Classifying Services to Gain Strategic Marketing Insights

By Christopher H. Lovelock

Article 1

Presented by Sandra Lamprecht

Objective

To generate greater sophistication within the realm of service marketing by

segmenting services into clusters that share certain relevant marketing

characteristics.

Previous Work – Classification of Goods

Hunt (1976) Emphasized the usefulness of classification schemes

in marketing

Copeland (1923) Most famous and enduring attempt to classify goods Classification of convenience, shopping, and specialty

goods Helped managers to:

Better understand consumer needs and behavior Provided insight into the management of retail distribution

systems

Classification of Goods Cont.

Bucklin (1963)Revised and refined Copeland’s original

classificationProvided important strategic guidelines for

retailers

Classification of Goods Cont.

Other Classification schemes:Durable vs. non-durable goods

Durability is relative to purchase frequency and, therefore, is important for the development of distribution and communications strategies

Consumer goods vs. industrial goodsRelates to types of goods purchased and

product evaluation (purchasing procedures and usage behaviors)

Shostack (1977), Bateson (1979), Berry (1980) Argued that there are significant distinctions between

services and goods and have proposed several generalizations for management practices

Enis & Roering (1981) Believe that the differences that lie between goods and

services have no meaningful strategic implications

Langeard et al. (1981) Stated the importance of recognizing that the service

sector, escpecially in the US, is becoming increasingly competitive

Previous Work – Classification of Services

Classification of Services Cont.

Judd (1964) - classification in accordance with ownership 1) Rented goods services- right to own and use a good for a defined time 2) Owned goods services- owned by customer (repair or improvement of goods, custom creation) 3) Nongoods services- “experiential possessions” or personal experiences 1 & 2 are specific in the services they encompass 3 is very broad and ignores select services- banking,

accounting, insurance, legal advice

Classification of Services Cont.

Rathmell (1874) – Getting to know how one’s business operates 1) Type of seller 2) Type of buyer 3) Buying motives 4) Buying practice 5) Degree of regulation This classification has no specific application to

services and, therefore, could also be used to classify goods

Classification of Services Cont.

Shostack (1977), Sasser et al (1978) – recognizing the composition of each product “package”

Identified the proportion of physical goods relative to the amount of intangible services within

Emphasizes that there are few pure goods / services

Physical Goods + Intangible

Services =

Package

Classification of Services Cont.

Hill (1977) – Emphasizes the nature of service benefits and, in 5, variations in the service delivery/consumption environment 1) Services affecting persons vs. those effecting goods 2) Permanent vs. temporary effects of the service 3) Reversibility vs. nonreversability of those effects 4) Physical effects vs. mental effects 5) Individual vs. collective services

Classification of Services Cont.

Thomas (1978) – Equipment based vs. People based, helps to understand product attributes 1) Primarily equipment based:

A) Automated- car wash B) Monitored by unskilled operators- movie theatre C) Operated by skilled personnel- airlines

2) Primarily people based: A) Unskilled labor- lawn care B) Skilled labor- repair work C) Professional staff- lawyers, dentists

Operational rather than marketing oriented

Classification of Services Cont.

Chase (1978) – Levels of customer contact

Extent of customer contact required in service 1) High contact- health care, hotels, restaurants 2) Low contact- wholesaling, postal service Product variability is harder to control in high contact

services because customers exert more influences on timing of demand and service features due to greater involvement in the service process

Classification of Services Cont.

Kotler (1980) – Synthesizes previous work, recognizes difference in purpose of service organizations1) People based vs. equipment based2) Extent to which the client’s presence is necessary3) Meets personal need vs. business needs4) Public vs. private , For-profit vs. nonprofit

Classification of Services Cont.

Lovelock (1980) – Synthesizes previous classifications and adds new schemes 1) Basic demand characteristics:

Object served- personal vs. property Extent of demand / supply imbalances Discrete vs. continuous relationship between customers and

providers 2) Service content and benefits:

Extent of physical goods content Extent of personal service content Single service vs. bundle service Timing and duration of benefits

3) Service delivery procedures: Multi-site vs. single-site delivery Allocation of capacity- reservations or first come first serve Independent vs. collective consumption Time defined vs. task defined transactions Extent to which customers must be present during service

delivery Defining objects served = most fundamental

classification scheme Suggests valuable marketing insights would come

from combining two or more classification schemes in a matrix

Methodology

“Builds on past research by examining characteristics of services that transcend industry boundaries and are different in degree or kind from the categorization schemes traditionally applied to manufacturing goods.”

Five Classification Schemes were selected and examined on two dimensions- reflecting Lovelocks early conclusions

Five Classification Schemes

Services

Nature of the service

act

Organization / Customer relations

Level of customization & judgment for the

service provider

Nature of demand and

supply

Mode of delivery

What is the nature of the service act?

Service= a “deed, act or performance” (Berry 1980)

Fundamental issues of services:At whom, or what, is the act direct? Is the act tangible or intangible

Who or what is the direct recipient of the service?

What is the nature of the service act?

People Things

Tangible Actions Services directed at people’s bodies

-restaurants, haircutting, beauty salons

Services directed at goods and other physical possessions

-freight transport, laundry/dry cleaning

Intangible Actions Services directed at people’s mind

-education, theatres

Services direct at intangible assets

-banking, legal services

Nature of Service Act

What type of relationship does the service organization have with the

customer?Relationships Ongoing relationships- customers receive service on a continuing basis

Possible “membership” relationship- ex) family doctor, phone plans No formal relationship

Delivery Continuous basis- ex) public goods (police protection, broadcasts) Each transaction is recorded and charged separately

Marketers tend to be less informed about their customers- “anonymous” consumer

Profitability & customer convenience are central to how a service will be priced 1) Single periodic charge / Flat rate- simple, usually for services offered on an

ongoing basis. Ex) insurance, public goods 2) Price per service administered- more complex, more fair for the less frequent

customers. Ex) pay phone 3) Base fee + incremental charges

Type of relationship between the service organization and the customer

Nature of service delivery

“Membership” relationship

No formal relationship

Continuous delivery system

Ex) college enrollment, insurance, banking

Ex) police protection, radio station, public highway

Discrete Transactions

Ex) transit pass, long-distance phone calls

Ex) pay phone, car rental, restaurant, movie theater

Organization / Customer Relationships

How much room is there for customization and judgment on the

part of the service provider?Customer is often involved in the production process – allows for tailoring of the service to meet the needs of the individual customerConcerns: The extent to which the characteristics of the service allows them to be customized How much judgment customer contact personnel are able to exercise in defining

the nature of the service received by the individual customerTypes of services: Wide choice of options

Contact personnel is limited- mobile phone providers Contact personnel has freedom- locus of control shifts from user to supplier,

these people often give advice- professional such as doctors Standardization

Contact personnel is limited- public transport Contact personnel has freedom- educators (different teachers teach the same

course different ways)

Extent to which service characteristics are customized

Extent to which customer contact personnel

exercise judgment in meeting individual

customer needs

High Low

High Ex) legal services, taxi service, real estate agents, plumber

Ex) preventative health programs, education (large class)

Low Ex) hotel service, telephone service

Ex) public transportation, fast food restaurants, movie theaters

Customization vs. Judgment

What is the nature for the demand and supply for the service?

Finished services cannot be inventoried

Demand exceeds supply on a particular day = excess business may be lost

Demand and supply imbalances are not found in all services

Extent of demand fluctuations over time

Extent to which supply is constrained

Wide Narrow

Peak demand can usually be met without a major delay

Could use increases in demand outside of peak periods

Ex) electricity, telephone, natural gas

Must decide whether to seek cont. growth in demand & capacity or maintain status quo

Ex) banking, insurance, legal services

Peak demand regularly exceeds capacity

Must try to smooth demand to match capacity- must both stimulate and discourage demand

Ex) theatres, hotels/motels, restaurants

A growing organization that may need temporary demarketing until capacity can be reach to meet current needs

Ex) services similar to those in above field but with insufficient capacity

Nature of Demand & Supply

How is the service delivered?

Nature of the interaction between the customer and the service organization: Customer goes to service organization Service organization comes to customer Customer and service organization transact at

arms length

Availability of service outlets: Single site Multiple site

Availability of service outlets

Nature of interaction between

customer and service organization

Single Site Multiple Site

Customer goes to service organization

Ex) theatre, barbershop

Ex) bus service, fast food chain

Service organization comes

to customer

Ex) lawn care service, pest control service, taxi

Ex) mail deliver, AAA emergency repairs

Customer and service organization

transact at arms length (mail or e-communications)

Ex) credit card company, local t.v. station

Ex) broadcast network, telephone company

Service Delivery

ConclusionService sector is becoming increasingly competitive partly due to the partial or complete deregulation of several major service industries“As competition intensifies within the service sector, the development of more effective marketing efforts becomes essential for survival” The 5 matrixes will help managers: Identify how those factors shape marketing problems

and opportunities and, therefore, how they should affect the nature of the marketing tasks

Recognize similarities between their industry and other industries to help them look beyond their immediate competitors for new ideas as to how to resolve marketing problems

Limitations

These matrixes can only provide a guideline for service companies to become more aware of their customers and the type of service they actually provide

It does not provide a simple clear outline as to how to market a specific service effectively

Every service in every market is different and unique, even services within the same market differ

The customer and market are always changing

Management ImplicationsNature of the service act: Answers questions such as:

A) Does the customer need to be physically present? 1) Throughout the service delivery? 2) Only to initiate / terminate the service transaction? 3) Not at all Customer satisfaction will be influenced by interactions they have with personnel,

nature of facilities, characteristic of other customers, questions of location and schedule convenience

B) Does the customer need to be mentally present during service delivery? If so can it be maintained across physical distance (mail or e-communications)?

C) In what ways is the target of the service act “modified” by the receipt of the service? How does the customer benefit from the “modifications?” To develop a better understanding of the nature of the service product and the core benefits it offers

Managers of service organizations may be able to identify opportunities for alternative, more convenient forms of service delivery- ex) Britain’s Open University’s use of t.v. and radio broadcasts

Organization / Customer Relations Membership relationships:

Company knows who its current customers are, their addresses, their preferences, their opinions on the service provided,

Valuable for segmentation purposes & targeted marketing May be offered discount rates in return for continuous

patronage Usually result in customer loyalty to a particular provider. Ex)

Rewards cards, Costco membership Helps ensure repeat business Task= build sales and revenues through membership but

avoid required membership and freezing out customers. Ex) Best Buy w/ Reward Zone

Allows for better decisions in regard to pricing

Level of Customization & Judgment Most senior managers have come up through

operations and, therefore, may require executive education programs to given them the necessary perspective on marketing to make balanced decisions

Customization is not necessarily important for success – sometimes the image of customization is enough.

Many people share the same experience. People share the same service facility but still have some custom

treatment. Ex) airlines use your name Customers like to know in advance what they are buying

Professional services the professional diagnosis the nature of the situation- can divide into two segments (diagnosis and implementation) to easy customer worries

Marketing focus on process of client-provider interactions. Ex) statement of qualifications

Levitt (1972,1976)

The industrialization of a service in order to take advantage of the economies of mass production may increase consumer satisfaction if speed, consistency, and price savings hold a higher value than service customization

Industrialization > Customization

if Speed + Consistency + Price Savings > benefits which yield from

the ability to customize

Nature of Demand and SupplyManaging demand in services because

fluctuations can be sharp and there is no buffer of inventory between supply and demand

Manage demandHire seasonal or part time workersRenting extra facilities during peak periods

Determining the appropriate strategy: 1) What is the typical cycle period for these demand fluctuations?

Predictable- demand varies by hour of the day, day of week/month, season of year

Random- no apparent pattern to demand fluctuations 2) What are the underlying causes of these demand fluctuations?

Customer habits or preferences- could marketing change these? Actions by third parties- employers set working hrs. hence marking

efforts might be directed at those employers Nonforcestable events- weather conditions, health symptoms

Managers need to know who or what is the target of the service to effectively choose these strategies.

Smooth out ups and downs of demand: Decrease demand:

Encourage customers to change their plans voluntarily- Offer discounts or added product value during times of low demand

Ration demand through reservations or a queuing system Increase demand:

New business development efforts should be targeted at prospective customers with a counter cyclical demand pattern. Ex) accounting firm has lots of business at the end of the year may find new business for the bulk of the year when it has relatively no business

Mode of delivery Customer has to come to the service

Convenience is lowest to the customer Service comes to customer- when target of the service is

immovable More expensive for the service organization

Transactions at arms length Ex) 800 numbers Not all services may be conducted at arms length but certain portions of

that service may be Ex) make reservations by phone to go eat at a restaurant If it is possible, it is up to the manager to decide whether a third party will have

the right to participate in the arms length step – sometimes consumers see these middle men as more objective and knowledgeable and trust their guidance more than the service provider

Increasing the number of outlets Increases convenience of access to customers but may raise issues of

quality control (consistency of the service)

Work Cited

Lovelock, Christopher H. (1983). Classifying Services to Gain Strategic Marketing Insights. Journal of Marketing (pre-1986), 47(000003), 9.  Retrieved January 31, 2008, from ABI/INFORM Global database. (Document ID: 66036482).