SUPPLEMENTAL “SERVICES” PRODUCT ELEMENT FRAMEWORKS FOR MKTG 490

11 MKTG CHAPTER Lamb, Hair, McDaniel 2007-2008 Services and Nonprofit Organization Marketing CHAPTER Designed by Amy McGuire, B-books, Ltd. Prepared by Deborah Baker, Texas Christian University

Learning Outcomes Discuss the importance of services to the economy Discuss the differences between services and goods Describe the components of service quality and the gap model of service quality LO1 LO2 LO3

Learning Outcomes Develop marketing mixes for services LO4 Discuss relationship marketing in services Explain internal marketing in services Discuss global issues in services marketing Describe nonprofit organization marketing LO4 LO5 LO6 LO7 LO8

The Importance of Services LO1 Discuss the importance of services to the economy

Service Service The result of applying human or mechanical efforts to people or objects. Notes: A service is the result of applying human or mechanical efforts to people or objects. Services involve a deed, a performance, or an effort that cannot be physically possessed. The marketing process is the same for all types of products, whether they are goods or services. In fact, many manufacturing firms can point to service as a major factor in their success. Services offered by the manufacturer are important to buyers, and is often a factor in the importance of purchasing products. For example, copiers. Services have some unique characteristics and marketing strategies need to be adjusted for these characteristics. LO1

REVIEW LEARNING OUTCOME LO1 The Importance of Services 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 81% Services as a percentage of GDP Services as a percentage of employment Services Deed Performance Effort Notes: The service sector accounts for 81 percent of both U.S. gross domestic product and U.S. employment. The demand for services is expected to continue. As a result of demographic shifts, services are expected to account for nearly all net job growth through the year 2012. (The aging population will need nursing care, physical therapy, and social workers.)

How Services Differ from Goods LO2 Discuss the differences between services and goods

How Services Differ from Goods Intangible Inseparable Heterogeneous Perishable Notes: Intangibility: Services cannot be touched, seen, tasted, heard, or felt in the same way as goods. Services cannot be stored and are easy to duplicate. Tangible cues are often used to communicate a service’s quality and nature. Facilities are a critical tangible part of a service experience. Produced and Consumed Simultaneously: Goods are produced, sold, and then consumed. In contrast, services are often sold, produced, and consumed at the same time. Consumers are involved in the production of the services that they buy. The quality of services depends on the quality of employees. Greater variability: Services are less standardized and uniform than goods—a characteristic known as heterogeneity. Because services are labor-intensive, consistency and quality control can be hard to achieve. Standardization and training help increase consistency and reliability. Perishability: Services cannot be stored, warehoused, or inventoried. If not used, the revenue is lost. One of the most important challenges in many service industries, such as hotels and airlines, is finding ways to synchronize supply and demand. Deep discounts and off-peak pricing strategies encourage demand during nonpeak times. LO2

How Services Differ from Goods Intangibility Search Qualities Experience Qualities Credence Qualities Notes: Compared to goods, services tend to exhibit fewer search qualities. A search quality is a characteristic that can be easily assessed before purchase. An experience quality is a characteristic that can be assessed only after use. A credence quality is a characteristic that consumers may have difficulty assessing even after purchase because they do not have the necessary knowledge or experience. Online Web MD What elements of Web MD Web site communicate the search, experience, and credence qualities of the services offered by online medical consultant? Online http://www.webmd.com LO2

Service Quality LO3 Describe the components of service quality and the gap model of service quality

Components of Service Quality LO3 Tangibles The physical evidence of a service. Empathy Caring, individualized attention to customers. Assurance The knowledge and courtesy of employees. Responsiveness The ability to provide prompt service. Reliability The ability to perform the service right the first time. Notes: Service quality is more difficult to define and measure than is the quality of tangible goods. Business executives rank the improvement of service quality as one of their most critical challenges. Researchers have shown that customers evaluate service quality by these five components.

The Gap Model of Service Quality Notes: A model of service quality called the gap model identifies five gaps that can cause problems in service delivery and influence customer evaluations of service quality. These gaps are shown in Exhibit 11.1. Gap 1: the gap between what customers want and what management thinks customers want. This gap results from a lack of understanding or a misinterpretation of customers’ needs or wants. To close gap 1, keep in touch with what customers want by doing research on customer needs and customer satisfaction. Gap 2: the gap between what management thinks customers want and the quality specifications that management develops to provide the service. Gap 3: the gap between the service quality specifications and the service that is actually provided. If gaps 1 and 2 are closed, gap 3 is due to the inability of management/employees to do what should be done. Poorly trained or motivated workers can cause this gap. To close gap 3, employees need the skills, training, and tools to perform their jobs. Gap 4: the gap between what the company provides and what the customer is told it provides. This is a communication gap, caused by such things as misleading or deceptive advertising campaigns. To close gap 4, companies need to create realistic customer expectations through honest, accurate, realistic communication. Gap 5: the gap between the service that customers receive and the service they want. This gap can be positive or negative. As the gaps shrink, service quality improves. Discussion/Team Activity: Discuss firms who provide high levels of service quality. Examples: Ritz-Carlton, Nordstrom, Neiman Marcus, Lexus.

Biz Flix Intolerable Cruelty LO3

REVIEW LEARNING OUTCOME LO3 Service Quality

Marketing Mixes for Services LO4 Develop marketing mixes for services Notes: Due to services’ unique characteristics, elements of the marketing mix need to be adjusted to meet these special needs.

Product Strategies for Services Mix Standardization or Customization Core and Supplementary Process Notes: Product strategies for service offerings include decisions on: Type of process involved Core and supplementary services Standardization or customization of the service product, and Service mix. These are described on the following slides. LO4

Service as a Process LO4 People Processing Possession Processing Mental Stimulus Processing People Processing Possession Processing Information Processing Notes: Two things get processed in service organization: People and objects. In some cases, the process is physical, while in others the process is intangible. There are four types of service processing categories: People processing takes place when the service is directed at a customer. Examples: health care, hairstyling Possession processing occurs when the service is directed at customers’ physical possessions. Examples: lawn care, car repair, dry cleaning Mental stimulus processing refers to services directed at people’s minds. Examples: spectator sports events, theater performances, education Information processing describes services that use technology or brainpower directed at a customer’s assets. Examples: insurance, consulting, banking LO4

The Service Factory LO4 Possession processing Notes: Because customer experiences and involvement differ for each of these types of services, marketing strategies may also differ. People-processing services require customers to enter the service factory. In contrast, possession-processing services typically do not require the customer to be present in the service factory. Marketing strategies for the former would require an attract, comfortable physical environment and employee training to ensure a positive employee-customer interaction. Possession processing Mental-stimulus processing LO4

The Service Offering LO4 Core Service Supplementary Service The most basic benefit the consumer is buying. A group of services that support or enhance the core service. Notes: The service offering is a bundle of activities that includes the core service, which is the most basic benefit, and a group of supplementary services that enhance or support the core service. In many industries, the core service becomes a commodity product as competition increases. As a result, supplementary services are used to create competitive advantage. Discussion/Team Activity: Name organizations and discuss their core and supplementary services. LO4

Core and Supplementary Services for FedEx Problem solving Billing statements Tracing Documentation Order taking Supplies Pickup Advice and information Overnight transportation and delivery of packages Notes: This slide depicts the core and supplementary services offered by FedEx. The core service is overnight transportation and package delivery. Supplementary services include problem solving, advice and information, and billing statements. LO4

Customization/Standardization Mass Customization A strategy that uses technology to deliver customized services on a mass basis. Notes: An important issue in developing service offerings is whether to customize or standardize. Customized services are more flexible but command a higher price. On the other hand, standardized services are more efficient and cost less. Instead of choosing either strategy, elements of both can be incorporated into an emerging strategy called mass customization. Mass customization uses technology to deliver customized services on a mass basis, thus meeting customers’ specific needs. Discussion/Team Activity: Identify companies who have successfully used mass customization to deliver individualized services. Examples include: Lands’ End, airlines’ video on demand LO4

The Service Mix Determine what new services to introduce Determine target market Decide what existing services to maintain and to eliminate Notes: Most service organizations market more than one service. Therefore, each part of the service mix should make a different contribution to achieving the firm’s goals. Designing a service strategy means deciding what new services to introduce to which target market, and deciding what services to maintain and to eliminate. LO4

Place (Distribution) Strategy Scheduling Location Direct or indirect distribution Number of outlets Convenience Notes: Distribution strategy for services should focus on issues shown on this slide. Convenience Number of outlets: the intensity of distribution should meet the target market’s needs and preferences. Direct vs. indirect distribution: many service firms use direct distribution or franchising. The newest form of direct distribution is the Internet. Location: the location of a service reveals the relationship between its target market strategy and distribution strategy. Scheduling: the most important factor for time-dependent service providers like airlines, physicians, and dentists. Discussion/Team Activity: Identify specific service providers who have utilized the distribution strategies described above. LO4

Promotion Strategy LO4 Stress tangible cues Use personal information sources Create a strong organizational image Engage in postpurchase communication Notes: Services are less tangible and are more difficult to promote than tangible goods. Four promotion strategies are: Stressing tangible cues Using personal informational sources Creating a strong organizational image Engaging in postpurchase communication Discussion/Team Activity: Identify specific service providers who have utilized the promotion strategies described above. LO4

Pricing Challenges for Services Price Strategy Pricing Challenges for Services Define the unit of service consumption Determine if multiple elements are “bundled” or priced separately Notes: The unique characteristics of services present two pricing challenges. Defining the unit of service consumption. Should it be based on completing a service task or should it be time based? Determining if multiple elements are bundled. Should pricing be based on a bundle of elements or whether each element should be priced separately? Discussion/Team Activity: Identify specific service providers who have utilized the pricing strategies described above. LO4

Pricing Objectives LO4 Revenue-Oriented Pricing Operations-Oriented Pricing Patronage-Oriented Pricing Maximize the surplus of income over costs Match supply and demand by varying price Maximize the number of customers by varying price Online: E*Trade, Ameritrade, Schwab Compare the pricing for services on the largest Internet financial Web sites. How can you account for the great differences in price for essentially the same service? Notes: Marketers should set performance objectives when pricing each service. Three categories of pricing objectives are: Revenue-oriented pricing focuses on maximizing the surplus of income over costs. Operations-oriented pricing seeks to match supply and demand by varying prices. Patronage-oriented pricing tries to maximize the number of customers using the service. A firm may need to use more than one type of pricing objective. http://www.etrade.com http://www.tdameritrade.com http://www.schwab.com Online LO4

REVIEW LEARNING OUTCOME LO4 Marketing Mixes for Services PLACE PROMOTION PRICE PRODUCT = SERVICE Process Core and Supplementary Mass Customization Standardization Number of outlets Direct Indirect Location Tangible cues Personal information Strong image Post-purchase communication Revenue oriented Operations oriented Patronage oriented

Relationship Marketing LO5 Discuss relationship marketing in services Notes: Many services involve ongoing interaction between the service organization and the customer. They can benefit from relationship marketing as a means of attracting, developing, and retaining customer relationships. It is more cost effective to keep existing customers than to attract new ones. Increasing customer retention by 2 percent can have the same effect on profits as reducing costs by 10 percent.

REVIEW LEARNING OUTCOME LO5 Relationship Marketing in Services 2 Social Financial 1 3 Structural Pricing incentives Design services to meet customer needs Creating value-added services not available elsewhere Notes: Relationship marketing can be practiced at three levels: Level 1: The firm uses pricing incentives to encourage customers to continue doing business. Examples include airline frequent flyer programs. This level of relationship marketing is the least effective because its price-based advantage is easily imitated by competitive firms. Level 2: This level uses pricing incentives as well as building social bonds with customers. The firm keeps in touch with customers. Examples include the 1-800-FLOWERS online Gift Reminder Program. Level 3: At this level, the firms adds structural bonds to the formula. This offers value-added services that are not available by competitive firms. Examples include Hertz #1 Club gold.

Internal Marketing in Service Firms LO6 Explain internal marketing in services

Internal Marketing LO6 Internal Marketing Treating employees as customers and developing systems and benefits that satisfy their needs. Notes: Services are performances, so the quality of a firm’s employees is an important component in building long-term relationships with customers. It is beneficial to the company to keep happy employees. Studies show that replacing an employee costs roughly 1.5 times a year’s pay. Examples of employee satisfaction programs include paying 100 percent of health insurance premiums, providing free lunches, and ongoing continuing education programs.

REVIEW LEARNING OUTCOME LO6 Internal Marketing in Services

Global Issues in Services Marketing Discuss global issues in services marketing

REVIEW LEARNING OUTCOME LO7 Global Issues in Services Marketing United States is world’s largest exporter of services. U.S.A. Notes: International marketing of services is a major part of global business. The United States is the world’s largest exporter of services. Because of competitive advantages, services industries such as construction and engineering have great global market potential. To be successful in the global marketplace, firms must first determine the nature of their core product, then design the marketing mix elements to take into account each country’s cultural, technological, and political environment.

Nonprofit Organization Marketing LO8 Describe nonprofit organization marketing

Nonprofit Organization Marketing An organization that exists to achieve some goal other than the usual business goals of profit, market share, or return on investment. Notes: Nonprofit organizations account for over 20 percent of the economic activity in the United States. LO8

Nonprofit Organization Marketing Government Museums Theaters Schools Churches Notes: The cost of government, the predominant form of nonprofit organization, has become the biggest single item in the American family budget. LO8

Nonprofit Organization Marketing Market intangible products Production requires customer’s presence Services vary greatly Services cannot be stored Shared Characteristics with Service Organizations Notes: Nonprofit organizations share characteristics with service firms. Both market intangible products, often require the customer to be present during the production process. Services often vary greatly, and can not be stored in the same way as tangible goods. LO8

Nonprofit Organization Marketing Identify desired customers Specify objectives Develop, manage, eliminate programs and services Decide on prices Schedule events or programs Communicate their availability Notes: Most nonprofit organizations perform the marketing activities as shown on this slide. Often, nonprofit organizations that carry out these functions do not realize they are engaged in marketing. LO8

Unique Aspects of Nonprofit Organization Marketing Strategies Setting of marketing objectives Selection of target markets Development of marketing mixes LO8

Provide services that respond to the wants of : Objectives Provide services that respond to the wants of : Users Payers Donors Politicians Appointed officials Media General Public Notes: Nonprofit organizations do not seek to make a profit for redistribution to owners or shareholders. The focus is often on generating enough funds to cover expenses. Most nonprofit organizations are expected to provide equitable and efficient services that respond to the wants and needs of multiple constituencies. LO8

Target Markets LO8 Unique Issues of Nonprofit Organizations Apathetic or strongly opposed targets Pressure to adopt undifferentiated segmentation Complementary positioning Unique Issues of Nonprofit Organizations Notes: Three issues relating to target markets are unique to nonprofit organizations: Apathetic or strongly opposed targets: Nonprofit organizations must often target those who are apathetic about or strongly opposed to receiving their services. Examples: vaccinations, help for drug or alcohol-related problems, and psychological counseling. Pressure to adopt undifferentiated segmentation strategies: Nonprofit organizations often fail to recognize the advantages of targeting, or are pressured to service the maximum number of people. Complementary positioning: Nonprofit organizations must often complement, rather than compete with, the effort of other groups. LO8

Distinctions between Business and Nonprofit Organizations Product Decisions Distinctions between Business and Nonprofit Organizations Benefit complexity Weak or indirect benefit strength Low involvement Notes: There are three product-related distinctions between business and nonprofit organizations: Benefit complexity: Nonprofit organizations often market complex behavior or ideas, such as the need not to smoke tobacco. The benefits that a person receive are complex, long term, and intangible, and consequently difficult to communicate to consumers. Benefit strength: The benefit strength of nonprofit offerings may be weak or indirect. For example, donating blood or asking neighbors for contributions to a charity. Involvement: Many nonprofit organizations market products that elicit low involvement, such as “don’t litter” campaigns. LO8

Promotion Decisions LO8 Professional volunteers Sales promotion activities Public service advertising Professional volunteers Online: Advertising Council What are the most compelling PSAs on the Ad Council site at the moment? Notes: Many nonprofit organizations (such as federal organizations) are prohibited from advertising, or do not have the resources to retain marketing expertise. However, special promotion resources include: Professional volunteers, such as donation of advertising agency time. Donated services create goodwill, personal contacts, and general awareness of the organization. Sales promotion activities that make use of existing services to draw attention to the offerings of nonprofit organizations. Public service advertising that is donated by a medium. Online http://www.adcouncil.com LO8

Pricing Decisions LO8 Pricing objectives Nonfinancial prices Below-cost pricing Separation between payers and users Indirect payment Nonfinancial prices Pricing objectives Characteristics Distinguishing Pricing Decisions of Nonprofit Organizations Notes: Five key characteristics distinguish the pricing decisions of nonprofit organizations from those of the profit sector: Pricing objectives: The main objective is to defray all or partial costs rather than achieve a profit. Nonfinancial prices: In many nonprofit situations, consumers must absorb nonmonetary costs, such as opportunity cost of time, embarrassment costs, and effort costs. Indirect payment: through taxes. Separation between payers and users: The services of many nonprofit organizations are used by those who are relatively poor and paid for by those who are better off financially. Below-cost pricing: An example is university tuition, with services priced below cost. LO8

REVIEW LEARNING OUTCOME LO8 Nonprofit Organization Marketing TARGET Apathetic or strongly opposed Undifferentiated segmentation Complementary positioning PRODUCT PROMOTION PLACE PRICE Professional volunteers Sales Public Service Advertising Involvement Benefit strength Benefit complexity Special facilities Nonfinancial Indirect payment Separation Below cost pricing