Fundamental Differences Between Goods and Services Chapter 3 Fundamental Differences Between Goods and Services

Chapter Objectives • Understand the characteristics of intangibility, inseparability, heterogeneity, and perishability. • Discuss the marketing problems associated with intangibility and their possible solutions. • Describe the marketing problems associated with inseparability and their possible solutions. • Explain the marketing problems associated with heterogeneity and their possible solutions. • Identify the marketing problems associated with perishability and their possible solutions. • Consider the impact of intangibility, inseparability, heterogeneity, and perishability on marketing’s relationship to other functions within the service organization. ©2011 Cengage Learning. All rights reserved.

Opening Vignette: Bed Wars Westin Hotels first introduced the “Heavenly Bed” in 1999 at a $30 million price tag Marriott International investment in the “Battle of Beds” in 2005 at an estimated $190 million Most recent, an array of pillow selections ©2011 Cengage Learning. All rights reserved.

Intangibility Pick up the shoes Feel the quality of materials VS. Pick up the shoes Feel the quality of materials View specific style and color Sample the fit Entitles the consumer to an experience Subjectively evaluated ©2011 Cengage Learning. All rights reserved.

Figure 3.1: Marketing Challenges and Solutions Pertaining to Intangibility Marketing Problems Possible Solutions Services cannot be inventoried Use of tangible clues to help “tangibilize” Lack of patent protection and can be easily copied Use of personal sources of information Difficulty in displaying or explain to customers Creation of a strong organizational image Difficulty in pricing strategies Utilize an activity-based costing approach ©2011 Cengage Learning. All rights reserved.

Marketing Problems caused by Intangibility Lack of service inventories Not protected by patents Not easily displayed or communicated Pricing is difficult ©2011 Cengage Learning. All rights reserved.

Possible Solutions for Intangibility Use tangible clues/physical evidence Quality furniture in a lawyer’s office Appearance of the personnel Utilize personal sources of information Family, friends, and other opinion leaders Create a strong organizational image Utilize an activity-based costing approach Physical evidence/tangible clues – the physical characteristics that surround a service to assist consumers in making service evaluations, such as the quality of furnishings, the appearance of personnel, or the quality of paper stock used to produce the firm’s brochure. Personal source of information – sources such as friend, family, and other opinion leaders that consumer use to gather information about a service. Activity-based costing (ABC) - costing method that breaks down the organization into a set of activities, and activities into tasks, which convert materials, labor, and technology into outputs. ©2011 Cengage Learning. All rights reserved.

Figure 3.2: Marketing Challenges and Solutions Pertaining to Inseparability Marketing Problems Possible Solutions Physical connection of the service provide to the service Selecting and training public contact personnel Involvement of the customer in the production process Effectively managing consumers Involvement of other customers in the production process Use of multisite location Special challenges in mass production of services ©2011 Cengage Learning. All rights reserved.

Marketing Problems caused by Inseparability Service provider is involved in the production process Customer is involved in the production process Other customers are involved in the production process (shared experience) The mass production of services presents special challenges ©2011 Cengage Learning. All rights reserved.

Customer is involved in the production process OPINION QUESTION: If given the choice of dining at one of two new restaurants, would you select a restaurant that had no cars in the parking lot, or would you choose a restaurant down the street with a full parking lot? Involvement may vary Impact on the type of service desired cycle of service demand length of the delivery process Service factory must be built with the customer’s presence in mind ©2011 Cengage Learning. All rights reserved.

Possible Solutions for Inseparability Selecting and training public contact personnel Develop strategies to manage consumers Develop multi-site locations PowerPoint Slide: #11 Possible Solutions to Inseparability Problems Increased emphasis placed on the selection and training of public contact personnel to ensure that the right types of employees are in the right jobs -A case in point is UPS. The company is virtually 100 percent employee owned. -Selection and training is a strategy that minimize the impact of inseparability by hiring and educating employees in such a way that the customer’s service experience is positive and the employees are properly equipped to handle customers and their needs Implementation of consumer management strategies that facilitate a positive service encounter for all consumers sharing the same service experience -Consumer Management is a strategy service personnel can implement that minimizes the impact of inseparability, such as separating smokers from nonsmokers in a restaurant Use of multisite locations to offset the mass production challenges posed by inseparability   -A case in points is H&R Block accounting services, Hyatt Legal Services, and Marriott Hotels. -Multisite locations is a way service firms that mass produce combat inseparability, involving multiple locations to limit the distance the consumers have to travel and staffing each location differently to serve a local market -factories in the field is another name for multisite locations ©2011 Cengage Learning. All rights reserved.

Figure 3.3: Heterogeneity-Marketing Challenges and Possible Solutions Marketing Problems Possible Solutions Difficult to standardize service and quality control Customization Standardization ©2011 Cengage Learning. All rights reserved.

Marketing Problems caused by Heterogeneity Standardization and quality control are difficult to achieve ©2011 Cengage Learning. All rights reserved.

Possible Solutions for Heterogeneity Customization Strategy Constructed to fit customer’s exact needs Standardization Strategy Faster Less expensive More consistent Customization develops services that meet each customer’s individual needs -taking advantage of the variation inherent in each service encounter by developing services that meet each customer’s exact specifications -Downside of providing customized services Customers may not be willing to pay the higher prices The speed of service delivery may be an issue Customers may not be willing to face the uncertainty Standardization -reducing variability in service production through intensive training of providers and/or replacing human labor with machines ©2011 Cengage Learning. All rights reserved.

Figure 3.4: Perishability-Marketing Challenges and Possible Solutions Marketing Problems Possible Solutions Demand Possible Solutions Supply Demand exceeds supply Creative pricing Part time employees Demand exceeds optimal levels of supply Reservation system Share capacity with other providers Lower demand than optimal supply level Shift to complementary services Prepare for expansion in advance Nonpeak demand Utilize third parties Customer participation ©2011 Cengage Learning. All rights reserved.

Marketing Problems caused by Perishability Matching supply and demand Demand exceeds maximum available supply Demand exceeds optimum supply level Demand is below optimal levels of supply Demand and supply are at optimal levels ©2011 Cengage Learning. All rights reserved.

Possible Solutions for Perishability Demand Strategies Creative pricing Reservation systems Complementary services Developing nonpeak demand utilizing nonpeak periods to prepare for peak periods appeal to different market segments with different demand patterns Creative Pricing-pricing strategies often used by service firms to help smooth demand fluctuations, such as offering “matinee” prices or “earlybird specials” to shift demand from peak to nonpeak periods. Used to target specific groups such as senior citizens, children and their parents (families), and college students Price incentives to use the company’s web site Reservation Systems-a strategy to help smooth demand fluctuations in which consumers ultimately request a portion of the firm’s services for a particular time slot. Typical service firms that use reservation systems include restaurants, doctors of all varieties, golf courses (tee times), and day spas. Advantage of a reservation system Reduce the customer’s risk of not receiving the service Minimize the time spent waiting in line for the service to be available Allow service firms to prepare in advance for a known quantity of demand Disadvantage of a reservation system Someone must maintain the system, which adds additional cost to the operation Customers do not always show up on time or sometimes fail to show up at all Offer to the customer an implied guarantee that the service will be available at a specified time, thereby increasing the customer’s expectation Development of Complementary Services-services provided for consumers to minimize their perceived waiting time, such as driving ranges at golf courses, arcades at movie theaters, or reading materials of doctors’ offices. Development of Nonpeak Demand-utilizes service downtime to prepare in advance for peak periods, and/or to market to different market segments with different demand patterns. Can reduce the effects of perishability Employees can be cross-trained during nonpeak demand periods to perform a variety of other duties to assist fellow personnel during peak demand periods Can be developed to generate additional revenues by marketing to a different market segment that has a different demand pattern than the firm’s traditional segment ©2011 Cengage Learning. All rights reserved.

Possible Solution for Perishability Supply Strategies Utilize part-time employees Share capacity Prepare in advance for expansion Utilize third-parties Increase customer participation Part-time Employee Utilization-employees who typically assist during peak demand periods and who generally work fewer than 40 hours per week Advantage of employing part-time workers Lower labor costs Flexible labor force that can be employed when needed and released during nonpeak periods Disadvantage of employing part-time workers Causes consumers to associate the firm with lower job skills and lack of motivation and organizational commitment Capacity Sharing-a strategy to increase the supply of service by forming a type of co-op among service providers that permits co-op members to expand their supply or service as a whole. Advance preparation for Expansion-planning for future expansion in advance and taking a long-term orientation to physical facilities and growth Utilization of Third Parties-a supply strategy in which a service firm utilizes an outside party to service customers and thereby save on costs, personnel, etc Increase in customer participation-a supply strategy that increases the supply of service by having the customer perform part of the service, such as providing a salad bar or dessert bar in a restaurant ©2011 Cengage Learning. All rights reserved.

The Structure of This Text An Overview of Services Marketing The Tactical Services Marketing Mix Implementing Successful Service Strategies ©2011 Cengage Learning. All rights reserved.

Figure 3.5: Overview of Services Marketing Chapters ©2011 Cengage Learning. All rights reserved.

Copyright © 2011 Cengage Learning. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2011 Cengage Learning.   ©2011 Cengage Learning. All rights reserved.