hotel Rooms Airline Seats Rental Cars Cruise Lines Quadrant 1: Movies Stadiums/Arenas Function Space Predictable Duration VariableFixed Price

124 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Dealing with Common Customer Conflicts Arising from Revenue Management Perceived Unfairness & Perceived Financial Risk Associated with Multi-Tier Pricing and Selective Inventory Availability Customer conflict can arise from: Marketing tools to reduce customer conflicts: Unfulfilled Inventory Commitment Unfulfilled Demand of Regular Customers Unfulfilled Price Expectation of Group Customers Change in the Nature of the Service Fenced Pricing Bundling Categorising High Published Price Well designed Customer Recovery Programme for Oversale Preferred Availability Policies Offer Lower Displacement Cost Alternatives Physical Segregation & Perceptible Extra Service Set Optimal Capacity Utilisation Level

125 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Price Elasticity (Fig. 6.6) DeDe DeDe DiDi DiDi Price per unit of service Quantity of Units Demanded D e : Demand is price elastic. Small changes in price lead to big changes in demand. D i : Demand for service is price inelastic. Big changes have little impact on demand.

126 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Key Categories of Rate Fences (Table 6.2) Rate FencesExamples Physical (Product-related) Fences Basic Product Class of travel (Business/Economy class) Size and furnishing of a hotel room Seat location in a theatre Amenities Free breakfast at a hotel, airport pick up etc. Free golf cart at a golf course Service Level Priority wait listing Increase in baggage allowances Dedicated service hotlines Dedicated account management team

127 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Key Categories of Rate Fences (Table 6.2 contd) Non Physical Fences Transaction Characteristics Time of booking or reservation Requirements for advance purchase Must pay full fare two weeks before departure Location of booking or reservation Passengers booking air tickets for an identical route in different countries are charged different prices Flexibility of ticket usage Fees/penalties for canceling or changing a reservation (up to loss of entire ticket price) Non refundable reservation fees

128 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Key Categories of Rate Fences (Table 6.2 contd) Non Physical Fences (contd) Consumption Characteristics Time or duration of use Early bird special in restaurant before 6pm Must stay over on Sat for airline, hotel Must stay at least five days Location of consumption Price depends on departure location, esp in international travel Prices vary by location (between cities, city centre versus edges of city)

129 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Key Categories of Rate Fences (Table 6.2 contd) Non Physical Fences (contd) Buyer Characteristics Frequency or volume of consumption Member of certain loyalty-tier with the firm get priority pricing, discounts or loyalty benefits Group membership Child, student, senior citizen discounts Affiliation with certain groups (e.g. Alumni) Size of customer group Group discounts based on size of group

130 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Relating Price Buckets and Fences to the Demand Curve (Fig. 6.7) First Class Full Fare Economy (No Restrictions) One-Week Advance Purchase One-Week Advance Purchase, Saturday Night Stayover 3-Week Advance Purchase, Saturday Night Stayover 3-Wk Adv. Prchs, Sat. Night Stay, No changes/refunds 3-Week Adv. Prchs, Sat. Night Stay., $100 for Changes Late Sales through Consolidators/ Internet, no refunds Capacity of Aircraft No. of Seats Demanded Capacity of 1 st -class Cabin Price per Seat

131 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Ethical Concerns in Pricing Customers are vulnerable when service is hard to evaluate or they dont observe work Many services have complex pricing schedules hard to understand difficult to calculate full costs in advance of service Unfairness and misrepresentation in price promotions misleading advertising hidden charges Too many rules and regulations customers feel constrained, exploited customers unfairly penalized when plans change

132 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Pricing Issues: Putting Strategy into Practice (Table 6.3) How much to charge? What basis for pricing? Who should collect payment? Where should payment be made? When should payment be made? How should payment be made? How to communicate prices?

133 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Consumption follows the Timing of Payments (Research Insight 6.1) Frequency of Health Club Visits Annual Payment Plan Semiannual Payment Plan Frequency of Health Club Visits Time Line Quarterly Payment Plan Time Line Monthly Payment Plan Source: John Gourville and Dilip Soman, Pricing and the Psychology of Consumption, Harvard Business Review, September 2002,

134 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 7(5) Distributing Services

135 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Applying the Flow Model of Distribution to Services Information and promotion flow Negotiation flow Product flow Distribution embraced three interrelated elements

136 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Information and Physical Processes of the Augmented Service Product (Fig. 7.1) Exceptions Billing Payment Information Processes Information Consultation Safekeeping Physical Processes Order- Taking Core Hospitality

137 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Using Websites for Service Delivery Safekeeping Track package movements Check repair status CORE: Use Web to deliver information-based core services Core Consultation Conduct dialog Use expert systems Order-Taking Make/confirm reservations Submit applications Order goods, check status Hospitality Record preferences Billing Receive bill Make auction bid Check account status Exceptions Make special requests Resolve problems Payment Pay by bank card Direct debit Information Read brochure/FAQ; get schedules/ directions; check prices

138 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Options for Service Delivery Customer goes to the service provider (or intermediary) Service provider goes to the customer Interaction at arms length (via the Internet, telephone, fax, mail, etc.) There are 3 types of interactions between customers and service firms

139 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Method of Service Delivery (Table 7.1) Availability of Service Outlets Nature of Interaction between Customer and Service Organization Single SiteMultiple Sites Customer goes to service organization Theater Barbershop Bus service Fast-food chain Service organization goes to customer House painting Mobile car wash Mail delivery Auto club road service Customer and service organization transact at arms length Credit card company Local TV station Broadcast network Telephone company

140 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Place vs. Cyberspace Place - customers and suppliers meet in a physical environment Cyberspace - customers and suppliers do business electronically in virtual environment created by phone/internet linkages Required for people processing services Offers live experiences, social interaction, e.g., food services More emphasis on eye-catching servicescape, entertainment Ideal for info-based services Saves time Facilitates information gathering May use express logistics service to deliver physical core products

141 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E /7 - Factors Encouraging Extended Operating Hours (Mgt Memo 7.1) Economic pressure from consumers Changes in legislation Economic incentives to improve asset utilization Availability of employees to work nights, weekends Automated self-service

142 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Technology Revolutionizes Service Delivery: Some Examples Smart mobile telephones to link users to Internet Voice recognition software Automated kiosks for self-service (e.g. bank ATMs) Web sites provide information take orders and accept payment deliver information-based services Smart cards that can act as electronic wallets

143 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E E-Commerce: Factors that Attract Customers to Virtual Stores Convenience (24-hour availability, save time, effort) Ease of obtaining information on-line and searching for desired items Better prices than in bricks-and-mortar stores Broad selection

144 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Splitting Responsibilities for Delivering Supplementary Services (Fig. 7.2) As created by originating firm As enhanced by distributor As experienced by customer + Core =

145 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Franchising Resources are limited Long-term commitment of store managers is crucial Local knowledge is important Fast growth is necessary to pre-empt competition Franchising is a fast growth strategy, when

146 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Service Process and Market Entry People Processing Services Export the service concept Import customers Transport customers to new locations Possession Processing Services Most require an ongoing local presence, whether it is the customers dropping off items or personnel visiting customer sites Information Based Services Export the service to a local service factory Import customers Export the information via telecommunications and transform it locally

147 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Barriers to International Trade in Services Operating successfully in international markets remains difficult for certain services despite efforts of the WTO and control relaxations Barriers include Refusal by immigration offices to issue work permits Heavy taxes on foreign firms Domestic preference policies Legal restrictions Lack of broadly-agreed accounting standards Cultural differences (esp. for entertainment industry)

148 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Forces for Internationalization Market drivers Competition drivers Technology drivers Cost drivers Government drivers Impact will vary by service type (people, possessions, information)

149 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Modes of Internationalization Export information-based services transmit via electronic channels store in physical media, ship as merchandise Use third parties to market/deliver service concept licensing agents brokers franchising alliance partners minority joint ventures Control service enterprise abroad direct investment in new business buyout of existing business

150 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Impact of Globalization Drivers on Different Service Categories (Table 7.2) Globalization Drivers People Processing Possession Processing Information Based Competition Simultaneity of production and consumption limits leverage of foreign competitive advantage, but management systems can be globalized Technology drives globalization of competitors with technical edge. Highly vulnerable to global dominance by competitors with monopoly or competitive advantage in information. Market People differ economically and culturally, so needs for service and ability to pay may vary. Level of economic developments impacts demand for services to individually owned goods Demand for many services is derived to a significant degree from economic and educational levels.

151 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Impact of Globalization Drivers on Different Service Categories (Table 7.2, contd) Globalization Drivers People Processing Possession Processing Information Based Technology Use of IT for delivery of supplementary services may be a function of ownership and familiarity with technology. Need for technology- based service delivery systems depends on possessions requiring service and the cost trade-offs in labor substitution Ability to deliver core services through remote terminals may be a function of investment in computerization etc. Cost Variable labor rates may impact on pricing in labor-sensitive services. Variable labor rates may favor low-cost locations. Major cost elements can be centralized & minor cost elements localized. Government Social policies (e.g., health) vary widely and may affect labor cost etc. Policies may decrease/increase cost & encourage/discourage certain activities Policies may impact demand and supply and distort pricing

152 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 8 Designing and Managing Service Processes

153 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Developing a Blueprint – Some Basic Advice Identify key activities in creating and delivering the service Distinguish between front stage (what customers experience) and back stage Chart activities in sequence Show how interactions between customers and employees are supported by backstage activities and systems Establish service standards for each step Identify potential fail points Focus initially on big picture (later, can drill down for more detail in specific areas)

154 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Service Blueprinting: Key Components 1. Define standards for frontstage activities 2. Specify physical evidence 3. Identify principal customer actions line of interaction (customers and front stage personnel) Front stage actions by customer-contact personnel line of visibility (between front stage and backstage) Backstage actions by customer contact personnel 8. Support processes involving other service personnel 9. Support processes involving IT Where appropriate, show fail points and risk of excessive waits

155 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Simplified Example: Blueprinting a Hotel Visit (extract only) Physical Evidence Customer Actions Employee Actions Face-to-face Front Stage Phone Contact Backstage Make reservation Rep. records, confirms Arrive, valet park Check-in at reception Doorman greets, valet takes car Enter data Valet Parks Car Make up Room Register guest data Receptionist verifies, gives key to room Go to room Hotel exterior, lobby, employees, key Elevator, corridor, room, bellhop Line of Interaction Line of Visibility

156 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Improving Reliability of Processes by Failure Proofing Analysis of reasons for failure often reveals opportunities for failure proofing to reduce/eliminate risk of errors Errors include: treatment errorshuman failures during contact with customers tangible errorsfailures in physical elements of service Fail-safe procedures include measures to prevent omission of tasks or performance of tasks incorrectly in wrong order too slowly not needed or specified Need fail-safe methods for both employees and customers

157 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Process Redesign: Principal Approaches (Table 8-1) Eliminating non-value-adding steps Shifting to self-service Delivering direct service Bundling services Redesigning physical aspects of service processes

158 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Customers as Co-Producers: Levels of Participation in Service Production Low – Employees and systems do all the work Medium – Customer inputs required to assist provider Provide needed information, instructions Make personal effort May share physical possessions High – Customer works actively with provider to co-produce the service

159 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Self Service Technologies (SSTs) Self-service is ultimate form of customer involvement in service production Customers undertake specific activities using facilities or systems provided by service supplier Customers time and effort replace those of employees Concept is not newself-serve supermarkets date from 1930s, ATMs and self-serve gas pumps from 1970s Today, customers face wide array of SSTs to deliver information-based services, both core and supplementary Many companies seek to divert customers from employee contact to Internet-based self-service

160 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Service Firms as Teachers: Well-trained Customers Perform Better Firms must teach customers roles as co-producers of service Customers need to know how to achieve best results Education can be provided through: Brochures Advertising Posted instructions Machine-based instructions Websites, including FAQs Service providers Fellow customers Employees must be well-trained to help advise, assist customers

161 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Managing Customers as Partial Employees to Increase Productivity and Quality 1. Analyze customers present roles in the business and compare to managements ideal 2. Determine if customers know how to perform and have necessary skills 3. Motivate customers by ensuring that will be rewarded for performing well 4. Regularly appraise customers performance; if unsatisfactory, consider changing roles or termination

162 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Problem of Customer Misbehavior – Identifying and Managing Jaycustomers What is a jaycustomer? A customer who behaves in a thoughtless or abusive fashion, causing problems for the firm itself, employees, other customers Why do jaycustomers matter? Can disrupt processes Affect service quality May spoil experience of other customers What should a firm do about them? Try to avoid attracting potential jaycustomers Institute preventive measures Control abusive behavior quickly Take legal action against abusers BUT firm must act in ways that dont alienate other customers

163 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Six Types of Jaycustomer Thief – seeks to avoid paying for service Rule breaker – ignores rules of social behavior and/or procedures for safe, efficient use of service Belligerent – angrily abuses service personnel (and sometimes other customers) physically and/or emotionally Family Feuders – fight with other customers in their party Vandal – deliberately damages physical facilities, furnishings, and equipment Deadbeat – fails to pay bills on time Can you think of others? How should firms deal with each of these problems?

164 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 9 Balancing Demand and Capacity

165 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Relating Demand to Capacity: Four Key Concepts Excess demand: too much demand relative to capacity at a given time Excess capacity: too much capacity relative to demand at a given time Maximum capacity: upper limit to a firms ability to meet demand at a given time Optimum capacity: point beyond which service quality declines as more customers are serviced

166 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Variations in Demand Relative to Capacity (Fig. 9-1) VOLUME DEMANDED TIME CYCLE 1 TIME CYCLE 2 Maximum Available Capacity Optimum Capacity (Demand and Supply Well Balanced Low Utilization (May Send Bad Signals) Demand exceeds capacity (business is lost) Demand exceeds optimum capacity (quality declines) Excess capacity (wasted resources) CAPACITY UTILIZED

167 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Defining Productive Capacity in Services Physical facilities to contain customers Physical facilities to store or process goods Physical equipment to process people, possessions, or information Labor used for physical or mental work Public/private infrastructuree.g., highways, airports, electricity

168 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Alternative Capacity Management Strategies Level capacity (fixed level at all times) Stretch and shrink offer inferior extra capacity at peaks (e.g. bus/metro standees) vary seated space per customer (e.g. elbow room, leg room) extend/cut hours of service Chase demand (adjust capacity to match demand) schedule downtime in low demand periods use part-time employees rent or share extra facilities and equipment cross-train employees Flexible Capacity (vary mix by segment)

169 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Predictable Demand Patterns and Their Underlying Causes (Table 9-1) Predictable Cycles of Demand Levels day week month year other Underlying Causes of Cyclical Variations employment billing or tax payments/refunds pay days school hours/holidays seasonal climate changes public/religious holidays natural cycles (e.g. coastal tides)

170 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Causes of Seemingly Random Changes in Demand Levels Weather Health problems Accidents, Fires, Crime Natural disasters Question: which of these events can be predicted?

171 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Alternative Demand Management Strategies (Table 9-2) Take no action let customers sort it out Reduce demand higher prices communication promoting alternative times Increase demand lower prices communication, including promotional incentives vary product features to increase desirability more convenient delivery times and places Inventory demand by reservation system Inventory demand by formalized queueing

172 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Hotel Room Demand Curves by Segment and by Season (Fig. 9-2) B h = business travelers in high season B l = business travelers in low season T h = tourist in high season T l = tourist in low season BhBh BhBh BlBl BlBl ThTh ThTh TlTl TlTl Price per Room Night Quantity of Rooms Demanded at Each Price by Travelers in Each Segment in Each Season Note: hypothetical example

173 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Avoiding Burdensome Waits for Customers Add extra capacity so that demand can be met at most times (problem: may add too many costs) Rethink design of queuing system to give priority to certain customers or transactions Redesign processes to shorten transaction time Manage customer behavior and perceptions of wait Install a reservations system

174 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Alternative Queuing Configurations (Fig. 9-4) Single line, single server, single stage Single line, single servers at sequential stages Parallel lines to multiple servers Designated lines to designated servers Single line to multiple servers (snake) Take a number (single or multiple servers)

175 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Tailoring Queuing Systems to Market Segments: Criteria for Allocation to Designated Lines Urgency of job emergencies vs. non-emergencies Duration of service transaction number of items to transact complexity of task Payment of premium price First class vs. economy Importance of customer frequent users/loyal customers vs. others

176 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Ten Propositions on the Psychology of Waiting Lines (Table 9-3) 1.Unoccupied time feels longer 2.Preprocess/postprocess waiting feel longer than in- process 3.Anxiety makes waiting seem longer 4.Uncertain waiting is longer than known, finite waiting 5.Unexplained waiting seems longer 6.Unfair waiting is longer than equitable waiting 7.People will wait longer for more valuable services 8.Waiting alone feels longer than in groups 9.Physically uncomfortable waiting feels longer 10. Waiting seems longer to new or occasional users Sources: Maister; Davis & Heineke; Jones & Peppiatt

177 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Benefits of Effective Reservations Systems Controls and smoothes demand Pre-sells service Informs and educates customers in advance of arrival Customers avoid waiting in line for service (if service times are honored) Data capture helps organizations prepare financial projections

178 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Characteristics of Well-designed Reservations Systems Fast and user friendly for customers and staff Can answer customer questions Offers options for self service (e.g. Web) Accommodates preferences (e.g., room with view) Deflects demand from unavailable first choices to alternative times and locations Includes strategies for no-shows and overbooking requiring deposits to discourage no-shows canceling unpaid bookings after designated time compensating victims of over-booking

179 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Setting Capacity Allocation Sales Targets for a Hotel by Segment and Time Period (Fig. 9-5) Out of commission for renovation Executive service guests Transient guests Weekend package Groups and conventions Airline contracts 100% 50% Week 7 (Low Season) MNights:Tu Time WThFSSn Executive service guests Transient guests W/E package Groups (no conventions) Airline contracts Week 36 (High Season) MTuWThFSSn Capacity (% rooms)

180 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Information Needed for Demand and Capacity Management Strategies Historical data on demand level and composition, noting responses to marketing variables Demand forecasts by segment under specified conditions Fixed and variable cost data, profitability of incremental sales Site-by-site demand variations Customer attitudes towards queuing Customer evaluations of quality at different levels of capacity utilization

181 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 10 Planning the Service Environment

182 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Purpose of Service Environments The service environment influences buyer behaviour in 3 ways Message-creating Medium: symbolic cues to communicate the distinctive nature and quality of the service experience. Attention-creating Medium: to make the servicescape stand out from other competing establishments, and to attract customers from target segments. Effect-creating Medium: colors, textures, sounds, scents and spatial design to enhance the desired service experience, and/or to heighten an appetite for certain goods, services or experiences Helps the firm to create a distinctive image & positioning that is unique.

183 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Comparison of Hotel Lobbies (Figure 10.1) Four Seasons Hotel, New York Orbit Hotel and Hostel, Los Angeles The servicescape is part of the value proposition!

184 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Mehrabian-Russell Stimulus-Response Model (Figure 10.2) Response Behaviors: Approach/ Avoidance & Cognitive Processes Environmental Stimuli & Cognitive Processes Dimensions of Affect: Pleasure and Arousal

185 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Mehrabian-Russell Stimulus-Response Model Simple and fundamental model of how people respond to environments Peoples conscious and unconscious perceptions and interpretation of the environment influence how they feel in that environment Feelings, rather than perceptions or thoughts drive behavior Typical outcome variable is approach or avoidance of an environment, but other possible outcomes can be added to the model as well

186 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Russell Model of Affect Arousing Pleasant Sleepy Unpleasant Exciting Relaxing Boring Distressing

187 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Russell Model of Affect Emotional responses to environments can be described along two main dimensions, pleasure and arousal. Pleasure is subjective depending on how much the individual likes or dislikes the environment Arousal quality of an environment is dependent on its information load, i.e., its degree of Novelty (unexpected, surprising, new, familiar) and Complexity (number of elements, extent of motion or change)

188 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Drivers of Affect Affect can be caused by perceptions and cognitive processes of any degree of complexity. Simple Cognitive Processes, Perception of Stimuli tangible cues (of service quality) consumer satisfaction Complex Cognitive Processes affective charged schemata processing attribution processes The more complex a cognitive process becomes, the more powerful its potential impact on affect.However, most service encounters are routine. Simple processes can determine affect.

189 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Behavioral Consequence of Affect Basically, pleasant environments result in approach, and unpleasant environments result in avoidance Arousal acts as an amplifier of the basic effect of pleasure on behavior If the environment is pleasant, increasing arousal can lead to excitement and stronger positive consumer response. If the environment is unpleasant, increasing arousal level will move consumers into the Distressing region Feelings during the service encounter is also an important driver of customer loyalty

190 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E An Integrated Framework – Bitners ServiceScape Model ( Figure 10.4) Environmental Dimensions Perceived ServiceScape Ambient Conditions Space/ Function Signs, Symbols & Artefacts Cognitive Emotional Psychological Customer Response Moderator Employee Responses Approach or Avoid Approach or Avoid Social Interaction Between Customers & Employees Holistic Environ- ment ModeratorsInternal ResponsesBehaviour Customer Responses Employee Response Moderator Cognitive Emotional Psychological

191 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E An Integrated Framework – Bitners ServiceScape Model(cont) Identifies the main dimensions in a service environment and views them holistically Customer and employee responses classified under, cognitive, emotional and psychological which would in turn lead to overt behavior towards the environment Key to effective design is how well each individual dimension fits together with everything else

192 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Dimensions of the Service Environment Ambient Conditions Music (e.g, fast tempo and high volume increase arousal levels) Scent (strong impact on mood, affect and evaluative responses, purchase intention and in-store behavior) Color (e.g, warm colors associated with elated mood states and arousal but also increase anxiety, cool colors reduce arousal but can elicit peacefulness and calm) Service environments are complex and have many design elements. The main dimensions in the servicescape model includes:

193 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Dimensions of the Service Environment (cont) Spatial Layout and Functionality Layout refers to size and shape of furnishings and the ways it is arranged Functionality is the ability of those items to facilitate performance Signs, Symbols and Artifact Explicit or implicit signals to communicate the firms image, help consumers find their way and to convey the rules of behavior

194 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Impact of Music on Restaurant Diners (Table 10-2) Restaurant Patron Behavior Fast-beat Music Environment Slow-beat Music Environment Difference between Slow and Fast-beat Environments Absolute Difference % Difference Consumer time spent at table 45min56min+11min+24% Spending on food $55.12$55.81+$0.69+1% Spending on beverages $21.62$30.47+$ % Total spending $76.74$86.28+$ % Estimated gross margin $48.62$55.82+$ %

195 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Effects of Scents on the Perceptions of Store Environments (Table 10-3) EvaluationUnscented Environment Mean Ratings Scented Environment Mean Ratings Difference Store Evaluation Negative/positive Outdated/modern Store Environment Unattractive/attracti ve Drab/colorful Boring/Stimulating

196 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Effects of Scents on the Perceptions of Store Environments (Table 10-3) EvaluationUnscented Environment Mean Ratings Scented Environment Mean Ratings Difference Merchandise Outdated/up- to-date style Inadequate/adequate Low/high quality Low/high price

197 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Aromatherapy: The Effects of Fragrance on People (Table 10-4) FragranceAromath erapy Aromather apy Class Tradition al Use Potential Psychological Impact on People OrangeCitrusCalmingSoothing agent, astringen t Calming and relaxing effect esp. for nervous people LavenderHerbaceo us Calming, balancing, soothing Muscle relaxant, soothing agent Relaxing and calming, helps create a homey and comfortable feel JasmineFloralUplifting, balancing Emollient soothing agent Helps makes people feel refreshed, joyful, comfortable PeppermintMintyEnergizing, stimulating Skin cleanser Increase attention level and boosts energy

198 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Common Associations and Human Responses to Colors (Table 10-5) ColorDegree of Warmth Nature Symbol Common Association and Human Responses to Color RedWarmEarthHigh energy and passion; can excite, stimulate, and increase arousal and blood pressures OrangeWarmestSunsetEmotions, expressions, and warmth GreenCoolGrass and Trees Nurturing, healing and unconditional love BlueCoolestSky and Ocean Relaxation, serenity and loyalty

199 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Selection of Environmental Design Elements There is a multitude of research on the perception and impact of environmental stimuli on behaviour, including: People density, crowding Lighting Sound/noise Scents and odours Queues No standard formula to designing the perfect combination of these elements. Design from the customers perspective Design with a holistic view!

200 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Tools to Guide in Servicescape Design Keen Observation of Customers Behavior and Responses to the service environment by management, supervisors, branch managers, and frontline staff Feedback and Ideas from Frontline Staff and Customers using a broad array of research tools ranging from suggestion boxes to focus groups and surveys. Field Experiments can be used to manipulate specific dimensions in an environment and the effects observed. Blueprinting or Service Mapping - extended to include the physical evidence in the environment.

201 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 11 Managing People for Service Advantage

202 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Frontline Service Personnel: Source of Customer Loyalty and Competitive Advantage Frontline is an important source of differentiation and competitive advantage. It is: a core part of the product the service firm the brand Frontline also drives customer loyalty, with employees playing key role in anticipating customer needs, customizing service delivery and building personalized relationships

203 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Boundary Spanning Roles Boundary spanners link the inside of the organization to the outside world Multiplicity of roles often results in service staff having to pursue both operational and marketing goals Consider management expectations of restaurant servers: deliver a highly satisfying dining experience to their customers be fast and efficient at executing operational task of serving customers do selling and cross selling, e.g. We have some nice desserts to follow your main course

204 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Role Stress in the Frontline Person vs. Role: Conflicts between what jobs require and employees own personality and beliefs Organization vs. Customer: Dilemma whether to follow company rules or to satisfy customer demands Customer vs. Customer: Conflicts between customers that demand service staff intervention 3 main causes of role stress:

205 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Emotional Labor The act of expressing socially desired emotions during service transactions (Hochschild, The Managed Heart) Three approaches used by employees surface acting deep acting spontaneous response Performing emotional labor in response to societys or managements display rules can be stressful Good HR practice emphasizes selective recruitment, training, counseling, strategies to alleviate stress

206 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Cycles of Failure, Mediocrity and Success Too many managers make short-sighted assumptions about financial implications of: Low pay Low investment (recruitment, training) High turnover human resource strategies Often costs of short-sighted policies are ignored: Costs of constant recruiting, hiring & training Lower productivity & lower sales of new workers Costs of disruptions to a service while a job remains unfilled Loss of departing persons knowledge of business and customers Cost of dissatisfied customers

207 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Cycle of Failure (Fig. 11.1)

208 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Service Sabotage (Fig. 11-A) Customary-Private Service Sabotage Sporadic-Private Service Sabotage Customer-Public Service Sabotage Sporadic-Public Service Sabotage Openness of Service Sabotage Behaviors Covert Overt Normality of Service Sabotage Behaviors Routinized Intermittent e.g. Waiters serving smaller servings, bad beer or sour wine e.g. Talking to guests like young kids and putting them down e.g. Chef occasionally purposefully slowing down orders e.g. Waiters spilling soup onto laps, gravy onto sleeves, or hot plates into someones hands

209 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Cycle of Mediocrity (Fig. 11.2)

210 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Cycle of Success (Fig. 11.3) Source: Heskett and Schlesinger

211 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E How to Manage People for Service Advantage? 1.Hire the right people 2.Enable your people 3.Motivate and energize your people Staff performance is a function of both ability and motivation. How can we get able service employees who are motivated to productively deliver service excellence?

212 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Hire the Right People The old saying People are your most important asset is wrong. The RIGHT people are your most most important asset. The old saying People are your most important asset is wrong. The RIGHT people are your most most important asset. Jim Collins

213 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Recruitment The right people are a firms most important asset: take a focused, marketing-like approach to recruitment Clarify what must be hired versus what can be taught Clarify nature of the working environment, corporate values and style, in addition to job specs Ensure candidates have/can obtain needed qualifications Evaluate candidates fit with firms culture and values Fit personalities, styles, energies to the appropriate jobs

214 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Select And Hire the Right People: (1) Be the Preferred Employer Create a large pool: Compete for Talent Market Share What determines a firms applicant pool? Positive image in the community as place to work Quality of its services The firms perceived status There is no perfect employee Different jobs are best filled by people with different skills, styles or personalities Hire candidates that fit firms core values and culture Focus on recruiting naturally warm personalities

215 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Observe Behavior Hire based on observed behavior, not words you hear Best predictor of future behavior is past behavior Consider group hiring sessions where candidates given group tasks Personality Testing Willingness to treat co-workers and customers with courtesy, consideration and tact Perceptiveness regarding customer needs Ability to communicate accurately and pleasantly Select and Hire the Right People: (2) How to Identify the Best Candidates

216 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Select and Hire the Right People: (3) How to Identify the Best Candidates Employ Multiple, Structured Interviews Use structured interviews built around job requirements Use more than one interviewer to reduce similar to me effects Give Applicants a Realistic Preview of the Job Chance to have hands-on with the job Assess how the candidates respond to job realities Allow candidates to self select themselves out of the job

217 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Organizational Culture, Purpose and Strategy Promote core values, get emotional commitment to strategy Get managers to teach why, what and how of job. Interpersonal and Technical Skills Both are necessary but neither is sufficient for optimal job performance Product/Service Knowledge Staffs product knowledge is a key aspect of service quality Staff need to be able to explain product features and to position products correctly Train Service Employees

218 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Factors Favoring Employee Empowerment Firms strategy is based on competitive differentiation and on personalized, customized service Emphasis on long-term relationships vs. one-time transactions Use of complex and non-routine technologies Environment is unpredictable, contains surprises Managers are comfortable letting employees work independently for benefit of firm and customers Employees seek to deepen skills, like working with others, and are good at group processes

219 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Control vs. Involvement Model of Management Information about operating results and measures of competitive performance Rewards based on organizational performance (e.g. profit sharing, stock ownership) Knowledge/skills enabling employees to understand and contribute to organizational performance Power to influence work procedures and organizational direction (e.g. quality circles, self-managing teams) Source: Bowen and Lawler Control concentrates 4 key features at top of organization; Involvement pushes them down:

220 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Suggestion involvement Employee recommendation Job involvement Jobs redesigned Employees retrained Supervisors facilitate High involvement Information is shared Employees skilled in teamwork, problem solving etc. Participate in decisions Profit sharing and stock ownership Levels of Employee Involvement

221 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Motivate and Energize the Frontline Job content Feedback and recognition Goal accomplishment Use the full range of available rewards effectively, including:

222 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Inverted Organizational Pyramid (Fig. 11.5) Frontline Staff Top Mgmt Middle Mgmt Legend: = Service encounters, or Moments of Truth. Traditional Organizational Pyramid Inverted Pyramid with a Customer & Frontline Focus Customer Base Frontline Staff Middle Mgmt & Top Mgmt Support Frontline

223 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Wheel of Successful HR in Service Firms (Fig. 11.6) Leadership that: Focuses the entire organization on supporting the frontline Fosters a strong service culture with passion for service and productivity Drives values that inspire, energize and guide service providers 1. Hire the Right People 3. Motivate & Energize Your People 2. Enable Your People Be the preferred employer & compete for talent market share Intensify the selection process Empower Frontline Build high performance service delivery teams Extensive Training Utilize the full range of rewards Service Excellence & Productivity

224 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 12 Managing Relationships and Building Loyalty

225 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Four Stages of Brand Loyalty in a Consumer Cognitive loyalty – perception from brand attribute information that one brand is preferable to its alternatives Affective loyalty – developing a liking for the brand based on cumulatively satisfying usage occasions Conative loyalty – commitment to rebuying the same brand Action loyalty – exhibiting consistent repurchase behavior

226 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Loyalty is Important to Profitability : Index of Customer Profits over Time (Fig. 12.1) Credit cardIndustrial laundryIndustrial distributionAuto servicing 0 (Year 1=100) – Year 1Year 2Year 3Year 4Year 5 Based on data from Reichheld and Sasser

227 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E What Makes Loyal Customers More Profitable? Tend to spend more as relationship develops customers balances may grow may consolidate purchases to one supplier Cost less to serve less need for information and assistance make fewer mistakes Recommend new customers to firm (act as unpaid sales people) Trust leads to willingness to pay regular prices vs. shopping for discounts

228 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Analyzing Why Customers Are More Profitable over Time (Fig. 12.2) Year Profit from price premium Profit from references Profit from reduced op. costs Profit from increased usage Base Profit Source: Reichheld and Sasser

229 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Measuring Customer Equity: Calculating Life Time Value of Each Customer Value at Acquisition revenues (application fee + initial purchase) Less costs (marketing +credit check + account set up) Annual Value (project for each year of relationship) revenues (annual fee + sales + service fees + value of referrals) Less costs (account management + cost of sales + write-offs) Net Present Value Determine anticipated customer relationship lifetime Select appropriate discount figure Sum anticipated annual values (future profits) at chosen discount rate Customer Equity is total sum of NPVs of all current customers

230 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Customer-Firm Relationship Database Marketing: Involves the use of technology by delivering differentiated service levels to consumers and subsequently tracking the relationship. Interaction Marketing: Usually in B2B context where people and the social process also add mutually beneficial value. Network Marketing: Common in B2B context where companies commit resources to develop positions in a network of relationships with the stakeholders and relevant agencies. Todays marketers seek to develop long-term relationships with customers. Relationship marketing includes:

231 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Types of Relationships with Customers (Table 12.1) Type of Relationship--Firm and Customer Nature of Service Delivery Membership No formal relationship Continuous Cable TV Radio station Insurance Police College enrollment Lighthouse Discrete transactions Subscriber phone Pay phone Theater subscription Movie theater Warranty repair Public transport

232 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Basic Segmentation Issues: Building an Appropriate Customer Portfolio Target customers whose needs match firms capabilities Focus on value of prospective customers within each segment, not just numbers Avoid targeting customers who might abuse: our employees, facilities other customers Create a mix of segments to reduce risks of volatility during swings of economic cycles

233 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Service-Relevant Segmentation Variables Timing of service use (e.g., by hour, day, season) Level of skill and experience as co-producer/self- server Preferred language in face-to-face contact Access to electronic delivery systems (e.g., Internet) Attitudes toward use of new service technologies

234 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Identifying and Selecting Target Segments (Mgt Memo 12.2) User characteristics demographics psychographics geographic location benefits sought User behavior when, where, how services used quantity/value of purchases frequency of use profitability of relationship sensitivity to marketing variables

235 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Portfolio of Professional Assignments (Fig. 12.4) Analytical Work on Project Data Bread and Butter Projects Significant Projects Pacesetters Major, State-of-the-art challenges for the firms principals that give the firm high visibility Major, State-of-the-art challenges for the firms principals that give the firm high visibility Demanding client assignments offering a learning experience for the firms most experienced associates Routine client projects shared among principals and associates Routine client projects shared among principals and associates Entry-level tasks for new associates or for research assistants & paraprofessionals Entry-level tasks for new associates or for research assistants & paraprofessionals

236 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Customer Pyramid (Fig. 12.5) Lead Iron Gold Which segment sees high value in our offer, spends more with us over time, costs less to maintain, and spreads positive word-of-mouth? Which segment costs us in time, effort and money, yet does not provide the return we want? Which segment is difficult to do business with? Platinum Good Relationship Customers Poor Relationship Customers

237 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E How Customers See Relational Benefits in Service Industries (Research Insights 12.1) Confidence benefits less risk of something going wrong, less anxiety ability to trust provider know what to expect get firms best service level Social benefits mutual recognition, known by name friendship, enjoyment of social aspects Special treatment benefits better prices, discounts, special deals unavailable to others extra services higher priority with waits, faster service

238 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Customer Satisfaction-Loyalty Relationship (Fig. 12.6) Loyalty (Retention) Very dissatisfied Dissatisfied Neither satisfied nor dissatisfied Satisfied Very Satisfied Satisfaction Near Apostle Zone of Defection Zone of Indifference Zone of Affection Terrorist Apostle

239 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Wheel of Loyalty (Fig. 12.7) 1. Build a Foundation for Loyalty 2. Create Loyalty Bonds 3. Reduce Churn Drivers Customer Loyalty Be selective in acquisition Conduct churn diagnostic Segment the market Use effective tiering of service. Deliver quality service. Deepen the relationship Give loyalty rewards Build higher level bonds Implement complaint handling & service recovery Address key churn drivers Increase switching costs Enabled through: Frontline staff Account managers Membership programs CRM Systems

240 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Rewarding Value of Use, Not Just Frequency at British Airways (Best Practice in Action 12.2) Dedicated reservations Reservations assurance Priority waitlist and standby Advance notification of delays exceeding 4 hours Upgraded check-in Preferred boarding Special services assistance Bonus air miles Upgrade for two

241 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Drivers of Service Switching (Fig. 12.9) Service Switching Service Encounter Failures Uncaring Impolite Unresponsive Unknowledgeable Response to Service Failure Negative Response No Response Reluctant Response Pricing High Price Price Increases Unfair Pricing Deceptive Pricing Inconvenience Location/Hours Wait for Appointment Wait for Service Competition Found Better Service Ethical Problems Cheat Hard Sell Involuntary Switching Customer Moved Provider Closed Value Proposition Others Service Failure / Recovery Core Service Failure Service Mistakes Billing Errors Service Catastrophe Unsafe Conflict of Interest

242 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Common CRM Applications (Mgt Memo 12.2) Signifies the whole process by which relationships with customers are built and maintained. CRM as an enabler, offering a unified customer interface and allow firms to better understand and segment the customers etc. Applications include: Data collection Data analysis Sales force automation Marketing automation Call center automation

243 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Customer Relationship Strategies with CRM Systems: Key Questions How should our value proposition change to increase customer loyalty? How much customization or one-to-one marketing and service delivery is appropriate and profitable? What is the incremental profit potential of increasing share of wallet with current customers? How much does this vary by customer tier and/or segment? How much time and resource can we allocate to CRM right now? If we believe in CRM, why have we not taken steps in that direction before? What can we do today to develop customer relationship without spending on technology?

244 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 13 Customer Feedback and Service Recovery

245 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E American Customer Satisfaction Index: Selected Industry Scores, 2002 Industry: Soft drinks Express mail, parcels Cars, vans, etc. Life insurance Comm. banks Hotels Personal computers Airlines Hospitals Fast food Restaurants Broadcasting (natl. news) IRS (tax) %1.3%0.0%1.3%2.8%0.0% 8.2%2.9%-2.6%4.8%3.3% % Change 2002 vs 2001 Score (Max = 100)

246 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Key Questions for Managers to Ask about Customer Complaining Behavior Why do customers complain? What proportion of unhappy customers complain? Why dont unhappy customers complain? Who is most likely to complain? Where do customers complain?

247 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Courses of Action Open to a Dissatisfied Customer (Figure 13.1) Service Encounter is Dissatisfactory Take some form of public action Take some form of private action Take no action Complain to the service firm Complain to a third party Take legal action to seek redress Defect (switch provider) Negative word-of- mouth Any one or a combination of these responses is possible

248 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Dimensions of Perceived Fairness in Service Recovery Process (Figure 13.2) Procedural Justice Interactive Justice Interactive Justice Outcome Justice Outcome Justice Complaint Handling & Service Recovery Process Justice Dimensions of the Service Recovery Process Customer Satisfaction with the Service Recovery Customer Satisfaction with the Service Recovery Source: Tax and Brown

249 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Proportion of Unhappy Customers Who Buy Again Depending on the Complaint Process 9% 37% 19% 46% 54% 70% 82% 95% Customer did not complain Complaint was not resolved Complaint was resolved Complaint was resolved quickly Problem cost > $100Problem cost $1 - 5 Source: TARP study

250 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Impact of Effective Service Recovery on Retention No Problem Unresolved Customer Retention 0% 10%20%30%40%50% 60% 70%80%90%100% 84% 92% 46% Source: IBM-Rochester study Problem, but effectively resolved

251 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Components of an Effective Service Recovery System (Figure 13.3)

252 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Strategies to Reduce Customer Complaint Barriers (Table 13.1) Complaint Barriers for Dissatisfied Customers Strategies to Reduce These Barriers Inconvenience Difficult to find the right complaint procedure. Effort, e.g., writing a letter. Make feedback easy and convenient by: Printing Customer Service Hotline numbers, and postal addresses on all customer communications materials. Doubtful Pay Off Uncertain whether any action, and what action will be taken by the firm to address the issue the customer is unhappy with. Reassure customers that their feedback will be taken seriously and will pay off by: Having service recovery procedures in place, and communicating this to customers. Featuring service improvements that resulted from customer feedback. Unpleasantness Complaining customers fear that they may be treated rudely, may have to hassle, or may feel embarrassed to complain. Make providing feedback a positive experience: Thank customers for their feedback. Train the frontline not to hassle and make customers feel comfortable. Allow for anonymous feedback.

253 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E How to Enable Effective Service Recovery Be proactiveon the spot, before customers complain Plan recovery procedures Teach recovery skills to relevant personnel Empower personnel to use judgment and skills to develop recovery solutions

254 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Guidelines for Effective Problem Resolution (Management Memo 13.1) Act fast Admit mistakes but dont be defensive Understand problem from customers viewpoint Dont argue Acknowledge customers feelings Give benefit of doubt Clarify steps to solve problem Keep customers informed of progress Consider compensation Persevere to regain goodwill

255 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Service Guarantees Help Promote and Achieve Service Loyalty Force firms to focus on what customers want Set clear standards Highlights cost of service failures Require systems to get & act on, customer feedback Reduce risks of purchase and build loyalty

256 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Types of Service Guarantees Single attribute-specific guarantee – one key service attribute is covered Multiattribute-specific guarantee – a few important service attributes are covered Full-satisfaction guarantee – all service aspects covered with no exceptions Combined guarantee – like the full-satisfaction, adding explicit minimum performance standards on important attributes

257 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Hampton Inn 100% Satisfaction Guarantee (Figure 13.4) What are the benefits of such a guarantee? Are there any downsides?

258 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Key Objectives of Effective Customer Feedback Systems Assessment and benchmarking of service quality and performance Customer-driven learning and improvements Creating a customer-oriented service culture

259 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Building a Customer Feedback System Total market surveys Post-transaction surveys Ongoing customer surveys Customer advisory panels Employee surveys/panels Focus groups Mystery shopping Complaint analysis Capture of service operating data

260 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Strengths and Weakness of Key Customer Feedback Collection Tools (Table 13.3) Selection of a cocktail of effective customer feedback collection tools.

261 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Entry Points for Unsolicited Feedback Employees serving customers face-to-face or by phone Intermediaries acting for original supplier Managers contacted by customers at head/regional office Complaint cards mailed or placed in special box Complaints passed to company by third-party recipients consumer advocates trade organizations legislative agencies other customers

262 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 14 Improving Service Quality and Productivity

263 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Importance of Productivity and Quality for Service Marketers Productivity Helps to keep costs down lower prices to develop market, compete better increase margins to permit larger marketing budgets raise profits to invest in service innovation May impact service experience (must avoid negatives) May require customer involvement, cooperation Quality Gain competitive advantage, maintain loyalty Increase value (may permit higher margins) Improve profits

264 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Perspectives on Service Quality Transcendental: Quality = excellence. Recognized only through experience Quality is precise and measurable Quality lies in the eyes of the beholder Quality is conformance to the firms developed specifications Quality is a trade-off between price and value Product-Based: User-Based: Manufacturing- Based: Value-Based:

265 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Dimensions of Service Quality Tangibles Reliability Responsiveness Assurance competence, courtesy credibility security Empathy access communication understanding of customer

266 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Seven Service Quality Gaps (Fig. 14.1) Customer experience relative to expectations Advertising and sales promises Customer interpretation of communications 1. Knowledge Gap 2. Standards Gap 3. Delivery Gap 5. Perceptions Gap 7. Service Gap Customer needs and expectations Management definition of these needs Translation into design/delivery specs Execution of design/delivery specs Customer perceptions of product execution 6. Interpretation Gap 4. I.C.Gap MANAGEMENT CUSTOMER

267 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Prescriptions for Closing Service Quality Gaps (Table 14.3) Knowledge: Learn what customers expect--conduct research, dialogue, feedback Standards: Specify SQ standards that reflect expectations Delivery: Ensure service performance matches specs-- consider roles of employees, equipment, customers Internal communications: Ensure performance levels match marketing promises Perceptions: Educate customers to see reality of service delivery Interpretation: Pretest communications to make sure message is clear and unambiguous.

268 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Hard and Soft Measures of Service Quality Hard measures refer to standards and measures that can be counted, timed or measured through audits typically operational processes or outcomes e.g. how many trains arrived late? Soft measures refer to standards and measures that cannot easily be observed and must be collected by talking to customers, employees or others e.g. SERVQUAL, surveys, and customer advisory panels. Control charts are useful for displaying performance over time against specific quality standards.

269 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Hard Measures of Service Quality Control charts to monitor a single variable Service quality indexes Root cause analysis (fishbone charts) Pareto analysis

270 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Composition e of FedExs Service Quality Index (SQI) (Table 14.4) Late Delivery – Right Day Late Delivery – Wrong Day Tracing request unanswered Complaints reopened Missing proofs of delivery Invoice adjustments Missed pickups Lost packages Damaged packages Aircraft Delays (minutes) Overcharged (packages missing label) Abandoned calls Failure Type Total Failure Points (SQI) = Weighting Factor XXX,XXX Daily Points X No of Incidents =

271 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Control Chart: Percent of Flights Leaving within 15 Minutes of Schedule (Fig. 14.2) JFMAMJJASOND 60% 70% 80% 90% 100% Month

272 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Tools to Address Service Quality Problems Fishbone diagrams: A cause-and-effect diagram to identify potential causes of problems. Pareto charts: Separating the trivial from the important. Often, a majority of problems is caused by a minority of causes i.e. the 80/20 rule. Blueprinting: A visualization of service delivery. It allows one to identify fail points in both the frontstage and backstage.

273 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Cause and Effect Chart for Airline Departure Delays (Fig. 14.3) Aircraft late to gate Late food service Late fuel Late cabin cleaners Poor announcement of departures Weight and balance sheet late Delayed Departures Delayed check-in procedure Acceptance of late passengers Facilities, Equipment Front-Stage Personnel Procedures Materials, Supplies Customers Gate agents cannot process fast enough Late/unavailable airline crew Arrive late Oversized bags Weather Air traffic Frontstage Personnel Procedure Materials, Supplies Backstage Personnel Information Customers Other Causes Mechanical Failures Late pushback Late baggage

274 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Analysis of Causes of Flight Departure Delays (Fig. 14.4) Late passengers Waiting for pushback Waiting for fueling Late weight and balance sheet Late cabin cleaning / supplies Other Newark All stations, excluding Chicago-Midway Hub Washington Natl. 23.1% 15.3% 15.4% 53.3% 15% 11.3% 8.7% 11.7% 33.3% 19% 9.5% 4.9 %

275 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Return on Quality (ROQ) ROQ approach is based on four assumptions: Quality is an investment Quality efforts must be financially accountable Its possible to spend too much on quality Not all quality expenditures are equally valid Implication: Quality improvement efforts may benefit from being related to productivity improvement programs

276 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E When Does Improving Service Reliability Become Uneconomical? (Fig. 14.5) Service Reliability 100% AB Investment Small Cost, Large Improvement Large Cost, Small Improvement C D Satisfy Target Customers Through Service Delivery as Planned Satisfy Target Customers Through Service Recovery Optimal Point of Reliability: Cost of Failure = Service Recovery Assumption: Customers are equally (or even more) satisfied with the service recovery provided than with a service that is delivered as planned.

277 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Productivity in a Service Context Productivity measures amount of output produced relative to the amount of inputs. Improvement in productivity means an improvement in the ratio of outputs to inputs. Intangible nature of many service elements makes it hard to measure the productivity of service firms, especially for information based services.

278 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Efficiency, Effectiveness, and Productivity Efficiency: comparison to a standard--usually time-based (e.g., how long employee takes to perform specific task) Problem: focus on inputs rather than outcomes May ignore variations in quality or value of service Effectiveness: degree to which firm is meeting its goals Cannot divorce productivity from quality/customer satisfaction Productivity: financial valuation of outputs to inputs Consistent delivery of outcomes desired by customers should command higher prices

279 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Measuring Service Productivity Traditional measures of service output tend to ignore variations in quality or value of service That is, they focus on outputs rather than outcomes, and stress efficiency but not effectiveness. Firms that are more effective in consistently delivering outcomes desired by customers can command higher prices. Furthermore, loyal customers are more profitable. Measures with customers as denominator include: profitability by customer capital employed per customer shareholder equity per customer

280 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Questions to Ask When Developing Strategies to Improve Service Productivity How to transform inputs into outputs efficiently? Will improving productivity hurt quality? Will improving quality hurt productivity? Are employees or technology the key to productivity? Can customers contribute to higher productivity?

281 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Operations-driven vs. Customer-driven Actions to Improve Service Productivity Operations-driven strategies Control costs, reduce waste Set productive capacity to match average demand Automate labor tasks Upgrade equipment and systems Train employees Leverage less-skilled employees through expert systems Customer-driven strategies Change timing of customer demand Involve customers more in production Ask customers to use third parties

282 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Backstage and Frontstage Productivity Changes: Implications for Customers Backstage improvements can ripple to the front stage and affect customers e.g., new printing peripherals may affect appearance of bank statements. Front-stage productivity enhancements are especially visible in high contact services. Some may just require passive acceptance by customers Others require customers to change their scripts and behavior.

283 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Overcoming Customers Reluctance to Accept Changes in Environment and Behavior Develop customer trust Understand customers habits and expectations Pretest new procedures and equipment Publicize the benefits Teach customers to use innovations and promote trial Monitor performance, continue to seek improvements

284 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Six Sigma Methodology to Improve and Redesign Customer Service Processes Process ImprovementProcess Design/Redesign Define Identify the problem Define requirements Set goals Identify specific or broad problems Define goal/change vision Clarify scope & customer requirements Measure Validate problem/process Refine problem/goal Measure key steps/inputs Measure performance to requirements Gather process efficiency data Analyze Develop causal hypothesis Identify root causes Validate hypothesis Identify best practices Assess process design Refine requirements Improve Develop ideas to measure root causes Test solutions Measure results Design new process Implement new process, structures and systems Control Establish measures to maintain performance Correct problems if needed Establish measures & reviews to maintain performance Correct problems if needed

285 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 15 Organizing for Service Leadership

286 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Customer-Led versus Market-Oriented Philosophies of Management Firms may lose market leader position if listen too closely to current customers Service leadership requires curiosity, risk taking Customer-led businesses focus on understanding expressed desires of customers in currently served markets Market-oriented businesses commit to understand current/ latent customer desires plus competitors plans, capabilities Scan market more broadly, have longer-term focus Work closely with lead users (windows to future vs. anchors to past) Combine traditional research with experimentation, observation Conclusion: Pursue customer satisfaction, but set limits on being led by customers, especially during rapid change

287 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Service Profit Chain (Fig. 15.1) Loyalty Service Quality Productivity & Output Quality EMPLOYEES Capability Satisfaction Service Value CUSTOMERS Satisfaction Loyalty Revenue Growth Profitability Operating strategy and service delivery system Service concept Target Market InternalExternal Workplace design Job design Selection and development Rewards and recognition Information and communication Tools for serving customers Quality and productivity improvements yield higher service quality and lower costs Lifetime value Retention Repeat business Referral

288 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Causal Links in the Service Profit Chain (Table 15.1) Customer loyalty drives profitability and growth Customer satisfaction drives customer loyalty Value drives customer satisfaction Employee productivity and retention drive value Employee loyalty drives productivity Employee satisfaction drives loyalty and productivity Internal quality drives employee satisfaction Top management leadership underlies chains success

289 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Integrating Three Functional Imperatives (recap from Chapter 1) Customers Marketing Imperative Human Resources Imperative Operations Imperative

290 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Defining Three Functional Imperatives Marketing Imperative Target right customers and build relationships Offer solutions that meet their needs Define quality package with competitive advantage Operations Imperative Create, deliver specified service to target customers Adhere to consistent quality standards Achieve high productivity to ensure acceptable costs Human Resource Imperative Recruit and retain the best employees for each job Train and motivate them to work well together Achieve both productivity and customer satisfaction

291 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Reducing Intra-Organizational Tension Transfers and cross training Cross functional taskforces New tasks and new people Process management teams Gain-sharing programs

292 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Search for Synergy: A Top Management Perspective What do we want? What can we do? What do our customers want? What do our employees, intermediaries, and other partners want?

293 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E From Losers to Leaders: Moving Up the Service Performance Ladder Service Leaders Service Leaders Crème de la crème of their respective industries Names synonymous with outstanding service, customer delight Service Professionals Clear positioning strategy Sustained reputation for meeting customer expectations Service Non-entities Traditional operations mindset Rudimentary marketing, often emphasizing price discounts Service Losers Only survive because of lack of viable alternatives in marketplace

294 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Achieving Service Leadership by Focusing on Role of Each Functional Area Marketing: move from tactical to innovative and strategic Operations: move from reactive/cost oriented to focused, innovative, well coordinated with marketing and HR Human Resources: move from tight control of low- cost workers to quality of employees as strategic advantage

295 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Leadership for Change Management Involves Eight Stages Create sense of urgency to develop impetus for change Put together strong team to direct process Create appropriate vision of where organization must go Communicate new vision broadly Empower employees to act on vision Produce sufficient short term results to create credibility Build momentum to tackle tougher problems Anchor new behaviors in the organizational culture Source: John Kotter

296 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Leadership Qualities Needed in Service Organizations Vision, charisma, persistence, high expectations, expertise, empathy, persuasiveness, integrity Ability to visualize quality of service as foundation for competing Believe in people who work for the firm, make good communications a priority Possess a natural enthusiasm for the business, teach it to others, pass on nuances, secrets, crafts of operating Cultivate leadership qualities of others in organization Use values to navigate firms through difficult times

297 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Transformational Leadership May Require Changing Corporate Culture Corporate Culture: Shared perceptions regarding what is important Shared values about what is right and wrong Shared understanding about what works and what doesnt Shared beliefs about why these things are important Shared styles of working and relating to others Climate for Service--Tangible working environment atop underlying culture. Influential factors include: Shared perceptions concerning practices, procedures and types of behaviors that get rewarded Clarity about mission and values, level of commitment to common purpose Flexibility: freedom to innovate, sense of responsibility, standards


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