Services Management

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

Service as Theater

“ All the world’s 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


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 audience—depending on type of performance, may be passive or active


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


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:


Facilitating Services - Information (Table 4.1)

Core

Customers often requireinformation about how toobtain and use a product orservice. They may alsoneed reminders anddocumentation


Facilitating Services - Order-Taking(Table 4.2)

Many goods and services must be ordered or reservedin advance. Customers need to know what is available andmay want to secure commitment to delivery

Core


Facilitating Services - Billing(Table 4.3)

“How much do I owe you?”Customers deserve clear, accurate and intelligiblebills and statements

Core


Facilitating Services - Payment(Table 4.4)

Customers may pay faster and more cheerfully if youmake transactions simpleand convenient for them

Core


Enhancing Services - Consultation(Table 4.5)

Value can be added to goods and services byoffering advice andconsultation tailored toeach customer’sneeds and situation

Core


Enhancing Services - Hospitality(Table 4.6)

Customers who invest time and effort in visiting abusiness and using itsservices deserve to betreated as welcome guests (after all, marketing invitedthem there!)

Core


Enhancing Services - Safekeeping(Table 4.7)

Customers prefer not toworry about looking afterthe personal possessions that they bring with themto a service site.

They may also want deliveryand after-sales services forgoods that they purchaseor rent

Core


Enhancing Services - Exceptions(Table 4.8)

Customers appreciate some flexibility in a businesswhen they make special requests. They expect itwhen not everything goesaccording to plan

Core


What is Brand Equity and Why Does It Matter?(From Berry, “Cultivating Brand Equity”)

Definition: A set of assets and liabilities linked to a brand’s 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


A Service Branding Model: How Communications + Experience Create Brand Equity

Firm’s Presented Brand (Sales, Advertising, PR)

What Media, Intermediaries,Word-of-Mouth Say re: Firm

Customer’s Experience with Firm

Awareness of Firm’s Brand

Meaning Attached To Firm’s Brand

Firm’sBrand Equity

Source: Adapted from L. L. Berry ( Fig. 1)

Marketer-controlled communications

Uncontrolled brand communications


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 e-mail and chat rooms Stimulate product trial Enable customers to place orders Measure effectiveness of specific advertising/promotional

campaigns


Chapter 6

Pricing and Revenue Management


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


Objectives of Pricing Strategies

Revenue and profit objectives Seek profit Cover costs

Patronage and user base-related objectives Build demand Build a user base


The Pricing Tripod (Fig. 6.1)

Pricing Strategy

CostsCompetition

Value to customer


Three Main Approaches to Pricing

Cost-Based PricingSet prices relative to financial costs

(problem: defining costs)

Competition-Based PricingMonitor competitors’ pricing strategy

(especially if service lacks differentiation)Who is the price leader? (one firm sets the pace)

Value-BasedRelate price to value perceived by customer


Perceived Benefits

Timee

Effort

Net Value = (Benefits – Outlays) (Fig. 6.3)

Perceived Outlays


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


Paying for Service:The Customer’s 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)


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

Problemsolving

Operating Costs

Incidental Expenses

Purchase andUse Costs

Search Costs

After Costs


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


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 informationtake orders and accept paymentdeliver information-based services

Smart cards that can act as “electronic wallets”


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 don’t alienate other

customers


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?


Planning the

Service Environment


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.


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!


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


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


The Russell Model of Affect

Arousing

Pleasant

Sleepy

Unpleasant

Exciting

RelaxingBoring

Distressing


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)


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 processingattribution 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.


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


An Integrated Framework – Bitner’s ServiceScape Model (Figure 10.4)

Environmental Dimensions

Perceived ServiceScape

AmbientConditions

Space/Function

Signs,Symbols & Artefacts

CognitiveEmotional Psychological

Customer Response Moderator

Employee Responses

ApproachorAvoid

ApproachorAvoid

Social Interaction Between Customers & Employees

Holistic Environ-ment

Moderators Internal Responses Behaviour

Customer Responses

EmployeeResponse Moderator

CognitiveEmotional Psychological


An Integrated Framework – Bitner’s ServiceScape Model(con’t)

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


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:


Dimensions of the Service Environment (con’t)

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 ArtifactExplicit or implicit signals to communicate the firm’s image,

help consumers find their way and to convey the rules of behavior


Selection of Environmental Design Elements

There is a multitude of research on the perception and impact of environmental stimuli on behaviour, including:

People density, crowdingLightingSound/noiseScents and odoursQueues

No standard formula to designing the perfect combination of these elements.

Design from the customer’s perspectiveDesign with a holistic view!


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.


Managing People

for Service Advantage


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


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”


Role Stress in the Frontline

Person vs. Role: Conflicts between what jobs require and employee’s 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:


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 society’s or management’s display rules can be stressful

Good HR practice emphasizes selective recruitment, training, counseling, strategies to alleviate stress


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?


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


Recruitment

The right people are a firm’s 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 candidate’s fit with firm’s culture and values

Fit personalities, styles, energies to the appropriate jobs


Select And Hire the Right People: (1) Be the Preferred Employer

Create a large pool: “Compete for Talent Market Share”

What determines a firm’s applicant pool?

Positive image in the community as place to work Quality of its services The firm’s perceived status

There is no perfect employee

Different jobs are best filled by people with different skills, styles or personalities

Hire candidates that fit firm’s core values and culture Focus on recruiting naturally warm personalities


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


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


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 Staff’s 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


Factors Favoring Employee Empowerment

Firm’s 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


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


Motivate and Energize the Frontline

Job content

Feedback and recognition

Goal accomplishment

Use the full range of available rewards effectively, including:


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


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 theRight People

3. Motivate & Energize Your People

2. Enable Your People

Be the preferred employer & compete for talent market share

Intensify the selection process

Empower FrontlineBuild high performance service

delivery teams Extensive Training

Utilize the full range of rewards

Service Excellence& Productivity


Managing Relationships

and Building Loyalty


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


What Makes Loyal Customers More Profitable?

Tend to spend more as relationship developscustomer’s balances may growmay consolidate purchases to one supplier

Cost less to serve less need for information and assistancemake fewer mistakes

Recommend new customers to firm (act as unpaid sales people)

Trust leads to willingness to pay regular prices vs. shopping for discounts


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.

Today’s marketers seek to develop long-term relationships with customers. Relationship marketing includes:


Basic Segmentation Issues: Building an Appropriate Customer Portfolio

Target customers whose needs match firm’s capabilities

Focus on value of prospective customers within each segment, not just numbers

Avoid targeting customers who might abuse:our employees, facilitiesother customers

Create a mix of segments to reduce risks of volatility during swings of economic cycles


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


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


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


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 firm’s 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


The Customer Satisfaction-Loyalty Relationship (Fig. 12.6)

0

20

40

60

80

100

1 2 3 4 5

Lo

yalt

y (R

eten

tio

n)

Verydissatisfied Dissatisfied

Neithersatisfied

nor dissatisfiedSatisfied

VerySatisfied

Satisfaction

Near Apostle

Zone of Defection

Zone of Indifference

Zone of Affection

Terrorist

Apostle


The Wheel of Loyalty (Fig. 12.7)

1. Build aFoundationfor Loyalty

2. Create LoyaltyBonds

3. Reduce Churn Drivers

CustomerLoyalty

Be selective in acquisition

Conduct churn diagnosticSegment 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


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 PropositionValue Proposition

OthersOthers

Service Failure / RecoveryService Failure / Recovery

Core Service Failure• Service Mistakes• Billing Errors• Service Catastrophe

• Unsafe• Conflict of Interest


Improving Service Quality

and Productivity


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


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 firm’s developed specifications

Quality is a trade-off between price and value

Product-Based:

User-Based:

Manufacturing-Based:

Value-Based:


Dimensions of Service Quality

Tangibles

Reliability

Responsiveness

Assurance competence, courtesy credibility security

Empathy access communication understanding of customer


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


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.


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.


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


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

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