1. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 1 From Excess Demand to Excess Capacity Four conditions potentially faced by fixed-capacity services:  Excess demand  Too much demand relative to capacity at a given time  Demand exceeds optimum capacity  Upper limit to a firm’s ability to meet demand at a given time  Optimum capacity  Point beyond which service quality declines as more customers are serviced  Excess capacity  Too much capacity relative to demand at a given time

2. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 2 Addressing Problem of Fluctuating Demand Two basic approaches:  Adjust level of capacity to meet demand  Need to understand productive capacity and how it varies on an incremental basis  Manage level of demand

3. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 3 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  Use marketing strategies to smooth out peaks, fill in valleys  Many firms use a mix of both approaches

4. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 4 Defining Productive Capacity in Services  Physical facilities to contain customers  Physical facilities to store or process goods  Physical equipment to process people, possessions, or information  Labor used for physical or mental work  Public/private infrastructure  See Best Practice In Action 9.1: Improving Check-In Service At Logan Airport

5. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 5 Alternative Capacity Management Strategies  Level capacity (fixed level at all times)  Stretch and shrink  Offer inferior extra capacity at peaks (e.g., bus/train standees)  Vary seated space per customer (e.g., elbow room, leg room)  Extend/cut hours of service  Chase demand (adjust capacity to match demand)  Flexible capacity (vary mix by segment)

6. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 6 Adjusting Capacity to Match Demand  Schedule downtime during periods of low demand  Use part-time employees  Rent or share extra facilities and equipment  Ask customers to share  Invite customers to perform self-service  Cross-train employees

7. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 7 Predictable Demand Patterns and Their Underlying Causes (Table 9.1)  day  week  month  year  other  employment  billing or tax payments/refunds  pay days  school hours/holidays  seasonal climate changes  public/religious holidays  natural cycles (e.g., coastal tides) Predictable Cycles of Demand Levels Underlying Causes of Cyclical Variations

8. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 8 Causes of Seemingly Random Changes in Demand Levels  Weather  Health problems  Accidents, Fires, Crime  Natural disasters Question: Which of these events can be predicted?

9. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 9 Analyzing Drivers of Demand  Understand why customers from specific market segments select this service  Keep good records of transactions to analyze demand patterns  Sophisticated software can help to track customer consumption patterns  Record weather conditions and other special factors that might influence demand

10. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 10 Overall Usage Levels Comprise Demand from Different Segments  Not all demand is desirable  Keep peak demand levels within service capacity of organization  Marketing cannot smooth out random fluctuations in demand  Fluctuations caused by factors beyond organization’s control (for example: weather)  Detailed market analysis may reveal that one segment’s demand cycle is concealed within a broader, random pattern

11. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 11 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 queuing

12. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 12 Marketing Strategies Can Reshape Some Demand Patterns  Use price and other costs to manage demand  Change product elements  Modify place and time of delivery  No change  Vary times when service is available  Offer service to customers at a new location  Promotion and education

13. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 13 Hotel Room Demand Curves by Segment and Season (Fig 9.3) 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

14. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 14 Waiting Is a Universal Phenomenon!  An average person may spend up to 30 minutes/day waiting in line — equivalent to over a week per year!  Almost nobody likes to wait  It's boring, time-wasting, and sometimes physically uncomfortable

15. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 15 Why Do Waiting Lines Occur? Not all queues take form of a physical waiting line in a single location  Because the number of arrivals at a facility exceeds capacity of system to process them at a specific point in the process  Queues are basically a symptom of unresolved capacity management problems

16. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 16 Saving Customers from Burdensome Waits  Add extra capacity so that demand can be met at most times (problem: may increase costs too much)  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

17. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 17 Alternative Queuing Configurations ( Fig 9.5) Single line, single server, single stage Single line, single servers, 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)

18. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 18 Criteria for Allocating Different Market Segments to Designated Lines  Urgency of job  Emergencies versus non-emergencies  Duration of service transaction  Number of items to transact  Complexity of task  Payment of premium price  First class versus economy  Importance of customer  Frequent users/high volume purchasers versus others

19. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 19 Ten Propositions on Psychology of Waiting Lines (1) ( Table 9.3)  Unoccupied time feels longer than occupied time  Pre- and post-process waits feel longer than in-process waits  Anxiety makes waits seem longer  Uncertain waits are longer than known, finite waits  Unexplained waits are longer than explained waits Sources: Maister; Davis & Heineke; Jones & Peppiatt

20. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 20 6.Unfair waits are longer than equitable waiting 7.People will wait longer for more valuable services 8.Waiting alone feels longer than waiting in groups 9.Physically uncomfortable waits feel longer 10.Waits seem longer to new or occasional users Ten Propositions on Psychology of Waiting Lines (2) (Table 9.3) Sources: Maister; Davis & Heineke; Jones & Peppiatt

21. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 21 Benefits of Reservations  Controls and smoothes demand  Pre-sells service  Informs and educates customers in advance of arrival  Saves customers from having to wait in line for service (if reservation times are honored)  Data captured helps organizations  Prepare financial projections  Plan operations and staffing levels

22. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 22 Characteristics of Well-Designed Reservations System  Fast and user-friendly for customers and staff  Answers customer questions  Offers options for self service (e.g., the 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

23. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 23 Setting Hotel Room Sales Targets by Segment and Time Period (Fig.9.7) Out of commission for renovation Loyalty Program Members Transient guests Weekend package Groups and conventions Airline contracts 100% 50% Week 7 (Low Season) MNights:Tu Time WThFSSu Loyalty Program Members Transient guests W/E package Groups (no conventions) Airline contracts Week 36 (High Season) MTuWThFSSu Capacity (% rooms)

24. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 24 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  Segment-by-segment data  Fixed and variable cost data, profitability of incremental sales  Meaningful location-by-location demand variations  Customer attitudes toward queuing  Customer opinions of quality at different levels of capacity utilization

25. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 25 Summary of Chapter 9: Balancing Demand and Productive Capacity (1)  At any moment in time, a fixed-capacity service may face  Excess demand  Demand exceeding optimum capacity  Demand and supply well-balanced at the level of optimum capacity  Excess capacity  Productive resources are used for creating goods and services; when facing capacity constraints, firms can consider  Stretching or shrinking capacity levels  Adjusting capacity to match demand  Creating flexible capacity  To determine what factors govern demand, firms need to  Understand patterns of demand  Analyze drivers of demand  Divide demand by market segments

26. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 9 - 26 Summary of Chapter 9: Balancing Demand and Productive Capacity (2)  Demand levels can be reshaped by marketing strategies  Use price and other costs to manage demand  Change product elements  Modify place and time of delivery  Use promotion and education  Waiting is a universal phenomenon. Waits can be reduced by  Rethinking the design of the queuing system  Redesigning the processes to shorten the time of each transaction  Managing customers ’ behavior and their perceptions of the wait  Installing a reservation system  An effective reservations system  Enables demand to be controlled and smoothed in manageable way  Should focus on yield  Requires information