DON HONORIO VENTURA STATE UNIVERSITY

COLLEGE OF BUSINESS STUDIES

SERVICES
MARKETING

JESTER C. DAVID, MBA, LPT

AY 2023-2023
1|Page
 MKTG E404- SERVICES
MARKETING

2|Page
 CHAPTER 1
INTRODUCTION TO SERVICES MARKETING

Objectives
After studying this unit, you will be able to:
 Describe the concept of services marketing
 Define services
 Discuss the service characteristics
 Distinguish between products and services
 Classify services
Introduction
Increasingly toward a services economy, marketers need to know more about marketing service
products. On a simplistic note, one can say that services are activities or benefits that one party
can offer to another that are essentially intangible and do not result in the ownership of anything.
Thus we see how services are different from goods.
During the past decade services have increasingly assumed an important role in the economy. Ever
since this trend was set in the nineties, services have gained dominance. The competition,
simultaneously, in service organizations, is becoming intense and severe. As a result these
organizations have to have a more professional approach to managing their businesses. Perhaps it
is in this context that the role of marketing is gaining importance in service organizations. In this
unit, you will be introduced to the concept of services.
1.1 Defining Services
One of the first to define services was the American Marketing Association, which, as early as in
1960, defined services as “activities, benefits, or satisfactions which are offered for sale, or
provided in connection with the sale of goods”. This definition took a very limited view on services
as it proposed that services are offered only in connection with the sale of goods.
The other definition which was proposed, in 1963, by Regan suggested that “services represent
either intangibles yielding satisfaction directly (transportation, housing), or intangibles yielding
satisfaction jointly when purchased either with commodities or other services (credit, delivery)”.
For the first time services were considered as pure intangibles capable of providing satisfaction to
the customer which could be marketed like tangible products.
Robert Judd defined service as a market transaction by an enterprise or entrepreneur where the
object of the market transaction is other than the transfer of ownership of a tangible commodity”.
Lehtinen, in 1983, defined services as “an activity or a series of activities which take place in
interactions with a contact person or a physical machine and which provides consumer
satisfaction”.

3|Page
Kotler and Bloom, in 1984, defined services as “any activity or benefit that one party can offer to
another that is essentially intangible and does not result in the ownership of anything. Its
production may or may not be tied to a physical product”.
Gummesson highlighting the intangible nature of services defined “services as something which
can be bought and sold but which you cannot drop on your foot. This definition also pointed out
one basic characteristic that the services can be exchanged even though they are not tangible.
According to Gronross, “a service is an activity or series of activities of more or less intangible
nature that normally, not necessarily, take place in interactions between the customer and service
employees and/or physical resources or goods and/or system of the service provider, which are
provided as solution to customer problems”.
This definition takes into account the following important features of services:
 Services are by and large “activities” or they are series of activities rather than things.
 As a result services are intangible.
 They take place in the interaction between the customer and the service provider, which
means that services are produced and consumed simultaneously.
 Customer has a role to play in the production process as the services are provided in
response to the problems of customers as solution
1.2 Understanding Service Characteristics
As our knowledge of the characteristics of services grows, so does our ability to deal with them
from both an economic and marketing perspective. Services are intangible, inseparable, variable,
and perishable. Each characteristic poses problems and requires strategies to deal with those
problems.

Intangibility means that unlike goods, services can’t be seen, touched and felt, tasted or smelled
or even heard before they are purchased.

4|Page
Inseparability suggests that services are produced, distributed, and consumed simultaneously. In
the case of manufactured goods, production takes place in the production unit; thereafter the goods
are kept in inventory and transported to the distribution outlet from where the consumers pick them
up for consumption.
Heterogeneity means that services delivered generally vary in quality, time consumed in delivery,
and the extent of service provided. Since people deliver most services, they are variable.
Perishability means that services can’t be stored.

1.2.1 More Intangible than Tangible

A good is an object, a device, a thing. A service is a deed, a performance, an effort. When a good
is purchased, something tangible is acquired; something that can be seen, touched, perhaps smelled
or worn. When a service is purchased, there is generally nothing tangible to show for it. Services
are consumed but not possessed, therefore the absence of tangible features means that it is difficult
for the seller to demonstrate or display services and for buyers to sample, test, or make a thorough
evaluation. To reduce uncertainty, buyers look for signs or evidence of service quality. Therefore,
the service provider’s task, according to Levitt, is to “manage the evidence” and to “tangibalise
the intangible”. Shostack even summarised that most market offerings are a combination of
tangible and intangible elements. It is whether the essence of what is being bought is tangible or
intangible that determines its classification as a good or a service.

5|Page
1.3 Product vs. Services
Levitt has suggested, “There are no such things as service industries. There are only service
industries whose service components are greater or less than those of other industries. Everybody
is in service”. The point that Levitt was trying to put across is that with almost every tangible core
physical product, an intangible service component is associated. Therefore, everybody is in
service.
It was as early as 1977 when Ms G Lynn Shostack, the Vice- President of Citibank, suggested that
marketing “entities” are combinations of intangible and tangible elements that are distinct and
discrete. If these absolute tangible and intangible elements are taken to the two ends of a
continuum, we can observe that all goods and services don’t fall at one place. There is a range that
varies from absolute tangible goods like salt to an absolute intangible service like education.
Theodore Levitt proposed the other approach of distinction between various goods. According to
him, goods can be put into two categories, namely, search goods and experienced goods. Search
goods are generally those goods which are packaged goods and the customer can see, evaluate and
try them prior to purchase.

6|Page
First, it is the pure tangible good which is like a commodity where it’s rather difficult to distinguish
between the goods supplied by two suppliers and these goods look identical. There is absolutely
no service or intangibles associated with either of the goods.
Second, it is the tangible good with accompanying service. In this case the offer consists of a
tangible good with service(s) associated with it. Here an effort is made to distinguish the product
from competing products based on service.
Third, it is a major service with accompanying minor goods or service. In this case the
manufacturer or supplier is primarily offering a service to the market and along with it minor goods
or services may or may not be associated.
Understanding the Nature of the Service Activity
What is the Nature of the Who or What is the direct recipient of the service?
Service Act? People Possessions
Services directed at people’s Services directed at physical
bodies possessions
Passenger transportation Freight transportation
Health care Repair and maintenance
Tangible Actions Lodging Warehousing/storage
Beauty Salons Janitorial services
Fitness centers Retail distribution
Restaurants/bars Laundry and dry cleaning

7|Page
 Haircutting Refueling
Funeral services Landscaping/lawn care
Disposal/recycling
Veterinary care

Services directed at people’s Services directed at intangible

mind assets
Advertising/PR Accounting
Arts and entertainment Banking
Broadcasting/cable Data processing
Management consulting Data transmission
Intangible Actions
Education Insurance
Information services Legal services
Concerts Programming
Psychotherapy Research
Religion Securities investments
Voice telephone Software consulting
Museums

1. People Processing
From ancient times, people have sought out services directed at them, such as being transported,
fed, lodged, restored to health, or made more beautiful. To receive such a service, customers must
physically enter the service system—they cannot deal at arm’s length with the service supplier.
Think about your own behavior as a consumer of service: How many times each week do you go
inside a service factory? It’s not called a “factory” of course—at least not by the provider. Instead
you know it as a hotel, a restaurant, a haircutting salon, a bus, or a hospital. Sometimes, service
providers are willing to come to the customers, bringing the necessary tools of their trade with
them: examples include home health care or haircutters who will visit busy executives at the office,
but most of the time customers have to do the travelling.
2. Possession Processing
Often, customers ask a service organization to provide treatment not to them but rather to some
physical possession—which could be anything from a house to a hedge, from a car to a computer,
or from a dress to a dog. Such activities may involve cleaning, maintaining, storing, improving,
repairing, or otherwise taking care of physical objects—both live and inanimate—that belong to

8|Page
the customer in order to extend their usefulness. Additional possession-processing services include
transport, storage, wholesale and retail distribution, installation, removal, and disposal.
Customers are less physically involved with this type of service than with people-processing
services, since there’s usually no real need for them to enter the service factory and accompany
their possession while it’s being processed. In fact, the customer’s involvement can often limited
to requesting the service, explaining the problem, and paying the bill. If the item is portable,
customers may have a choice between dropping it off at the service factory or (perhaps for an extra
fee) having it picked up from their home or workplace. Alternatively, if the object to be processed
is something that would be difficult to move, such as landscaping, installed equipment, or part of
the building, then the “factory” must move to the customer, with service personnel bringing the
tools and materials necessary to complete the job on-site.
The actual service process might involve exterminating a house to get rid of termites, trimming a
hedge at an office park, repairing a car, installing software in the computer, cleaning a dress, or
giving shots to the family dog.
3. Mental Stimulus Processing
Services that interact with people’s minds include education, news and information, professional
advice, psychotherapy, entertainment, and certain religious activities. Anything touching people’s
minds has the power to shape attitudes and influence behavior
Receiving such services requires an investment of time on the customer’s part. However, recipients
don’t necessarily have to be physically present in a service factory—just mentally in
communication with the information being presented. Although passengers can sleep through a
flight and still obtain the benefit of arriving at their desired destination, sleeping in class or during
an educational TV broadcast will not normally leave students much wiser at the end than they were
at the beginning!
Entertainment, teaching sessions, and religious services are often delivered face to face, with
customers physically present with many others in the same facility. In such instances, managers
find themselves sharing many of the same challenges as their colleagues in people-processing
services. But these services can also be transmitted to customers in distant locations through
telecommunication channels. Finally, since the core content is information-based (whether it’s
music, voice, or visual images), this type of service can easily be converted to digital bits or analog
signals, recorded for posterity, and transformed into a manufactured product, such as a compact
disk, video tape, cd, Dvd which may then be packed and marketed much like any other physical
good.
4. Information Processing
Information processing, one of the buzzwords of our age, has been revolutionized by computers.
But not all information is processed by Machines: professionals in a wide variety of fields use their
brains. Information is most intangible form of service output, but is often transformed into physical
form as letters, reports, books, tapes, or diskettes to create a more enduring record. Among the
services that are highly dependent on effective collection and processing of information are

9|Page
financial services, accounting, law, marketing research, management consulting, medical
diagnosis, and variety of other professional services.
Synthesis
 Services have become an integral part of any economy’s infrastructure and have become
indispensable to urban life.
 Services marketing is marketing based on relationship and value. It may be used to market
a service or a product. Marketing a service-base business is different from marketing a
product-base business.
 There are four special characteristics of services: intangibility, perishability, variability and
inseparability.
 A customer cannot see, touch, or feel the service product. There is also no scope for the
customer to make impulse purchase decisions as triggered by visual images and the touch-
and-feel factor ñ which are not any way possible in intangible service offers.
 These are the ways in which intangibility can be overcome: Visualization, Association,
Physical Representation and Documentation.
 The perishability factor prevents a service marketer from storing his offers. This robs him
of the privilege of delayed sales. The service marketer suffers from lost opportunities.
Methods to overcome perishability are: over-marketing, managing demand and managing
supply.
 Variability conveys to the customer an element of inconsistency and non- standardization
in the service offer and service delivery. The customer’s service encounters are different
every time. This can be overcome by training of internal customers, proper recruitment and
selection of other customers, training of external customers and automation.
 Services can be differentiated from products based on factors such as the nature of the
product, customer involvement in the production process, people as part of the product,
quality control problems, difficulty in evaluation, absence of inventories, importance of the
time factor, and nature of distribution channels.

10 | P a g e
 CHAPTER 2
SERVICE MARKETING ENVIRONMENT

Objectives
After studying this unit, you will be able to:
1. Analyze the external factors that affect service marketing
2. Identify the internal factors that affect service marketing
3. Describe Porter’s Five Forces Model
4. Discuss the scenario building approach of scanning the service marketing environment

Introduction
It would be appropriate to take a look at the different environment factors that have affected the
service-sector growth in India - positively as well as negatively. In this unit, you shall take a look
at how, if differently, services were affected abroad by the environmental factors. This unit will
also suggest you templates for making environmental assessments. There are two types of
environment in which a service firm works:
 The general or external or macro-environment.
 The task or internal or micro-environment.
The general environment factors are those that affect all service firms. They are external to a
service firm, and it can neither control nor influence them. In the end, all that an alert service
marketer can do is to read the changes and developments in the environmental factors, understand
the implications for his firm, adapt himself and allow for them in his strategy. Task environmental
factors are internal to the organization and affect the individual service firm directly. The firm can
control and influence its task environment factors for decisive competitive advantage.
The General or External or Macro Environment
SLEPT analysis is a framework to assess an organization’s external environmental influence on it.
It considers five factors affecting the macro-environment - Social, Legal, Economic, Political and
Technological (hence the mnemonic SLEPT)
The outcome of SLEPT analysis is an overall picture of the macro environment to identify threats
and opportunities that can be used in SWOT analysis. SWOT further adds on the internal factors
affecting the organization. SLEPT helps to identify and hence take advantage by maximizing
opportunities and minimizing threats. It gives an understanding of the broad and long term trends
and makes the firm in a better position for strategic decision making.
The external or the macro environment of a service firm consists of the following SLEPT factors:
 Socio-Cultural factors

11 | P a g e
  Legal factors
 Economic factors
 Political factors
 Technological factors

1. Social Factors: Includes health consciousness, education level, population growth rate, gender
distribution, social classes etc.

2. Legal Factors: Includes laws such as anti-trust law, discrimination law, intellectual property
laws, consumer protection laws, employment laws, regulatory mechanism etc.

3. Economic Factors: Includes growth rates, inflation rates, interest rates, exchange rates, fiscal
policies, monetary policies, credit availability etc.

4. Political Factors: includes government policies and intervention in the economy such as
corruption level, government stability, trade control, competition regulation, involvement in
Trade Unions, consumer protection laws, employment laws etc.

5. Technological Factors: includes technological aspects such as R&D activity, technology

incentives, rate of technological change, infrastructure level, access to technology etc.
Internal or Micro Environment
The internal or the micro-environment factors of a service firm consist of the following:
 External customers/consumer
 Internal customers/channel partners/providers
 Competitors
 Suppliers
 Regulators
Internal customers are an intrinsic part of a service firm’s environment consisting of employees,
channel partners, providers, Direct Sales Agents, etc. They are controllable, and directly affect the
service firm in its business endeavor. All service firms accomplish their objectives through the
action of their employees. The employees work to further their personal, social and economic
agenda. They are so important and crucial a variable that they have become an important marketing
mix variable for the service firm. The main challenge in the employee-employer relations is to
create situations wherein both achieve their goals. Therefore, this environment factor is either
strength or a weakness to the service firm.
Consumers, Suppliers, Competitors and Regulators are all external to a service firm’s
marketing context. Therefore they are either a threat or are considered to be an opportunity for the
service firm.

12 | P a g e
Porters Five Forces Model

Rivalry among Existing Service Firms

With competition, service firms use tactics like price, comparative advertising, and increased
customer service or warranties. When the status quo is disturbed by one player - it could be for
more opportunities, quest for market share or the service firm feels market pressures, etc. rivalry
develops. The intensity of rivalry depends on the type of market and the differentiation between
rivals. Competition is both good and bad for the industry.
Relative Power of Customers
When customers are in a buyer’s market, are mature and have a plethora of choices in services and
players, their bargaining power increases. When too many service firms fight for the same
customers, it will erode the profitability of the service firms. The shakeout is being witnessed in
the satellite TV channels. With over 80 channels vying for the viewer’s attention, the channels are
skating on very thin margins.
Relative Power of Suppliers
Suppliers begin to pose a threat when they start raising their prices. The increased cost of goods
for a retailer will tell on his profitability if the retailer is not able to recover his price. Service firms
should look for alternatives and substitutes.
Threat of New Entrants
New entrants will increase supply, diluting the exclusivity of the service and sending premium
prices into a downward spiral. Also, the new entrants will seek to increase market share. This will
see a further lowering of prices, affecting profitability of all competitors across the board.

13 | P a g e
Threat of Substitutes
Service firms compete with each other (direct) but also with substitute goods and services. The
service marketer should constantly look out for this threat - as it is the most invisible competition
of all.
Environmental Scanning: Scenario Building Approach
This process is futuristic, and the decision-maker has to analyze his decisions in relation to his
future. The following steps are involved in this technique:
Stage 1: Analysis of the Decision(s)
The decision-maker makes a detailed analysis of all the resources that he might require to
implement his decisions.
Stage 2: Identification of Key Decision Factors
The service marketer identifies all those variables that influenced his decision.
Stage 3: Identifying the Socio-cultural Factors
The service marketer should identify and evaluate the influence of such social and group forces as
demographic changes, social class, culture, family and household influences, value systems,
reference group influences and the consumer-decision-making
Stage 4: Analysis of each of the Key Variables Separately
All the above variables are independently analyzed and all other details are collected for each of
them. The sources of data are secondary as well as primary.
Stage 5: Selection of Scenario Logics
The collected data are then extrapolated and projections are made. The scenario build-up is
supported with more evidence.
Synthesis
 The services marketing environment can be broadly divided into external or macro
environment or internal or micro environment.
 The external environment includes the SLEPT factors: Social, legal, economic, political
and technological.
 The social factors that affect a service market are: consumption patterns, age composition,
beliefs and values, gender structure and family structures.
 The legal factors are a percolation of the political and governmental factors. So, often, they
do merge in environmental analysis. But increasingly, political factors are getting molded
by the legal norms ñ especially with internationalisms like WTO and Environmental norms.
 Politics is the science of government. The governmental influence has been omnipresent
and service firms have been greatly affected by the policies and other decisions made at
the Central, State or local level.

14 | P a g e
  The internal marketing environment includes external customers, internal customers,
competitors, suppliers and regulators.
 Internal customers are an intrinsic part of a service firm’s environment consisting of
employees, channel partners, providers, Direct Sales Agents, etc. They are controllable,
and directly affect the service firm in its business endeavor.
 Scenario Building Approach is a good way to analyze the environment. This process is
futuristic, and the decision-maker has to analyze his decisions in relation to his future

15 | P a g e
 CHAPTER 3
THE SERVICE MARKETING MIX AND PURCHASE PROCESS

Objectives
After studying this unit, you will be able to:
1. Identify the constituent of the service marketing mix
2. Describe the buying situations faced by consumers
3. Discuss the purchase process for service
Introduction
This unit gives as brief overview of the service marketing mix and takes you through the service
purchase process. Marketers have found that the traditional four Ps ñ product, price, place and
promotion, fall short when the strategy for marketing services has to be designed. Marketers and
strategists have identified three more Ps namely, people, process management, and physical
evidence, for the marketing mix of services. The customer is the main reason for the existence of
the service firm, forming the basis for all marketing strategies like segmenting, targeting and
positioning. Without an understanding of the customer, it would be impossible for the marketer to
deliver the offer, more so in the face of increasing competition. For a better understanding of a
consumer, marketers need to understand. the buying situations faced by the consumers and the
purchase process. Both of these are analyzed in this unit.
The Service Marketing Mix

The four traditional Ps of the marketing mix - product, place, price, and promotion are adequate
for marketing a product. However, they fail to cover the following aspects, which differentiate
products from services and are, therefore, important for services marketing.
 The product element involves only tangible aspects and is therefore not appropriate for
services, which are basically intangible in nature.

Example: The strategy used to design and launch a new motorcycle model cannot be
adopted for launching a new service as a variant.

 A part of the promotion of services usually takes place at the time of consumption itself.
This is not so in the case of a product. In fact, the people involved in service production
handle the promotion too in most cases.

Example: The way in which a waiter at a restaurant provides service to the customers is a
form of promotion of the service
 The dual role played by service customers as co-producers and end consumers in the
production of service goes unnoticed by the four traditional Ps.

16 | P a g e
  The four traditional Ps fail to capture the importance of distribution for services. In most
of the services, the production and consumption takes place at the same time; therefore, the
distribution channel is either absent or is very small.
 Further, consumers are unable to perceive the quality standards of services before
consumption. On the other hand, marketers are not able to identify and measure the
elements of the marketing mix that can deliver quality service.

Caution: The above problems faced by marketers have led to the addition of another three
Ps for marketing services, namely, people, process management, and physical evidence
The Expanded Marketing Mix for Services

Services have special characteristics like perishability, intangibility, heterogeneity and

inseparability, which distinguish them from goods. People, process and physical evidence play a
greater role in the marketing of services than in the marketing of products.
Characteristics Of Service
1. Intangibility: The inability of a consumer to preassess the value of using a service. Unlike
a physical product, a service cannot be seen, tasted, felt, heard, or smelled prior to its
purchase. This makes it hard to evaluate its quality. ... In other words, you need to offer
evidence of quality.
2. Inseparability (also known as simultaneity): is used in marketing to describe a key quality
of services that distinguishes them from goods. ... In other words, services are generated
and consumed within the same time frame. Moreover, it is very difficult to separate a
service from the service provider. They are inseparable.
3. Heterogeneity or Variability: Heterogeneity of services means the quality of a service
may vary from one service provider to another or may vary for the same service provider
at different times of the day or week.
4. Perishability: Perishability is used in marketing to describe the way in which a service
capacity cannot be stored for sale in the future. Services cannot be stored, saved, returned,
or resold once they have been used. Once rendered to a customer, the service is completely
consumed and cannot be delivered to another customer.

17 | P a g e
Product
Marketers have identified three levels in developing the product element of the marketing mix as
far as services are concerned. The “core” level aims to satisfy the important needs of the customer
while the “tangible” level manages the appearance of the product. The “augmented” level involves
the addition of supplementary services to the basic offering.
These three levels can be condensed into two, the core level that caters to the basic benefits and a
secondary level which includes the tangible as well as the augmented service levels. The core level
basically deals with the service offering while the secondary service level deals mostly with the
delivery of service.
Example: The core service of a restaurant is to serve good food to the customers while the
secondary service includes providing them with a good ambience. It is easy to differentiate
products from one another when compared to services
Example: How can a customer differentiate between the services of two banks which offer similar
schemes and interest rates?
The new product development for services, therefore, involves offering innovative services and
adding new secondary services at regular intervals. This helps marketers attract and retain
customers in a competitive market.
Pricing
The pricing of services is very different from the pricing of goods for various reasons. Services,
for example, can be differentiated based on their price, as a higher price is generally associated
with better quality. Another differentiating factor between services and goods as far as pricing is
concerned, is the cost component involved. The fixed cost is high and the variable costs are low
for a service, when compared to a product.
Example: The marginal cost involved in serving a customer in restaurants is negligible while the
fixed cost of establishing and maintaining the restaurant is high.
Therefore, a major part of the price paid by the customers is directed towards covering the fixed
costs of the service provider. In case of a product, a major part of the price paid by the customer
goes towards the variable cost of producing that unit of the product.
Another important aspect of pricing of services is that the price of the same service can be changed
depending on the demand for the service. Though this happens with some of the products which
are seasonal, it is basically dependent on demand as far as services are concerned.
Example: The owner of a discotheque can increase or decrease the price of entry depending on the
demand. Similarly, banquet owners raise the tariff during the peak season and lower it during the
lean seas

18 | P a g e
Promotion
Service consumers experience a high level of perceived risk when compared to consumers of
products because of the intangible nature of services. Service providers should aim to promote
their services in order to eliminate the elements of this perceived risk. This can be best achieved
by encouraging and promoting positive word-of-mouth publicity, developing strong brands,
offering a trial use of service for the customers and finally, by managing advertising and public
relations effectively to clearly communicate the message to the customers. Promotion of service
offers cannot be carried out in isolation without promoting the service provider, as consumer will
not be able to rate the intangible services without knowing who the service provider is. Therefore,
promotion of the service provider becomes equally important in services.
Example: A bank customer can identify and relate to a service offer in a better way when the
service provider (the bank employees or the brand name) is known.
Another distinguishing factor for promotion of services is that the service personnel and other
customers also participate in the promotion process.
Example: When a customer visits a restaurant or an entertainment park, he makes an assessment
of the service based on the behaviour of the service personnel and the kind of gathering there.
Therefore, attracting the right crowd and employing the right people is very important for a service
provider. This provides plenty of opportunities for service providers to promote their services.
Place
In services, place relates to the ease involved in accessing a service. Due to the inseparability of
services, they are produced and consumed at the same place. This inseparability of services makes
it impossible for service providers to produce the service at a place where the costs are low and
sell it at a place where there is a high demand for it. Therefore, there is no distribution channel for
services marketing, or if at all there is one, it is very small.
Caution: Further, place decisions involve the following:
 The physical location of the service provider’s outlet. Telecom network companies for
example, are striving to provide their patron stores to improve accessibility to their
services.
 The physical appearance and ambience of the place of service offering. The ambience in a
bank makes the waiting customers satisfied or dissatisfied.
 The decision to use particular types of intermediaries to offer easy accessibility to the
customers and improve operational efficiency of the organization. For example, the
decision of a theatre owner to sell movie tickets either directly or through operators like
bookmyshow.com.

19 | P a g e
People
Many service organizations involve their personnel both at the point of frontline delivery and
during the production process that does not involve the final consumer. Thus, the service personnel
have an important role in not only designing the service, but also in delivering it.
Many services involve consumers as co-producers in designing the service offering to suit their
individual preferences. In these cases, the service personnel play an important role in helping the
end consumer present his requirements precisely.
Example: In a salon, the service provider involves the customer also in the service and asks him
various questions to ascertain his desires so that they can give the customers satisfaction.
The perception of a service by a customer also depends on the other customers receiving the same
service. Basically, the image of the service is largely affected by the views and characteristics of
other users.
Example: A hotel like Le Meridian has developed the image of an elite-class hotel with high-
spending and high-profile visitors.
Further, the behaviour or performance of other consumers largely affects the service production
and delivery process. Fellow consumers have the power to either degrade the service quality or
elevate it.
Example: When a person behaves badly at a restaurant, the total experience of others gets
negatively affected.
Similarly, when a customer behaves pleasantly in a restaurant and creates a good ambience, it
enhances the experience of other customers as well.
Process
The production and delivery process in the manufacturing sector is easier than in the services
sector. Marketers of services are often confused, as there is little difference between marketing
and operations management in services. This is because the production, delivery and consumption
of services take place simultaneously.
Example: A person in a movie theatre is required to purchase the ticket first, get his tickets checked
at the security clearance and then get inside.
Customer service encounters have an impact on the quality of service delivered by the
organization. A service encounter is the actual time period during which an interaction takes place
between the service provider and the customer. Among all the service encounters, a few are very
important for completing the service delivery process on a successful note.
Caution: These particular interactions are named “critical incidents” and are directly responsible
for customer satisfaction or dissatisfaction.
These feelings of satisfaction or dissatisfaction may result either from their interaction with the
service personnel or from the interaction with the equipment or production processes.

20 | P a g e
Over the years, some service organizations have mechanized their service processes to reduce the
element of human judgment and error in service delivery.
Example: Movie theatres have introduced ticket kiosks to offer convenience to customers and also
reduce the human element in the service delivery process.
This mechanization helps reduce labour costs which along with competition in the service industry
have increased tremendously. Organizations have also started involving customers in the
production process to reduce costs. Though some customer's’ expectations are not met, others are
ready to get involved in the service production activity for lower prices.
Example: A restaurant offering self-service can save on labour costs and can pass on the savings
to the customers in the form of lower prices.
Further, service organizations have identified customer segments that do not want to take the co-
production responsibilities and are even ready to pay higher prices.
Physical Evidence
Service customers experience a greater perceived risk as they cannot rate a particular service until
it is consumed. Therefore, service providers should try to attach an element of tangibility to their
service offering. The physical evidence can be in any form, for example, brochures or TV
commercials showing the details of a holiday destination, pleasant and courteous behaviour of the
service personnel in a bank, the location and ambience of a food outlet, etc.
Buying Situations Faced by the Consumer

Customers find themselves in different buying situations, from purchase to purchase and service
transaction to service transaction. In other words, two trips to the retail bank for two different
purposes (e.g., the first to deposit a cheque in his savings account and the second for a home loan)
may not have the same purchase decisions. The second buying situation would differ greatly from
the first if one or more of the following factors are absent:
 The customer is aware of the service product category and service brand

Example: Mrs. Sharma knows what a credit card is and is also aware of a particular brand
in addition to other brands of cards.

 The customer has definite decision-making criteria about the purchase of the service offer.
Example: Mr. Roy is very clear about the hotel that he would like to stay in for his business
tour. It should be close to the business district as also the airport; its tariff should not be
more than ` 2,000/- per day and it should have a conference centre.
The customer is competent enough to evaluate the service offer and also has definite
evaluation criteria
The three buying situations as elaborated by Howard and Sheth are:

21 | P a g e
 1. Straight Re-buy or Routinized response behaviour: Here the customer comes for
repurchase of the same service product - say a bank draft. Here all the three conditions of
differentiation are met. He is aware of the service product category, as well as the brand.
The purchase is of daily or frequent necessity. He has low involvement with the purchase
process. It would be the same when he goes to the post office for stamps or to the
xerographer for photocopying.
2. Modified Re-buy or Limited problem solving: In this situation, the customer does not
meet one or more of the differentiation criteria. He or she may be aware of the category or
brand but not the new version or form. Then there is a small amount of problem solving
for the customer. For instance, when Mrs. Subramanian goes for her weekly visit to the
beauty parlour and asks for her usual treatment, the assistant solicits her attention to a new
treatment with newer products and techniques. Mrs. Subramanian might then enquire about
its core and peripheral benefits, its usage and after-effects, if any, as also about the price.
3. Extensive problem solving or Critical problem solving or New Task: A customer would
be in this buying situation when the offer is totally unfamiliar, and he is not clear either
about his decision criteria or his evaluation criteria. This is because of his lack of
knowledge of the offer. In this situation, two or three of the conditions aren’t met. This
happens for most service offers like a vacation, package tours, flights, insurance as well as
major consultancy contracts. The consumer is most of the time not aware of, say, the
destination or its promises. Neither he is clear of the criteria of choosing a holiday spot,
nor does he have the competence to evaluate the criteria of decision making. These are high
involvement purchasing processes and the customer would require a lot of time for
information search as well as decision-making

Purchase Process for Services

22 | P a g e
 Need Arousal
To the customer, the service-buying process implies the service transaction and experience, while for the
marketer it is the service encounter and the service delivery. The buying process is triggered by some
unsatisfied need felt by the customer. The need could be aroused by a variety of sources or stimulus called
cues or drives. The cue is both commercial and social oriented. Commercial cues are controllable by the
service marketer and can be intelligently engineered to arouse the customers’ needs. They consist of the
following:

 Service Product: This seemingly may not be possible in services because of their intangibility. But
brands and other tangibles can be suitably used to serve as a cue. Thus Monginis can use its cakes
as the cue, while Thomas Cook can use its components of brands (name and colour) and services
to stimulate need. This is one reason why travellers Cheques come in a handy little wallet — a
tangible by product of the service transaction that out last, it, and one that serves as a pleasurable
(and useful) visual reminder long after the service has been utilized. The more established the
service, the more effective is the cue.

 Price: Price is communicative, and from it, the customer perceives a lot about the offerís value,
quality and positioning. A discount offered by a retail store, a holiday package tour company or a
hotel might act as a cue. Even without any discounts, the prevalent price level conveys to the
consumer a lot about the service offerís quality, target and value to the consumer.

 Display: In retailing, visual merchandising is used to great effect in triggering needs. The customers
are allowed to feel empowered in selecting the merchandise themselves, instead of asking for them,
as was prevalent in the old format of retailing. Display of intangibles may not be possible, but other
visualization cues can be used.

Example: Travel agencies use beautiful posters of destinations to act as the cue.
 Signage: This is a component of the service brand, which targets the cognitive part of the
customerís brainóenhancing their knowledge and their ability to recognize. The recognition
stimulates the need for service consumption. Signage is used in outdoor advertising.

 Advertisements and Promotions: They are one of the most effective cues, successfully
stimulating need. The content ñ including copy and visual ñ execution seeks to arouse the need for
the service in the customer. News of any new promotions ñ discounts, freebies etc. ñ might also
trigger the need.

 Distribution Outlets: This is a major source of cues - especially in retailing. In service outlets, the
design, ambience, and atmospherics are examples of cues.

 Recognition of the Need

There are two types of need recognition: primary and secondary need recognition.
Primary Needs: The consumer categorizes his need by occasions, urgency and priority of
purchase. He recognizes the need to purchase, say, clothes for Diwali, a watch as a wedding gift
someone, replenishing the larder, an insurance plan for saving on taxes, a dinner or a concert.
Service marketers get an opportunity in influencing need recognition by displays in their retail

23 | P a g e
outlets, advertising and promotions. Even visual merchandising can be used to great effect by
retailers in stimulating demand.
Secondary Needs: There are follow-up needs to primary demands which could include both goods
as well as services. A need for an engineering education would be followed by requirements for
calculators, a PC, savings accounts if the student is staying in a hostel, clothes etc. A desire for a
vacation might trigger the need for new luggage, casual clothes or a camera. The service marketer
should be savvy enough to recognize primary needs and be ready to service secondary needs.

 The Level of Involvement

This is an indication of the amount of time and effort invested by the consumer in the decision-
making process. If the consumer is not confident on the purchase decision or is not aware of the
product, brand or even the service category, he will spend more time in the decision-making
process. If he perceives the offer to have complex features, fears more risk in the consumption, or
if there are more number of users, then he is bound to take more time in deciding.
Most financial decisions like savings, investments and insurance have complex features and riders.
The insurance advisor has to be patient in answering all queries, persistent in his marketing and
follow-ups, and extremely effective in his communication, so that the consumer is clear about the
offer and its benefits. Similarly, decisions for vacations take more time for a family, as the number
of users is large. Decisions for time-share resorts take a longer time to make than a one-off holiday,
because the consumer perceives financial risks, longer lock-up of capital and irreversibility of the
deal.
The service marketer should resort to branding, and standardization and increase awareness and
usage to make people less involved. This will lower the time taken in decision making and reduce
marketing time and costs for the marketer.
 Search for Information and Identification of Alternatives
In this part of the decision-making process, the customer spends time and effort in searching for
information and alternatives. For routine purchases, the customer will know the brand, and service
product and be aware of its benefits. He would then spend less time in his search for information
and alternatives for satisfying his needs. Brands that come to his mind and those he recognizes
during the purchase are called the evoked set. But there is the consideration set which comes out
of suggestions through friends, colleagues, advertising, etc. Service brands that come under the
former set have more marketing advantages.
If a customer is not able to find the required information during his search ñ and if the process
entails high involvement ñ then a certain offer will not be part of his decision making and the
marketer loses out and suffers from lost opportunity

 Evaluation of Alternatives
The customer for the service starts making a comparison of the attributes of the alternatives based
on his criteria of decision making. The criteria could be features of the offer like price, benefits -
core and peripheral ñ reputation, and performance expectations. He then makes the comparison

24 | P a g e
based on such subjective parameters as perception of brands and his own attitudes. The customer
ranks his preference among the alternatives which tend to satisfy both functional and rational needs
related to the performance of the product as well as psychological or emotional needs that goes
with his self-image.
At this stage, the customer has almost made a decision from the information gathered, to buy the
service offer, decline or delay the purchase.

 Decision
With the overall evaluation as decision-making criteria, the customer takes either of the two
decisions: to buy or not to buy. The decision to buy would include the offer, the most preferred
brand, method of purchase (buying a book on the net, through catalogues, offline in a book- store
or from the pavements) and payments (cash, by cheque, credit cards or through a loan).

 Purchase Action and Other Decisions

What other decisions can possibly be left for the consumer after the decision to buy or not to buy?
There is the purchase action and other decisions. In retailing, this may take the form of available
colours and sizes of, say, apparel. A customer might take a decision to go for a movie or a concert
but the experience and enjoyment would depend on getting the desired category of seats in the
desired theatre.
Installations at home and usage could be other decisions.
Example: For a telephone connection service, a customer would have to take such decisions as to
whether the telephone set should be placed in the bedroom or drawing room. Who will be
authorized to use the long-distance telephoning facility would be a usage decision.

 Post-purchase Behaviour and Feelings

This reaction takes place during and after the purchase and usage. The customer has two types of
reactions: pleasure and pain. When the service delivery is below expectation, the customer is
disappointed, dissatisfied, and experiences “pain”. He is literally pained at the poor service
delivery.
If the service delivery is as expected (different from ‘promised’) by the customer then the customer
is satisfied. But if the service delivery is beyond expectation, the customer is “delighted”. The
service marketer should concentrate all his attention on customer delight to retain the customer ñ
which is 3 to 4 times less expensive than customer acquisition.
Synthesis
 The four traditional Ps of the marketing mix ñ product, place, price, and promotion are
adequate for marketing a product but they are not enough to market a service.  For
services marketing, the strategists have suggested an extended mix which includes people,
process and physical evidence, in addition to the other Ps.

25 | P a g e
  Services have special characteristics like perishability, intangibility and inseparability,
which distinguish them from goods. People, process and physical evidence play a greater
role in the marketing of services than in the marketing of products.
 Marketers have identified three levels in developing the product element of the marketing
mix as far as services are concerned- core level, augmented level and tangible level.
 The pricing of services is very different from the pricing of goods for various reasons.
Services for example, can be differentiated based on their price, as a higher price is
generally associated with better quality. Another differentiating factor between services
and goods as far as pricing is concerned, is the cost component involved.
 Service consumers experience a high level of perceived risk when compared to consumers
of products because of the intangible nature of services. Service providers should aim to
promote their services in order to eliminate the elements of this perceived risk.
 Due to the inseparability of services, they are produced and consumed at the same place.
This inseparability of services makes it impossible for service providers to produce the
service at a place where the costs are low and sell it at a place where there is a high demand
for it.
 Many service organizations involve their personnel both at the point of frontline delivery
and during the production process that does not involve the final consumer. Many services
involve consumers as co-producers in designing the service offering to suit their individual
preferences.
 The production and delivery process in the manufacturing sector is easier than in the
services sector. Marketers of services are often confused, as there is little difference
between marketing and operations management in services. This is because the production,
delivery and consumption of services take place simultaneously.
 Service customers experience a greater perceived risk as they cannot rate a particular
service until it is consumed. Therefore, service providers should try to attach an element of
tangibility to their service offering.
 Customers find themselves in different buying situations, from purchase to purchase and
service transaction to service transaction.
 The consumer goes through several steps while making a service purchase decision: need
arousal, recognition of the need, level of involvement, search for information, identification
of alternatives, evaluation of alternatives, purchase decisions, purchase actions and other
decisions, and post purchase behaviour.
 It is not mandatory that all customers will follow all the eight steps of the decision- making
process all the time. Those customers who are familiar with the service offer and the brand
will not be following the whole sequence.

26 | P a g e
 CHAPTER 4
CUSTOMER RELATIONSHIP MANAGEMENT IN SERVICE

Objectives
After studying this unit, you will be able to:
 Describe the Service-profit Chain Model
 Identify the components of CRM
 Discuss the CRM Business Cycle
 Realize the concept of Customer Relationship Analytics
 Describe the concept of Lifetime Value of a Customer
Introduction
Management is a broader concept than marketing, because it covers marketing management,
manufacturing management, human resource management, service management, sales
management, and research and development management. Thus, CRM requires organizational and
business level approaches ñ which are customer-centric ñ for doing business rather than
simply a marketing strategy. CRM involves all of the corporate functions (marketing,
manufacturing, customer services, field sales and field service) required to contact customers
directly or indirectly. The term “touch points” is used in CRM to refer to the many ways in which
customers and firms interact. CRM is a business strategy that goes beyond increasing transaction
volume.
Its objectives are to increase profitability, revenue, and customer satisfaction. To achieve CRM, a
company-wide set of tools, technologies, and procedures promote the relationship with the
customer to increase sales. Thus, CRM is primarily a strategic business and process issue rather
than a technical issue. In this unit, you are going to learn various aspects of CRM of a service firm.
In this unit, you will also be introduced to some of the CRM strategies used by service firms.
Customer relationship management (CRM)
Customer relationship management (CRM) refers to the principles, practices, and guidelines that
an organization follows when interacting with its customers.
Customer relationship management (CRM) is the combination of practices, strategies and
technologies that companies use to manage and analyze customer interactions and data throughout
the customer lifecycle. The goal is to improve customer service relationships and assist in customer
retention and drive sales growth. CRM systems compile customer data across different channels,
or points of contact, between the customer and the company, which could include the company's
website, telephone, live chat, direct mail, marketing materials and social networks. CRM systems
can also give customer-facing staff members detailed information on customers' personal
information, purchase history, buying preferences and concerns.
Benefits of CRM

27 | P a g e
A CRM system helps businesses organize and centralize their information on customers, allowing
for easier access and customer support. Businesses use CRM systems to optimize sales and
marketing and improve customer retention. Data analytics is also much easier, where businesses
can track the success of various projects or campaigns, identify trends, infer associations, and
create visually intuitive data dashboards.
Customers enjoy better service and are more likely to report higher satisfaction as a result.
Customer interactions including complaints are stored and can be easily recalled so that customers
do not have to constantly repeat themselves.
What are the 6 components of CRM?
Understanding the six components can help you foster the most robust customer relationships.
Let’s begin with the first step: satisfaction.
1. Customer satisfaction
Customer satisfaction measures a customer’s perception of the quality of a product, service, or
company, incorporating product engagement and many other factors. It’s also sometimes called
customer success.
Customer satisfaction is an essential component of CRM because it is a purchasing guideline for
the company and the customer. If a customer is not satisfied with the result of their purchase, they
are more likely to purchase from another company.
Lego increased user satisfaction by collecting and implementing user feedback within its CRM
strategy.
Their LEGO Ideas website allows brick-building enthusiasts to submit their product ideas, and any
suggestion that receives 10,000 votes from the community will receive consideration for
production.
2. Customer loyalty
Customer loyalty is the measure of repeat sales and referrals. This measurement depends on how
often a customer purchases from one particular company versus others that may be similar or better
suited to their needs throughout the customer journey.
Loyal customers are more likely to be satisfied with their purchase and recommend the product to
others. Thus, it is essential because it provides a consistent source of revenue for the company as
product engagement has a higher success rate as customers are familiar with and satisfied with
products from a specific company.
Use your CRM to offer loyalty schemes to your users, such as:
• Paid loyalty programs.
• Value-based loyalty programs.
• Points-based loyalty programs.

28 | P a g e
The loyalty program of Bodycare retailer Blume is called Blumetopia and uses a points system
called Blume Bucks. Customers can earn Blume Bucks by following the brand on Instagram,
placing an order, or referring friends to Blume.
3. Profitability
Profitability measures how much profit (or loss) a company makes during its operation. Calculate
it by total revenue minus total costs. Profit is significant because it allows companies to continue
operations and stay profitable to grow and expand.
Without profit, companies would eventually be unable to pay employees, suppliers, or taxes and
eventually go out of business due to a lack of funds.
Imagine we spend $20 per year on acquiring, servicing, and selling to each customer like David,
and he generates $25 in sales, then his profitability is $5.
Suppose we calculate the profitability for a larger group of customers. In that case, we can divide
the total sales by the number of customers to determine the sales per customer and then calculate
their profitability based on the $20 cost per customer.
4. Customer Retention
Customer retention measures how many customers remain loyal to one company over time.
Retained customers are less expensive for companies than new customers who have to go through
research and development, marketing campaigns, and promotion costs all over again for new
customers.
They are also more profitable for companies because they do not have to spend money acquiring
them again after they have already purchased from the company once before.
One of the best examples of user retention is a robust onboarding program.
REI’s (online outdoor equipment seller) Co-op membership program is a prime example of a
successful loyalty program that has resonated with customers and contributed to the company’s
overall success.
While the membership cost customers money, it provided valuable benefits like store credits,
exclusive gear access, and service discounts. The membership benefited REI by using marketing
to reinforce the program’s perks to reduce churn and increase customer lifetime value.
5. Marketing
CRM plays a crucial role in marketing as it involves promoting and advertising your business to
attract new customers. By analyzing the behaviour of potential customers, CRM helps enhance
advertising strategies for greater effectiveness.
Marketing consists of different sub-components that vary depending on your business. One of the
sub-components of marketing is customer service.

29 | P a g e
The purpose of CRM is to gather consumer information and use it to enhance their experience. By
connecting all channels onto a single platform, CRM helps companies personalize their products
and services, including personalized marketing messages.
6. Business Reporting
The final component of CRM is business reporting, which provides users with reports containing
visual elements to track data over time. By comparing historical data and forecasting future
performance, users can gain insights into their business operations.
Users can export data to other systems using the report function. This helps CRM users track data
and make forecasts for upcoming periods.
Understanding how to create reports for CRM is crucial as reports can assist marketers and
customer support departments in enhancing their processes, while also offering valuable insights
to business investors regarding the company’s health and revenue trends.
The reports should be readily available and viewable from any perspective. By having the
information centralized, executives can conveniently oversee multiple departments at once.
Why is CRM important?
Customer relationship management is an important part of business operations because it can do
the following:
1. Increase sales and brand name recognition
2. Help provide customers with a positive experience across all company channels
3. Assist businesses in identifying and maintaining loyal customers
4. Offer a strategic way to interact with both potential and returning clients
5. Help companies find better leads for sales opportunities
6. Provide data points that can be used for marketing initiatives
7. Allow companies to plan for future customer relationship goals
8. Establish a rapport between a business and its customers
What Are the Steps in the CRM Process?
The process steps are also a collaborative effort among a company’s sales, marketing, and support
departments. Below are the said CRM steps, how teams work together in every stage, and how a
CRM system helps you achieve each step.
1. Generate Brand Awareness
The first step in the CRM business process is to make potential customers aware of your products
and services through different marketing channels like social media and advertisements. The

30 | P a g e
marketing team begins this task by researching your target audience’s demographics, purchasing
behavior, interests, and preferences.
As part of the CRM development process, the team creates customer personas to segment the
audience into groups. Then, you can launch marketing campaigns tailored to your target audience’s
interests. Knowing your customer demographics and creating their persona helps you create
effective marketing messages that resonate with your customer base.
A buyer persona is a fictional character representing your ideal customers, with details such as
their demographics, behavioral interests, values, and challenges. This helps businesses identify
their target market and understand what they need to provide their customers.
2. Acquire Leads
After introducing your brand to potential customers, the second step is generating leads. The sales
or marketing team (or both) engages with your target audience via available communication
channels
Lead generation is the process of attracting leads or potential customers into your sales funnel.
This is done through multichannel engagement and by generating content that captures the interest
of your audience. It also involves nurturing them through the buying process to increase the
chances of turning them into customers.
3. Convert Leads Into Customers
Once you have captured the attention and interest of your prospects, the next step is to convert
them into paying customers. To do this, you can combine content marketing and marketing
automation. The CRM analyzes and captures contacts and leads’ interaction with these activities.
Then, the sales team gauges lead interest and builds further trust with them until they decide to
make a purchase.
Lead conversion varies based on the offering of a business. For example, a lead conversion tactic
for a retail business might involve sending a series of promotional marketing emails to encourage
potential customers to buy. Meanwhile, a lead for a high-value service, such as real estate, will
include more complex business and CRM procedures. These could cover sending and revising
proposals, contract and cost negotiations, and multiple follow-up conversations before a
purchasing decision is made.
4. Nurture Leads
Nurturing leads is crucial in building customer loyalty, wherein customers keep coming back to
you and making repeat purchases. One of the most effective ways to nurture customers is through
email marketing, where you continuously share relevant content based on their preferences.
This is where email marketing list segmentation plays an essential role because you shouldn’t
utilize a one-size-fits-all approach since your customers have diverse preferences. Therefore, build
various email marketing distribution channels based on factors such as past purchase history,
demographics, and pages visited on your site.

31 | P a g e
Here are some examples of content sales professionals can use to nurture their leads:
1. Introductory product demo videos
2. Whitepapers with customer case studies and testimonials
3. Survey about customer goals or product preferences
4. Blog posts about key features of a product
5. Email newsletters about useful services
6. Link to relevant webcasts or podcasts
7. How-to articles or e-books
5. Provide Quality Customer Support
The customer relationship management process does not end when a customer makes a purchase.
Your business must retain customers to grow—and this is where your support team comes in.
Excellent customer service keeps clients coming back for your products or services. Ensure you
deliver superior service, preferably via various communication channels (live chat, email, and
phone) whenever your customers need it.
Leverage your CRM’s help desk and service system to understand your customer’s user experience
after they make a purchase. Getting honest feedback from them is important to understand the
changes you need to make to improve their experience.
6. Drive Upsells & Cross-sells
Once you’ve built and established your customer database, the goal is to introduce repeat buyers
to your other products or services. To do this, you use upselling and cross-selling strategies.
Upselling is a sales strategy used to convince existing customers to buy additional products or
upgrades related to their original purchase. One example of this is offering warranties in addition
to a gadget and letting customers know another product offers more features than the one they
chose.
Meanwhile, cross-selling is a sales strategy for obtaining more value from a deal or sales
transaction. It involves suggesting additional products or services complementing an existing
purchase so you can generate more revenue from one deal from customers already in the buying
mindset. For instance, cross-selling works when a product is paired with a service, such as
purchasing a laptop sleeve after buying an actual laptop.
Use a customer relationship management platform to organize your customer list according to
purchase history and send custom email templates about relevant products for each group. You
can also set reminders for regular check-in calls with repeat customers. This is your chance to ask
them for feedback about your product or service and how they think you can improve their
experience.

32 | P a g e
What are CRM analytics?
 CRM analytics gives you insights about your customers and how well your sales and
customer service teams are reaching them.
 CRM analytics helps you monitor your customer service efforts, validate your customer
data, analyze your customers’ habits and generate better leads.
 You can divide the most important CRM analytics into three larger classes of key data.
 This article is for business owners and marketers looking to understand CRM analytics,
what they track and why they should be tracked.
Even if you believe you’ve come up with the best product or service in the world, you’ll need to
find people who agree enough to buy what you sell. With customer relationship management
(CRM) analytics, you can figure out who’s buying, who might buy soon and how you can retain
your customers. Below, learn more about CRM analytics and why and how your company should
collect them.
CRM analytics are data that demonstrate your company’s sales and customer service performance.
CRM analytics also presents customer data that you can use to inform smarter business decisions.
Typically, you’ll use CRM software to obtain CRM analytics and automate all your data collection
and report generation.
Benefits of CRM analysis
The primary benefit of CRM analysis is that you can use it to inform your sales, customer service
and marketing processes. You can use your CRM analytics to improve your methods via:
1. Customer service evaluations. CRM analytics fill you in on your customer service team’s
performance. If you see figures that your team could improve, implement practices that push your
team toward these goals.
2. Accurate customer data. Whether you’re using your customer data for demographic
marketing or email marketing, you need to know whether you’re reaching the right person. CRM
analysis ensures you’re doing just that.
3. Thorough customer analytics. How much does your customer usually spend per quarter
with you? Are they buying the same products time and time again, or does it vary? With CRM
analytics, you’ll get firm answers to these questions, and you can use what you learn to refine your
marketing strategies.
4. Efficient lead generation. Your CRM analysis can tell you which of your marketing efforts
most strongly correlate to purchases. If you see one approach correlating strongly to purchases but
have only targeted a sliver of your customers with that approach, try that method more – your sales
might increase.

33 | P a g e
Synthesis

 CRM is a business strategy that goes beyond increasing transaction volume. Its objectives
are to increase profitability, revenue, and customer satisfaction. To achieve CRM, a
company-wide set of tools, technologies, and procedures promote the relationship with the
customer to increase sales.
 It is more expensive to acquire customers than retain customers. But customer retention
becomes a challenge in the era of heightened competition and decreasing customer loyalty.
Various researches point out to the fact that customer acquisition is five to ten times more
expensive than customer retention.
 Service profit model is based on seven theorems, which says that customer loyalty is linked
with customer satisfaction and employee loyalty with employee satisfaction. But it has
been criticized by some on the grounds that the relation between satisfaction and loyalty is
not always linear.
 CRM consists of three components: customer, relationship and management. The customer
is the only source of the company’s present profit and future growth.
 The relationship between a company and its customers involves continuous bi-directional
communication and interaction. The relationship can be short-term or long-term,
continuous or discrete, and repeating or one-time.
 CRM is not an activity only within a marketing department. Rather it involves continuous
corporate change in culture and processes. The customer information collected is
transformed into corporate knowledge that leads to activities that take advantage of the
information and of market opportunities.
 CRM business cycle consists of four stages: acquisition and retaining, understand and
differentiate, develop and customize, and interact and deliver.
 Analytical CRM integrates customer data coming in from various channels into a single
system to provide a decision-making platform. Such channels include the various
components of CRM systems - call centres, customer service automation, marketing
automation and sales automation.
 Customer-relationship analytics take on the role of a highly sophisticated marketing
department. These tools identify your most valuable customers, group these customers
based on purchasing behaviour and other attributes, and target them with promotions and
sales efforts designed to increase customer loyalty and sales revenue.
 Customer-relationship analytics is part of a growing effort to apply measurable and
actionable analytics to key parts of the business. Business performance management
applications now cover a range of key performance indicators, including sales, marketing,
finance and manufacturing.
 A fundamental concept of Customer-Relationship Management is the lifetime value of a
new customer. The basic idea is that customers should be judged on their profitability to
the firm over the total time they make purchases.

34 | P a g e
 CHAPTER 5
SERVICE QUALITY

Objectives
After studying this unit, you will be able to:

 Identify the service quality issues

 Describe the Gap model
 Discuss the Service Management Model
 Explain the Service Marketing
Introduction

There are a lot of challenges that service marketers face due to the basic difference that prevails
between service and goods. Some of the challenges that they constantly face are:

 Understanding customer needs and their expectations from service;

 Tangibilising the service offering;
 Dealing with different types and varieties of people-internal as well as external customers
ñ as also the delivery issues;
 Keeping promises made to customers.

But the most intriguing challenge is the measurement and monitoring of quality.
Some questions regarding quality of service still elude any definitive answers:

 How can service quality be defined and improved when the product is intangible and non-
standardised?
 How can new services be designed and tested effectively when the service is essentially an
intangible process?
 How can the service firm be certain that its communication has been effective, consistent
and relevant, especially when its other marketing mixes are also communicating? This
apprehension is especially true with respect to the role played by the providers in the
service transaction.
In this unit, you will learn about the quality issues in services and various service quality models.

Service Quality Issues

Defining quality in service: In manufacturing, quality is defined by the degree of compliance

between stated goals and achieved targets. It is therefore rather easy to measure and conform to a
standard. In service it becomes difficult to comprehend the concept of quality and measure it. This
is due to the mother of all characteristics for services ñ the intangibility factor ñ and it makes
measurement and assessment of service quality extremely challenging. Perception of service
quality is, additionally, felt by all parties involved in a service delivery process: service providers,

35 | P a g e
customers and suppliers. They should therefore understand each other’s definitions of service
quality. Quality can be viewed from multiple perspectives:

Product-based
The definition is based on measurable parameters. It is suitable for goods, but becomes a challenge
in services. The number of times a telephone rings before the receiver is picked up by a service
provider can be a basis of measuring responsiveness.
Example: Domino’s Pizza has successfully positioned itself as a firm, which promises to deliver
its fare in half an hour - in other words, giving measurable parameters for quality.

User-based
This definition is from the customer’s perspective, reinforcing the notion that “quality is in the
eyes of the beholder”.

Example: An extremely well-read professor following all the guidelines of teaching can be
condemned with “poor” rating if the students are not able to comprehend the accent, or if the
delivery is uninteresting.
This element of subjectivity raises a challenge: that of finding out:

 What the customer expects,

 Which attributes to be included for garnering the largest appeal from the largest group of
customers, and
 How to differentiate between those attributes that provide satisfaction and those that imply
quality.
This approach begins where product-based quality definition ends.

Manufacturing-based
This is conformance based and quality is perceived as an outcome of production processes. Output
is considered to be of high quality if it conforms to design specifications. This factor is controllable
by the service firm but does not take into consideration customer satisfaction.

Value-based
This definition equates quality with value. The service provider will have to strike a balance
between conformance and performance, evaluating benefits and price to customer satisfaction.

Transcendental
Quality can only be experienced but can neither be described nor documented rendering it
impractical for quality managers. Tourism is one such area where quality can, to some extent, be
only experienced directly.

36 | P a g e
Task: Give examples of some quality issues with some major service firms based on product, user
and value.

Quality in service has two-window viewpoints: internal and external to the service firm. Internal
quality is all about the entire service delivery process-from concept to
encounter/experience/transaction/consumption. While internal quality is all about conformance
and compliance to design standards, external quality is about the customer’s perception. While the
former can be controlled by the service firm, service quality is as perceived by the customers - and
should be measured from that perspective. All aspects of “marketing myopia” rear their ugly heads
again when any service quality measurement is based on the manager’s opinions of the customer’s
expectations:

 Service firms may not know the specific criteria for decision-making in service
consumption.
 Management may be myopic on the way customers evaluate performance of the
competitive products.
 Marketing myopia might creep in and make management blind to the differing and
evolving needs of the consumers. The need evolution could be due to market and
environmental factors, competitive response and technological advances.

Caution: We give below the formal definition of quality: Quality is “the totality of features and
characteristics of a product or service that bears on its ability to satisfy given needs.

Service Quality Models

Gap Model of Service Quality

This model can help a firm desirous of improving service quality to focus better on its strategies
and service processes. This model can not only be used to find and identify areas in service delivery
and designs (which might lack quality), but also measure and monitor quality in service.
Quality in service is as perceived by the customer. There is no other way to either comprehend or
administer. As service is intangible; the only way to measure quality in service is to measure the
expectation of the customer before the receipt of service and measure his perception after the
experience, that is, the service encounter. The gap between the two is a measure of the service
quality. The larger the gap, the worse is the service quality; the narrower the gap, better the service
quality of the firm; i.e., the firm is successful in meeting the customer’s expectations... so far. !

Caution: Since consumer expectations keep inching upward constantly, so must the quality of
service.

 the measurement of the expectation of the customers (in this case, students) before the
service delivery (before admission), and
 the measurement of perception of the experience, after the service encounter (after
admission, during the 2-year course and after the convocation);

37 | P a g e
  Thus measuring the gap between the two.
The model professes two types of gaps:

The Customer Gap

Customer Gap is the gap between customer expectations and customer perceptions. This, in other
words, is the service quality shortfall as seen by the customers. Customers develop expectations
from receipt of external stimuli from many sources - ranging from those that are company-
controlled to social influences. These form the bases of his reference-to-come for the service
experience. The customer’s perceptions indicate the service as actually received, for all practical
purposes, since what we perceive is what is real to us. Perceptions are everything.

 Company-controlled external stimuli are: service product/offer, price, advertising,

promotions, displays, outlets etc.
 Social influences as external stimuli are: word of mouth communications and reference
groups.
 Other influencers of expectations are: personal needs and past experience of the customer.
The customer gap indicates the difference between actual performance and the customer’s
perception of the service. There are a lot of subjective judgments made by customers. Last
experiences may prejudice them and change their estimation of quality.

Example: A customer is satisfied with a certain restaurant; but his last experience there (it could
be because of a new waiter) could leave him embittered, washing away years of happy experiences
at one go.

Lesson: We are only as good as our last “Moment of Truth”, and what it signified to the customer.
Service quality is all about the responsiveness of an organization to meet the customer’s
expectations. The service performance is measured by the perceived service quality. The quality
of a service has two components:

 Technical Quality: This is the end result of the service operations process.
 Functional Quality: This is about the process, especially concerning the interaction
between the customer and service provider.
These two factors inject a heavy dose of subjectivity into the service process.
Any service organization would be desirous of closing the gap between what is expected and what
the customer has received. To them, this would be absolutely necessary to build a long-term
relationship with the customer, to retain him. But in order to close the Customer Gap, another type
of gap has to be closed:

38 | P a g e
The Provider Gap.
The Provider Gap
There are four provider gaps and these in sum total are the cause of the Customer Gap. They are
the shortfalls within the service firm. To close the customer gap, the provider gap (or, as also
known, Company Gap) has to be bridged. The four provider gaps are:

Gap 1: Customer Expectation ñ Management Perception Gap

It is the inability of top management to perceive what the customer wants, and is the main reason
why a firm cannot meet a customer’s expectations. The company is blinded by a perceptual veil
of ignorance, arrogance or criminal neglect.
Some of the reasons why Gap-1 can occur are:

 Inadequate marketing research;

 Lack of upward communication in the organization;
 Insufficient focus on relationship building (‘don’t care’ attitude), etc

Gap 2: Management Perception-Service Quality Expectation Gap

This gap is created in the design process of the service product and lying down of specifications
for service quality during service transactions. In the design process, this gap arises during the
translation of management’s perception of customer-expectation into design specifications.
Managers would set specifications for service quality on the basis of what they believe the
customer requires ó a very dangerous presumption. The implications of this gap are that even if
the firm has crystal-clear knowledge and understanding of the customer’s expectations, there
would be scope for misunderstanding this, leading to setting the wrong specifications, service
designs and standards.

Example: A bank would believe that customer friendly interaction is what the customers prefer but
the standard would be set on computerization-which is impersonal and neutral. There is no human
contact to support the concept of ‘friendliness’.
Some reasons for Gap-2 to occur are:

 Failure to connect service design to service positioning

 Unsystematic new-service development process
 Lack of customer-defined service standards
 Absence of a formal process of setting service quality goals, etc.

Gap 3: Service Quality Specifications-Service Delivery Gap

This occurs at the service provider level when there is deviation from service standards specified
and actually delivered to the customers. This probably is the bane of all public sector institutions,
be they banks, insurance companies, hotels, travel agencies, hospitals or any such. The

39 | P a g e
management’s perception and service design standards might be accurate and perfect. But if the
interacting service provider during service delivery falls short of the standards specified, the
customer will get an impression of a poorly performing firm. This becomes especially important
for that firm that is heavily dependent on people in performing the last transaction.

Example: Public sector banks might have the best of design specifications set by Reserve Bank of
India; yet late-coming staff, corrupt employees (the Harshad Mehta scam of misuse of Portfolio
Management Funds and the internal document mess-up in State Bank of India) would bring large
gaps in quality to put it mildly.
Some of the reasons for Gap-3 to occur are:

 Ineffective recruitment, role ambiguity;

 Role conflict;
 Lack of empowerment, control and poor teamwork;
 Failure to match supply and demand (in a retail store there would be peak crowds during
the evenings and slack demand during the afternoons, but the employee strengths would
be the same), customers not co-operating or failing to live up to their roles (lack of
knowledge and responsibilities);
 Channel conflicts, etc. The service firm must ensure that systems, processes and people are
in the right place.
This will make sure that service delivery is as per the design standards set.

Gap 4: Service Delivery-External Communications to Customer

This is essentially a communication gap. The gap is the difference between service delivery
intention and capability and what is being communicated to the customers. An over-hyped
communication raises the expectations of the customer - and his benchmark of service quality and
his expectations from the service delivery sky-rocket. It will be difficult then for the firm to meet
the expectation and there would inevitably be a shortfall. The tragedy is the customers would have
been satisfied without the hype. But now they go back with memories of disappointment and are
actually dissatisfied. This results from inadequate communication from the firm.

Example: Doordarshan, the much-maligned state TV broadcaster, would announce a certain

programme, say an interview with Mr. Amitabh Bachchan, to be broadcast at 7 p.m. and they
would fail to do so at that hour - creating huge disappointment. The viewers would curse and would
not forgive DD despite an apology - even if one were forthcoming.
The causes of Gap-4 are:

 Lack of cohesiveness in marketing communications;

 Absence of strong internal marketing programme, not being able to meet customers’
expectations through communications;

40 | P a g e
  Over-promising in advertising and personal selling,
 Inadequate horizontal communication between sales and operations;
 Differences in policies and procedures across branches,

The Service Triangle Management Model

There is a revolution taking place in the service industry, necessitating a radical change in every
service professional’s perspective.
Two models typify the change in the service perspective today:

 The Industrial Management Model: This is prevalent today and is a hangover from the
industrial era.
 The Market-focused Management Model: This is the model which can be used by
service firms as a replacement to meet the new environment changes for survival.

The Industrial Management Model is an approach to organizing a firm that focuses on revenues
and operating costs and ignores the role personnel play in generating customer satisfaction and
sustainable profits.

The model is a hangover of manufacturing methods but, sadly, is even now employed by many
organizations. Firms that follow this model fully believe that the factors that bring in the revenue
are advertising, sales promotion, accessibility, distribution and locational advantages. They are of
the opinion that the cost drivers are personnel, operations and that these should be controlled. Even
service sectors that seek price-competitive advantages follow this model.

41 | P a g e
Example: Jewellers of Mumbai employing Bengali goldsmiths. Even basic hygiene factors aren’t
met and the goldsmiths live and work in abysmal conditions. Another example would be the
myriad call centres that are sprouting all over India today. To get clients and projects, they are
pursuing cost-cutting measures as the means to control expenses.

Organizations following the industrial model believe that employees are indifferent, not very
skilled, do not have the right attitude and motivation and therefore cannot be empowered for
complex tasks. They would prefer to depend on automation and technology. There is therefore
greater dependence on senior personnel and less on front-line personnel.

The Market-focused Management Model focuses on the components of the firm that facilitate
the firm’s service delivery system. It proposes that the firm should be supportive of those personnel
who serve the customers and interact with them. In other words, there is more emphasis by the
organization on those employees who are in the front line. The support is in the form of equipment,
office space (hygiene factors), moral support, motivation initiatives, career growth and money.

If a service-oriented firm decides to follow this model, then for them customer interaction or
service delivery becomes the most important part of their strategy and the front-line personnel their
most important tool. This model is based on the Service Triangle framework.
The Service Triangle framework depicts the relationships among three groups of the service
organization:

 The service strategy,

 Systems embedded in the organization and
 The people of the organization.
The customer is at the centre, interacting with each of the groups.

The service firm’s strategy must be communicated to its consumers: This would not only apprise
the consumer about the firm’s service product and its distinguishing features but also about its
commitment for delivery.

42 | P a g e
Example: Industrial Development Bank of India (IDBI) announces subscription is open for its deep
discount, infrastructure, and other tax saving Bonds - all under a catchall name of Flexi Bonds. In
its advertisements and through press conferences, the Bank would seek to make it very clear about
the corpus fund; it’s utility, and most important of all, the benefits and safety of the instruments.

The service strategy also needs to be communicated to the firm’s employees: This would ensure
transparency, eliminating misunderstandings and aid in sincerity of commitment percolating down
the management levels. Example: Continuing with the example of IDBI, the bank has to educate
its officers, channel partners like share brokers and investment consultants about the bonds, its
features and benefits.

There should be consistency in the service strategy and the systems that are developed to run
the day-to-day operations to achieve the strategic goal. Systems would be designed only after the
service strategy becomes clear and is agreed on. The systems would then greatly aid the service
transactions/encounter. This would greatly affect the feeling of the customers, which would lead
to their satisfaction.

Example: Thomas Cook might have a strategy this tourist season for its inbound tour packages. It
has over 56 branches all over the country. Tour packages can have customized itinerary plans. But
it should set up systems to carry out the strategy. Else, there would be confusion in all the branches,
duplication in jobs like calculation of itinerary tariffs, repeat handling of the same enquiries from
all the branches and of course ad hoc decisions will take place.

The impact of organizational systems on customers: This would in turn greatly influence their
service experience.

Example: Continuing with the Thomas Cook example, if the organizational systems are faulty, like
the communication to the inbound tourists (the itinerary details), or if a Thomas Cook employee
is not aware of the latest currency exchange rates or the hotel tariffs - then the customer is
discouraged and leaves with a lasting impression of the organization as being inefficient and
incompetent.

The importance of organizational systems and employee efforts: Rules and regulations should
aid an employee in giving of his best, not hinder him in his service transactions.

“Giving someone the freedom to take responsibility releases resources that would otherwise
remain concealed,” said Jan Carlzon, the legendary head of Scandinavian Airlines System (SAS).
Carlzon was responsible for turning around SAS. Organizational systems should “transform
people from administrators (read clerks) to leaders and facilitators.” The rules and regulations
should empower the employee and facilitate him in intrapreneurship-entrepreneurship inside an
organization. The interaction between the customer and service provider: It is these interactions
that give rise to service encounters or critical incidents. They are also called Moments of Truth
(MOT). The quality of these interactions is the source of customer satisfaction.

43 | P a g e
Example: An insurance company might profess to be very modern, high-tech and big, and boast
of versatile products. But if the quality of transaction with the customer is not pleasant, the
customer will have a negative perception, which actually is the measurement of the quality of
insurance service by the company.

Service Triangle Marketing Model

It is said that services marketing is a game of “promises” played amongst three entities engaged in
the service transaction. The three entities in a service transaction are:

The Company
This is the organization that has dreamed up the service product, and its various benefits. It offers
the service product to the customer to achieve its service goals to the customers.

Example: East India Hotels, which owns and manages the Oberoi brand of hotels, offers expensive
accommodation, entertainment, leisure, etc., for the upper crust of society.

Autoriders have collaborated with Avis/Hertz-Rent-A-Car to provide a fleet of cars for rental usage
to corporate and well-heeled individual customers.

The Customer
The customer is the one who wants his needs and desires satisfied. He will do so by consuming
the service product.

Example: Romesh Bhandari wants a loan to purchase a car. He gets a loan from ICICI Bank at a
certain rate of interest.

The Sharma family is bored and therefore goes to Essel World on a public holiday. They have a
grand time.

44 | P a g e
The Provider
They are the internal customers of an organization who invariably complete the service transaction
on behalf of the company. They are mostly employees, but also include franchisees, channel
partners, distributors, wholesalers, retailers, etc.

Example: Andromeda is the largest Direct Sales Agent (DSA) for Citibank and successfully sells
its multibrand cards successfully.
Karvy Consultants and LIC, Reliance, etc. are other examples for this.

Three different types of marketing take place during the service transaction amongst the three
entities:

 External Marketing: The company does “external marketing” on the customer. It

promises benefits, explains features and assures satisfaction by way of advertising, public
relations exercises and other forms of corporate communication. It uses mass-media to
convey its promises. It “makes promises” to the customers.
 Internal Marketing: The Company does internal marketing to its providers. The company
has to provide working space like offices, and equipment’s, like computers, and telephones
to its provider. It also has to recruit, select and trained appropriate employees, channel
partners, and franchisees. It enables the providers to complete the service transaction. The
company “enables its promises”.
 Interactive Marketing: The providers do interactive marketing with the customer. The
provider is the one who interacts with the customers. The provider is the face of the
company and represents the company. Both the customer as well and provider get instant
feedback about each other during a service transaction. Their transaction reflects the
perception of the quality of the service. The provider “keeps the promises” made by the
company to the customers.

Task: Give some examples of major external and interactive marketing campaigns run by services
firms

SERVQUAL Model

This method says that customer service expectation can be measured along a few factors. There
are two versions of this method.

Dimensions of Service Quality

We will discuss two works both of which will give the totality of dimensions to service quality.
David A. Garvin: Eight dimensions of quality were identified by Garvin:

45 | P a g e
 1. Performance: Every product is supposed to deliver benefits and the measure of its quality
is performance of the offer. A dish scourer, which can clean plates completely and quickly,
would be a performance measure.
2. Features: These are in addition to the core product, which does not come as standard
“features”, like add-ons.
3. Reliability: This is a measure of the degree of probability of the product delivering what
had been promised.
4. Conformance: Delivery quality meeting design standards.
5. Durability: This is a measure of the length of time that a product can deliver benefits,
without deterioration.
6. Serviceability: If the product can be repaired with ease and speed, then it is a measure of
quality. It could include the behavioural dimension of service personnel, like their
politeness.
7. Aesthetics: This is a measure of the product’s looks, design, touch and feel. 8. Perceived
quality: Consumers develop a perception due to company-controlled stimuli like
advertising, publicity and brand promotion, and social effects like word-of-mouth.
A Parasuraman et al: Parasuraman, Valerie Zeithaml and Leonard Berry identified five dimensions
with which consumers judge services.

1. Reliability: The service should be performed with dependability, and as per its promise.
2. Responsiveness: This concerns the attitude of the service provider to be willing to provide
service. It also includes their sensitivity as well as timeliness in responding to customer
requests.
3. Assurance: This relates to the knowledge, skill and competence of the service providers.
It also indicates their ability to generate trust and faith, and also capability in service
delivery with politeness and consideration.
4. Empathy: This dimension relates to caring, feeling as well as the ability to give
personalized service.
5. Tangibles: This is a measure of the effectiveness of the physical evidence of the service
provider like design layout and
Importance of Quality
The importance of quality can be assessed by going though the following points:

 Lower Costs: Higher quality of services imply fewer mistakes for any repeat tasks, service
recovery exercises or refunds to disgruntled customers. Preventive and corrective measures
through quality control processes lower costs and increases productivity.
 Immune or Less Vulnerable to Price War: Service firms known for their high quality
services have an additional differentiating attribute and can avoid the service commodity
trap. They can afford to have a higher price as they offer more benefits than the
competition.

46 | P a g e
  Higher Customer Loyalty: As mentioned in the previous unit and section, service quality
ensures customer satisfaction that drives customer loyalty and enhanced profits.
 Higher Market Share: Loyal customers contribute to positive word-of-mouth publicity (the
‘buzz effect’), which broadens customer base with minimal costs.
 Loyal Internal Customers: The previous unit has explored the linear relationship between
happy employees and customer loyalty, and a firm’s profitability. Employees become
proud of the firm for which they are working; having a sense of belonging is known for
inspiring and delivering high quality services. Lower attrition level lowers manpower and
training costs and the service firm can leverage on the knowledge and skill of its employees.
 Higher ROI: The service-profit chain had established in the previous unit that high quality
services contribute to higher profitability.

Synthesis

 In manufacturing, quality is defined by the degree of compliance between stated goals and
achieved targets. It is therefore rather easy to measure and conform to a standard.
 In service it becomes difficult to comprehend the concept of quality and measure it. This
is due to the mother of all characteristics for services – the intangibility factor – and it
makes measurement and assessment of service quality extremely challenging.
 Quality in service has two-window viewpoints: internal and external to the service firm.
 Internal quality is all about the entire service delivery process-from concept to encounter/
experience/transaction/consumption and external refers to the customer expectations.
 The Gap model can help a firm desirous of improving service quality to focus better on its
strategies and service processes. This model can not only be used to find and identify areas
in service delivery and designs but also measure and monitor quality in service. It consists
of two types of gaps- consumer gaps and provider gaps.
 Customer Gap is the gap between customer expectations and customer perceptions. This
in other words, is the service quality shortfall as seen by the customers. Customers develop
expectations from receipt of external stimuli from many sources - ranging from those that
are company-controlled to social influences.
 There are four provider gaps and these in sum total are the cause of the Customer Gap.
They are the shortfalls within the service firm.
 Gap 1 is the customer expectation and management perception gap, Gap 2 is the
management perception and service quality expectation gap, Gap 3 Service quality
specifications and service delivery gap and Gap 4 is the service delivery and external
communications gap.
 The Industrial Management Model is an approach to organizing a firm that focuses on
revenues and operating costs and ignores the role personnel play in generating customer
satisfaction and sustainable profits.

47 | P a g e
  The Market-focused Management Model focuses on the components of the firm that
facilitate the firm’s service delivery system. It proposes that the firm should be supportive
of those personnel who serve the customers and interact with them.
 SERVQUAL method says that customer expectations can be judged based on following
factor: responsiveness, assurance, tangibility, empathy and reliability.
 The importance of quality in services finds its base in lowered costs, higher customer
loyalty, higher market share, loyal internal customers and higher ROI.

48 | P a g e
 CHAPTER 6
SERVICE SEGMENTATION AND TARGETING

Objectives
After studying this unit, you will be able to:

 Describe the concept of market segmentation

 Identify the basis used for segmentation
 Contrast differentiated and undifferentiated marketing
 Realize the concept of target marketing

Introduction
One cannot be everything to everyone;
But one can be everything to a select few.
- Michael Porter

After analyzing the consumer and his buying behaviour, the service marketer usually comes to the
conclusion that it is not possible or desirable to address the whole market with his offers. The
decision for the service firm is to choose its markets, and target them with its service offers. The
process of identifying market segments, selecting one or more of them and developing a marketing
mix to meet their needs is known as target marketing.
Apart from targeting, assigning a draft of the service delivery to the target audience is also
necessary. In this unit you will learn how service marketers segment the market and choose their
target audience.

Market Segmentation

Market segmentation is a process of dividing a heterogeneous market into homogenous sub- units,
concept that was first developed by a Wendell R. Smith in a paper in 1956. It is defined as dividing
a market into distinct groups of buyers with different needs, characteristics, or behaviour who
might require separate services or marketing mixes.

A market was analyzed for its nature and composition, and was clubbed under groups of similar
needs and other characteristics. Customers inside a grouping had similar preferences and traits;
two different groups had different preferences and traits. Each of these groupings was called a
segment, and the process was known as market segmentation.

49 | P a g e
The Diaspora Effect
Since pre-historic times, men (or even proto-men) constantly moved from one place to another.
They did so for the following reasons:

 Pull factors: This is the “fatal attraction” that the people might have for a place due to
perceived higher greater opportunity, higher quality of life, etc.
 Push factors: People move by compulsion, due to natural calamities like flood, drought,
famine; political upheavals like Partition, ethnic “cleansing” of Kashmiri pundits, etc.

But with these movements, the composition of the market gets distorted, and keeps changing.
This makes a constant study of the market very necessary for the marketer; and provides another
reason for market segmentation.

Effective Segmentation
The segments should be:

 Measurable and obtainable: Size, purchasing power, and characteristics of segments

 Accessible: The segments should be effectively reached and served.
Example: Questions like this keep cropping up: “Will it be possible for us to communicate and
serve the people of the North-East if and when we open our branch there?”

Substantial and Viable: The segment chosen should be large and profitable. It should be cost-
effective for the service marketer to address the segment.

 Intensity in Competition: More the intensity of competition, less attractive is the segment.
 Actionable: If the segments are attractive and have the potential for profit making, then
effective marketing programmes can be designed.

Example: NIIT found that the Chinese market had huge potential and designed innovative
marketing programmes to serve that market.

 Differentiable: The segments should be distinct from each other, behaving and responding
differently. Or else, the process becomes like Undifferentiated Marketing.

Bases for Segmenting the Service Consumer

A service marketer can segment the market on the basis of demographics, geography,
psychographics and behaviour.

Demographic Segmentation
Demographic segmentation can be done on the basis of age, gender, family, income and education.

50 | P a g e
Age
It is generally believed that people belonging to the same age group act or behave in similar manner
and they have specific needs and desires. Service marketers believe that as a person grows up in
age, his needs and wants also change. Along with this, their ability and capacity to process
information also changes

Gender
Marketers can also segment the market on the basis of gender. They can design services
specifically for a particular sex or both the sexes.

Example: For ages beauty parlour services were meant only for women or gymnasium only for
men.

As there is an increase in travelling of businesswomen/working women across the globe, the

hospitality and tourism industry has geared up to cater to their specific needs like comfort, security
etc.

Family
The size and the structure of the family is also an important consideration while segmenting the
market. With changing times, the focus is fast shifting from joint families to nuclear families. But
still joint families are an area of interest for the marketers. They can specifically design their
services to cater to the needs of families with 3-4 members with enough flexibility to serve more
members if required.

Example: A restaurant can plan their seating arrangement so that each table can accommodate
four members but they also have the provision for larger tables which can accommodate more
members.

With the growing urbanization and increased job and education opportunities, people are moving
from rural areas or small towns to cities and most of them settle down there only. There is also an
increase in families where both the parents work and children stay at home. Service marketers
have taken a note of all these things and have designed their offerings accordingly.

Example: There is a sudden increase in day care centres-cum-play schools like Kidzee, Motherís
Pride, etc. to take of children while their parents are away.
Tour operators like Thomas Cook and Cox and Kings have special packages for nuclear families

Income
It is one of the most important bases of segmentation as income determines the purchasing power
of the individuals. It is generally observed that as income increases, people tend to send more on
luxuries and specialized services. This segmentation is more relevant when family income is

51 | P a g e
considered rather than individual income as more and more families are becoming dual income
families.

Example: As income increases, people will be attracted towards health clinics like VLCC and spas
and salons. They will also be attracted towards travel and tourism.

Education
Another factor that determines the needs and wants of the consumers is the level of awareness and
knowledge, which in turn depends on the education level.
Example: An uneducated person might not understand the cellular services available in the market.

Geographic Segmentation
Under geographic segmentation the market can be segmented on the basis on countries, states,
cities, districts, urban areas, rural areas, etc. A region can be divided into north, east, south and
west. Countries have different gross domestic product, per capita income, standard of living,
lifestyle, culture, values, etc. All these things have to be considered while developing markets
segments. Markets can also be segmented on the basis of population and climatic conditions. All
these considerations are kept in mind while designing services or products for segments. In
Addition, marketers should also analyze the behavioural changes of the population that has
migrated.

Example: A tour operator can promote tour packages for hilly areas like Switzerland or Canada
to people in hot and humid regions like Middle-East.

Psychographic Segmentation
The marketer has to find out the basic characteristics which could influence the purchase decisions
of the individuals. For this, marketers can segment the market on the basis of lifestyles and
personality.

Lifestyles
The buying behaviour of individuals is largely influenced by their lifestyles. While segmenting the
market on the bases of lifestyle, marketers gain a sound understanding of customer’s way of life,
their activities, interest, opinions, beliefs and values. All this information will help the marketers
to design their services. This segmentation also helps in determining the effective marketing mix.

Example: A young student would want to eat a lot of fast food, so outlet like KFC and Pizza Hut
can target them.

Mature people (50+) like to meet each other socially over drinks, so they like to members of social
clubs.

52 | P a g e
Personality
Service marketers can also design services depending on various personality types. Personality
refers to special character traits and each person has a unique personality. And their unique
personality forms the basis of their unique needs and desires.

Example: A person who is an introvert and likes a relaxed atmosphere would prefer a restaurant
with serene and quite atmosphere were very soft music is being played whereas an extrovert would
like to visit a restaurant with very lively atmosphere.

Behaviouristic Segmentation
This type of segmentation would depend upon:

 Occasions when used - an anniversary dinner at a restaurant.

 Benefits - this segmentation is credited to Russell Haley and analyses why consumers buy
what they buy.
 Usage frequency (heavy or light - mobile phone users)
 Attitudes favourable or unfavourable disposition, including loyalty.
 Motivating factors – Maslow’s Need Hierarchy model, et al.
 Values.

Steps in Market Segmentation

Marketers use the following procedure for segmenting the markets:

Identifying Customer Segments

The first step in the process of market segmentation is to identify the customer segments using any
of the bases discussed above or a combination of the bases. Customers can be identified on the
basis of geographies, demographics, psychographics, or behaviouristic characteristics. The
marketer should determine the basis for segmentation based on the area of business.

Example: If the marketer is in the business of insurance, he can opt for demographics or
behaviouristic characteristics (benefits) as a basis for segmentation. In this case, using geographies
might not be a very good option.

Identifying customer segments helps the marketers in designing, promoting, delivering or pricing
the service for each segment. It basically helps them in identifying the marketing mix for each
segment.
Example: When hospitality services firm segments the market based on income and lifestyles and
realizes that more and more upper middle class and upper class families are opting for their
services; it can plan to cater to this segment by opening a spa and health gym facilities.

53 | P a g e
Each segment may have different preferences - while some may be price oriented, others may be
quality or brand oriented. Therefore, marketers should find the existing similarities in the
purchasing patterns of the target segments.

Develop Measures for Attractiveness

The second step involves analyzing the segments identified in the first step on the basis of their
size, growth potential, profitability and the purchasing power. Analyzing each segment on these
bases will help the marketers to choose and invest in those segments which have great potential to
produce profits for the firm in future.

Example: A fashion counsellor can look to target more and more men as men are increasingly
becoming fashion conscious.

Selecting Customer Segments

This is the last step in the segmentation process and involves developing the profiles of the
customer segments identified in the first step and analyzed for profit and growth potential in the
second step. It includes developing products or services and their marketing mix that match the
user profiles.

Example: The insurance services firm targeting the old people should design retirement benefits
plans or after retirements plans to cater to their needs.

Undifferentiated Marketing vs. Differentiated Marketing

Undifferentiated Marketing
This implied that the organization had only one product and it aimed the product at the whole
market. It expected the customers to take it or leave it, since there was hardly any choice in the
offer. It never bothered with individual tastes and it manufactured one product for the whole
market.

The advantage of this method was that it introduced the concept of mass marketing. A lot of cost
was cut in terms of having low inventory, fewer models and there was an economy of scale in the
manufacturing process. Cost was reduced successfully. Communication was also not very
complicated and mass media was used. The customers looked for their basic, core need to be
satisfied.

Did u know? Henry Ford could get away with make the famous statement, “I am willing to sell a
car in any colour provided it is black”; regarding his model T which ñ after 20 years of being in
production ñ accounted for almost half of all the cars sold till then in the world.

Example: In India, a good example would be Bajaj Auto. Before 1982, it offered only one kind of
scooter with two different names: Chetak and Super. Chetak was meant for export and was
available to a resident Indian only in foreign currency, and Super in Indian currency. And that was

54 | P a g e
its only offer. The consumer had to accept the offer whether he liked the design or not. The Indian
consumer had not much quality choices in scooters, and admittedly, Bajaj Auto did manufacture
its limited variety of wares with attention to high quality. There weren’t too many alternatives; the
market was not mature enough to understand the varied depths of its demands. Consumers were
passive and undemanding; there was not much competition, even from the other scooter in the
market, a clunkier, chain-driven but rugged make called “Lambretta”.

Differentiated Marketing
After this came the second stage of evolution of marketing. With a little more competition, and
with the customers becoming more mature, the organization now introduced slight variations in
its product models. But nevertheless it dumped the entire product on to the market. Expecting the
market to choose slight variations, the organization offered the same core product in these
variations.

Example: Hero Honda in 1986 had the same core 100 cc, four-stroke engine motorcycle but made
cosmetic changes in its designs naming one as Candy model CD100, another as Sleek, and a third
as CD100SS. But the core product was the same, and the company expected that the market would
have consumers who would make their choices out of these.
The customers were seemingly anesthetized to the fact that the core offer was the same and the
variations were mostly cosmetic. There were other organizations, too, that were making use of this
particular type of marketing which is prevalent even now.

The next step for the service marketer was to deliver more value to consumers with added benefits
commensurate with the identified consumer needs. By doing this, he achieved two ends
simultaneously: overcoming the consumer’s inherent negative perception of receiving the same
core product with mere cosmetic changes ó and successfully targeting a broader market base with
differential benefits.

Example: Indian Railways will have a train, say, the Howrah-Bombay Mail, travelling from
Chhatrapati Shivaji Terminus, Mumbai to Howrah, Calcutta. The core offer of the train service
was transporting people from one place to another. This was the same, irrespective of whether the
passenger travelled in a general compartment, Sleeper Class, First Class, A.C. 2 Tier, A.C. 3 Tier
or A.C. first Class.

In above example, the customer paid extra for slight variations but the core product was the same.
Irrespective of what the customers paid and how they travelled, they all reached their destinations
at the same time, at the same place.

The same was true for airlines. In a flight, the passengers could be seated in economy, business
and first class sections. But they all reach their destinations at the same time in the same place.

A movie theatre would have sections called Dress Circle, Balcony and Stalls. But the viewers
would see the same movie, in the same air-conditioned hall and experience the same ambience.

55 | P a g e
The difference in their ticket prices would be based on the difference in seat cushioning and
distance from the screen. Consumers paid more or less according to their different need for
peripheral benefits, the differentiated pricing intentionally succeeding in creating social
stratification represented by different seating areas.

In Differentiated and Undifferentiated Marketing, the marketer looked for sufficient similarities in
the preferences of the consumer. He evaluated the market by the size or number of consumers who
had the same preferences, to enable him to sell service products across the whole market.

Niche Marketing
In Niche Marketing or Concentrated marketing or Focus Marketing, the service marketer looked
for a very specialized segment. His entire offer ñ and marketing resources ñ was tailored towards
this very special group of consumers. The size of the market was small, the consumers had very
special preferences and there were no other players catering to these customers.

Example: Dilip Chhabria or ëDCí as he is known in India re-designs cars for, and services car
buyers who are looking for exclusive designs for the cars available in the market. His company,
DC Cars Pvt. Ltd., redesigns the body on the same platform of the vehicles and his service is
custom-driven.

Portfolio Management Services (PMS) are given by banks to exclusive customers who want
specialized services for their investible funds. No two demands could be the same.

Market Targeting
The service marketer evaluates these groups and chooses those groups which it perceives it could
cater to with its available resources. If a service marketer chooses only one segment, then it is
“focus” or “concentrated” marketing, whereby his attention is on a single market, known as a
:niche”. If he chooses a few of the segments, then it is multi-segment strategies, where a series of
separate marketing activities is designed for different market segments. A service marketer with
deep pockets and other resources addresses himself to all the segments. The service marketer, over
the period has come to the realization that no single offer can satisfy the whole market.

Niche marketing makes a firm use its limited resources optimally; the customers do not suffer from
any confusion about the ability of the firm to service them. But with niche strategy, a service firm
becomes vulnerable to powerful competitors coming in.

Example: Dinerís Club was the only player in the card business in the seventies and early eighties,
for a select customer segment. But it was soon overpowered by more powerful players, till it was
taken over by Citibank.

Multi-segment strategies are the prerogative of larger service firms, attempting to conquer different
segments through different marketing programmes. There is more scope for expansion and growth
with this strategy, with the firm reaping the benefits of economy of scale and economy of scope.

56 | P a g e
But it will make the service firm incur higher expenses and will require higher expertise. There is
the danger of getting spread too thinly, with the ensuing confusion of the customers.

Synthesis

 The process of identifying market segments, selecting one or more of them and developing
a marketing mix to meet their needs is known as target marketing.
 Market Segmentation is defined as dividing a market into distinct groups of buyers with
different needs, characteristics, or behaviour that might require separate services or
marketing mixes.
 An effective segment is one which is: measurable, actionable, accessible, sustainable,
competitive and differentiable.
 There are several ways in which a service marketer can segment the market: demographics,
geography, psychographics, and behaviouristic.
 Demographic segmentation can be done on the basis of age, gender, family, income and
education.
 Under geographic segmentation the market can be segmented on the basis on countries,
states, cities, districts, urban areas, rural areas etc. A region can be divided into north, east,
south and west.
 Under psychographic segmentation, the service marketer can segment on the basis of
lifestyles and personality. Behaviouristic segmentation can be done based on benefits,
attitudes, motivation, usage rate, loyalty, etc.
 There are 3 basic steps in effective segmentation: identifying customer segments develop
measures for attractiveness and selecting customer segments.
 Undifferentiated marketing is providing the same service to all the segments and
differentiated marketing refers to segmenting the market and designing specialized services
for each segment. As contrast, niche marketing to catering to specific needs to a particular
segment.
 A service marketer with deep pockets and other resources addresses himself to all the
segments. The service marketer, over the period has come to the realization that no single
offer can satisfy the whole market.

57 | P a g e
 CHAPTER 7
SERVICE PRODUCT AND OPERATION

Objectives:
After completing the module, the students are expected to:

 Realize the concept of a service product

 Describe the concepts of service product lifecycle and service branding
 Discuss the new service product development process
 Explain the service process and role of blueprinting in service operation

Introduction
This unit provides a detailed discussion on the service product and the operations. A product is an
offering of commercial intent having tangible and intangible features that goes to satisfy needs,
wants and desires of the consumers. A product thus becomes a tool by which an organization
achieves its strategic goal. Some examples are a car, soap, a book, a sofa, etc. The consumer gets
his various needs satisfied by the product. Peter Ducker, the management guru, defined a product
uniquely. He said,

“A product is a product if it is purchased and consumed; if it is not purchased and consumed then
itremains a raw material or material in process”.

This definition beautifully captures the responsibility of the marketer. He should not only design
beautiful products but also market them. By this definition, a movie or a play is not a complete
entertainment product if people don’t see them ñ although they might win a plethora of awards.
Process is an important element of service marketing mix. It is a tactical tool for the service
marketer to achieve his strategic goal. All the other 6Ps of the service product mix form parts of
service operations.

The Concept of Service Product

The offer can be both a good as well as a service. The offer can be a good or a service or a
combination of both. The service product is an offering of commercial and not-for-profit intent,
having intangible and tangible features going on to satisfy various needs, wants and desires of the
customers.

Example: The credit cards have got various intangible features (convenience, flexibility, maximum
retail acceptance, insurance, contests, etc). The tangible features of a credit card could be colourful
mailers, complimentary diaries, calendars and other free gifts, price discounts, etc.

Thus in the marketing of services, unlike that of goods, no exchanges take place as the product is
intangible. The service marketer performs a deed for the buyer. What really happens is a

58 | P a g e
transaction between the marketer and consumer who actually consumes the experience ñ but never
gets to own the offer.
Example: A ride on the super-luxurious Volvo bus from Mumbai to Pune is a service.

The customer experiences the journey but never owns the bus. His quality of experience is
definitely affected by tangible components of the service offer: cushioned seats, air-conditioning,
complementary food, music and video entertainment etc. Thus service transaction remains the
main focus for the service marketing strategies and management.

Theodore Levittís Total Product Concept

Theodore Levitt explained that a product was now no longer an isolated goods offering. It now
was a combination of three products:
The core product: This had the very basic features and was the main reason for consumption.

Example: A motorcycle as a core product should have engine, petrol tank, wheels, handlebars and
a seat.

A product with such features was necessarily at the introduction stage of the life cycle. At this
stage, neither was the market/consumer mature nor was there much competition. This implied that
consumers did not really recognize the depth of their demands nor did they have much choice in
goods.

It implies that every service product should provide a basic function ñ which goes on to solve a
customer’s problem and satisfies his need. Without the ‘core’ product, no service offer would exist.
It is only the core product that will lure potential customers, offering benefits to them.

Example: With nearing middle age, a person is concerned about financial security post- retirement.
His problem can be solved by the following solutions: fixed deposits in reputed

banks, fixed deposits with companies, mutual and pension funds, shares of private companies and
government securities, bullion, land and other properties, etc. They all promise to offer the same
core product ñ security and growth; and supply the desired benefit of relieving the person’s anxiety.
Which of these offers should the potential customer go for? The final decision of the potential
customer will largely depend upon more than just the core product.
Examples of core service product attributes:

 Functionality
 Key benefits
Example: A tour package by SOTC/Kuoni will have guided tour of destinations as the core service
with arranged accommodation, transportation, travel formalities as key benefits.

59 | P a g e
The formal product (or the actual product): Once the first version of the product was launched
and was made available to the market, technology and manufacturing/business know-how started
permeating down to many players. This resulted in lots more competition and therefore lots more
choices for the consumers.

Example: While the internal combustion engine and motorcar were invented in Germany, mass
manufacturing and mega marketing was perfected first in USA and then in Japan, and now South
Korean carmakers like Hyundai are world-beaters.

Thus, to stay ahead of the competition, marketers started offering more features like colour,
styling, designs, brands, prices, etc., that would attract customers to their products. The intention
was that the products would be noticed and bought.

The augmented product (or the extended product): With further competition, marketers sought
more differentiation and added more features/attributes to the original product. At the third level
of the product, the features were becoming more and more intangible and they were all services.
This time, they added guarantees/warranties, customer education and training, different payment
options, installations, home deliveries, etc.

The intangibles were offering mostly psychological benefits to the consumers, with the objective
of enhancing the value of the core and the formal/actual product. It definitely helped to underscore
the differentiation and get noticed.
Guarantees warranties, and free after sales service assured the customer of continuing reliability;
strong brands implied trust; customer education and training went a long way towards reduce the

60 | P a g e
consumers anxiety in handling complex features; easy finance helped the customer to make a spot
buying decision courteous behaviour and prompt dealing would increase loyalty. And finally,
when all competitive products looked the same, service became the only differentiator.

Example: Between two similar brands of washing machines, a customer would plunk for the one
that had a better service component. Thus despite their intangibility, services became the crucial
factors for a firm to derive competitive advantage.

Creating a Product Range

The service firm should be in a position to offer a wide range of products. This will enable them
to get more customers and satisfy their wide-ranging needs. The wider range would also enable
the firm to be more competitive. A new service firm might, to begin with, offer only one product.
Example: Mobile phone operator Orange offered only one basic product during the launch of their
service in 1995. But with competition, they have expanded the range of their service offers.

61 | P a g e
But some service firms use their range of offers (or the lack of it) as a strategy.

Example: Talwalkarís, the famed health-and-fitness franchise chain of Mumbai, have stuck to their
offer since the last five decades;

Lakme Beauty Salon is only for beauty treatment while Ayush Therapy Clinic is for ayurvedic
treatment
Others have progressively widened their product offers:

Example: Travel major Thomas Cook offers the entire gamut of travel services including ticketing,
visa and passport services, tour operation management, foreign exchange facilitation, travel
insurance, Para- banking services like travellers’ cheques and credit cards.
State Bank of India offers the entire gamut of retail banking services like personal banking, credit
cards, home loans, personal loans, small business finance, large institutional finance, international
banking, agricultural banking, insurance, banc assurance, etc.

The complete bouquet of all offers of a firm is called Product (or Offer) Mix. It is with this set that
a service firm can offer the maximum choices to its customers and enhance its strength in the
market.

How can a service firm increase its product mix to get the best possible response from the market?
It can do so in the following three ways:

1. By creating a service product line (new product development),

2. By increasing the number of service offer items within each product line (length), or
3. By increasing the number of product lines (width).

A Service Product Line can be explained as a group of closely related offers, targeted at the same
type of customers, having the same end use. A bank having twenty different types of mutual fund
schemes would fall under one product line. If it offers banc assurance products, then the latter will
fall under a different product line altogether (insurance), having different end use and different
types of customers with different needs. Very simplistically, the different brand names that are
available under a particular product line (or the length of the service product mix) can be an
indication of the strength of the service product line.

Example: SBI Mutual Fund has over twenty-six different basic offers, like Magnum Children’s
Benefit, Magnum Gilt, MSFU Pharma, etc.

HSBC Mutual Fund has over fifteen schemes like Gilt Fund Long Term, MIP Regular, Income
Investment, etc.

The breadth (or the width) of the product mix of a service firm refers to its different business
propositions or different business lines. As mentioned before, certain service firms specialize in
one or a few product lines (i.e., their breadth is less) while others have deliberately spread

62 | P a g e
themselves wider to cover more business areas, trying to satisfy variety of needs of the market. In
the case of the latter, sometimes, they may be addressing themselves to an entirely different
audience.

Example: ITC, the tobacco giant, is in the hospitality business (Welcome chain of hotels), travel
and cargo (International Travel House), golf course management, education (Sangeet Research
Academy, Kolkata) and off-the-shelf leisure wear branded as Wills Lifestyle, etc.

ICICI, the country’s largest private sector bank, has diversified into insurance (ICICI Prudential
and ICICI Lombard), informational technology (ICICI InfoTech), home and personal loans, etc.

The depth of the service product mix of the firm gives another perspective to the number of items
in a product line. It gives to the customer varieties of choices of the same service product ñ either
by weight, size, volume, colour or other special features.

Pure service offers being intangible, the first four choices may not be feasible. Addition of special
features to the same service product might give more choices to the customers. In the example of
the mutual fund payers quoted above, whether the schemes are growth oriented, dividend paying
or both might enlarge the scope of choice being offered to the customers.

In retailing, the same apparel brand can be offered in different sizes and colours; ice cream parlours
offer the same ice cream in different flavours, colours etc. Service firms like tour package
operators, beauty parlours,restaurants, clubs, offer different grades of services at different prices,
with different add-on features.

Example: Kuoni Travel through its brand SOTC is offering rigidly designed tour packages for its
customers but also is offering from this summer the highly flexible Christopher Columbus
Holidays for the freewheeling traveller.

Product Life Cycle

A service offer goes through stages of slow acceptance, surge in popularity, steady sales and
sometimes drop in sales. The drop in sales can be due to many factors including better substitute
offers, product obsolescence, changing preferences of the consumers, etc.

Example: In Mumbai, and other metros, in the late nineties, there arose a craze amongst the youth
for pool parlours, that started sprouting in every nook and corner of the cities; for entrepreneurs, it
seemed to be a jolly good idea: minimal capital and interiors, small space, with the only fixed
capital requirement being the pool table, cue sticks, balls, air conditioning (sometimes even that
was dispensed with), bare furniture, etc., taking on the form of a fad. But its flameout was just as
fast as its rise.

It became imperative for the service marketer to study these varying patterns of sales growth over
the lifetime of the offer. A useful model for such study that evolved to satisfy an analyst’s need
was the concept of the service Product Life Cycle (PLC). With the simple comparison to the stages

63 | P a g e
of human life, PLC implies that services also move through easily identifiable compartments of
time and have different characteristics. It greatly helped the service marketer to plan for the
appropriate marketing initiatives and responses during specific stages of a service offer’s life span.

The PLC has been co-opted as a basic assumption factor in the Boston Consulting Group Grid and
in many theories of new product development. Researchers have come to the conclusion that the
product life cycle model is very valid in many common market scenarios.

What are the characteristics of a typical offer/service product life cycle? It is the different stages
that the product goes through during its cycle of birth, youth, maturity, decline and death/rebirth.
The marketer can attempt at a revival and therefore it’s called a life cycle.

Conception/Incubation
This is the incubation stage of a service product, called New Product Development. It consists of
the complete activities from ideation, research and development and product testing.

Introduction
This is the stage soon after the launch of the service offer. The public at large is not fully aware or
exposed to the offer. Sales growth or adoption by the market is slow. The potential consumers
display uncertainty and resistance to any new products that are not tried and tested. And those that
would dare to risk sampling the offers would be the experimental, innovators or adopters.

64 | P a g e
The service firm would be incurring heavy expenditure, without any surge of revenue, only for
building up awareness through different types of promotions. Unlike firms dealing in goods,
service marketers do not have to go through the expenditure of cost of production, storage and
inventory ñ not unless they have sizable tangible component in their offer (like restaurants).
Neither would they have to bother about such cost drivers as full utilization of production facilities
or the lack of economies of scale at the introduction stage. Nevertheless, at this stage, the cost of
the offers is high and only adroit cash flow management can take the service firm through to the
next stage of the product life cycle.

The normal sequences for any offer to become popular and enduring its trial, or sampling of the
offer ó followed by repeat purchases. For intangibles like service products, word-of-mouth
publicity and recommendations anyway plays a major role in bringing in new customers for
sampling. If the service offer is unable to satisfy the customers, there is a dim possibility of any
product surviving the first stage.

Growth
There will be a surge in demand for the service offer when customers make repeat purchases and
potential customers come in due to recommendations made by the formers and by the generally
positive publicity floating around. Entertainment products like theatres, concerts, operas, plays,
movies, and circus etc. are highly vulnerable to such publicity.

Why does the profit curve peak (Time period TP) much before the peaking of the sales curve (Time
period TS)?

It is to be noted that the peak of the profit curve does not coincide with the peak of the sales curve.
The reasons are due to normal market dynamics. Surging sales, high voltage publicity, increasing
awareness and profits are all indications of success. But success breeds imitators; direct
competition enters the fray, hoping to harvest from the successful formula. To beat them, the
service firm has to fight in two ways: spend more money on brand promotions like advertisements
and publicity and by offering price cuts. Although effective in slowing down the onslaught of
competition, the added expenditures cut deeply into its profits.
There is a “bandwagon effect” with the increase in sales, size of the consumer market, and number
of competitive players.

CAUTION: Bandwagon Effect refers to the situation where an individual does a thing because
other also does it. With increase in market volumes and competition, price tends to drop. The
service marketer has to invest in promotions to establish consumer attitudes, increase market
penetration and accessibility through wider distribution reach in order to bandwagon effect.

65 | P a g e
Maturity
Sales at the maturity stage flatten and slow down. Most possible product benefits are usually
developed and the market has reached the dreaded point of saturation. There is now an obvious
over-capacity, with more players in the fray. Price cutting becomes the norm for attracting
customers. The shakeout had enabled only the strong players to be around. The cost of doing
business increases and the market becomes stable. Sales growth can slow down to as low as zero
indicating complete saturation of the market.

At this stage, if any new player entered the market, they would only steal business from each other.
The Indian hotel industry, especially the five star luxury segment was witness to such a scenario
in the sluggish early nineties as well as post 9/11.

Most of the products available today are at this stage of the life cycle; many service offers are
spread amongst Maturity (supermarkets), early Growth (deep discounters) and Introduction (e-
retailing, e-auctions) stages. At the beginning of this cycle, profits are likely to be at their peak;
there is an inevitable decrease as competition hot up and prices fall. Many small brands swiftly
head for the next stage, decline.

Decline
In the decline stage, there is a downturn in revenues, customer acquisition and retention. This could
be due to a number of factors:

 Direct Competitors: could be doing a better job in offering the same service with more
value.

Example: Private airlines like Jet Airways and Sahara Air have contributed to the declining
popularity of the state-owned services like Alliance, Indian Airlines etc.

 Emergence of Substitute competition: The market could witness other offers that could
give the customers the same benefits and satisfy their same need.

Example: Video parlours with all their stocks of videocassettes were either forced to close shop or
shift to other business areas with the emergence of satellite television broadcasting, twenty-four-
hour movie channels, and VCDs/DVDs.

 Changing preference of the customers for the service offer or the category: The
disappearances of the pool parlours as well as the low key demand of pager messaging
service are some of the examples.
 Technology obsolescence could make the service offer redundant with better service being
offered from those equipped with the latest technology.

Example: All India Radio (AIR), the state owned broadcaster has lost its audience to the high tech
Frequency Modulated (FM) private players. The decline of the service offer can be permanent or
last for years.

66 | P a g e
Post-mortem
This stage is an after-effect of the changing environmental factors and the paradigm shift in global
managerial thinking and is newly emerging to grab the attention of decision makers. It implies that
even after the service product and the market have declined and the managers have stopped any
further investments, expenditures, or allocating any responsibility and accountability, quality time
is spent in monitoring and servicing the customers. This has been necessitated by the societal as
well as other environmental consideration.

In case of goods, an automobile firm may have stopped the production of certain models but is
bound by government and international regulation to continue making spare parts available to the
customers and servicing their cars.
Example: Daewoo exiting from India leaving behind numerous owners of their Matiz cars.

Similarly, servicing of the customers and their service products continue even if the product has
been withdrawn or the service firm has exited from the market.
Example: In 1977, IBM and Coca-Cola exited from India. IBM chose to leave behind some of its
personnel who would be taking care of their mainframe machines installed in India. The servicing
of these machines continued. The majority of the IBM personnel came together under Computer
Maintenance Corporation or the now well-known CMC Ltd. ostensibly to take care of the IBM
computers in the country.

Marketing Responses to PLC

The primary use of life cycle theories is to predict the strategic marketing mix required at each of
its stages. Introduction The marketer can make use of market penetration strategies by investing
in promotions or making widespread entree through low price, and skimming strategies where
short-term gain is the objective with high entree price. For services, the marketer is more capable
of moving in at high speed than the goods marketer, as he does not have to grapple with such
problems of production, inventory, storage and logistics.
The service marketer can choose from any of the given four market entry alternatives (Figure 9.3)

67 | P a g e
Rapid Skimming: It is an expensive initiative combining high price and high promotion, directed
at a low aware, low willingness-to-buy market. This strategy is very useful if the market size and
potential is very high and the likelihood of the competition to quickly adopt and adapt to the offer
is also very high. When a service firm has a short-term goal of profit maximization and increase
in the sales volume, it can resort to this strategy. The target markets are the Early Adopters and
Innovators who do not mind paying the high price for the privilege of being the early users.

Example: The early entrants in the cell phone service operations like BPL Mobile, Max
Touch/Orange/Hutch, RPG Cellular, etc., followed this strategy.

Slow Skimming: This strategy is used when the service firm is confident that it can recoup its
investments in sufficient time. This could be due to lack of competition (public sector
undertakings, infrastructure services like airlines, telecommunication, etc., are some examples),
requirement of heavy investments in technology and systems to compete, etc. The target market,
mostly business and industrial users pays for the high price as the product is exclusive and vital
for their competitiveness. Five star hotels and Enterprise Resource Planning (ERP) and Supply
Chain Management (SCM) System providers like SAP, BaAN, i2, Mindtree Consulting, etc., used
this strategy.

Rapid Penetration Strategy: If the service firm has a long-term objective of being a market
leader, market share and profit maximization, and if there exist entry barriers like intensive
competition, then this strategy is useful.

The price of their offers is lower but there is high visibility in the media. Big Bazaar, the discounter
major has successfully used this strategy to make its mark.

Slow Penetration Strategy: When the market size is large, well aware of the service offer and
sensitive to price but the competitive threats are almost non-existent, this strategy is used. The
long-term objective of the service firm is to maximize sales or profits.

“Speed to market”: ICICI Bank made waves by moving in very fast with its retail banking
products. So did the grocery chain of cooperatives in superstore format Apna Bazaar. A slow entry
would enable the competitors to bring out ìme tooî products ñ and quite possibly grab a large
market share. With the capability to move in quickly, the service marketer can considerably reduce
the lead time between product conception/incubation and product introduction. This is known as
the marketer’s and/or their product’s ‘speed to market’ factor. A necessary system for the service
marketer to speedily consolidating his entry includes information integration, cohesiveness and
synchronization of all management functions.

Growth
It is obvious that the Growth stage is a battleground for survival. It does begin with a highly
optimistic “Take Off” but ends with a bloodbath of “Shake Out” with only the fittest surviving.
The competition has got a chance to survive the shake out if they don’t just copy the original but

68 | P a g e
add innovative features themselves, attracting more customers and helping to enlarge the market
base. With the market growing in size, all players could be accommodated and price war, in
actuality a poison pill of a solution, avoided.

This is what happened with the cell phone service operators in the latter part of the nineties. But if
the market does not grow or there is more number of players than the market can accommodate,
then price war is inevitable, discounting becoming the norm and value being given the short shrift.
Two service sectors that saw brutal haemorrhaging in India are travel and time- sharing. Travel
agents, airlines and even stock brokers and insurance agents not only chose to undercut but resort
to such unhealthy (was it also unethical?) practices as giving back customers a part of their
commissions. Time-share marketers that have had their obituaries in print are Dalmia Resorts,
Sterling Resorts, etc.

After achieving optimum awareness of the service offer, the marketer should go all out in
developing customers, increasing service delivery capability to keep up with demand, increasing
access and making distribution effective. This will enhance the brand value of the offer, which will
become an important asset during the inevitable maturity phase of the life cycle. The advertising
as a communication tool should explain the offer, emphasize its features and image and create
favourable attitudes.

Example: Shopperss Stop the early mover in organized, up-market retailing used its advertising
effectively to change attitudes and build its image, stressing on the shopping experience, parking
and valet features, and the international brands availability.
Any sluggish response by the marketer and the inevitable inability to meet supply and demand
might result in lost opportunities and poor customer retention. Increasing the market share should
be an important objective of the service firm, bearing in mind the evolving competition. At the end
of the growth phase, it can sacrifice short-term profits by using reduced price to lure price-
conscious customer.

Maturity
This stage will witness steady sales with frenetic competition and price war. The service products
do not have any new innovations and the effort of the marketer is only to stimulate sales. The
marketer, therefore, concentrates on maximizing profits, mostly seeks differentiation, offers wider
range of products and concentrates on building relationships and long-term commitments with the
customers. Product line modifications and line extensions can be attempted here.

There is also not-so-subtle attempt at poaching customers from the competition by using sales
promotions. The marketer should make attempts at consolidating the position and maintaining the
market share. The distribution should be the widest and multiple channels can be looked into.
Retailing of computer products at this stage includes company owned outlets, discounters, mail
order catalogues, direct marketing, internet retailing, etc. The offer is clearly now ready to jump

69 | P a g e
into the augmented product level. With profits beginning to decline, the firm should go in for niche
segments, service augmentation, image building and value creation.

Decline
There is really nothing that the marketer can do if the category of the offer itself is on the decline,
like for example the services of ear cleaners, bespoke tailors or development and printing of black-
and-white films. Whatever brand development and image building the above two service providers
might do, it would be almost impossible to reverse the trend of declining preferences by the
customers. The reasons for the decline of a particular category or certain offers have been outlined
in the previous section on PLC. The marketer then becomes reluctant to invest any more resources
on the products; on the contrary, he squeezes as much revenue or profit possible from the offer.
The considerably reduced customer base is exploited for maximum profit extraction with high
price targeting tactics. Offers are rationalized, prices are reduced, distribution is phased out and
promotional investments are minimized.
Michael Porter has suggested for a service firm four strategies to tackle their products in decline:

 Leadership: When there is still potential in the market for profit exploitation, the service
firm can invest in product support to strengthen it and emerge as a strong and competitive
player.
 Niche: The service marketer can analyze the total market, and identify certain specific
segments that has potential for profitability and which can decay slower than the rest.
 Harvest: The marketer is all set to totally exploit the offers. While no further investments
are made, there is a serious attempt to streamline costs including reduction of attributes in
the augmented product level: customer service, warranties, training etc. The attempt is to
“milk” the investments made in the offer.
 Divestment: If the marketer is savvy enough to detect the symptoms of decline early on,
the product line can be sold in the latter part of maturity or earlier part of decline stages, at
a profit.

Service products that are declining tend not to be withdrawn completely from the market, and as a
result the market is awash with them. They thus do tend to distract the attention of marketers in
particular and managers in general from those products which are stars and profit centres.

Post-mortem
Post-mortem very rarely affects services, mostly influencing managers in manufacturing and
primary activities. Banking, entertainment, insurance, consultancy or retailing does not really have
to engage in such activities as planned disposal of oil rigs (oil exploration and drilling) as Shell
was forced to do in United Kingdom, nor careful dismantling of plants and manufacturing
facilities, like DuPont was forced to do in many countries, especially in United States.

70 | P a g e
Branding of a Service Product

With proliferating competitive offerings, customers do have choices but are not able to distinguish
one from the other. To differentiate their offerings from the rest and giving them unique identities
to make them distinguishable, the marketer resorts to the creation of brands. The American
Marketing Association defines a brand as

“A name, term, sign, or design, or a combination of them, intended to identify goods and services
of one seller or a group of sellers so as to differentiate them from the competition.”
A brand can convey six levels of meaning:

 Attributes: Helps the customer associate certain attributes to the offering, like availability
of 24-hour service from Citibank (The Citi never sleeps).
 Benefits: The attributes and features of the service should be able to convey the existence
and promised delivery of benefits that could be functional (State Bank of India has wide
ranging offers for all) and/or emotional (“Security is a warm feeling”) and (“The nation
banks on us”).
 Values: The brand should communicate about the values and beliefs of the service
marketer (HDFC extols trust, faith, and expertise: “With you. Right through”); Delhi Police
(With you, for you, Always’).
 Culture: The service brand can represent certain specific culture (McDonaldís is as much
about America as Lufthansa is about German culture; dabbawalas about India)
 Personality: The service can project a personality (NIIT suggesting an intelligent
personality like Vishwanathan Anand, while Airtel talks about a can-do person).
 User: The brand also suggests the type of customers who uses its service (American
Express cards b oast that its card holders are achievers).

Importance of Branding Service Products

Both the marketer and the customer benefit enormously when service products are branded. As
mentioned before, the intangibility of the service makes it difficult for customers to comprehend
the totality of the offer, believe in their proposition or be too deeply involved in the purchase. For
the marketer, the same aspects make their persuasion and marketing long drawn out and more
strenuous.
By branding service products, customers are benefited in the following way:

 Reducing time and effort in the decision-making process (DMP) during every purchase of
a service offer. Customers are able to shift from high to low involvement in their purchases.
The name gives recognition of product and reassurance as to quality of their attributes.
 Consistency of delivery, quality and benefits of the offer are assured, considerably reducing
customers’ risk perception.

71 | P a g e
  Enhancing the image and status of the offer, satisfying psychological or emotional needs
of the customers.
Brands aid the service marketer in the following ways:

 Charge a premium on their service. Customers tend to place more value on the promise,
status, security, guarantee and consistency of the offer. Thus some lawyers, consultants,
market researchers and airlines, etc., can charge a higher fee than others.
 Services are intangible and therefore do not have a legal case for patenting their concept,
innovations, designs, formats or processes. Therefore, brand name can give services legal
protection against imitation. Amazon.com, “planet earth’s largest bookstore” was
controversially given a patent in 2002 for its “one-click” purchase process technology.
 The service marketer can segment markets through branding.
Example: Future Group has Pantaloons, for the upper segment, Big Bazaar discount store for the
large mid segment. The Wheels-Rent-A-Car group of the Bhorukas have Transport Corporation
of India (TCI) for their trucking logistics, Gati/DTDC for courier and cargo business and Assam
Bengal Corporation (ABC), for large containers and cargo and Ritco Travels handling customers
with travel needs.

 Retain larger number of customers for repeat consumption. This will generate more profits
and enable usages in promotions.
 Ensuring a less risky springboard for new product launches through brand extensions. The
brand link communicates in advance to the market about the similar attributes and promise
of the new offer. Example, HDFC, ICICI, UTI, SBI and IDBI chose to flaunt their names
in respect of new financial ventures like retail banking, general and life insurance, mutual
funds and securities,

Brand Name Policies and Decisions

There are three levels of branding policies for service firms:

Corporate/company branding: The service firm’s name is promoted and built, followed by the
individual product names. But more often than not, the corporate name is stressed for legitimacy.

Example: State Bank is the only brand name that customers know and recall about the financial
institution, although they might be considering their “Teacher Plus” Home Loan Scheme. All
products are subservient or insignificant to it.

The Sahara group is the prominent brand, with other products and business line taking a secondary
cue: Sahara Air (airline), Sahara Manoranjan (TV channel), Sahara Finance, etc.

Family branding: A very strong brand name either of the firm or one product is built and then
multiple brands ride along with it. The benefits are simply, instant recognition and low cost in
development. There can be blanket family brands ñ one brand name for all offers ñ as well as

72 | P a g e
separate family names for all offers under similar product lines. Example: The Star TV Group has
a bouquet of channels with the family branding of “Star”: Star News, Star Plus, Star Sports, Star
Movies, Star World, Star Gold, etc. Individual Brands: Each product of the firm has a unique and
distinctive brand name and there could be multiple products in a product line.

Example: In addition to watch retailing “The World of Titan”, Tatas ventured into the highly
successful jewellery retailing Tanishq.

Brand Development for Existing Service Products

There are many ways in which existing service products can be developed:

Brand Extension: An existing brand can be used as the vehicle for introducing new or modified
products. It can work even for corporate branding.

Example: HDFC, HDFC Bank, HDFC Standard Life Insurance Company, HDFC Chubb General
Insurance Company, HDFC Mutual Funds, HDFC Securities, etc.

Multi-branding: In a fragmented market, a service marketer can introduce multiple brands to

sweep as much of market share as possible. If not, then business would have gone to competing
brands anyway.

Example: Five star hotels like Oberois and Taj have launched three star hotel chains to cater to the
growing middle segment. Internationally, Marriott launched its budget hotels brand Fairfield Inns
while Ramada hotels used Roadway for similar purpose. Retailers have used multi-branding to
widen their customer base.

Example: Shoppers’ Stop acquired book retailer Crossword while Pantaloons has Food Bazaar and
Big Bazaar.

Cannibalization: This retrograde development takes place when due to multi-branding; one brand
eats into the current and potential market of another of the same service firm.

Example: Citibank had its own credit and debit cards. After it acquired Diners Club, there was
perceptive cannibalization.

Up-market Pantaloons would have had the effects of cannibalization after introducing discount
store chain Big Bazaar, especially if they were in the same mall premises as Phoenix High Street,
Lower Parel, Mumbai.

Co-branding: Different brands can be bundled together as a form of additional benefits and
promotions. Car dealers are co-branding their sales with consumer finance companies; similarly
housing finance companies are riding the waves with many housing developers.

Example: Credit card companies are being co-branded with global franchisers Visa or Master card;
they are also being tied to airlines’ frequent flyer programmes. Co-branding helps service
marketers enter segments not previously targeted by either of them.

73 | P a g e
Private and generic brands: Retailers and franchisees are bringing out their own brands, called
‘private label’ brands. These brands are giving distinctiveness to the retailers and the franchisees
and preventing customers from comparing the brands.

Example: Some retailers, like Tata Retail Enterprise’s (Trent’s) Westside, have made a virtue of
having only store brands. Internationally, Gap was a retailer in the sixties and the seventies of only
Levi’s denim wares. In the eighties it went into the development of its store brands and now has
only its own brand, Gap. Generic brands or simply no brands in services existed in service repair
of home appliances, assembly of computers and air conditioners, single tutor coaching classes or
single personnel counselling, etc.

Service Brand Building

The following steps should help a marketer build service brands:

 The basic values of the service company should be clearly enunciated and then the
corporate brand can be developed. Thus the strong corporate brand name of SBI, ICICI
bank or HDFC ensures that the respective service products have images of quality and
values – only because the respective firms first clearly enunciated their basic values.
 While brand managers are responsible for the development of corporate and service brand,
in services everyone including the providers and the top company personnel should live
through and believe in the brand’s promise and proposition. Cynicism on the brand will
kill any development chance. This happened with all public sector undertaking brands,
especially airlines, banks and insurance. The managers and the providers were themselves
disparaging their own company offers and proposition.
 The company should clearly define the essence of the brand that is to be delivered during
service transaction. There should be the identified core services as well as the uniquely
differentiating supplementary services that are facilitating in nature. Thus, for a travel
agent, core services would constitute booking the ticket and getting the travel documents
like passports and visa made, supplementary or facilitating services would be telephonic
intimation, home delivery, travel information as well as destination information, etc.
 At every moments of truth (MOT) occasion, like events, service interaction, seminar, news,
press conference, e-mail, person-to-person contact, etc., the service firm should ensure
positive customer experience.
 The brand value proposition should always be the main plank for the firm’s strategy,
operations, service delivery and product development.
 The firm should correctly measure the effectiveness of the brand building exercises. The
old method was to measure awareness, recognition and recall. But other methods like
measuring value perception of the customer, customer satisfaction, customer share of the
wallet, customer retention and customer advocacy or referrals are more effective
measurements of service brands.

74 | P a g e
New Service Development

In light of the discussion on service product, if a new service offer is to be developed, then the
following five steps should be systematically followed in a sequence, as shown in table 9.1

The first step in developing a new service offering is to assess the customer benefits. It is said that
people don’t buy products because of their attributes, rather they buy their benefits. Therefore, it
is important to identify what benefits the prospective customer would seek from your service offer.
Proper market research and available appropriate information should provide the necessary
knowledge of what qualities customers expect so that the corresponding features are taken care of
in the service package.

Thereafter, the service organization should develop the service concept. Consumer benefits have
to be translated into core, facilitating and support services with a view to defining what general
benefits the service organization would offer to its customers.

The third stage is that of developing the augmented service offer. Obviously the service production
and service delivery system are to be developed so that the service package is not only made
accessible but the customer is also involved in the delivery process itself.

Careful planning at this stage is essential because if the right service in the right form and in the
right quality and quantity is not delivered, the entire customer oriented plan would collapse.
Therefore, the delivery of the service offer is an inseparable part of development of any service
offer.

75 | P a g e
Lastly, the appropriate market communication strategy should be prepared and its implementation
plan should be defined not only to inform and persuade the customers but also to enhance the
desired image.

Service Operations

Though service operation includes the entire service process, the major concern is the service
delivery. Customers tend to perceive the service delivery system as part of the service itself. The
pedagogy (teaching methodology, which can include plain lectures, group works, assignments,
case analysis, projects, business models, role plays, experiential exercises, book reviews, cinema
analysis, etc.) of a professor of marketing in a business school is perceived by the customers
(students) to be a part of the service itself. This makes operational management decisions crucial
to the success of marketing of services. This implies continuous coordination of marketing and
operations personnel.

All the work of a bank can be described in the form of a process. They involve activities,
procedures, schedules, tasks and mechanisms of service delivery. It includes policy decisions of
the scope and scale of customer involvement and employee discretion. For a service marketer,
concentrating on the process part to measure quality for a service marketer is important due to the
intangibility factor.

A service organization’s decision-making process is also part of the service delivery process and
is actually the precursor to all processes. Given below are the service delivery processes of a
management college and its student acquisition

76 | P a g e
Role of Blueprints
Blueprint maps the entire service delivery process. To facilitate maximum satisfaction to the
customers, more inputs were added to the service delivery. Service evolved from very simple steps
to complex processes, and there arose a need for the marketer to get a ‘bird’s eye view’ of the
whole process. Blueprinting is flowcharting of a service operation. This methodology was devised
by Lyn Shostack in 1984, to help out new service firms in mapping the sequences before the
beginning of service delivery or any encounter. This would help the service manager in identifying
areas of potential failures, and weak service delivery points — and identify solutions to overcome
them.
This would prevent the manager from learning by costly trial and error. It (blueprinting) also
enables marketing managers to understand the parts of the operating system that are visible to the
consumer and hence parts of the servuction system.

In the servuction system, it is very difficult to identify components of an individual firm. Worse,
firms underestimate the sensitivity of points of contact.

Example: Many banks, schools, travel agencies fail to understand the importance of the first
enquiry telephone call. If the telephone rings for too long, without any response, the potential
customer has already formed an opinion of an uncaring organization.

If the first encounter itself is not pleasant, the customer is not going to come back. Service firms
are now starting to realize the importance of the first call and its potential for generating revenues.
They are setting up ’24 × 7 × 365' call centres to be manned by efficient and alert call handlers.
The providers are adequately enabled by training, and computer facilities for all enquiry data
access and customer and product details. The service providers are trained to pick up the phone on
the first ring.
Service flowcharts allow managers to better understand servuction processes. Designing the
process becomes the key to product design. In the design stage, it is ensured that the visible part
of operations is supported by invisible processes. Flowcharts seek to identify the following:

 The time it takes to move from one process to another;

 The costs involved with each process step;
 The amount of inventory build-up at each process step;
 The bottlenecks in the system.
A customer blueprint has three core elements:

 Identification of all those functions that is essential to deliver a service along with the
appropriate personnel with requisite responsibility, authority and accountability.
 The relationships amongst different functions of service components are explained by
graphics and charts. The relationship is based on time and sequence with each other. For a

77 | P a g e
 hotel, the sequence of housekeeping in relation to reception and registration has to be
elaborated with a specific time interval.
 Setting up of standards for each function with tolerance levels and variance from standards.
These tolerances for variance should not adversely affect the service quality adversely.

Benefits of Blueprinting
The objective of blueprinting is to show how information, assets and customers are processed. To
put all of them in a blueprint is to imply that they are elements of uncertainty.
The following are the benefits of blueprinting a service process:

 Through blueprinting, marketing and operations personnel are able to communicate with
each other on paper before they do so in real time.
 It provides a check on logical flow of the whole process.
 Bottlenecks represent points in a system where the consumer waits the longest. This
identification would help the service manager understand the reasons for the delay and
come out with solutions.
 Balanced Production Line: This implies that process times and inventories of all steps are
the same. If not, the consumer never waits for the next process. This implies for the service
manager that there will be incomplete service experience.
 It is an effective tool for managers to recognize the benefits of a changing system to process
consumers more effectively.
 It helps the marketer to set target times initially based on consumers’ expected level of
service.

Operations Blueprint
There are alternative ways to develop service blueprints. Instead of going by the service manager’s
own experience and knowledge of service delivery, an alternative way to develop a blueprint
would be to start from consumer scripts. This is a process where consumers are allowed to describe
the process they follow while using the service. Their usage becomes the guideline for
blueprinting.
There are two types of Blueprint:

1. One-sided Blueprint: These are unbalanced blueprints based on management’s perception

of how a sequence of events should occur. This is the beginning of marketing myopia.
Sincerity of efforts on the part of the management is no substitute to effectiveness. An
example of an employee blueprint is given in figure 9.5, overnight stay in the hotel.
Employee scripts are equally important in identifying parts not observable to consumer.

78 | P a g e
2. Two-sided Blueprint: This considers both employee and customer perceptions of how events
occur. Consumers are asked to pay special attention to contact activities of service encounters.
The blueprinting process is undertaken with scripts. There are some norms for the scripts which
are attempts to group events and order them in the sequence of occurrence.
Thus there are two types of scripts:

1. Convergent Scripts: Employee/consumer scripts that are mutually agreeable and enhance
consumer satisfaction.
2. Divergent Scripts: Scripts that mismatch and point to areas in which expectations are not
met.

Process can be changed from the simple to complex and vice versa or in terms of divergence. A
new positioning can be made or the old one can be reinforced in the following four ways:

 Reduced Divergence: Cost reduction, product improvement and simpler distribution are
some of the ways this can be done. There is an opportunity to produce more uniform quality
while there can be the perception of limited choices (similar to a mass marketer). Indian
Railways tend to follow this strategy as also most air-freight companies.
 Increased Divergence: Greater customization, more flexibility and therefore higher price.
Focus marketing or niche positioning can be attempted.

Example: Tour package operators like Kuoni/SOTC have attempted this strategy successfully.
They have had tour groups for school children with their class teachers as a mandatory part of the
group.

 Reduced Complexity: This is specialization where there are minimal steps and processes.
Notes Charter flight operators like UVI Holidays resort to this positioning. Whitewater
rafters like Wanderlust are also following this strategy.

79 | P a g e
  Increased Complexity: This strategy is used for market penetration by adding more
services. Supermarkets, retail banks, etc., tend to opt for this strategy.

Synthesis

 The offer can be both a good as well as a service. The offer can be a good or a service or a
combination of both.
 Theodore Levitt explained that a product was now no longer an isolated goods offering. It
now was a combination of three products: core product, the formal product and the
augmented product.
 The service firm should be in a position to offer a wide range of products. This will enable
them to get more customers and satisfy their wide-ranging needs. The wider range would
also enable the firm to be more competitive.
 A Service Product Line can be explained as a group of closely related offers, targeted at
the same type of customers, having the same end use.
 In the introduction stage, the service firm would be incurring heavy expenditure, without
any surge of revenue, only for building up awareness through different types of promotions.
In growth stage, there will be a surge in demand for the service offer when customers make
repeat purchases and potential customers come in due to recommendations made by the
formers.
 Sales at the maturity stage flatten and slow down. Most possible product benefits are
usually developed and the market has reached the dreaded point of saturation. In the decline
stage, there is a downturn in revenues, customer acquisition and retention.
 In maturity, the marketer concentrates on maximizing profits, mostly seeks differentiation,
offers wider range of products and concentrates on building relationships and long-term
commitments with the customers.
 To differentiate the offerings from the rest and giving them unique identities to make them
distinguishable, the marketer resorts to the creation of brands.
 Branding a service, helps marketers in charging a premium from the consumers and
effectively segmenting the market through different brands.
 The new product development process includes these steps: idea generation, idea
screening, business analysis, product development and testing, test marketing and
commercialization.
 Though service operation includes the entire service process, the major concern is the
service delivery. Customers tend to perceive the service delivery system as part of the
service itself.
 A service organization’s decision-making process is also part of the service delivery
process and is actually the precursor to all processes.

80 | P a g e
  Blueprint maps the entire service delivery process. To facilitate maximum satisfaction to
the customers, more inputs were added to the service delivery. Service evolved from very
simple steps to complex processes, and there arose a need for the marketer to get a “bird’s
eye view” of the whole process.
 There are alternative ways to develop service blueprints. Instead of going by the service
manager’s own experience and knowledge of service delivery, an alternative way to
develop a blueprint would be to start from consumer scripts

81 | P a g e
 CHAPTER 8
PRICING OF SERVICES

Objectives:
After completing the module, the students are expected to:
1. Describe the concept of price and value in services
2. State the objectives of pricing
3. Discuss various pricing approaches
4. Identify various pricing strategies

Introduction
You must have heard a famous line that says, “nothing in this world is free”. You have to pay a
“price” to buy products and services. Price is one of the most critical elements of the marketing
mix for services - both for profit as well as not-for-profit firms. It is the only marketing mix
variable which generates revenue; all others ñ product, promotion and place/distribution-are cost
drivers.

Pricing is also one of the tactical tools least understood by the marketer. It is the most flexible of
all marketing tools (mixes), and can be changed even at the retail level. Pricing decisions have far
reaching implications for the organizations’ profits, market share, sales and social appeal.

Pricing in case of services is more difficult than in case of products. If you were a restaurant owner,
you can charge people only for the food that you are serving. But then who will pay for the nice
ambience you have built up for your customers? Who will pay for the band you have for music?
Thus, these elements have to be taken into consideration while deciding the prices of your food.
In this unit, we will do a detailed study of the pricing strategies of services.

Concept of Value and Price in Services

Price is what customers are willing to pay for services. How much a customer has to pay depends
on the value he perceives in the service offer. The payment can be in many forms - money, barter,
or return services. Price can be simply explained, thus:
Price = quantity of money received by service provider/quantity of service received by the buyer
Price is a component of value. Most of us refer to price as value but they are not the same.

The consumer’s perception of product quality changes with variations in price. The consumer
makes a straight-cut analogy: high price = high quality. This “black box” effect becomes a boon
for services as its intangibility prevents consumers from evaluating the offer correctly. Price
becomes very communicative and gives a convincing indication of quality. People have no other

82 | P a g e
way of convincing themselves of the quality of restaurants or a hospital except by the price. That
is how Nordstrom, the famous Seattle-based retailer, could differentiate itself from others by
offering high-end services and could successfully position itself as an up-market value added.

Did you know? Stella Artois, which makes premium lager beer, slogans its high price as a virtue:
“Reassuringly expensive”.

Value is the ratio of perceived benefits of the service to be purchased to price and other added
costs. Travelling time, hassles, energy costs, and psychic costs are some examples of added costs.

The customer has to endure monetary and other costs for the service. Guarantees, warranties, home
delivery, quality, brands et al are examples of value as they are indicative of potential benefits in
an offer. In sum, the benefits are product value, service value, personnel value and image value.

 Product Value: The worth assigned to the product by the customer.

Example: A customer might choose a Philips DVD because of superior features and technology.

 Service Value: The worth assigned to the service by the customer. The customer chose
Philips for its guarantees, warranties, large distribution networks, retail outlets and service
centres.
 Personnel Value: The worth assigned to the service-providing personnel by the customer.
The customer bought it from a Philips showroom because of the personnelís superior
product knowledge and customer-orientation.
 Image Value: The worth assigned to the image of the service or the service provider by
the customer. The customer chose Philips because of the name association with quality,
innovation, etc.
 Monetary Price: The actual rupee price paid by the consumer for a product; in the above
example, for the Philips DVD.
 Time Costs: The time the customer has to spend to acquire the service. For the customer
who wanted to buy the DVD, this would include travelling time, product inquiry at various
retail outlets, clarification, demonstration, sales and payment time at the Philips showroom
as well as installation of the DVD.
 Energy Costs: The physical energy spent by the customer to acquire the service. To
purchase the DVD, the customer would have had to endure travelling hassles, shopping
inconvenience, by himself or with the family, etc.
 Psychic Costs: The mental energy spent by the customer to acquire the service, that is,
worrying and aggravation. The customer would have suffered anxiety during the selection,
delivery and installation of the DVD, especially if there were hassles. The last could
happen, for instance, if the wall paint is scratched/scraped and furniture damaged during
installation.

83 | P a g e
Uses and Objectives of Pricing

The importance of pricing to the development of marketing strategy is reflected in the diverse
range of strategic uses to which it is put:

 At the beginning of the life of a new service, price is often used to gain entry to a new
market.

Example: A firm of estate agents seeking to extend its operations to a new region may offer
initially very low commission rates in order to build volume in that market.

 Price is used as a means of maintaining the market share of a service during its life and is
used tactically to defend its position against competitors.
 Ultimately, for organizations working to financial objectives, prices must be set at a level
that allows them to meet their financial objectives.

Organizational Objectives through Pricing

Profit or Income Related Objectives
a) To Achieve a Targeted Return on Investment (ROI): Many service firms work on a
target return on sales or on its investments as an objective. Thus, if Crossword, the book
retailer, works on a 25 per cent return on sales, they would appropriately add an amount
called mark-up to its cost of the book. The mark-up would cover most of its anticipated
costs as well as make provision for profit. Targeted return on investment is taken by a firm
with respect to its assets and liabilities, that is, its net worth. The industry leader mostly
does this - as their pricing can be independent of competition.

Example: HDFC, the leading housing financier, can price its services to earn a net profit
that is 20 per cent of its net worth.

b) To maximize profit: Service firms require profit in order to enable them to pay dividend
to its investors, pay rent and other utility bills, pay salaries and wages to its staff and also
invest in new technologies and other expansion plans. But to maximize profits, the service
firm requires data on its segments, possible sale in each segment at different prices, as also
estimates of fixed and variable costs.

With these available data, it would be easy for Container Corporation of India (CONCOR) to
calculate the combination of price and revenue that generates the highest profits. But those
firms which do not have such developed marketing systems like Management Information
System (MIS), Marketing Research, Estimation and forecasting methods as well as Test
marketing would not know their demand curves - and thus may not be able to pursue profit
maximization.

84 | P a g e
 Volume or Sales Related Objectives
(a) To increase sales volume: A service firm pursues this pricing objective to grow rapidly
(market penetration) and/or to discourage new entrant competition. The goal is usually
described as a percentage increase in volume sales over a certain period of years. To
achieve this, the service marketer could either discount the price or have an innovative
pricing strategy. Example: Sahara Air recently tried innovative pricing; Reliance
Infocommís entry-level ìDhirubhai Ambani Pioneer Offerî and then ìMonsoon
Hungamaî pricing for its wireless in local loop (WiLL) mobile services are classic
examples of such pricing objectives and strategy.

(b) To maintain or increase market share: The market share of a firm is indicative of its
market position. Any slippage in market share will not only reduce revenues but would
also be a public relations disaster. Market share can fall due to aggressive competition
(better-priced rival products, better substitutes) or external factors like currency
devaluation. The latter might make imports cheaper and exports expensive. Falling
market share would make capacity utilization impossible and increase idle cost. A hotel
which loses market share will suffer such losses - apart from loss of prestige.

Status-quo Oriented Objectives

Prices are set only to maintain the firm’s previous position – “The most passive of all pricing
goals.” The firm really seeks to avoid a price war.
(a) Competition rendezvous: Service firms that enter a market late - like most private insurance
companies in India - try to set a price as prevalent in the market. The main objective is to make
an entry in the market than to make a profit. Often, the new entrant safely brackets himself to
a successful firm to get the same positioning and image without going through the hassles of
complex decision making models. For example, a new B-school might structure its fees on
similar lines as the competition.
(b) Price stabilization: Here a service firm tends to “follow the leader” when setting its prices.
The main objective is not to start a price war, which would be harmful to all the players.

Society Oriented Objectives

Certain service firms set prices not for profit, sales or beating the competition. Their objective is
social responsibility or responsibility to the customer. They might actually make losses but the
objective is the general benefit of society at large. Most metro railway ticket prices, public library
memberships and postal services follow societal pricing goals.

Example: The Indian Postal Service might actually incur a net cost of ` 4.00 for a postcard but
price it at one rupee. Most Non-Governmental Organizations (NGOs) price their offerings, like
greeting cards, toys, wall hangings, etc., high with the objective of transferring their surplus for
the service of social causes

85 | P a g e
Framework for Pricing Decisions in Services
The service marketer has to make his pricing decisions after obtaining in-depth knowledge of his
firm’s costs, competitive strategies, government policy, the prevailing and potential demand and
most important, his corporate objective.

 Customer Demand: Price elasticity of demand for offers has to be analyzed by the
marketer. As mentioned before, services have inelastic demand; for goods this analysis is
important - for forecasting, estimation, inventory management. The marketer has to
consider the following factors which imply price elasticity of demand to be low:
- Non-availability of competitive products and substitutes will keep demand
unchanged even if prices are increased.
- Price-quality perception.
- Customer is resistant to change or to adopt new shopping behaviour.
- Customers do not notice higher prices anyway if they are of higher income group
or have urgency in service consumption - like an immediate surgery.
 A service marketer’s cost structure - fixed, variable, direct and indirect components, as
also their long-term impacts.
 Corporate objective of a service marketer could be a premium player (foreign banks like
American Express), a mass/social service provider (State Bank of India and Indian Postal
Service), a market skimmer, or to achieve market penetration, etc.
 Government policy will include taxation, excise, export and import duties, etc., all of
which would greatly affect price.
 Competitor reactions whether they are from market leaders or bit players, will greatly
affect price.
 Entry and exit barriers in the industry will affect price.

Pricing Approaches

It is important for a service management student to know the difference between price and pricing.
While pricing is strategic, an activity under taken by the top management to decide the way
revenue would come, price is tactical, a one-time decision affecting the whole organization over a
period of time. Price is the end result of pricing, which ends in a figure printed on the price-tag or
label. It is through price (apart from the other elements of the marketing mix) that the firm would
generate revenue, while pricing is a process leading to policy, on the basis of which prices of
products are finalized.

There are four important bases for price determination:

1. What it costs to produce a service.

2. The amount that consumers are willing to pay for it.
3. The price that competitors are charging.

86 | P a g e
 4. The constraints on pricing that are imposed by government and/or regulatory bodies.

Cost as a Basis for Pricing

Simply put, in this method of pricing, the service marketer adds up all his costs, adds his profit
margin and the result is the price. The skill required of the service marketer is the ability to identify
and measure the different types of costs: direct, indirect, fixed and variable, etc. If the marketer
makes any error in identification or measurement of a particular type of cost input, then it is going
to affect his profitability - and he may not even know about it. Worse, he may not know which
service component is contributing to profits and which is not.
The cost structure of a service firm can be explained thus:

The total cost of producing a service can be divided into costs which are variable and those that
are fixed. Variable costs increase as service production increases; fixed costs do not change even
if an additional unit of service is produced. Fixed costs therefore cannot be attributed to any
particular unit of output.
In spite of many disadvantages, there are many reasons why “cost-plus” type pricing methods are
so widely used in the service sector:

 Essentially a simple model to follow in pricing decisions, it can be adopted by

entrepreneurs, small-scale service providers like restaurant-owners and leisure and
tourism-oriented professionals like travel agents, tour-operators, etc.
 Prices are easy to calculate and especially in services, where the offer has to be tailored to
the individual needs of customers, it is easier to empower price decisions for services.
 The predictive nature of the method helps the service marketer to better plan his resources
and potential. He does not have too many variables affecting his plan outlay and therefore
can look forward to realistic forecasts. With cost-oriented pricing method, the service
marketer, like a travel agent, has a better knowledge of his earnings and expenditures.
 Cost-based pricing is adopted when the precise nature of the service that will actually be
provided is not known at the outset or its details and components, etc., are unknown.

Example: Arranging for a conference or an event to bring doctors and surgeons for a
pharmaceutical company. In this case, an agreement is made that the final price will be based in
some way on costs.

 A service provider is allowed by many professional associations to increase prices beyond

those originally agreed in his estimate - on the basis of the actual costs incurred.

Measured against these advantages, there are many problems for a service marketer to price his
services on the basis of historical costs:

87 | P a g e
  Cost-based pricing does not take into account competition that a service might face at any
given time. Neither does it take into account that some customers may value the same
service more highly than others.
 It is sometimes more difficult to calculate costs in service than for goods ñ mainly due to
the intangibility factor. The structure of costs facing many service businesses is typically
different from goods.
 It is easier to determine costs for previous accounting periods (historical) than to forecast
what these costs will be in the future (predictive).
Cost-based pricing can be of two types:

 Full cost or mark-up pricing

 Marginal Cost or Contribution pricing

Full Cost or Mark-up Pricing

Here prices are based on total or full cost plus the desired profit. Retailers would call this desired
profit as mark-up. The break-even analysis is a variation of this method. As elaborated before, it
does not take into account different types of costs. These costs, in addition, are affected by changes
in the volume of output or the type of output. Full cost pricing ignores consumer demand.

Marginal Cost Pricing

A special kind of cost-based pricing occurs when service firms choose not to include their fixed
costs.

Example: A student in a computer training school during the exam seasons, a customer in a Goa
hotel during the monsoon, a visitor to Essel World theme park during the rainy season or a diner
in a restaurant is charged not on the basis of total unit cost of producing the offer, but only the
additional costs which result directly from servicing that additional customer.

This is normally used when most of the service firm’s output has been sold at a full price that has
recovered its fixed costs - but in order to keep its workforce engaged during the slack season, the
firm reduces its price. In this way it manages to cover its variable costs.

Those service industries with low short-term supply elasticity and high fixed costs, like BPOs, use
marginal cost pricing extensively.

Competitor-based Pricing
This pricing is based on what the competitor is offering. A service firm uses this method to make
an entry in the market, finding an appropriate price bracket for its service offer - without having
to go through a trial and error process - by pegging itself to the competition. The service marketer
needs to be astute enough to recognize who his competition is. The competition could be from

88 | P a g e
firms offering the same services fulfilling similar needs (direct competition - State Bank of India
versus Canara Bank), different services fulfilling similar needs (substitute competition - a
restaurant versus movie theatre versus discotheque) or similar services fulfilling different needs
(indirect competition - a theme park like Essel world catering to tourists, lovers, recreationists,
shoppers etc.)

Going Rate Pricing: This is used in those services where cost levels are difficult to establish, and
a going rate is preferred. Example: In one street a cluster of restaurants (‘Khau gali’ and
‘Chowpatty’ in Mumbai, ‘Chhappan Dookaan’ and ëSarafaí in Indore, ‘Paranthe wala Gali’ in
Delhi, etc.) serve basically the same fare at the same prices. The same is true for apparel stores,
electronics or books in one street (‘Fashion Street’ and ‘Heera Panna’ in Mumbai). Charging a
going rate is an easy way to avoid calculation of costs.

Sealed-bid pricing: This is the system of tenders and quotations where bids are received from
service providers. Thus housekeeping, restaurant and canteen contracts, security services, fleet
operations, etc., are usually awarded on the basis of predetermined specification fulfilment and
their offer price. The appropriate price and therefore the provider are chosen.

Pricing below the Competition

Here, the new entrant service provider will price his offers below the competition, with the full
intention of increasing his market share at the time of consideration. Thus, an airline that intends
to slash its prices will definitely acquire more customers trading off against profitability. The
danger to this approach is that the service marketer might price himself out of business or might
invite price retaliation. This will increase commoditisation of the service, make customers very
price sensitive and may forever remove concepts of value and brands. The size of the market
actually comes down. Often, cash discounts are offered. Certain service providers, like discount
retailers, base their lower-than-the-competition price on low mark-up, high volume and minimal
service.

Pricing above the Competition

This kind of pricing works only for premium or very distinctive services. If the target market is
class (foreign banks, high-end boutiques like Sheetal, Concorde aircraft flights, up-market
restaurants, etc.) as opposed to mass, then this pricing method works. But if there is a general
recession, then above-the-market pricing is unsustainable.

Demand-based Pricing
This is based on what the customers are prepared to pay. Different customers have different upper-
ceilings on the price that they are willing to pay for a service. The skill required for a service
marketer is a fine knowledge of consumer demand and the consumer’s ability to pay (correct
identification of the early adopters, middle-majority and laggards in a market) Price discrimination
logically takes place here

89 | P a g e
The discrimination is carried out on the basis of groups of users, points of use and types of use.

Groups of user discrimination: Here the same service is priced for different groups of users
depending on their ability as well as willingness to pay.

Example: Haj pilgrims are charged lower tariffs when compared to the business or leisure traveller.
Similarly, the Government of Maharashtra has floated a controversial proposal to differentially
price school tuitions based on the parent’s income.
But essentially this pricing is based on fine segmentation and the customer’s willingness to pay.
Thus mobile phone tariffs were unbelievably high (when compared to prevalent rates) when
introduced and targeted first to the innovators and then to the early adopters. Indian Railways offer
lower tariffs to price-sensitive senior citizens; the rationale could also be social, intended for the
pensioners. It is easier to do this kind of discrimination in services than for goods as the customer
cannot resell the lower priced offer to someone else profitably.

Points of use/consumption discrimination: Different prices are charged from different points of
service delivery. This is leveraging the locational advantages of the provider. Thus, retail stores
have different price tags in up-market or posh localities than in suburban locations.

Example: The Indian telecommunication department has different tariff structures for rural areas
and for metros. Hotels located near airports or downtown areas have higher tariffs; the Taj and the
Welcome Group hotels will, in Agra, have different tariffs for those rooms that give an unrestricted
view of the Taj.

Time-of-use discrimination: A service industry is usually open to the vagaries of demand and
seasonal demands, as it cannot be stored and resold later (perishability) and has to be produced
and consumed at the same time (inseparability).

Example: Hotels in Goa would have unoccupied rooms and Essel world will have only romantics
and rain-dancers during the monsoon. Similarly, while the matinee show in a movie theatre will
have vacant seats, the evening shows could be overflowing.

Thus, during peaks, customers will be willing to pay more (notice higher flight tariffs during the
summer holiday season as well as during winter!). Thus also, the telephone and mobile services
companies usually have lower (or even zero tariff between two preset numbers) tariffs during off-
peak periods like 9 p.m. onwards up to 9 a.m.

Pricing Strategies

New Service Pricing Strategy

In developing a price strategy for a new service, two key issues need to be addressed:

 What price position is sought for the service?

 How novel is the service offering?

90 | P a g e
Task: Compare the prices at CafÈ Coffee Day with those at local coffee shops. Prepare a report
to illustrate your findings and analysis.

Price Skimming Strategy

Saturation Pricing Strategy
The success of a saturation pricing strategy is dependent upon a sound understanding of the buying
behaviour of the target market, in particular:

 The level of knowledge, which consumers have about prices.

 The extent to which the service supplier can increase prices on the basis of perceived added
value of the service offering.
 The extent to which the service supplier can turn a casually gained relationship into a long-
term committed relationship

Service Portfolio Pricing

A number of product relationships can be identified as being important for pricing purposes:

 Optional additional services

 Captive services
 Competing services
 Price Bundling

Tactical Pricing
Some of the tactical uses of pricing are analyzed below:

 Tactical pricing can provide short-term competitive advantage.

 Tactical pricing can be used to remove unplanned excess supply.
 Short-term tactical pricing can be used to protect markets against new entrants.
 Discriminatory pricing with respect to time that may have been part of the strategic pricing
plan can be implemented by a number of tactical programmes.
 Similarly, discriminatory pricing with respect to place must be translated from a strategic
plan to a tactical programme.
 For discriminatory pricing between different consumer segments, the problem of turning a
strategy into a tactical programme hinges on the ease with which segments can be isolated
and charged different prices.
 Tactical pricing programmes are used to motivate intermediaries.

Pricing Strategies for Public Sector Services

The pricing of services which by their very nature require a high degree of central planning, but
which are expected to exhibit some degree of marketing orientation, present particular challenges

91 | P a g e
to marketers. It may be difficult or even undesirable to implement a straightforward price- value
relationship with individual service users for a number of reasons:

 External benefits may be generated by a service, which is difficult or impossible for the
service provider to appropriate from individual users.
 The benefits to society at large may be as significant as the benefits received by the
individual who is the immediate recipient.
 Pricing can be actively used as a means of social policy.

Internal Market Pricing

A number of possible solutions to the problem of internal pricing can be identified:

1. If an external market exists, a ‘shadow’ price can be imputed to the transfer, reflecting what
the transaction would have cost if it had been brought in from outside.
a. Where no external market exists, bargaining between divisional managers can take
place, although the final outcome may be a reflection of the relative bargaining
strength of each manager.
b. Corporate management could instruct all divisions to trade on an agreed full cost
pricing basis.
c. A system of dual pricing can be adopted where selling divisions receive a market
price (where this can be identified) while the buying division pays the fullcost of
production. Any difference is transferred to corporate accounts.

2. A proportion of the internal service producer’s fixed costs can be spread over all resource
users as a standing charge, regardless of whether they actually use the services of that unit.
This would enable the internal supplier to compete on price relatively easily, while still
allowing resource users for whom a higher standard of service is worth paying a premium
to buy in their requirements from outside.

Synthesis

 Price is one of the most critical elements of the marketing mix for services - both for profit
as well as not-for-profit firms. It is the only marketing mix variable which generates
revenue.
 Price is what customers are willing to pay for services. How much a customer has to pay
depends on the value he perceives in the service offer. The payment can be in many forms-
money, barter, or return services.
 Value is the ratio of perceived benefits of the service to be purchased to price and other
added costs. Travelling time, hassles, energy costs, and psychic costs are some examples
of added costs.

92 | P a g e
  An organization attempts to achieve a variety of objectives through pricing like profit or
income objectives, volume or sales related objectives, status-quo oriented objectives and
society related objectives.
 The service marketer has to make his pricing decisions after obtaining in-depth knowledge
of his firm’s costs, competitive strategies, government policy, the prevailing and potential
demand and most important, his corporate objective.
 The firm has to consider the consumer demand, cost structure, company objectives,
government policies, competitor policies and entry exit barriers while deciding on the
prices.
 There are four important bases for price determination: What it costs to produce a service,
the amount that consumers are willing to pay for it, the price that competitors are charging
and the constraints on pricing that are imposed by government and/or regulatory bodies.
 In Cost-based method of pricing, the service marketer adds up all his costs, adds his profit
margin and the result is the price. The skill required of the service marketer is the ability
to identify and measure the different types of costs: direct, indirect, fixed and variable, etc.
 There are two approaches to cost-based pricing: full cost or mark-up pricing and marginal
cost pricing.
 Competitor-based pricing is based on what the competitor is offering. A service firm uses
this method to make an entry in the market, finding an appropriate price bracket for its
service offer - without having to go through a trial and error process - by pegging itself to
the competition.
 Demand-based pricing is based on what the customers are prepared to pay. Different
customers have different upper-ceilings on the price that they are willing to pay for a
service

93 | P a g e
 CHAPTER 9
SERVICE STRATEGIES

Objectives
After studying this unit, you will be able to:

 Discuss the competitive marketing strategy of service firms

 Know some service recovery strategies
 Realise how service firms manage demand, supply and productivity
 Know how waiting lines can be managed

Introduction
The service firm has some major issues which are to be tackled by the management and the
marketers. Due to the intangibility of services it is very difficult to make a competitive strategy for
the services. Different people attach different attributes to a service and evaluate the service
differently. Due to the variability factor, the services can’t be standardized which makes it even
more difficult to decide on one strategy. A service marketer should always keep in mind the
requirements of the customers while deciding on any single strategy because the requirements of
every single customer vary.

It is also very important and difficult to manage the demand and supply constraints. Demand is a
variable which depends on a variety of factors and service firm has this challenge of matching its
capacity to demand. They sometimes also try to influence the demand variable to match their own
capacity. With low capacity and high demand also comes, the problem of waiting lines. This is
one area where the service firm loses most of its customers. Customers hate to wait in lines. Now
with the availability of many options and substitutes, customers have become more impatient.
Managing waiting lines is also a big challenge for the service firms. In this unit, you will learn the
competitive service strategies, recovery strategies, how demand, supply, productivity and waiting
lines are managed

Competitive Marketing Strategy

A service firm with multiple goods and service offers needs to make separate strategic plans for
each business proposition and each market in which it competes.

Example: HDFC the home finance will have different strategic plans when compared to the retail
banking strategies of HDFC that has now merged with its parent company, HDFC Bank or its
insurance ventures HDFC Standard Life and HDFC Chubb.

Then there would be requirement of strategic plans for different functions like marketing, human
resource, finance etc. Thus HDFC Group (which includes home finance, retail bank, life and
general insurance) or the ICICI Group (which includes the universal bank with all its different

94 | P a g e
divisions of institutional, retail, home and consumer finance, etc., life and general insurance,
informational technology, etc.) can have strategic plans at three levels:

1. Corporate level strategic planning: The service organization has a clutch of SBUs, and the
planning affects the fortunes of all of them. The focus is to integrate the strategies of the individual
SBUs to conform to the group’s goals.

Example: Ratan Tata and his board of directors at Tata Sons makes the decision that the Tata
Group would focus on infrastructure, steel, automobiles, telecommunication, information
technology, hospitality, tea and chemicals. The decision to exit from FMCG (TOMCO, Lakme),
liquor and office products (Forbes, Forbes & Campbell) etc., were made at this level.

2. Business-unit level strategic planning: Decisions that affect an individual SBU as a whole are
taken at this level. Thus, the decision for Taj Hotels, if ever so taken, to grow by acquisition and
not just by organic means will be taken at this level.
3. Functional-level strategic planning: This will affect the different functions of an SBU.
There are some models which are often used for making marketing strategy. We will discuss them
one by one in subsequent subsections.

Marketing Strategy at Functional Level

Strategy for a marketer would imply a plan of action that is the prerogative of top marketing
management, is usually long term and comprehensive in concept, and affects the whole
organization and the firmís whole market. It consists of the following activities:

 Conduct a situation analysis

 Develop marketing objectives
 Select target markets, after appropriate segmentation and measure market demand
 Determine positioning and differential advantage(s)
 Design strategic marketing mix(es)
Situation analysis consists of the following sequential steps:

1. Analyze and evaluate the past marketing plans and forecast the probable future impact on
them. This will serve as a guiding tool for revision of the plans and save the firm from
reinventing the wheel” and avoid such traps as “change for change’s sake”. But appropriate
introspection could make firms abandon many ‘holy cows’ concepts and go for fresh and
innovative change of plans.
2. Evaluate the External as well as Internal Environment factors of the service firm. The
external environment includes political, economic, socio-cultural, legal and technological
factors. The internal environmental factors include such marketing resources as quality of
personnel (their skills and experience), consumers and customers of the firm, R&D

95 | P a g e
 capability including the power of information management (knowledge management),
financial health (including access to funds), etc.
3. Analyze the market opportunity available for the service firm. It is a prerequisite for the
service marketer to make an opportunity analysis before venturing into a market. The firm
could be offering a new service product or expanding its existing business into a new area
or market.
Market opportunity for a service firm has two important implications:
 There is a gap between demand and supply
 The existing market is not satisfactorily served by existing players. Market
opportunity identification involves the analysis of the following:
 Size of the market - present and potential
 Marketing strategies of the competition and the depth of their value benefits. This
can be illustrated thus:
Benefit that a customer derives from the consumption of the offer
Price that he pays for it
 Marketing programmes required to successfully penetrate the desired market
 Identifying the key success factors in the service industry and aligning them with
the service firm’s strengths and weaknesses.
4 Analyze the previous marketing strategies used to target the customer groups and the key
indicators of performances or the Key Result Areas (KRAs). Peter F. Drucker identified
eight KRAs:
 Market Share
 Innovation
 Productivity
 Physical and Financial Resources
 Profitability
 Manager Performance and Development
 Employee Performance and Attitude
 Social Responsibility
5. Perform a SWOT assessment by identifying and evaluating the service firm ’s areas of
strengths to leverage on, overcome or dilute its weaknesses, seize the opportunities and
avoid threats or find ways and means to meet challenges. Strengths and weaknesses are
internal component of a service organization’s process, pointing at its capabilities and

96 | P a g e
competencies.

97 | P a g e