How Important is the Service Sector in

Our Economy?

Chapter 1
§In most countries, services add more economic value than
agriculture, raw materials and manufacturing combined

Overview of Services marketing §Service organizations can be any size—from huge global
corporations to local small businesses
§Most activities by government agencies and nonprofit
organizations involve services

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Services dominate the United States Economy:

GDP by Industry

Agriculture, Forestry,
Mining, Construction 8%
Finance, Insurance,
Real Estate
Manufacturing 14% 20%

Government Wholesale and

(mostly services) Retail Trade
13% 16%

Other Services 11% Transport, Utilities,

SERVICES Communications
8%
Business Health
Services 6%
5%
Source: Bureau of Economic Analysis, November 2002

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 How Important is the Service Sector in Changing Structure of Employment
Our Economy? as Economic Development Evolves

§ In developed economies, employment is dominated by service

jobs and most new job growth comes from services
Agriculture
§ Jobs range from high-paid professionals and technicians to
minimum-wage positions
Services

Industry

Time, per Capita Income

Source: IMF, 1997

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Factors stimulating the transformation of the service economy Internal Services

§ Government Policies (e.g., regulations, trade agreements)

§ Social Changes (e.g., affluence, lack of time, desire for § Service elements within an organization that facilitate creation
experiences) of--or add value to--its final output
§ Business Trends
Ø Manufacturers offer service § Includes:
Ø Growth of chains and franchising Ø accounting and payroll administration
Ø Pressures to improve productivity and quality Ø recruitment and training
Ø More strategic alliances Ø legal services
Ø Marketing emphasis by nonprofits Ø transportation
Ø Innovative hiring practices Ø catering and food services
§ Advances in IT (e.g., speed, digitization, wireless, Internet) Ø cleaning and landscaping

§ Internationalization (travel, transnational companies) § Increasingly, these services are being outsourced

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 Defining the Essence of a Service Defining the Essence of a Service

Services are economic activities offered by party to another, most § An act or performance offered by one party to another
commonly employed time-defined performances to bring about § An economic activity that does not result in ownership
desired results in recipients themselves or in objects or other assets
for which purchasers have responsibility. Service customers expect § A process that creates benefits by facilitating a desired change in:
to obtain value from access to labor, professional skills, facilities, Ø customers themselves
networks, systems, and equipment, but do not normally take Ø physical possessions
ownership of any of the physical elements involved. Ø intangible assets

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Molecular model Four Categories of Services

Employing Different Underlying Processes (Fig. 1.5)

What is the Who or What is the Direct Recipient of the Service?

Nature of the
DIRECTED AT PEOPLE DIRECTED AT POSSESSIONS
Service Act?
TANGIBLE People Processing Possession Processing
ACTS
e.g., airlines, hospitals, e.g., freight, repair, cleaning,
haircutting, restaurants hotels, landscaping, retailing,
fitness centers recycling

INTANGIBLE Mental Stimulus Processing Information Processing

ACTS (directed at intangible assets)

e.g., broadcasting, consulting, e.g., accounting, banking,

education, psychotherapy insurance, legal, research

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 Distinguishing Characteristics of Services

§ Customers do not obtain ownership of services

§ Service products are ephemeral and cannot be inventoried
§ Intangible elements dominate value creation
Marketing Relevant § Greater involvement of customers in production process
Differences Between Goods § Other people may form part of product experience
and Services § Greater variability in operational inputs and outputs
§ Many services are difficult for customers to evaluate
§ Time factor is more important--speed may be key
§ Delivery systems include electronic and physical channels

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Marketing Implications - 1 Marketing Implications - 2

§ No ownership § Services cannot be inventoried after production

Ø Customers obtain temporary rentals, hiring of personnel, or Ø Service performances are ephemeral—transitory, perishable
access to facilities and systems Exception: some information-based output can be recorded in
electronic/printed form and re-used many times
Ø Pricing often based on time
Ø Balancing demand and supply may be vital marketing strategy
Ø Customer choice criteria may differ for renting vs. purchase--
Ø Key to profits: target right segments at right times at right price
may include convenience, quality of personnel
Ø Need to determine whether benefits are perishable or durable
Ø Can’t own people (no slavery!) but can hire expertise and
labor

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 Marketing Implications - 3 Marketing Implications - 4

§ Customers may be involved in production process § Intangible elements dominate value creation
Ø Customer involvement includes self-service and cooperation
Ø Understand value added by labor and expertise of personnel
with service personnel
Ø Effective HR management is critical to achieve service quality
Ø Think of customers in these settings as “partial employees”
Ø Customer behavior and competence can help or hinder Ø Make highly intangible services more “concrete” by creating
productivity, so marketers need to educate/train customers and communicating physical images or metaphors and
Ø Changing the delivery process may affect role played by tangible clues
customers
Ø Design service facilities, equipment, and systems with
customers in mind: user-friendly, convenient
locations/schedules

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Value Added by Tangible vs Intangible Elements in Marketing Implications - 5

Goods and Services

Hi
§ Other people are often part of the service product
Salt Ø Achieve competitive edge through perceived quality of
Soft drinks employees
CD Player
Golf clubs
Ø Ensure job specs and standards for frontline service personnel
New car reflect both marketing and operational criteria
Tailored clothing Ø Recognize that appearance and behavior of other customers
Furniture rental can influence service experience positively or negatively
Fast food restaurant
Plumbing repair Ø Avoid inappropriate mix of customer segments at same time
Office cleaning Ø Manage customer behavior (the customer is not always right!)
Health club
Airline flight
Retail banking
Insurance
Weather forecast
Lo Intangible Elements Hi
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 Marketing Implications - 6 Marketing Implications - 7

§ Greater variability in operational inputs and outputs § Often difficult for customers to evaluate services
Ø Must work hard to control quality and achieve consistency Ø Educate customers to help them make good choices, avoid
risk
Ø Seek to improve productivity through standardization, and by
Ø Tell customers what to expect, what to look for
training both employees and customers
Ø Create trusted brand with reputation for considerate, ethical
Ø Need to have effective service recovery policies in place
behavior
because it is more difficult to shield customers from service
Ø Encourage positive word-of-mouth from satisfied customers
failures

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Marketing Implications - 8

§ Time factor assumes great importance

Ø Offer convenience of extended service hours up to 24/7
Ø Understand customers’ time constraints and priorities
Ø Minimize waiting time
Ø Look for ways to compete on speed
Important Differences Exist
§ Distribution channels take different forms among Services
Ø Tangible activities must be delivered through physical
channels
Ø Use electronic channels to deliver intangible, information-
based elements instantly and expand geographic reach

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 Implications of Service Processes Implications of Service Processes:
(1) Seeking Efficiency May Lower Satisfaction (2) Designing the Service Factory
People-processing services require customers to visit the
Processes determine how services are created/delivered—
“service factory,” so:
process change may affect customer satisfaction
Ø Think of facility as a “stage” for service performance
§ Imposing new processes on customers, especially replacing Ø Design process around customer
people by machines, may cause dissatisfaction
Ø Choose convenient location
§ New processes that improve efficiency by cutting costs may
hurt service quality Ø Create pleasing appearance, avoid unwanted noises, smells
§ Best new processes deliver benefits desired by customers Ø Consider customer needs--info, parking, food, toilets, etc.
Ø Faster
Ø Simpler
Ø More conveniently

§ Customers may need to be educated about new procedures

and how to use them
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Implications of Service Processes: Implications of Service Processes:

(3) Evaluating Alternative Delivery Channels (4) Balancing Demand and Capacity
When capacity to serve is
For possession-processing, mental-stimulus processing, or limited and demand varies
widely, problems arise because
information processing services, alternatives include: service output can’t be stored:

1. Customers come to the service factory 1. If demand is high and exceeds supply, business may be lost
2. Customers come to a retail office 2. If demand is low, productive capacity is wasted

3. Service employees visit customer’s home or workplace Potential solutions:

4. Business is conducted at arm’s length through
- Manage demand
- Manage capacity
- physical channels (e.g., mail, courier service)
- electronic channels (e.g., phone, fax, email, Web site)

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 Implications of Service Processes: Implications of Service Processes:
(5) Applying Information Technology (6) Including People as Part of the Product

All services can benefit from IT, Involvement in service

but mental-stimulus processing delivery often entails
and information-processing contact with other people
services have the most to gain:
§ Remote delivery of information-based services “anywhere, § Managers should be concerned
anytime” about employees’ appearance,
§ New service features through websites, email, and internet (e.g., social skills, technical skills
information, reservations)
§ More opportunities for self-service § Other customers may enhance or
detract from service experience--
§ New types of services need to manage customer
behavior

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Elements of The Services Marketing Mix:

“7Ps” vs. the Traditional “4Ps”

Rethinking the original 4Ps

§ Product elements
The Services § Place and time
§ Promotion and education
Marketing Mix § Price and other user outlays
Adding Three New Elements
§ Physical environment
§ Process
§ People
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 The 7Ps: The 7Ps:
(1) Product Elements (2) Place and Time

All Aspects of Service Performance that Create Value Delivery Decisions: Where, When, and How

§ Core product features—both tangible and intangible elements § Geographic locations served
§ Bundle of supplementary service elements § Service schedules
§ Performance levels relative to competition § Physical channels
§ Benefits delivered to customers (customers don’t buy a hotel § Electronic channels
room, they buy a good night’s sleep) § Customer control and convenience
§ Guarantees § Channel partners/intermediaries

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The 7Ps: The 7Ps:

(3) Promotion and Education (4) Price and Other User Outlays

Informing, Educating, Persuading, and Reminding Customers Marketers Must Recognize that Customer Outlays Involve
§ Marketing communication tools More than the Price Paid to Seller
Ø media elements (print, broadcast, outdoor, retail, Internet, etc.) Traditional Pricing Tasks
Ø personal selling, customer service
Ø sales promotion § Selling price, discounts, premiums
Ø publicity/PR § Margins for intermediaries (if any)
§ Credit terms
§ Imagery and recognition
Ø branding Identify and Minimize Other Costs Incurred by Users
Ø corporate design § Additional monetary costs associated with service usage (e.g., travel to service
location, parking, phone, babysitting,etc.)
§ Content § Time expenditures, especially waiting
Ø information, advice § Unwanted mental and physical effort
Ø persuasive messages
Ø customer education/training
§ Negative sensory experiences

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 The 7Ps: The 7Ps:
(5) Physical Environment (6) Process

Designing the Servicescape and providing tangible

evidence of service performances Method and Sequence in Service Creation and Delivery

§ Create and maintaining physical appearances § Design of activity flows

Ø buildings/landscaping
Ø interior design/furnishings
§ Number and sequence of actions for customers
Ø vehicles/equipment § Providers of value chain components
Ø staff grooming/clothing
Ø sounds and smells § Nature of customer involvement
Ø other tangibles
§ Role of contact personnel
§ Select tangible metaphors for use in marketing communications § Role of technology, degree of automation

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The 7Ps: Managing the 7Ps Requires Collaboration between

(7) People Marketing, Operations, and HR Functions (Fig. 1.7)

Managing the Human Side of the Enterprise

§ The right customer-contact employees performing tasks well Operations
Ø job design
Marketing
Ø recruiting/selection
Management Management
Ø training
Ø motivation Customers
Ø evaluation/rewards
Ø empowerment/teamwork

§ The right customers for the firm’s mission

Ø fit well with product/processes/corporate goals
Ø appreciate benefits and value offered Human Resources
Ø possess (or can be educated to have) needed skills (co-production) Management
Ø firm is able to manage customer behavior

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