The document covers the fundamentals of services marketing, focusing on the unique characteristics and challenges of services compared to goods. It introduces key concepts such as the service marketing triangle, the expanded services marketing mix (7 Ps), and the gaps model of service quality, while also outlining customer behavior and expectations in service encounters. Various industries and examples highlight the diverse applications and implications of services marketing strategies.

1. 1
SM
Services Marketing
Prof. B. B. Mishra

2. 2
SM
Objectives for Chapter 1:
Introduction to Services
• Explain what services are and identify service trends
• Explain the need for special services marketing
concepts and practices
• Outline the basic differences between goods and
services and the resulting challenges for service
businesses
• Introduce the service marketing triangle
• Introduce the expanded services marketing mix
• Introduce the gaps model of service quality

3. 3
SM Introduction
• Services are deeds,processes and
performance
• Intangible, but may have a tangible
component
• Generally produced and consumed at
the same time
• Need to distinguish between SERVICE
and CUSTOMER SERVICE

4. 4
SM
Challenges for Services
• Defining and improving quality
• Communicating and testing new
services
• Communicating and maintaining a
consistent image
• Motivating and sustaining employee
commitment
• Coordinating marketing, operations and
human resource efforts
• Setting prices

5. 5
SM
Examples of Service Industries
• Health Care
– hospital, medical practice, dentistry, eye care
• Professional Services
– accounting, legal, architectural
• Financial Services
– banking, investment advising, insurance
• Hospitality
– restaurant, hotel/motel, bed & breakfast,
– ski resort, rafting
• Travel
– airlines, travel agencies, theme park
• Others:
– hair styling, pest control, plumbing, lawn
maintenance, counseling services, health club

6. 6
SM
Figure 1-1
Tangibility Spectrum
Tangible
Dominant
Intangible
Dominant
Salt
Soft Drinks
Detergents
Automobiles
Cosmetics
Advertising
Agencies
Airlines
Investment
Management
Consulting
Teaching
Fast-food
Outlets
Fast-food
Outlets













7. 7
SM
Figure 1-2
Percent of
U.S. Labor Force by Industry
Source: Survey of Current Business, April 1998, Table B.8, July 1988, Table 6.6B, and July 1992, Table 6.4C; Eli
Ginzberg and George J. Vojta, “The Service Sector of the U.S. Economy,” Scientific American, 244,3 (1981): 31-39.
0
10
20
30
40
50
60
70
80
1929 1948 1969 1977 1984 1996
Percent
of
GDP
Year
 Services
 Manufacturing
 Mining & Agriculture

8. 8
SM
Figure 1-3
Percent of U.S. Gross
Domestic Product by Industry
Source: Survey of Current Business, August 1996, Table 11, April 1998, Table B.3; Eli Ginzberg
and George J. Vojta, “The Service Sector of the U.S. Economy,” Scientific American, 244,3
(1981): 31-39.
0
10
20
30
40
50
60
70
80
1948 1959 1967 1977 1987 1996
Percent
of
GDP
Year
 Services
 Manufacturing
 Mining & Agriculture

9. 9
SM
Differences Between
Goods and Services
Intangibility
Perishability
Simultaneous
Production
and
Consumption
Heterogeneity

10. 10
SM Implications of Intangibility
 Services cannot be inventoried
 Services cannot be patented
 Services cannot be readily
displayed or communicated
 Pricing is difficult

11. 11
SM Implications of Heterogeneity
Service delivery and customer
satisfaction depend on employee
actions
Service quality depends on many
uncontrollable factors
There is no sure knowledge that the
service delivered matches what was
planned and promoted

12. 12
SM
Implications of Simultaneous
Production and Consumption
Customers participate in and affect
the transaction
Customers affect each other
Employees affect the service
outcome
Decentralization may be essential
Mass production is difficult

13. 13
SM Implications of Perishability
 It is difficult to synchronize supply
and demand with services
 Services cannot be returned or
resold

14. 14
SM
Table 1-2
Services are Different
Goods Services Resulting Implications
Tangible Intangible Services cannot be inventoried.
Services cannot be patented.
Services cannot be readily displayed or communicated.
Pricing is difficult.
Standardized Heterogeneous Service delivery and customer satisfaction depend on
employee actions.
Service quality depends on many uncontrollable factors.
There is no sure knowledge that the service delivered
matches what was planned and promoted.
Production
separate from
consumption
Simultaneous
production and
consumption
Customers participate in and affect the transaction.
Customers affect each other.
Employees affect the service outcome.
Decentralization may be essential.
Mass production is difficult.
Nonperishable Perishable It is difficult to synchronize supply and demand with
services.
Services cannot be returned or resold.
Source: Adapted from Valarie A. Zeithaml, A. Parasuraman, and Leonard L. Berry, “Problems and Strategies in Services
Marketing,” Journal of Marketing 49 (Spring 1985): 33-46.

15. 15
SM
Figure 1-5
The Services Marketing Triangle
Internal
Marketing
Interactive Marketing
External
Marketing
Company
(Management)
Customers
Employees
“enabling the
promise”
“delivering the promise”
“setting the
promise”
Source: Adapted from Mary Jo Bitner, Christian Gronroos, and Philip Kotler

16. 16
SM
Ways to Use the
Services Marketing Triangle
Overall Strategic
Assessment
• How is the service
organization doing on
all three sides of the
triangle?
• Where are the
weaknesses?
• What are the strengths?
Specific Service
Implementation
• What is being promoted and
by whom?
• How will it be delivered
and by whom?
• Are the supporting systems
in place to deliver the
promised service?

17. 17
SM
Source: Adapted from A. Parasuraman
Company
Customers
Providers
Technology
Figure 1-6
The Services Triangle
and Technology

18. 18
SM
Services Marketing Mix:
7 Ps for Services
• Traditional Marketing Mix
• Expanded Mix for Services: 7 Ps
• Building Customer Relationships
Through People, Processes, and
Physical Evidence
• Ways to Use the 7 Ps

19. 19
SM
Traditional Marketing Mix
• All elements within the control of the firm
that communicate the firm’s capabilities
and image to customers or that influence
customer satisfaction with the firm’s
product and services:
 Product
 Price
 Place
 Promotion

20. 20
SM
Expanded Mix for Services --
the 7 Ps
• Product
• Price
• Place
• Promotion
• People
• Process
• Physical Evidence

21. 21
SM
Table 1-3
Expanded Marketing Mix for
Services
PRODUCT PLACE PROMOTION PRICE
Physical good
features
Channel type Promotion
blend
Flexibility
Quality level Exposure Salespeople Price level
Accessories Intermediaries Advertising Terms
Packaging Outlet location Sales
promotion
Differentiation
Warranties Transportation Publicity Allowances
Product lines Storage
Branding

22. 22
SM
Table 1-3 (Continued)
Expanded Marketing Mix for
Services
PEOPLE PHYSICAL
EVIDENCE
PROCESS
Employees Facility design Flow of activities
Customers Equipment Number of steps
Communicating
culture and values
Signage Level of customer
involvement
Employee research Employee dress
Other tangibles

23. 23
SM
Ways to Use the 7 Ps
Overall Strategic
Assessment
•How effective is a firm’s
services marketing mix?
•Is the mix well-aligned with
overall vision and strategy?
•What are the strengths
and weaknesses in terms
of the 7 Ps?
Specific Service
Implementation
• Who is the customer?
• What is the service?
• How effectively does the
services marketing mix for a
service communicate its
benefits and quality?
• What changes
/improvements are needed?

24. 24
SM
Services Marketing Triangle
Applications Exercise
• Focus on a service organization. In the
context you are focusing on, who
occupies each of the three points of the
triangle?
• How is each type of marketing being
carried out currently?
• Are the three sides of the triangle well
aligned?
• Are there specific challenges or barriers
in any of the three areas?

25. 25
SM
SM
Part 1
FOCUS ON THE CUSTOMER

26. 26
SM
Perceived
Service
Expected
Service
CUSTOMER
COMPANY
Customer
Gap
GAP 1
GAP 2
Gaps Model of Service Quality
GAP 3
External
Communications
to Customers
GAP 4
Service Delivery
Customer-Driven Service
Designs and Standards
Company Perceptions of
Consumer Expectations
Part 1 Opener

27. 27
SM Gaps Model of Service Quality
• Customer Gap:
• difference between expectations and
perceptions
• Provider Gap 1:
• not knowing what customers expect
• Provider Gap 2:
• not having the right service designs and
standards
• Provider Gap 3:
• not delivering to service standards
• Provider Gap 4:
• not matching performance to promises
Part 1 Opener

28. 28
SM
The Customer Gap
Expected
Service
Perceived
Service
GAP
Part 1 Opener

29. 29
SM
SM
Chapter 2
CONSUMER BEHAVIOR
IN SERVICES

30. 30
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Objectives for Chapter 2:
Consumer Behavior in
Services
• Overview the generic differences in consumer
behavior between services and goods
• Introduce the aspects of consumer behavior that a
marketer must understand in five categories of
consumer behavior:
• Information search
• Evaluation of service alternatives
• Service purchase and consumption
• Post purchase evaluation
• Role of culture

31. 31
SM
Consumer Evaluation
Processes for Services
• Search Qualities
– attributes a consumer can determine prior to
purchase of a product
• Experience Qualities
– attributes a consumer can determine after purchase
(or during consumption) of a product
• Credence Qualities
– characteristics that may be impossible to evaluate
even after purchase and consumption

32. 32
SM
Figure 2-1
Continuum of Evaluation for
Different Types of Products
Difficult to evaluate
Easy to evaluate
High in search
qualities
High in experience
qualities
High in credence
qualities
Most
Goods
Most
Services

33. 33
SM
Figure 2-2
Categories in Consumer Decision-
Making and Evaluation of Services
Information
Search
Evaluation of
Alternatives
Purchase and
Consumption
Post-Purchase
Evaluation
 Use of personal sources
 Perceived risk
 Evoked set
 Emotion and mood
 Service provision as drama
 Service roles and scripts
 Compatibility of customers
 Attribution of dissatisfaction
 Innovation diffusion
 Brand loyalty

34. 34
SM
Figure 2-3
Categories in Consumer Decision-
Making and Evaluation of Services
Information
Search
Evaluation of
Alternatives
Purchase and
Consumption
Post-Purchase
Evaluation
 Use of personal sources
 Perceived risk
 Evoked set
 Emotion and mood
 Service provision as
drama
 Service roles and scripts
 Compatibility of customers
 Attribution of dissatisfaction
 Innovation diffusion
 Brand loyalty
Culture
 Values and attitudes
 Manners and customs
 Material culture
 Aesthetics
 Educational and social
institutions

35. 35
SM Information search
• In buying services consumers rely more
on personal sources. WHY? Refer p32
• Personal influence becomes pivotal as
product complexity increases
• Word of mouth important in delivery of
services
• With service most evaluation follows
purchase

36. 36
SM Perceived Risk
• More risk would appear to be involved
with purchase of services (no
guarantees)
• Many services so specialised and
difficult to evaluate (How do you know
whether the plumber has done a good
job?)
• Therefore a firm needs to develop
strategies to reduce this risk, e.g,
training of employees, standardisation

37. 37
SM Evoked Set
• The evoked set of alternatives likely to
be smaller with services than goods
• If you would go to a shopping centre
you may only find one dry cleaner or
“single brand”
• It is also difficult to obtain adequate
prepurchase information about service
• The Internet may widen this potential
• Consumer may choose to do it
themselves, e.g. garden services

38. 38
SM Emotion and Mood
• Emotion and mood are feeling states
that influence people’s perception and
evaluation of their experiences
• Moods are transient
• Emotions more intense, stable and
pervasive
• May have a negative or positive
influence

39. 39
SM Service Provision as Drama
• Need to maintain a desirable impression
• Service “actors” need to perform
certain routines
• Physical setting important, smell, music,
use of space, temperature, cleanliness,
etc.

40. 40
SM
Global Feature:
Differences in the Service Experience
in the U.S. and Japan
 Authenticity
 Caring
 Control Courtesy
 Formality
 Friendliness
 Personalization
 Promptness

41. 41
SM
SM
Chapter 3
CUSTOMER
EXPECTATIONS OF
SERVICES

42. 42
SM
Objectives for Chapter 3:
Customer Expectations of
Service
• Recognize that customers hold different types of
expectations for service performance
• Discuss controllable and uncontrollable sources of
customer expectations
• Distinguish between customers’ global expectations
of their relationships and their expectations of the
service encounter
• Acknowledge that expectations are similar for many
different types of customers
• Delineate the most important current issues
surrounding customer expectations

43. 43
SM DEFINITIONS
• Customers have different expectations
re services – or expected service
• Desired service – customer hopes to
receive
• Adequate service – the level of service
the customer may accept
• DO YOUR EXPECTATIONS DIFFER
RE SPUR and CAPTAIN DOREGO?

44. 44
SM
Figure 3-1
Dual Customer
Expectation Levels
Adequate Service
Desired Service
Zone of
Tolerance
(Two levels of expectations)

45. 45
SM
Figure 3-2
The Zone of Tolerance
Adequate Service
Desired Service
Zone of
Tolerance

46. 46
SM
Figure 3-3
Zones of Tolerance VARY for
Different Service Dimensions
Most Important Factors Least Important Factors
Level
of
Expectation
Source: Berry, Parasuraman, and Zeithaml (1993)
Adequate Service
Desired Service
Zone of
Tolerance
Desired
Service
Adequate
Service
Zone
of
Tolerance
Desired Service
Adequate Service

47. 47
SM
Figure 3-4
Zones of Tolerance VARY for
First-Time and Recovery Service
First-Time Service
Outcome
Process
Outcome
Process
Recovery Service
Expectations
LOW HIGH
Source: Parasuraman, Berry and Zeithaml (1991)

48. 48
SM
Figure 3-5
Factors that Influence
Desired Service
Desired
Service
Adequate
Service
Zone
of
Tolerance
Enduring Service
Intensifiers
Personal Needs

49. 49
SM
• Personal needs include physical, social,
psychological categories
• Enduring service intensifiers are
individual, stable factors that lead to
heightened sensitivity to service
This can further divided into Derived
Service Expectations and Personal
service Philosophies

50. 50
SM
Figure 3-6
Factors that Influence
Adequate Service
Desired
Service
Adequate
Service
Zone
of
Tolerance
Self-Perceived
Service Role
Situational
Factors
Perceived Service
Alternatives
Transitory Service
Intensifiers

51. 51
SM
• Transitory service intensifiers –
temporary – a computer breakdown will
be less tolerated at financial year-ends
• Perceived service alternatives
• Perceived service role of customer
• Situational factors

52. 52
SM
Figure 3-7
Factors that Influence
Desired and Predicted Service
Desired
Service
Adequate
Service
Zone
of
Tolerance
Predicted
Service
Explicit Service
Promises
Implicit Service
Promises
Word-of-Mouth
Past Experience

53. 53
SM
Chapter 4
CUSTOMER
PERCEPTIONS OF
SERVICE

54. 54
SM
Objectives for Chapter 4:
Customer Perceptions of Service
• Provide you with definitions and
understanding of customer satisfaction and
service quality
• Show that service encounters or the
“moments of truth” are the building blocks
of customer perceptions
• Highlight strategies for managing customer
perceptions of service

55. 55
SM
Figure 4-1
Customer Perceptions of Service
Quality and Customer Satisfaction
Service
Quality
Reliability
Responsiveness
Assurance
Empathy
Tangibles
Product
Quality
Price
Personal
Factors
Customer
Satisfaction
Situational
Factors

56. 56
SM
Factors Influencing
Customer Satisfaction
• Product/service quality
• Product/service attributes or features
• Consumer Emotions
• Attributions for product/service success
or failure
• Equity or fairness evaluations

57. 57
SM
Outcomes of
Customer Satisfaction
• Increased customer retention
• Positive word-of-mouth communications
• Increased revenues

58. 58
SM
Figure 4-3
Relationship between Customer Satisfaction and
Loyalty in Competitive Industries
0%
20%
40%
60%
80%
100%
Very
dissatisfied
Dissatisfied Neither
satisfied nor
dissatisfied
Satisfied Very
satisfied
Satisfaction measure
Loyalty
(retention)
Source: James L. Heskett, W. Earl Sasser, Jr., and Leonard A. Schlesinger, The Service Profit Chain, (New York, NY: The Free Press, 1997), p. 83.

59. 59
SM Service Quality
• The customer’s judgment of overall
excellence of the service provided in
relation to the quality that was expected.
• Process and outcome quality are both
important.

60. 60
SM
The Five Dimensions of
Service Quality
Ability to perform the promised
service dependably and accurately.
Knowledge and courtesy of
employees and their ability to convey
trust and confidence.
Physical facilities, equipment, and
appearance of personnel.
Caring, individualized attention the
firm provides its customers.
Willingness to help customers and
provide prompt service.
Tangibles
Reliability
Responsiveness
Assurance
Empathy

61. 61
SM
Exercise to
Identify Service Attributes
In groups of five, choose a services industry and spend 10 minutes
brainstorming specific requirements of customers in each of the five
service quality dimensions. Be certain the requirements reflect the
customer’s point of view.
Reliability:
Assurance:
Tangibles:
Empathy:
Responsiveness:

62. 62
SM
SERVQUAL Attributes
 Providing service as promised
 Dependability in handling customers’ service
problems
 Performing services right the first time
 Providing services at the promised time
 Maintaining error-free records
 Keeping customers informed as to when services will
be performed
 Prompt service to customers
 Willingness to help customers
 Readiness to respond to customers’ requests
RELIABILITY
RESPONSIVENESS
 Employees who instill confidence in customers
 Making customers feel safe in their transactions
 Employees who are consistently courteous
 Employees who have the knowledge to answer
customer questions
ASSURANCE
 Giving customers individual attention
 Employees who deal with customers in a caring
fashion
 Having the customer’s best interest at heart
 Employees who understand the needs of their
customers
 Convenient business hours
EMPATHY
 Modern equipment
 Visually appealing facilities
 Employees who have a neat, professional
appearance
 Visually appealing materials associated with the
service
TANGIBLES

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SM
The Service Encounter
• is the “moment of truth”
• occurs any time the customer interacts with the firm
• can potentially be critical in determining customer satisfaction
and loyalty
• types of encounters:
– remote encounters
– phone encounters
– face-to-face encounters
• is an opportunity to:
– build trust
– reinforce quality
– build brand identity
– increase loyalty

64. 64
SM
Check-In
Request Wake-Up Call
Checkout
Bellboy Takes to Room
Restaurant Meal
Figure 4-4
A Service Encounter
Cascade for a Hotel Visit

65. 65
SM
Figure 4-5
A Service Encounter
Cascade for an Industrial Purchase
Sales Call
Ordering Supplies
Billing
Delivery and Installation
Servicing

66. 66
SM
Critical Service Encounters
Research
• GOAL - understanding actual events and
behaviors that cause customer
dis/satisfaction in service encounters
• METHOD - Critical Incident Technique
• DATA - stories from customers and
employees
• OUTPUT - identification of themes
underlying satisfaction and dissatisfaction
with service encounters

67. 67
SM
Sample Questions for Critical
Incidents Technique Study
• Think of a time when, as a customer, you
had a particularly satisfying (dissatisfying)
interaction with an employee of .
• When did the incident happen?
• What specific circumstances led up to this
situation?
• Exactly what was said and done?
• What resulted that made you feel the
interaction was satisfying (dissatisfying)?

68. 68
SM
Common Themes in Critical
Service Encounters Research
Recovery: Adaptability:
Spontaneity:
Coping:
Employee Response
to Service Delivery
System Failure
Employee Response
to Customer Needs
and Requests
Employee Response
to Problem Customers
Unprompted and
Unsolicited Employee
Actions and Attitudes

69. 69
SM
Recovery
• Acknowledge
problem
• Explain causes
• Apologize
• Compensate/upgra
de
• Lay out options
• Take responsibility
• Ignore customer
• Blame customer
• Leave customer to
fend for him/herself
• Downgrade
• Act as if nothing is
wrong
DO DON’T

70. 70
SM
Adaptability
• Recognize the
seriousness of the
need
• Acknowledge
• Anticipate
• Attempt to
accommodate
• Explain rules/policies
• Take responsibility
• Exert effort to
accommodate
• Promise, then fail to
follow through
• Ignore
• Show unwillingness to try
• Embarrass the customer
• Laugh at the customer
• Avoid responsibility
DO DON’T

71. 71
SM
Spontaneity
• Take time
• Be attentive
• Anticipate needs
• Listen
• Provide information
(even if not asked)
• Treat customers fairly
• Show empathy
• Acknowledge by name
• Exhibit impatience
• Ignore
• Yell/laugh/swear
• Steal from or cheat
a customer
• Discriminate
• Treat impersonally
DO DON’T

72. 72
SM
Coping
• Listen
• Try to
accommodate
• Explain
• Let go of the
customer
• Take customer’s
dissatisfaction
personally
• Let customer’s
dissatisfaction affect
others
DO DON’T

73. 73
SM
Figure 4-6
Evidence of Service from the
Customer’s Point of View
People
Process
Physical
Evidence
 Contact employees
 Customer him/herself
 Other customers
 Operational flow of
activities
 Steps in process
 Flexibility vs.
standard
 Technology vs.
human
 Tangible
communication
 Servicescape
 Guarantees
 Technology

74. 74
SM
LISTENING TO
CUSTOMER
REQUIREMENTS

75. 75
SM
Provider GAP 1
Company
Perceptions of
Consumer
Expectations
Expected
Service
CUSTOMER
COMPANY
GAP 1
Part 2 Opener

76. 76
SM
UNDERSTANDING
CUSTOMER
EXPECTATIONS AND
PERCEPTIONS THROUGH
MARKETING RESEARCH

77. 77
SM
Objectives for Chapter 5:
Understanding Customer Expectations
and Perceptions through
Marketing Research
• Present the types of and guidelines for marketing
research in services
• Show the ways that marketing research
information can and should be used for services
• Describe the strategies by which companies can
facilitate interaction and communication between
management and customers
• Present ways that companies can and do
facilitate interaction between contact people and
management

78. 78
SM
Common Research Objectives
for Services
• To identify dissatisfied customers
• To discover customer requirements or expectations
• To monitor and track service performance
• To assess overall company performance compared to
competition
• To assess gaps between customer expectations and
perceptions
• To gauge effectiveness of changes in service
• To appraise service performance of individuals and
teams for rewards
• To determine expectations for a new service
• To monitor changing expectations in an industry
• To forecast future expectations

79. 79
SM
Figure 5-1
Criteria for An Effective Services
Research Program
Research
Objectives
Includes
Perceptions
and
Expectations
of
Customers
Includes
Measures
of
Loyalty or
Behavioral
Intentions
Includes
Statistical
Validity
When Necessary
Measures
Priorities
or
Importance
Occurs
with
Appropriate
Frequency

80. 80
SM
Portfolio of Services Research
Customer Complaint
Solicitation
“Relationship” Surveys
Post-Transaction Surveys
Customer Focus Groups
“Mystery Shopping” of
Service Providers
Employee Surveys
Lost Customer Research
Identify dissatisfied customers to attempt recovery;
identify most common categories of service failure for
remedial action
Obtain customer feedback while service experience is still
fresh; act on feedback quickly if negative patterns develop
Use as input for quantitative surveys; provide a forum
for customers to suggest service-improvement ideas
Assess company’s service performance compared to
competitors; identify service-improvement priorities; track
service improvement over time
Measure individual employee service behaviors for use in
coaching, training, performance evaluation, recognition and
rewards; identify systemic strengths and weaknesses in
service
Measure internal service quality; identify employee-
perceived obstacles to improve service; track
employee morale and attitudes
Determine the reasons why customers defect
Research Objective Type of Research
Future Expectations Research
To forecast future expectations of customers
To develop and test new service ideas

81. 81
SM
Stages in the Research
Process
• Stage 1 : Define Problem
• Stage 2 : Develop Measurement
Strategy
• Stage 3 : Implement Research
Program
• Stage 4 : Collect and Tabulate Data
• Stage 5 : Interpret and Analyze
Findings
• Stage 6 : Report Findings

82. 82
SM
Figure 5-5
Service Quality Perceptions Relative to
Zones of Tolerance by Dimensions
Retail Chain
9
8
7
6
5
4
3
2
1
0
Reliability Responsiveness Assurance Empathy Tangibles
O
O O
O
Zone of Tolerance S.Q. Perception
O
O

83. 83
SM
Service Quality Perceptions
Relative to Zones of Tolerance by
Dimensions
Computer
Manufacturer
10
8
6
4
2
0
Reliability Responsiveness Assurance Empathy Tangibles
O
O O
O
O
Zone of Tolerance S.Q. Perception
O

84. 84
SM
Figure 5-6
Importance/Performance Matrix
HIGH
HIGH
LOW
Performance
Importance


 






Attributes to Improve Attributes to Maintain
High
Leverage
Attributes to De-emphasize
Attributes to Maintain
Low
Leverage

85. 85
SM
SM
Chapter 6
BUILDING
CUSTOMER
RELATIONSHIPS

86. 86
SM
Objectives for Chapter 6:
Building Customer Relationships
• Explain relationship marketing, its goals, and the benefits
of long-term relationships for firms and customers
• Explain why and how to estimate customer lifetime value
• Specify the foundations for successful relationship
marketing--quality core services and careful market
segmentation
• Provide you with examples of successful customer
retention strategies
• Introduce the idea that “the customer isn’t always right”

87. 87
SM
Relationship Marketing
• is a philosophy of doing business that focuses on
keeping and improving current customers
• does not necessarily emphasize acquiring new
customers
• is usually cheaper (for the firm)--to keep a current
customer costs less than to attract a new one
• goal = to build and maintain a base of committed
customers who are profitable for the organization
• thus, the focus is on the attraction, retention, and
enhancement of customer relationships

88. 88
SM
Lifetime Value of a Customer
• Assumptions
• Income
– Expected Customer Lifetime
– Average Revenue (month/year)
– Other Customers convinced via WOM
– Employee Loyalty??
• Expenses
– Costs of Serving Customer Increase??

89. 89
SM A Loyal Customer is One Who...
• Shows Behavioral Commitment
– buys from only one supplier, even though
other options exist
– increasingly buys more and more from a
particular supplier
– provides constructive
feedback/suggestions
• Exhibits Psychological Commitment
– Wouldn’t consider terminating the
relationship--psychological commitment
– has a positive attitude about the supplier

90. 90
SM Customer Loyalty Exercise
• Think of a service provider you are loyal
to.
• What do you do (your behaviors,
actions, feelings) that indicates you are
loyal?
• Why are you loyal to this provider?

91. 91
SM
Benefits to the Organization of
Customer Loyalty
• loyal customers tend to spend more
with the organization over time
• on average costs of relationship
maintenance are lower than new
customer costs
• employee retention is more likely with a
stable customer base
• lifetime value of a customer can be very
high

92. 92
SM Benefits to the Customer
• inherent benefits in getting good value
• economic, social, and continuity
benefits
– contribution to sense of well-being and
quality of life and other psychological
benefits
– avoidance of change
– simplified decision making
– social support and friendships
– special deals

93. 93
SM
“The Customer Isn’t Always
Right”
• Not all customers are good relationship
customers:
– wrong segment
– not profitable in the long term
– difficult customers

94. 94
SM
Strategies for Building
Relationships
• Foundations:
– Excellent Quality/Value
– Careful Segmentation
• Bonding Strategies:
– Financial Bonds
– Social & Psychological Bonds
– Structural Bonds
– Customization Bonds
• Relationship Strategies Wheel

95. 95
SM
Getting
Satisfying
Retaining
Enhancing
Figure 6-1
Customer Goals of
Relationship Marketing

96. 96
SM
Figure 6-3
Underlying Logic of Customer Retention
Benefits to the Organization
Customer Retention &
Increased Profits
Employee Loyalty
Quality
Service
Customer Satisfaction

97. 97
SM
Figure 6-5
Steps in Market Segmentation and
Targeting for Services
Identify
Bases for
Segmenting
the Market
STEP 1:
Develop
Profiles of
Resulting
Segments
STEP 2:
Develop
Measures
of Segment
Attractive-
ness
STEP 3:
Select the
Target
Segments
STEP4:
Ensure that
Segments
Are
Compatible
STEP 5:

98. 98
SM
Figure 6-6
Levels of Retention Strategies
Excellent
Quality
and
Value
I. Financial
Bonds
II.
Social
Bonds
IV.
Structural
Bonds
III. Customization
Bonds
Volume and
Frequency
Rewards
Bundling and
Cross Selling
Stable
Pricing
Social Bonds
Among
Customers
Personal
Relationships
Continuous
Relationships
Customer
Intimacy
Mass
Customization
Anticipation/
Innovation
Shared
Processes
and
Equipment
Joint
Investments
Integrated
Information
Systems

99. 99
SM
SM
Chapter 7
SERVICE RECOVERY

100. 100
SM
Objectives for Chapter 7:
Service Recovery
• Illustrate the importance of recovery from
service failures in building loyalty
• Discuss the nature of consumer
complaints and why people do and do not
complain
• Provide evidence of what customers
expect and the kind of responses they
want when they complain
• Provide strategies for effective service
recovery

101. 101
SM
Figure 7-1
Unhappy Customers’
Repurchase Intentions
95%
70%
46%
37%
82%
54%
19%
9%
Complaints Resolved Quickly
Complaints Resolved
Complaints Not Resolved
Minor complaints ($1-$5 losses) Major complaints (over $100 losses)
Unhappy Customers Who Don’t Complain
Unhappy Customers Who Do Complain
Percent of Customers Who Will Buy Again
Source: Adapted from data reported by the Technical Assistance Research Program.

102. 102
SM
Figure 7-3
Customer Response Following
Service Failure
Service Failure
Do Nothing
Take Action
Stay with Provider
Switch Providers
Complain to
Provider
Complain to
Family & Friends
Complain to
Third Party
Stay with Provider
Switch Providers

103. 103
SM
Figure 7-5
Service Recovery Strategies
Service
Recovery
Strategies

104. 104
SM
Figure 7-6
Causes Behind Service
Switching
Service
Switching
Behavior
• High Price
• Price Increases
• Unfair Pricing
• Deceptive Pricing
Pricing
• Location/Hours
• Wait for Appointment
• Wait for Service
Inconvenience
• Service Mistakes
• Billing Errors
• Service Catastrophe
Core Service Failure
• Uncaring
• Impolite
• Unresponsive
• Unknowledgeable
Service Encounter Failures
• Negative Response
• No Response
• Reluctant Response
Response to Service Failure
• Found Better Service
Competition
• Cheat
• Hard Sell
• Unsafe
• Conflict of Interest
Ethical Problems
• Customer Moved
• Provider Closed
Involuntary Switching
Source: Sue Keaveney

105. 105
SM Service Guarantees
• guarantee = an assurance of the
fulfillment of a condition (Webster’s
Dictionary)
• for products, guarantee often done in
the form of a warranty
• services are often not guaranteed
–cannot return the service
–service experience is intangible
–(so what do you guarantee?)

106. 106
SM
Table 7-7
Characteristics of an Effective
Service Guarantee
Unconditional
 The guarantee should make its promise unconditionally -
no strings attached.
Meaningful
 It should guarantee elements of the service that are
important to the customer.
 The payout should cover fully the customer's
dissatisfaction.
Easy to Understand and Communicate
 For customers - they need to understand what to expect.
 For employees - they need to understand what to do.
Easy to Invoke and Collect
 There should not be a lot of hoops or red tape in the way
of accessing or collecting on the guarantee.
Source: Christopher W.L. Hart, “The Power of Unconditional Guarantees,” Harvard Business Review, July-August, 1988, pp. 54-62.

107. 107
SM Why a Good Guarantee Works
• forces company to focus on customers
• sets clear standards
• generates feedback
• forces company to understand why it
failed
• builds “marketing muscle”

108. 108
SM Service Guarantees
• Does everyone need a guarantee?
• Reasons companies do NOT offer
guarantees:
– guarantee would be at odds with company’s
image
– too many uncontrollable external variables
– fears of cheating by customers
– costs of the guarantee are too high

109. 109
SM
Service Guarantees
• service guarantees work for companies
who are already customer-focused
• effective guarantees can be BIG deals -
they put the company at risk in the eyes
of the customer
• customers should be involved in the
design of service guarantees
• the guarantee should be so stunning that
it comes as a surprise -- a WOW!! factor
• “it’s the icing on the cake, not the cake”

110. 110
SM
Part 3
ALIGNING STRATEGY,
SERVICE DESIGN
AND STANDARDS

111. 111
SM
CUSTOMER
COMPANY
GAP 2
Customer-Driven
Service Designs and
Standards
Company
Perceptions of
Consumer
Expectations
Provider GAP 2
Part 3 Opener

112. 112
SM
Chapter 8
SERVICE DEVELOPMENT
AND DESIGN

113. 113
SM
Objectives for Chapter 8:
Service Development and Design
• Describe the challenges inherent in
service design
• Present steps in the new service
development process
• Show the value of service blueprinting
and quality function deployment (QFD)
in new service design and service
improvement
• Present lessons learned in choosing
and implementing high-performance

114. 114
SM
Figure 8-1
Risks of Relying on Words Alone
to Describe Services
 Oversimplification
 Incompleteness
 Subjectivity
 Biased Interpretation

115. 115
SM
Figure 8-2
New Service Development Process
Source: Booz-Allen & Hamilton, 1982; Bowers, 1985; Cooper, 1993; Khurana & Rosenthal 1997.
 Business Strategy Development or Review
 New Service Strategy Development
 Idea Generation
 Concept Development and Evaluation
 Business Analysis
 Service Development and Testing
 Postintroduction Evaluation
 Commercialization
 Market Testing
Screen ideas against new service strategy
Test concept with customers and employees
Test for profitability and feasibility
Conduct service prototype test
Test service and other marketing-mix elements
Front End
Planning
Implementation

116. 116
SM
Figure 8-3
New Service Strategy Matrix for
Identifying Growth Opportunities
Markets
Offerings
Existing
Services
New
Services
Current Customers New Customers
SHARE BUILDING
DIVERSIFICATION
MARKET
DEVELOPMENT
SERVICE
DEVELOPMENT

117. A tool for simultaneously depicting the
service process, the points of customer
contact, and the evidence of service
from the customer’s point of view.
Service
Mapping
Process
Points of Contact
Evidence
Figure 8-4
Service Mapping/Blueprinting

118. 118
SM
Service Blueprint Components
CUSTOMER ACTIONS
line of interaction
“ONSTAGE” CONTACT EMPLOYEE ACTIONS
line of visibility
“BACKSTAGE” CONTACT EMPLOYEE ACTIONS
line of internal interaction
SUPPORT PROCESSES

119. 119
SM
Driver
Picks
Up Pkg.
Dispatch
Driver
Airport
Receives
& Loads
Sort
Packages
Load on
Airplane
Fly to
Destinatio
n
Unload
&
Sort
Load
On
Truck
Express Mail Delivery Service
SUPPORT
PROCESS
CONTACT
PERSON
(Back
Stage)
(On
Stage)
CUSTOME
R
PHYSICAL
EVIDENCE
Customer
Calls
Customer
Gives
Package
Truck
Packaging
Forms
Hand-held
Computer
Uniform
Receive
Package
Truck
Packaging
Forms
Hand-held
Computer
Uniform
Deliver
Package
Customer
Service
Order
Fly to
Sort
Center

120. 120
SM
Overnight Hotel Stay
SUPPORT
PROCESS
CONTACT
PERSON
(Back
Stage)
(On
Stage)
CUSTOMER
Hotel
Exterior
Parking
Cart for
Bags
Desk
Registration
Papers
Lobby
Key
Elevators
Hallways
Room
Cart for
Bags
Room
Amenities
Bath
Menu Delivery
Tray
Food
Appearance
Food
Bill
Desk
Lobby
Hotel
Exterior
Parking
Arrive
at
Hotel
Give Bags
to
Bellperson
Check in
Go to
Room
Receive
Bags
Sleep
Shower
Call
Room
Service
Receive
Food
Eat
Check out
and
Leave
Greet and
Take
Bags
Process
Registration
Deliver
Bags
Deliver
Food
Process
Check Out
Take Bags
to Room
Take
Food
Order
Registration
System
Prepare
Food
Registration
System
PHYSICAL
EVIDENCE

121. 121
SM
Figure 8-8
Building a Service Blueprint
Step 1
Identify the
process to
be blue-
printed.
Step 2
Identify the
customer
or
customer
segment.
Step 3
Map the
process
from the
customer’
s point of
view.
Step 4
Map
contact
employee
actions,
onstage
and back-
stage.
Step 5
Link
customer
and contact
person
activities to
needed
support
functions.
Step 6
Add
evidence
of service
at each
customer
action
step.

122. 122
SM
Application of Service Blueprints
• New Service Development
• concept development
• market testing
• Supporting a “Zero Defects” Culture
• managing reliability
• identifying empowerment issues
• Service Recovery Strategies
• identifying service problems
• conducting root cause analysis
• modifying processes

123. 123
SM
Blueprints Can Be Used By:
• Service Marketers
– creating realistic customer
expectations
• service system design
• promotion
• Operations Management
– rendering the service as
promised
• managing fail points
• training systems
• quality control
• Human Resources
– empowering the human element
• job descriptions
• selection criteria
• appraisal systems
• System Technology
– providing necessary tools:
• system specifications
• personal preference databases

124. 124
SM
SM
Chapter 9
CUSTOMER-DEFINED
SERVICE STANDARDS

125. 125
SM
Objectives for Chapter 9:
Customer-defined Service
Standards
• Differentiate between company-defined
and customer-defined service standards
• Distinguish among one-time service
fixes and “hard” and “soft” customer-
defined standards
• Explain the critical role of the service
encounter sequence in developing
customer-defined standards
• Illustrate how to translate customer
expectations into behaviors and actions

126. 126
SM
Figure 9-1
AT&T’s Process Map for Measurements
Reliability (40%)
Easy To Use (20%)
Features / Functions (40%)
Knowledge (30%)
Responsive (25%)
Follow-Up (10%)
Delivery Interval Meets Needs (30%)
Does Not Break (25%)
Installed When Promised (10%)
No Repeat Trouble (30%)
Fixed Fast (25%)
Kept Informed (10%)
Accuracy, No Surprise (45%)
Resolve On First Call (35%)
Easy To Understand (10%)
Business Process Customer Need Internal Metric
30% Product
30% Sales
10% Installation
15% Repair
15% Billing
% Repair Call
% Calls for Help
Functional Performance Test
Supervisor Observations
% Proposal Made on Time
% Follow Up Made
Average Order Interval
% Repair Reports
% Installed On Due Date
% Repeat Reports
Average Speed Of Repair
% Customers Informed
% Billing Inquiries
% Resolved First Call
% Billing Inquiries
Total
Quality
Source: AT&T General Business Systems

127. 127
SM
Exercise for Creating Customer-
Defined Service Standards
• Form a group of four people
• Use your school’s undergraduate or
graduate program, or an approved
alternative
• Complete the customer-driven service
standards importance chart
• Establish standards for the most important
and lowest-performed behaviors and
actions
• Be prepared to present your findings to the

128. 128
SM
Service Encounter Customer Requirements Measurements
Service
Quality
Customer-Driven Standards and
Measurements Exercise

129. 129
SM
Figure 9-2
Getting to Actionable Steps
Satisfaction Value
Relationship
Solution Provider
Reliability Empathy
Assurance Tangibles
Responsiveness Price
Delivers on Time
Returns Calls Quickly
Knows My Industry
Delivers by Weds 11/4
Returns Calls in 2 Hrs
Knows Strengths of
My Competitors
Requirements:
Abstract
Concrete
Dig
Deeper
Dig
Deeper
Dig
Deeper
Diagnosticity:
Low
High
General Concepts
Dimensions
Behaviors
and Actions
Attributes

130. 130
SM
Figure 9-3
Process for Setting Customer-Defined
Standards
1. Identify Existing or Desired Service Encounter Sequence
2. Translate Customer Expectations Into Behaviors/Actions
4. Set Hard or Soft Standards
5. Develop Feedback
Mechanisms
7. Track Measures Against Standards
Measure by
Audits or
Operating Data
Hard Soft
Measure by
Transaction-
Based Surveys
3. Select Behaviors/Actions for Standards
6. Establish Measures and Target Levels
8. Update Target Levels and Measures

131. 131
SM
Importance/Performance
Matrix
HIGH
HIGH
Performance









10.0
8.0
7.0
9.0
LOW
8.0 9.0 10.0
Importance
Improve Maintain
Delivers on promises specified in proposal/contract (9.49, 8.51)
Gets project within budget, on time (9.31, 7.84)
Completes projects
correctly, on time (9.29, 7.68)
Does whatever it takes to
correct problems (9.26, 7.96)
Provides equipment that operates as vendor said it would (9.24, 8.14)
Gets price we originally agreed upon (9.21, 8.64)
Takes responsibility for their mistakes (9.18, 8.01)
Delivers or installs on
promised date (9.02, 7.84)
Tells me cost ahead of time (9.06, 8.46)

Gets back to me when
promised (9.04, 7.63)

132. 132
SM
Figure 9-5
Linkage between Soft Measures and
Hard Measures for Speed of Complaint
Handling
S
A
T
I
S
F
A
C
T
I
O
N
2 4 6 8 12 16 20 24
W O R K I N G H O U R S
Large Customers
Small Customers
10
9
8
7
6
5
4
3
2
1
0

133. 133
SM
Figure 9-6
Aligning Company Processes
with Customer Expectations
Customer Expectations
Customer
Process
Blueprint
Company
Process
Blueprint
Company Sequential Processes
A B C D E F G H
40 Days
New Card
Mailed
Lost Card
Reported
Report Lost
Card
Receive New
Card
48 Hours

134. 134
SM
Chapter 10
PHYSICAL EVIDENCE
AND THE SERVICESCAPE

135. 135
SM
Objectives for Chapter 10:
Physical Evidence and the
Services cape
• Explain the impact on customer perceptions of
physical evidence, particularly the services cape
• Illustrate differences in types and roles of services
capes and their implications for strategy
• Explain why the services cape affects employee and
customer behavior
• Analyze four different approaches for understanding
the effects of physical environment
• Present elements of an effective physical evidence
strategy

136. 136
SM
Table 10-1
Elements of Physical Evidence
Servicescape Other tangibles
Facility exterior
Exterior design
Signage
Parking
Landscape
Surrounding environment
Facility interior
Interior design
Equipment
Signage
Layout
Air quality/temperature
Business cards
Stationery
Billing statements
Reports
Employee dress
Uniforms
Brochures
Internet/Web pages

137. 137
SM
Table 10-2
Examples of Physical Evidence from the
Customer’s Point of View
Service Physical evidence
Servicescape Other tangibles
Insurance Not applicable Policy itself
Billing statements
Periodic updates
Company brochure
Letters/cards
Hospital Building exterior
Parking
Signs
Waiting areas
Admissions office
Patient care room
Medical equipment
Recovery room
Uniforms
Reports/stationery
Billing statements
Airline Airline gate area
Airplane exterior
Airplane interior (décor, seats, air
quality)
Tickets
Food
Uniforms
Express mail Not applicable Packaging
Trucks
Uniforms
Computers
Sporting
event
Parking, Seating, Restrooms
Stadium exterior
Ticketing area, Concession Areas
Entrance, Playiing Field
Signs
Tickets
Program
Uniforms

138. 138
SM
Table 10-3
Typology of Service Organizations Based on
Variations in Form and Use of the Servicescape
Complexity of the servicescape evidence
Servicescape
usage
Elaborate Lean
Self-service
(customer only)
Golf Land
Surf 'n' Splash
ATM
Ticketron
Post office kiosk
Internet services
Express mail drop-off
Interpersonal
services
(both customer and
employeee)
Hotel
Restaurants
Health clinic
Hospital
Bank
Airline
School
Dry cleaner
Hot dog stand
Hair salon
Remote service
(employee only)
Telephone company
Insurance company
Utility
Many professional services
Telephone mail-order desk
Automated voice-messaging-
based services

139. 139
SM
Figure 10-3
A Framework for Understanding Environment-user
Relationships in Service Organizations
Source: Adapted from Mary Jo Bitner, “Servicescapes.”
PHYSICAL
ENVIRONMENTAL
DIMENSIONS
HOLISTIC
ENVIRONMENT
INTERNAL
RESPONSES
BEHAVIOR
Ambient
Conditions
Space/Function
Signs, Symbols,
and Artifacts
Perceived
Servicescape
Cognitive
Emotional
Physiological
Cognitive
Emotional
Physiological
Employee
Responses
Customer
Responses
Individual
Behaviors
Social
Interactions
between and
among
customer and
employees
Individual
Behaviors

140. 140
SM
Part 4
DELIVERING AND
PERFORMING SERVICE

141. 141
SM
CUSTOMER
COMPANY
Provider GAP 3
Service Delivery
GAP 3
Customer-Driven
Service Designs and
Standards
Part 4 Opener

142. 142
SM
Chapter 11
EMPLOYEES’ ROLES IN
SERVICE DELIVERY

143. 143
SM
Objectives for Chapter 11:
Employees’ Roles in Service
Delivery
• Illustrate the critical importance of service
employees in creating customer satisfaction
and service quality
• Demonstrate the challenges inherent in
boundary-spanning roles
• Provide examples of strategies for creating
customer-oriented service delivery
• Show how the strategies can support a
service culture where providing excellent
service is a way of life

144. 144
SM Service Employees
• They are the service
• They are the firm in the customer’s
eyes
• They are marketers
• Importance is evident in
– The Services Marketing Mix (People)
– The Service-Profit Chain
– The Services Triangle

145. 145
SM Service Employees
• Who are they?
– “boundary spanners”
• What are these jobs like?
– emotional labor
– many sources of potential conflict
• person/role
• organization/client
• interclient
• quality/productivity

146. 146
SM
Figure 11-3
Boundary Spanners Interact with Both
Internal and External Constituents
Internal Environment
External Environment

147. 147
SM
Figure 11-4
Sources of Conflict for
Boundary-Spanning Workers
• Person vs. Role
• Organization vs. Client
• Client vs. Client
• Quality vs. Productivity

148. 148
SM
Figure 11-5
Human Resource Strategies for Closing
GAP 3
Customer-
oriented
Service
Delivery
Hire the
Right People
Provide
Needed Support
Systems
Retain the
Best
People
Develop
People to
Deliver
Service
Quality
Hire for
Service
Competencies
and Service
Inclination
Provide
Supportive
Technology
and
Equipment
Treat
Employees
as
Customers
Empower
Employees

149. 150
SM Service Culture
“A culture where an appreciation for
good service exists, and where giving
good service to internal as well as
ultimate, external customers, is
considered a natural way of life and one
of the most important norms by
everyone in the organization.”

150. 151
SM
SM
Chapter 12
CUSTOMERS’ ROLES IN
SERVICE DELIVERY

151. 152
SM
Objectives for Chapter 12:
Customers’ Roles in Service
Delivery
• Illustrate the importance of customers in
successful service delivery
• Enumerate the variety of roles that
service customers play
• Productive resources
• Contributors to quality and satisfaction
• Competitors
• Explain strategies for involving service
customers effectively to increase both
quality and productivity

152. 153
SM
Importance of Other
Customers in Service Delivery
• Other customers can detract from
satisfaction
• disruptive behaviors
• excessive crowding
• incompatible needs
• Other customers can enhance
satisfaction
• mere presence
• socialization/friendships
• roles: assistants, teachers, supporters

153. 154
SM How Customers Widen Gap 3
• Lack of understanding of their roles
• Not being willing or able to perform their
roles
• No rewards for “good performance”
• Interfering with other customers
• Incompatible market segments

154. 155
SM
Figure 12-2
Customer Roles in Service
Delivery
Productive Resources
Contributors to
Quality and
Satisfaction
Competitors

155. 156
SM
Customers as Productive
Resources
• “partial employees”
– contributing effort, time, or other resources
to the production process
• customer inputs can affect
organization’s productivity
• key issue:
– should customers’ roles be expanded?
reduced?

156. 157
SM
Customers as Contributors to
Service Quality and Satisfaction
• Customers can contribute to
– their own satisfaction with the service
• by performing their role effectively
• by working with the service provider
– the quality of the service they receive
• by asking questions
• by taking responsibility for their own satisfaction
• by complaining when there is a service failure

157. 158
SM
Customers as Competitors
• customers may “compete” with the service
provider
• “internal exchange” vs. “external exchange”
• internal/external decision often based on:
– expertise
– resources
– time
– economic rewards
– psychic rewards
– trust
– control

158. 159
SM
Technology Spotlight:
Services Production Continuum
1 2 3 4 5 6
Gas Station Illustration
1. Customer pumps gas and pays at the pump with automation
2. Customer pumps gas and goes inside to pay attendant
3. Customer pumps gas and attendant takes payment at the pump
4. Attendant pumps gas and customer pays at the pump with automation
5. Attendant pumps gas and customer goes inside to pay attendant
6. Attendant pumps gas and attendant takes payment at the pump
Customer Production Joint Production Firm Production

159. 160
SM
Figure 12-3
Strategies for Enhancing Customer
Participation
Effective
Customer
Participation
Recruit, Educate,
and Reward
Customers
Define Customer
Jobs
Manage the
Customer
Mix

160. 161
SM
Strategies for Enhancing
Customer Participation
1. Define customers’ jobs
- helping himself
- helping others
- promoting the company
2. Individual differences: not everyone wants
to participate

161. 162
SM
Strategies for Recruiting,
Educating and Rewarding Customers
1. Recruit the right customers
2. Educate and train customers to perform
effectively
3. Reward customers for their contribution
4. Avoid negative outcomes of inappropriate
customer participation
Manage the Customer Mix

162. 163
SM
SM
Chapter 14
MANAGING DEMAND
AND CAPACITY

163. 164
SM
Objectives for Chapter 14:
Managing Demand and Capacity
• Explain:
• the underlying issue for capacity-constrained
services
• the implications of capacity constraints
• the implications of different types of demand
patterns on matching supply and demand
• Lay out strategies for matching supply and demand
through:
• shifting demand to match capacity or
• flexing capacity to meet demand
• Demonstrate the benefits and risks of yield management
strategies

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Understanding Capacity
Constraints and Demand Patterns
• Time, labor,
equipment and
facilities
• Optimal versus
maximal use of
capacity
• Charting demand
patterns
• Predictable cycles
• Random demand
fluctuations
• Demand patterns
by market segment
Capacity Constraints Demand Patterns

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Figure 14-3
Strategies for Shifting Demand
to Match Capacity
• Use signage to communicate
busy days and times
• Offer incentives to customers
for usage during non-peak
times
• Take care of loyal or regular
customers first
• Advertise peak usage times
and benefits of non-peak use
• Charge full price for the
service--no discounts
• Use sales and advertising to
increase business from
current market segments
• Modify the service offering to
appeal to new market
segments
• Offer discounts or price
reductions
• Modify hours of operation
• Bring the service to the
customer
Demand Too High Demand Too Low
Shift Demand

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Figure 14-4
Strategies for Flexing Capacity
to Match Demand
• Stretch time, labor,
facilities and equipment
• Cross-train employees
• Hire part-time employees
• Request overtime work
from employees
• Rent or share facilities
• Rent or share equipment
• Subcontract or outsource
activities
• Perform maintenance
renovations
• Schedule vacations
• Schedule employee
training
• Lay off employees
Demand Too High Demand Too Low
Flex Capacity

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Table 14-1
What is the Nature of Demand
Relative to Supply?
Extent of demand fluctuations over time
Extent to which
supply is
constrained
Wide Narrow
Peak demand can
usually be met
without a major
delay
1
Electricity
Natural gas
Telephone
Hospital maternity unit
Police and fire
emergencies
2
Insurance
Legal services
Banking
Laundry and dry cleaning
Peak demand
regularly exceeds
capacity
4
Accounting and tax
preparation
Passenger transportation
Hotels and motels
Restaurants
Theaters
3
Services similar to those in
2 but which have
insufficient capacity for
their base level of business
Source: Christopher H. Lovelock, “Classifying Services to Gain Strategic Marketing Insights,” Journal of Marketing, 47, 3 (Summer 1983): 17.

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Table 14-2
What is the Constraint on
Capacity?
Nature of the constraint Type of service
Time Legal
Consulting
Accounting
Medical
Labor Law firm
Accounting firm
Consulting firm
Health clinic
Equipment Delivery services
Telecommunication
Utilities
Health club
Facilities Hotels
Restaurants
Hospitals
Airlines
Schools
Theaters
Churches

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Waiting Line Issues
and Strategies
• unoccupied time feels longer
• preprocess waits feel longer
• anxiety makes waits seem longer
• uncertain waits seem longer than
finite waits
• unexplained waits seem longer
• unfair waits feel longer
• longer waits are more acceptable
for “valuable” services
• solo waits feel longer

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Part 5
MANAGING SERVICE
PROMISES

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CUSTOMER
COMPANY
External
Communications
to Customers
GAP 4
Service Delivery
Provider GAP 4
Part 5 Opener

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Chapter 15
INTEGRATED
MARKETING
COMMUNICATION

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Objectives for Chapter 15:
Integrated Services
Marketing Communications
• Introduce the concept of Integrated Services
Marketing Communication
• Discuss the key reasons for service communication
problems
• Present four key ways to integrate marketing
communication in service organizations
• Present specific strategies for managing promises,
managing customer expectations, educating
customers, and managing internal communications
• Provide perspective on the popular service objective
of exceeding customer expectations

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Figure 15-1
Communications and the Services
Marketing Triangle
Internal Marketing
Vertical Communications
Horizontal Communications
Interactive Marketing
Personal Selling
Customer Service Center
Service Encounters
Servicescapes
External Marketing
Communication
Advertising
Sales Promotion
Public Relations
Direct Marketing
Company
Customers
Employees
Source: Parts of model adapted from work by Christian Gronroos and Phillip Kotler

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Goal:
Delivery
greater than
or equal to
promises
Improve
Customer
Education
Manage
Service
Promises
Manage
Customer
Expectations
Manage
Internal
Marketing
Communication
Figure 15-3
Approaches for Integrating Services
Marketing Communication

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Goal:
Delivery
greater than
or equal to
promises
Offer
Service
Guarantees
Create
Effective
Services
Communications
MANAGING SERVICE PROMISES
Make
Realistic
Promises
Coordinate
External
Communicatio
n
Figure 15-4
Approaches for
Managing Service Promises

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Communicate Criteria for
Service Effectiveness
Create Tiered-Value
Offerings
Figure 15-8
Approaches for
Managing Customer Expectations
Negotiate
Unrealistic
Expectations
Goal:
Delivery
greater than
or equal to
promises
Offer Choices

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Goal:
Delivery
greater than
or equal to
promises
Prepare
Customers
for the
Service
Process
Clarify
Expectations
after the Sale
Figure 15-9
Approaches for
Improving Customer Education
Teach
Customers
to Avoid
Peak
Demand
Periods
and
Seek Slow
Periods
Confirm
Performance
to Standards

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Goal:
Delivery
greater than
or equal to
promises
Figure 15-10
Approaches for Managing
Internal Marketing Communications
Create Effective
Vertical
Communications
Align Back
Office Personnel
w/ External Customers
Create Effective
Horizontal
Communications
Create
Cross-Functional
Teams

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SM
Chapter 17
THE FINANCIAL AND
ECONOMIC IMPACT OF
SERVICE QUALITY

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Objectives for Chapter 17:
The Financial and Economic
Impact of Service
• Examine the direct effects of service on profits
• Consider the impact of service on getting new
customers
• Evaluate the role of service in keeping customers
• Examine the link between perceptions of service
and purchase intentions
• Emphasize the importance of selecting profitable
customers
• Discuss what is know about the key service
drivers of overall service quality, customer
retention and profitability
• Discuss the balanced performance scorecard to
focus on strategic measurement other than
financials

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Figure 17-1
The Direct Relationship between
Service and Profits
Profits
?
Service
Quality

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Figure 17-2
Offensive Marketing Effects of
Service on Profits
Profits
Market
Share
Reputation Sales
Price
Premium
Service
Quality

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Figure 17-3
Defensive Marketing Effects of
Service on Profit
Margins
Profits
Customer
Retention
Costs
Price
Premium
Word of
Mouth
Volume of
Purchases
Service
Quality

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Figure 17-5
Perceptions of Service, Behavioral
Intentions and Profits
Customer
Retention
Costs
Price
Premium
Word of
Mouth
Margins
Profits
Volume of
Purchases
Service Behavioral
Intentions
Sales

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Figure 17-6
The “80/20” Customer Pyramid
Most Profitable
Customers
Least Profitable
Customers
What segment spends more with
us over time, costs less to maintain,
spreads positive word of mouth?
What segment costs us in
time, effort and money yet
does not provide the return
we want? What segment is
difficult to do business with?
Other
Customers
Best
Customers

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Figure 17-7
The Expanded Customer Pyramid
Most Profitable
Customers
Least Profitable
Customers
What segment spends more with
us over time, costs less to maintain,
spreads positive word of mouth?
What segment costs us in
time, effort and money yet
does not provide the return
we want? What segment is
difficult to do business with?
Gold
Iron
Lead
Platinum

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Figure 17-8
The Key Drivers of Service Quality,
Customer Retention, and Profits
Key Drivers
Service
Quality
Service
Encounter
Service
Encounter
Service
Encounter
Customer
Retention
Behavioral
Intentions Profits
Service
Encounter
Service Encounters

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Figure 17-9
Sample Measurements for the
Balanced Scorecard
Adapted from Kaplan and Norton
Innovation and
Learning Perspective
Customer
Perspective
Service Perceptions
Service Expectations
Perceived Value
Behavioral Intentions:
Operational
Perspective:
Right first time (% hits)
Right on time (% hits)
Responsiveness (% on
time)
Transaction time (hours,
days)
Throughput time
Reduction in waste
Process quality
Financial Measures
Price Premium
Volume Increases
Value of Customer
Referrals
Value of Cross Sales
Long-term Value of
Customer
% Loyalty
% Intent to Switch
# Customer
Referrals
# Cross Sales
# of Defections
Number of new products
Return on innovation
Employee skills
Time to market
Time spent talking to
customers

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Figure 17-10
Service Quality Spells Profits
Service
Quality
Customer
Retention
Costs
Price
Premium
Word of
Mouth
Margins
Profits
Defensive
Marketing
Volume of
Purchases
Market
Share
Reputation
Sales
Price
Premium
Offensive
Marketing

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THANK YOU