LESSON: 1

CONCEPT AND NATURE OF SERVICE

STRUCTURE
1.1 Objectives
1.2 Introduction
1.3 Nature of services
1.4 Classification of service
1.5 Reasons for growth of services
1.6 Role of services in economy
1.7 Summary
1.8 Keywords
1.9 Self-Assessment Questions
1.10 References / Suggested Readings

1.1 OBJECTIVES
After going through this lesson, you will be able:
 To understand the concept, nature and types of services
 To understand the difference between goods and services.
 To understand the role of services in an economy.

1.2 INTRODUCTION
In simple words, services are deeds, processes, and performances. But, the increasing
interest in the services sector has been accompanied by considerable disagreement and
debate as to what constitutes a service and whether service marketing is a distinctive
subject area. In order to develop clarity on service as a concept, it is desirable to look at the
way various researchers and scholars have defined it over the years.

1
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 of 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 intangible yielding satisfactions directly (transportation, housing etc.), or
intangibles yielding satisfactions jointly when purchased either with commodities or other
services (credit, delivery, etc.)”. For the first time services were considered as pure
intangibles - capable of providing satisfaction to the customer and can 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”.

In 1973 Bessom proposed that “for the consumer, services are activities offered for sale
that provide valuable benefits or satisfactions; activities that he cannot perform for himself
or that he chooses not to perform for himself”.

Another definition given by Blois in 1974 says that, “a service is an activity offered for
sale which yields benefits and satisfactions without leading to a physical change in the
form of a good”.

Stanton proposed a definition in 1974 and defined service as “Separately identifiable,

intangible activities which provide want satisfaction when marketed to consumers and/or
industrial users and which are not necessarily tied to the sale of a product or another
service”.
Kotler and Bloom in 1984, defined service 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”.

Gronroos defined a service as “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 systems of the service
provider, which are provided as solution to customer problems”.

We may conclude service as, “an activity or series of activities rather than things which has
some element of intangibility associated with it, which involves some interaction between
the customer and the service provider, and does not result in a transfer of ownership.
Customer has a vital role to play in the production process as the services are provided in
response to the problems of customers as solution. The production of the service may or
may not be closely associated with a physical product”.

1.3 NATURE OF SERVICES

It is utmost important to explore the distinctive features of services, because recognition of
these special characteristics will provide insights for enlightened and innovative
management. One reason for the poor quality of service levels across different service
industries is that managers often tend to solve service marketing problems with tools and
techniques that are essentially meant for tangible products. It happens because of
inadequate understanding about the nature of services. 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 have a number of unique characteristics that
make them different from products.
Some of most commonly accepted characteristics are as follows:

(i) Intangibility: The most basic and universally cited characteristic of services is
intangibility, because services are performances or actions rather than objects, they cannot
be seen, felt, tasted, or touched in the same manner that we can sense tangible goods. For
example, when we buy a cake of soap, we can see, feel, smell and use to check its
effectiveness in cleaning. But, when we pay fees for a semester in the university, we are
paying for the benefits of deriving knowledge, skills and education which is delivered to us
by teachers. Teaching is an intangible service. When we travel by a plane, the benefit
which we are deriving is a service (transportation) but, it has some tangible aspects such as
the particular plane in which we fly and the food and drink which are served.

The broad definition of services implies that intangibility is a key determinant of whether
an offering is or is not a service. While this is true, it is also true that very few products are
purely tangible or purely intangible. Instead, services tend to be more intangible than
manufactured products, and manufactured products tend to be more tangible than services.

The tangibility spectrum shown in Table 1.1 captures this idea.

Intangibility presents several marketing challenges. Services cannot be inventoried, and

therefore fluctuations in demand are often difficult to manage. It cannot be patented
legally, and new service concepts can, therefore, easily be copied by competitors. It cannot
be readily displayed or easily communicated to customers, so quality may be difficult for
consumers to assess. The actual costs of a ‘unit of service’ are hard to determine and the
price/quality relationship is complex.

(ii) Inseparability: In most cases a service cannot be separated from the person or firm
providing it. A service is provided by a person who possesses a particular skill (singer,
doctor, etc.), by using equipment to handle a tangible product (dry cleaning) or by allowing
access to or use of a physical infrastructure (hotel, train, etc.). Services are typically
produced and consumed at the same time. The relationship between production and
consumption, therefore, dictates that production and marketing are highly integrated
processes. The telephone company produces telephone service while the telephone user
consumes it. A plumber has to be physically present to provide the service, the beautician
has to be available to perform the massage. The service provider and the client are often
physically present when consumption takes place.

Generally, most goods are produced first, then sold and consumed. On the other hand,
services are usually sold first and produced and consumed simultaneously. Sasser observed
that the firm is unable to store or transport services, that only direct distribution is possible,
thereby potentially limiting the number of markets that firm can cover. Apart from the
stress laid on ‘right place’ and ‘right time’ in case of distributing goods, there is additional
importance given to the performance of service in the ‘right way’ as well. Another outcome
of simultaneous production and consumption is that service producers find themselves
playing a role as part of the product itself and as an essential ingredient in the service
experience for the consumer.

Since services often are produced and consumed at the same time, mass production is
difficult if not impossible. The quality of service and customer satisfaction will be highly
dependent on actions of employees and the interactions between employees and customers.
It is not usually possible to gain significant economies of scale through centralization.
Usually operations need to be relatively decentralized so that the service can be delivered
directly to the consumer at convenient locations. Since the customer is involved in and
observes the production process, and thus may affect (positively or negatively) the outcome
of the service transaction.

(iii) Heterogeneity: Since services are performances, frequently produced by human

beings, no two services will be precisely alike. The human element is very much involved
in providing and rendering services and this makes standardization a very difficult task to
achieve. The doctor who gives us complete attention in one visit may behave a little
differently in next visit. The new bank clerk who encashes our cheques may not be as
efficient as the previous one and we may have to spend more time for the same activity.
This is despite the fact that rules and procedures have been laid down to reduce the role of
the human element and ensure maximum efficiency. Airlines, banks, hotels, etc. have a
large number of standardized procedures. Human contact is minimal in the computerized
reservation systems, but when we go to the hotel there will be a person at the reception to
hand over the key of the reserved room. The way that person interacts with us will be an
important factor in our overall assessment of the service provided by the hotel. The rooms,
the food, the facilities may be all perfect, but it is the people interacting with us who make
all the difference between a favorable and unfavorable perception of the hotel.
Heterogeneity also results because no two customers are precisely alike; each will have
unique demands or experience the service in a unique way. Thus, the heterogeneity
connected with services is largely the result of human interaction (between and among
employees and customers) and all of the vagaries that accompany it.

Levitt argues that owing to the industrialization of services, their production can no longer
be viewed as being heterogeneous. Attempts have been made to improve productivity in
the service sector by introduction of technology. Uniformity can be achieved by
substituting equipment and machinery for labor. Hostage suggested that service firms could
also reduce variability by training the service providers in appropriate responses to each
customer situation. They can also monitor customer satisfaction through suggestion and
complaint system so that poor service can be detected and corrected.

Services are heterogeneous across time, organizations, and people and as a result, it is very
difficult to ensure consistent service quality. Quality actually depends on many factors that
cannot be fully controlled by the service supplier, such as the ability of the consumer to
articulate his or her needs, the ability and willingness of personnel to satisfy those needs,
the presence (or absence) of other customers, and the level of demand for the service.
Because of these complicating factors, the service manager cannot always know for sure
that the service is being delivered in a manner consistent with what was originally planned
and promoted.
(iv) Perishability: Perishability refers to the fact that services cannot be saved, stored,
resold, or returned. Since services are deeds, performances or acts whose production and
consumption takes place simultaneously, they tend to perish in the absence of
consumption. Goods can be stored and sold at a later date in the absence of a customer.
Services, on the other hand, go waste if they are not consumed. A seat on an airplane or in
a restaurant, an hour of a professor’s time, or telephone line capacity not used cannot be
reclaimed and used or resold at a later time.

A primary issue that marketers face in relation to service perishability is the inability to
hold inventory. Demand forecasting and creative planning for capacity utilization are,
therefore, important and challenging decision areas. The fact that services cannot typically
be returned or resold also implies a need for strong recovery strategies when things do go
wrong. Kurtz and Boone observed that the utility of most services is short lived; therefore,
they cannot be produced ahead of time and stored for periods of peak demand. The
perishability of services is not a problem when demand is steady because it is easy to staff
for the service in advance. When there are wide fluctuations in demand there should be a
highly flexible production system or idle productive capacity. Sasser has described several
strategies for producing a better match between demand and supply in a service business.
On the demand side, the firm can make use of differential pricing, cultivating non-peak
demand and developing complementary services. On the supply side, for effective
matching with demand, the firm may hire part time employees to serve peak demand; peak-
time efficiency routines can be introduced, facilities for future expansion can be developed,
and increased consumer participation can be encouraged.

(v) No Transfer of Ownership: When we buy a product, we become its owner-be it a pen,
book, shirt, TV or Car. In the case of a service, we may pay for its use, but we never own
it. By buying a ticket one can see the evening film show in local cinema theatre; by paying
wages one can hire the services of a chauffeur who will drive his car; by paying the
required charges we can have a marketing research firm survey into the reasons for our
product’s poor sales performance, etc. In case of a service, the payment is not for purchase,
but only for the use or access to or for hire of items or facilities; and transfer of ownership
does not take place.

The above cited characteristics of services make it unique and that is why services receive
special treatment from marketers. There is general agreement that inherent differences
between goods and services exist and that they result in unique, or at least different,
management challenges for service businesses and for manufacturers that offer services as
a core offering. The difference between goods and services can be best understood from the
table 1.1.

Table 1.1
Differences between physical goods and services

Physical Goods Services

A thing An activity or process
Tangible Intangible
Homogeneous Heterogeneous
Production and distribution are separated Production, distribution and consumption
from consumption. are simultaneous process.
Core value produced in factory Core value produced in buyer-seller
interactions.
Customers do not participate in the Customer may participate in the production
production process.
Can be kept in stock. Cannot be kept in stock.
Transfer of ownership. No transfer of ownership.

Source: Christian Gronross, Service management and Marketing, Massachusetts:

Lexington Books, 1990, p. 28.

1.4 CLASSIFICATION OF SERVICE

The service sector can best be characterized by its diversity. Service organizations range in
size from huge international corporations in such fields as airlines, banking, insurance,
telecommunication, hotel chains, and freight transportation to a vast array of locally owned
and operated small businesses, including restaurants, laundries, taxis, and numerous
 business to business services. Franchised service outlets- in fields ranging from fast food to
book keeping- combine the marketing characteristics of a large chain that offers a
standardized product with local ownership and operation of a specific facility.

Researchers have directed much attention to the development of classification systems for
services. Such classification schemes help service managers to cross their industry
boundaries and gain experience from other service industries which share common
problems and have similar characteristics. Solutions to problems and breakthroughs in
similar service industries can then be applied by managers to their own service businesses.
Ever since marketing researchers started defining services, they also proposed their
classification. The first one was proposed as early as 1964 and the last, as late as 1989.
Summary of these classifications has been given in table 1.2 and 1.3.

Table 1.2
Summary of Proposed Schemes for Classifying Services (1964-1980)

Author Proposed Classification Comment

Judd (1964) 1. Rented goods services (right to own and First two are fairly specific but
use a good for a defined time period) third category is very broad and
2. Owned goods service (custom repair ignores services such as
improvement of goods owned by the insurance, banking, legal advice
customer) and accounting.
3. Non-goods services (personal,
experience or “experiential possession”
Zeithmel 1. Type of seller No specific application to
(1974) 2. Type of buyer services could apply equally well
3. Buying motives to goods
4. Buying practice
5. Degree of regulation
Shostack* Proportion of physical goods and intangible Offers opportunities for multi
(1977) services contained attribute modelling.
Emphasises within each product “package” that there are few pure goods or
Sasser et. al.* pure services.
(1978)
Hill (1977) 1. Services affecting persons vs. those Emphasizes nature of service
affecting goods benefits and (in 5) variations in
 2. Permanent vs. temporary effects of the the service delivery /
service consumption environment.
3. Reversibility vs. non-reversibility of
these effects
4. Physical effects vs. mental effects
5. Individual vs. collective services
Thomas (1978) 1. Primarily equipment based Although operational rather than
a. automated (e.g., car wash) marketing in orientation,
b. monitored by unskilled operators (e.g., provides a useful way of
movie theatre) understanding product attributes.
c. operated by skilled personnel (e.g.,
airline)
Chase (1978) Primarily people-based Recognizes that product
a. unskilled labor (e.g., lawn care) variability is harder to control in
b. skilled labor (e.g., repair work) high contact services because
c. professional staff (e.g., lawyers, dentists) customers exert more influence
on timing of demand and service
features due to their greater
involvement in the service
process.
Kotler (1980) Extent of customer contact required in Synthesizes previous work,
service delivery recognizes differences in purpose
a. high contact (e.g., health care, hotels, of service organization.
restaurants)
b. low contact (e.g., postal service,
wholesaling)
Lovelock 1. People based vs. equipment based Synthesizes previous
(1980) 2. Extent to which client’s presence classification and adds several
necessary new schemes. Proposes several
3. Meets personal needs vs. business needs categories within each
4. Public vs. private, for-profit vs. non- classification. Concludes that
profit defining object served is most
5. Basic demand characteristics fundamental classification
-object served (persons vs. property) scheme. Suggests that valuable
-extent of demand/supply marketing insights would come
-discrete v s . continuous relationships from combining two or more
between customers and providers classification schemes in a
6. Service content and benefits matrix.
-extent of physical goods content
-extent of personal service content
-single services vs. bundle of services
-timing and duration of benefits
7. Service delivery procedures
-multisite vs. single site delivery
 -allocation of capacity (reservations vs.
first come, first served)
-independent vs. collective consumption
-time defined vs. task defined
transactions -extent to which customers
must be present during service delivery
* These were two independent studies that drew broadly similar conclusions.
Source: Christopher H Lovelock : “Classifying Services to Gain Strategic Marketing
Insights”, Journal of Marketing, Vol. 47, Summer 1983, pp. 11-12.

Table 1.3
Summary of Proposed Schemes for Classifying Services (1983 -1989)
Author Proposed Classification Comment
Lovelock 1. The nature of the service act Provides a series of
(1983) a.Tangible actions to people or things classifications which together
b.Intangible actions to people or things illustrate the complete nature of
2. Relationships with customers services and provide useful
a. Continuous delivery background information for
b. Discrete transactions managerial purposes.
c. “Membership” relationships
d. No formal relationships
3. Customization and judgement in service
delivery
a. Judgement exercised by customer
contact persons
b. Customization of services
4. Nature of demand in relation to supply
a. Extent to which supply is
constrained
b. Extent of demand fluctuations
5. Methods of service delivery
a. single or multi-site delivery
b. service delivered on provider’s or
customer’s premises
Schmenner 1. Degree of interaction and Recognizes that some services
(1986) Customization may be more customized and
a. Low involve a higher degree of labor
b. High intensity and may help the
2. Degree of labor intensity reader to understand the
a. Low strategic and tactical options
b. High available.
Vandermerwe 1. Degree of consumer/ producer Recognizes the importance and
& Chadwick interaction role of goods components in
(1989) a. Lower service business.
b. Higher
2. Relative involvement of goods
a. “Pure” services
b. Services with some goods or
delivered through goods
c. Services embodied in goods
Source: Christian Gronroos, Service management and Marketing (Massachusetts:
Lexington Books), 1990, pp. 33-34.

These classifications not only demonstrate the diversity of services but also suggest how
important it is in a specific situation to carefully analyze the detailed nature of the service
operation. The general characteristics of services remain unchanged irrespective of the
nature of service business where the customer is always a person or group of persons; the
service is perceived more or less intangibly, some kind of interaction between the customer
and some parts of the production system of the service provider-including personnel,
technology, or both – always occurs, and some kind of input from the customer is always
required in the process.

The classifications do not suggest that a specific service is so unique that the basic
fundamentals of managing services do not apply to them. However, they do lay emphasis
on various aspects of service operation, types of resources to be used and how to manage
the process depending on the nature of service and the interface with the customers.

1.5 REASONS FOR GROWTH OF SERVICES

Manufacturing industries grew because they produced tangible goods which satisfied
man’s physiological needs of food, shelter and clothing. As the basic need was fulfilled
there was demand for improved satisfaction, and this led to a proliferation of variations of
the same product and a number of companies involved in its manufacture. The growth of
service industries can be traced to the economic development of society and the socio-
cultural changes that have accompanied it. Changing environmental forces brought out the
various types of services in forefront of the economy. These environmental forces
separately or in combination create new type of service. The following environmental
factors are responsible to make a new service.

(i) Consumer affluence: Due to the fast rise in the income of consumers, they are attracted
towards the new areas like clubs, health clubs, domestic services, travel and tourism,
entertainment, banking, investment, retailing, insurance, repairs, etc. and these are growing
much faster than ever before. There is a significant change in the pattern of family
expenditure.
(ii)Working women: During the recent times a large number of women have come up in a
variety of professions. The work performance of women in most of services sector like
bank, insurance, airlines, etc. is highly appreciable. In short, women are getting involved in
almost all male dominated activities. Due to increasing involvement of women in
commercial activities, the services like domestic activities, fast food restaurants, marriage
counselling, personal care, financial services, retailing, etc. have emerged in the recent
times.
(iii) Double income no kids (DINK): Dinks are the working couples who have consciously
postponed parenthood plans indefinitely or in an increasing number of cases, have decided
not to have any children ever. The dink culture is getting stronger and spreading wider day
by day. The realization that parenthood is likely to result in more commitments at home
and demands on their time, thereby slowing down their career plans and ambitions, make
them postpone their parenthood plans. Whatsoever be their life style, they have double
income and no kids, resulting in the emerging and enhancing of services like,
entertainment, hotels and restaurants, career institutes, domestic services, travel resorts,
personal care, etc.
(iv)Leisure time: People do get some time to travel and holiday, and therefore, there is a
need for travel agencies, resorts, hotels and entertainment. There are others who would like
to utilize this time to improve their career prospects, and therefore, there is a need for adult
education, distance learning, part time courses, etc.
(v)Greater life expectancy: According to the World Development Report and World
Human Resource Index, the life expectancy of people has increased significantly all over
the world barring few developing countries. It may be due to the advancement in the
medical technology, and greater awareness about health and education. Greater life
expectancy invites opportunities in services like hospitals, Nursing Homes, entertainment,
leisure services, investment banking and so on.
(vi) Product innovations: In the changing time the consumers have become more
conscious of quality than cost. They need high quality goods at par with international
standards. Having this in mind the manufacturers have focused their attention on quality
improvement, innovations, etc. In this process many more services have emerged on
account of product innovation. Some of them are servicing services, repairs, computer,
training and development, education, etc.
(vii Product complexity: A large number of products are now being purchased in
households which can be serviced only by specialized persons e.g. water purifiers,
microwave oven, computers, etc., giving rise to the need for services. The growing product
complexities create greater demand for skilled specialists to provide maintenance for these
complex products and brings out other services like expert advice, consultancy services,
etc.
(viii) Complexity of life: Certain product and services have made human life more
comfortable and complex as well. Also, life itself has become more complex due to the
socio-economic, psycho-political, technological and legal change. This has brought about
the emergence of services like legal aid, tax consulting, professional services, airlines,
courier services, insurance, banking, etc.
(ix) New young youth: Every new generation has its own characteristics and enjoys a
different life style. There is a lot of difference between the generations in respect to their
living conditions/ styles, maturity, thinking, attitudes, behavior, beliefs, satisfactions,
performance values and so on. Today’s generation with all these changes provide more
opportunities to services like entertainment, fast food, computers, travel, picnic resorts,
educational institution, counselling, retailing, etc.
(x) Resource scarcity and ecology: As the natural resources are depleting and need for
conservation is increasing, we have seen the coming up of service providers like pollution
control agencies, car pools, water management, etc.
(xi) Corporate crowd: The phenomena of globalization, privatization and liberalization
coupled with faster urbanization have created the corporate world crowd and its support
services. This crowd is responsible in bringing the new services, and redefining the old
ones. The services like hotels and restaurants, banking, insurance, travel and tourism,
advertising, airlines, courier services, marketing research, health care, legal services, etc.
will emerge and flourish more and more.

1.6 ROLE OF SERVICES IN ECONOMY

There is a growing market for services and increasing dominance of services in economies
worldwide. Services are a dominant force in countries around the world as can be seen in
the global feature. The tremendous growth and economic contributions of the service sector
have drawn increasing attention to the issues and problems of service sector industries.
There was a time when it was believed that the industrial revolution was the only solution
to the problems of poverty, unemployment and other ills of society. Now, however, the
service sector promises to fulfil the task. Services touch the lives of every person every day
whether it is in the field of food services, communication, leisure services, maintenance
services, travel, amusement parks, to name only a few. Services are increasingly being used
by the corporate as well as the household sector. This emphasis on services and its
increasing use has not happened overnight - it started in the twentieth century especially
after the end of World War II. Due to large scale destruction during the war, a lot of
economic activities had to be carried out to bring the war torn economies back on road.
World War II marked as milestone in the explosive rise of service industries. Throughout
the second half of the twentieth century services industries have attained considerable
growth in most western nations. After Green Revolution and Industrial revolution, the next
possible popular revolution will be in the field of service sector. In Green revolution the
man learnt to use, exploit and interact with nature (i.e., land and natural resources). In
Industrial revolution man learnt to use, exploit and interact with
equipment’s and machines for development. In case of services, man is learning to use,
exploit and interact with other man-made resources for development.

In the present day world, the service sector is growing at a phenomenal rate and termed as
‘sunrise sector of the economy’. Table 1.4 depicts the share of services in GDP as
compared with agriculture and industry dividing the world in three groups; low income,
middle income and high income.

Table 1.4 Share of Service Sector in GDP

(in percentage)
Group of Countries Major Sector Players
Agriculture Industry Services Total
Low Income 25 39 36 100
Middle Income 12 36 52 100
High Income 02 32 66 100
World Total 05 32 63 100
Source: World Bank, World Development Report 1997.

There is another report mentioned in Table 1.5 which clearly indicates the increasing trend
of services in GDP in most of the cases among the Asian Nations.
Table 1.5
Share of services in GDP among the Asian Nations
during 1980, 1991 & 1996.
(in percentage)
Countries Years
1980 1991 1996
China 23 32 28
Indonesia 34 39 42
Thailand 50 49 47
Malaysia 41 41 41
South Korea 48 47 50
Hong Kong 67 75 85
Singapore 60 62 63
India 36 41 42
Source : Asian Development Outlook 1997-1998.

Today service industries are the source of economic leadership. Many developed countries
are now termed as service economy. Table 1.6 depicts the percentages of Gross Domestic
Product by industry of origin for some selected countries representing both developed and
developing economies for 1999.

Table 1.6
GDP by Industry of Origin in 1999
(in percentage)
Country Agriculture Industry Services
USA 2 26 72
UK (1998) 2 31 67
France 2 26 72
Mexico 5 27 68
Republic of Korea (1998) 6 43 51
Brazil 9 29 62
China 17 50 33
Indonesia 20 45 35
India 28 25 46
Source: World Bank, World Development Report 1999/2000, Table 12, pp. 252-3 and
World Development Report 2000/2001, Table 12, pp. 296-7.

Raising the standard of living of people through services; service sector may well
symbolize the third and possibly the most important revolution of recent times. The
standard of living of people will not increase only through capital formation, economic
transformation and national income, indeed it is also important that masses are aware of the
living style and behavior. Service sector creates and expands job opportunities. The new
and indeed, the biggest employment opportunities are offered by service industries. In
service sector each job created in allied sectors leads to three jobs in subsidiary sectors.

Table 1.7 indicates the increasing trend of employment in service jobs.

Table 1.7
Percentage of Employment in Service Jobs
(in percentage)
Countries Year
1980 1991 1996
USA 67.1 71.0 80.0
Canada 67.2 70.8 73.8
Belgium 64.3 70.1 73.3
Australia 64.7 69.7 73.3
UK 60.4 67.7 70.0
Israel 63.3 66.0 69.3
France 56.9 63.6 65.7
Finland 52.2 60.1 64.7
Japan 54.5 58.1 60.3
Italy 48.7 57.7 60.1
India 20.2 22.4 37.6
Source: Statistical Year Book, Department of International Economic and Social Affairs,
Statistical Office, United Nations, New York.

Looking at the trend of growth of service sector it may be concluded that future belongs to
services.
1.7 SUMMARY
It is now obvious that most economies, the world over, are increasingly becoming service
economies and, therefore, there is a need to manage services in the best possible way.
Services are activities which are intangible in nature, therefore, standardization is one of
the major issues in services. Also, services are typically delivered by employees of the
service providers, therefore, there is also a need to manage the human resources. In
addition, unlike in the manufacturing sector where production, distribution and consump-
tion are separate activities, in service sector these three are simultaneous processes. In fact
services are so varied and diverse that one needs to classify them to identify selected areas
which need to be managed strategically.

1.8 KEYWORDS
Service: an activity or series of activities rather than things which has some element of
intangibility associated with it, which involves some interaction between the customer and
the service provider, and does not result in a transfer of ownership.

Intangibility: As services are performances or actions rather than objects, they cannot be
seen, felt, tasted, or touched in the same manner that we can sense tangible goods.

Inseparability: A service cannot be separated from the person or firm providing it.

Heterogeneity: Since most of the services are being rendered by human beings, their
performances cannot be mechanized and as a result no two performances of even a single
service provider are identical.

Perishability: Services if not consumed simply perish away.

1.9 SELF ASSESSMENT QUESTIONS
1. What do you mean by services? How do services differ from products?
2. Do you think that classification of services helps in developing the marketing strategy
better? How?
3. Discuss the important characteristics of services with suitable examples. Also discuss
what challenges they pose before service marketers.
4. Discuss the reasons of growth of service sector.
5. Write a detailed note on role of service sector in economy.

1.9 REFERENCES / SUGGESTED READINGS

1. Ravi Shanker, ‘Services Marketing: The Indian Perspective’, Excel Books.
2. Lovelock, ‘Services Marketing: People, Technology, Strategy’, Pearson Education.
3. Zeithaml and Bitner, ‘Services Marketing: Integrating Customer Focus Across the
Firm’, Tata McGraw Hill.
4. Rust, Zahorik, and Keiningham, ‘Service Marketing’, Addison Wesley.
5. Fitzsimmons and Fitzsimmons, ‘Service Marketing: Operations, Strategy, and
Information Technology’, McGraw Hill.
LESSON: 2
MARKETING MIX FOR SERVICES

STRUCTURE
2.1 Objectives
2.2 Introduction
2.3 Product
2.4 Price
2.5 Place
2.6 Promotion
2.7 People
2.8 Physical evidence
2.9 Process
2.10 Summary
2.11 Keywords
2.11. Self-Assessment Questions
2.12. References / Suggested Readings

2.1 OBJECTIVES
After going through this lesson, you will be able:
 To explain traditional marketing mix comprising of product, price, place and
promotion as applied to service organizations.
 To discuss the extended marketing mix which incorporates traditional marketing
mix as well as three more 3 Ps namely people, process and physical evidence.
2.2 INTRODUCTION
Marketing mix is the set of important internal elements that make up an organization’s
marketing programme. The marketing mix concept is a well-established tool used as a
structure by marketers. It can be defined as the elements an organization controls that can
be used to satisfy or communicate with customers. The phrase ‘marketing mix’ was first
used by Neil H. Borden. The concept had its genesis in the classic work of James Culliton
on the management of marketing costs. Borden suggested twelve marketing mix variables
in the context of manufacturers. Borden’s concept of marketing mix was given due
recognition in marketing theory and the concept of marketing mix was accepted as the set
of marketing tools that a firm uses to pursue its marketing objectives in the target market,
influenced by specific environmental variables.

It was McCarthy who summed up the twelve elements of Borden’s marketing mix into 4Ps
- product, price, place (i.e. distribution), and promotion. He even clarified that the customer
is not a part of the marketing mix, rather, he should be the target of all marketing efforts.
The activities in service marketing are different, and often do not fall in the conventional
marketing mix (4Ps) classification, though many marketing concepts and tools used by
goods marketers hold good in services with some change in focus and importance. The
traditional marketing mix became inadequate for service industries because of the
following reasons:

 The concept of marketing mix as such was developed for manufacturing industries and
was more oriented to deal with goods marketing situations.
 Marketing practitioners in service sector found that it did not address their needs.
 Due to differences in characteristics of physical products and services, marketing
models and concepts had to be developed in direction of the service sector.

Keeping in view the inadequacy of conventional marketing mix to address the service
situations, it needs to be modified and broadened. A seven Ps framework for services has
been proposed. These elements of marketing mix for services are product, price, place,
promotion, people, physical evidence and process. It is important to elaborate these Ps in
order to have an understanding of a specific combination of these elements to arrive at the
marketing strategy for service firms. A detailed account of each of these elements of
marketing mix is as follows:

2.3 PRODUCT
A product is an overall concept of objects or processes which provide some value to
customer; goods and services are subcategories which describe two types of product. Thus,
the term product is frequently used in a broad sense to denote either a manufactured good
or a service. In fact, customers are not buying goods or services - they are really buying
specific benefits and value from the total offering. So, the most important issue in service
product is what benefits and satisfaction the consumer is seeking from the service. From
the point of view of a restaurant’s manager, the restaurant simply provides food. But, the
customers coming to the restaurant may be seeking an ‘outing’ - an atmosphere different
from home, relaxation, entertainment or even status. The marketing of services can be a
success only if there is a match between the service product from the customer’s view point
and the supplier’s view point. To find this match it is desirable to analyze the service at the
following levels:

(i) Customer benefit concept: The service product which is offered in the market must
have its origin in the benefits which the customers are seeking. But, the problem is that
customers themselves may not have a clear idea of what they are seeking, or they may find
it difficult to express or it may be a combination of several benefits and not a single one.
Over a period of time, the benefits sought may also change. This change in customer may
come about by a satisfactory or unhappy experience in utilizing the service, through
increased sophistication in service use and consumption, and changing expectations. All
these make the issue of marketing a service product more complex.
(ii) Service concept: Using the customer benefits as starting point, the service concept
defines the specific benefits which the service offers. At the generic level, the service
concept refers to the basic service which is being offered. A center for performing arts may
offer entertainment and recreation. But, within this broad framework, there can be specific
choice paths for satisfying the entertainment objectives, such as, drama, musical concerts,
mime, poetry recitation, dance, etc. Defining the service concept helps in answering
fundamental question - ‘what business are we in?’

(iii) Service offer: After defining the business in which we are operating, the next step is to
give a specific shape and form to the basic service concept. In the case of center for the
performing arts, the service concept is to provide entertainment. The service offer is
concerned with the specific elements that will be used to provide entertainment; drama,
music, mime, dance. In the category of musical concerts, the choice may be vocal or
instrumental, with vocal whether light or classical, Hindustani, Carnatic or Western. While
these represent the intangible items of the service offer, the physical infrastructure of the
center, in terms of its seating capacity, seating comfort, quality and acoustics, provision for
air-conditioning, snack bar and toilets are the tangible items. The tangible aspects can be
controlled by offering the best possible benefit, but the quality and performance of the
actors, singers, musicians cannot be controlled.

(iv) Service forms: In what form should the services be made available to the customers is
another area of decision making. Should all the shows of the center be available in a
package deal against an annual membership fee or seasonal ticket? Should there be daily
tickets with the consumer having the freedom to watch any one or more performances
being staged on that particular day? Should each performance have a separate entrance
ticket, with a higher priced ticket for a well-known performer? Service form refers to the
various options relating to each service element. The manner in which they are combined
gives shape to the service form.
(v) Service delivery system: When we go to bank to withdraw money, we either use a
cheque or a withdrawal slip in which we fill all the particulars and hand it over to the
dealing assistant, who after verifying the details, gives us money. The cheque or
withdrawal slip and the dealing assistant constitute the delivery system. In case of airlines,
the airplane, pilot, crew members, airport, etc. are the elements of delivery system. The two
main elements in a delivery system are the people and the physical evidence. The
competence and public relations ability of a lawyer represents the ‘people’ component,
while his office building, office door, letter head, etc., are all elements of the ‘physical
evidence’ component. The physical evidence components have also been called facilitating
goods or support goods. These are the tangible elements of the service and they exert an
important influence on the quality of the service as perceived by the consumers. Delivering
an intangible at a level consistently is a complex issue. The experience in two flights of the
same airline is not the same. The visit to a bank on two occasions brings different
experiences. The consumer’s service experience is, as such, a result of provider-customer
interaction, atmosphere, emotional stress, anxieties, surprises, etc. It is because of these
delivery factors (varying at different points of time) that no two customer experiences are
identical. This variability of experience is attributable to the inability of the service firms to
deliver the intangible uniformly.

Service firms must learn to manage intangibles. They need to go beyond the technical skills
of employees or the tangible output. Service levels should be set in accordance with the
desired customer satisfaction. The answer to ‘what customer expects’ should be sought.
And it is not an easy answer because the subjective nature of the customer expectations
often vitiates the whole exercise.

2.4 PRICE
Pricing is one factor that has received much less attention in service firms. Pricing
decisions in services are approached in a not-very-sophisticated manner. The role price
plays in the marketing strategy is lesser known in service firms than in manufacturing
firms. Even in Britain, the United States and some other developed economies where more
people are employed in the provision of services than in the direct production of material
goods, the marketing of services in general, and their pricing in particular, are relatively
neglected aspects of management studies.

Though price is one of the Ps in the marketing mix of firms, its use as a purposive
marketing tool has been limited to a few marketers. Most marketers tend to adopt a passive
approach and commit many mistakes in pricing their goods and services. “The most
common mistakes are these: pricing is too cost-oriented; price is not revised often enough
to capitalize on market changes; price is set independent of the rest of marketing mix rather
than as an intrinsic element of market positioning strategy, and price is not varied enough
for different product items and market segments”.

Unlike in manufactured goods, where price has one common name across a wide range of
goods, such as, fruits, clothes, computers, cars, etc.; price in services goes by different
names. The services are diverse. The extent of their diversity can be gauged by the names
by which the price is called in services. In table 2.1, some terms referring to price in
different services are listed.

Almost every service has its own price terminology.

Table 2.1
Price Terminology for Selected Services
Service Terminology
Advertising Commission
Brokerage service Commission
Consultancy Fee
Employee Services Salary
Education Tuition fee
Financial Services Interest/charge/commission
 Guest speaker Honorarium
Health care Fee
Insurance Premium
Legal service Fee
Property/Accommodation Rent
Road use Toll
Recreational service Ticket charge/money, Admission charge
Share/Stock service Brokerage/Commission
Transport Fare
Utilities Tariff
Source : Donald Cowell, “The Marketing of Services”, Heinemann, London.

Pricing is important because it has a direct bearing on sales and profits of an organization.
Therefore, price cannot be determined in isolation without keeping in mind the sales it
would generate and the profit it would earn. Generally, a trade-off is observed between the
sales and the profit. A lower price of product or service is capable of generating higher
sales at low profit per unit. Similarly, a high price would result in greater profit margins but
the product or service may not sell that much. Pricing arithmetic is not simple. There are a
number of factors that influence the pricing decisions of a firm. It is important for a firm to
consider the customers, the marketing offer, competition, legal framework, and social and
technological environment while setting the price.

Pricing methods and practices tend to vary widely in service industries. Unlike goods
which may bear similarities in processes, competition, output, raw material, labor, etc.;
service industries are laden with diversity. On the spectrum of variety and uniqueness;
services are unique, both in their own character and in their difference from one another.
This service character does not allow standardization of pricing across various service
categories. A household service supplier, banking company, hairdresser, transporter, etc.;
because of their unique character, tend to consider their pricing in a variety of ways.
In determining the prices of services, the one characteristic which has great impact is their
perishability and the fact that fluctuations in demand cannot be met through inventory.
Hotels and airlines offering lower rates in off-season and lower telephone charges for
outstation calls after peak hours are examples of how pricing strategy can be used to offset
the perishable characteristics of services.

Another characteristic of services that creates a problem in price determination is the high
content of the intangible component. The higher the intangibility, the more difficult it is to
calculate cost and greater the tendency towards non-uniform services, such as fees of
doctors, management consultants, lawyers, etc. In such cases, the price may sometimes be
settled through negotiation between the buyer and seller.

On the other hand, in services such as dry cleaning, the tangible component is higher, and
the service provided is homogeneous. It is easier to calculate the cost on a unit basis and
have a uniform pricing policy. In general, the more unique a service is, the greater the
freedom to fix the price at any level. Often the price may be fixed according to the
customer’s ability to pay. In such cases price may be used as an indicator of quality.

The third characteristic to be kept in mind while determining prices is that in many
services, the prices are subject to regulations, either by the government or by trade
associations. Bank charges, electricity and water rates, fare for rail and air transport in
India are controlled by the government. In many other cases, the trade or industry
association may regulate prices in order to avoid undercutting and maintain quality
standards. International air fares are regulated by international agreement of airlines; sea
freight fares are regulated by shipping conferences. In all such cases, the producer has no
freedom to determine his own price.

The two methods which a service organization may use to determine prices are cost-based
pricing and market-oriented pricing. In the former, the price may be regulated by the
government or industry association on the basis of the cost incurred by the most efficient
unit. Such a pricing strategy is effective in restricting entry and aiming at minimum profit
targets. The market-oriented pricing may either be a result of the competition or customer-
oriented. In case of competition-oriented pricing, the price may be fixed at the level which
the competitor is charging, or fixed lower to increase market share. Customer-oriented
pricing varies according to the customer’s ability to pay.

The pricing tactics that may be used to sell services are:

(i) Differential or Flexible Pricing: It is used to reduce the ‘perishability’ characteristic of

services and iron out the fluctuations in demand. Differential price implies changing
different prices according to:
 customer’s ability to pay differentials (as in professional services of management
consultants, lawyers);
 price time differentials (used in hotels, airlines, telephones where there is the
concept of season and off-season and peak hours); and
 place differential used in rent of property-theatre seat pring (balcony tickets are
more expensive than front row seats) and houses in better located colonies
command higher rent.
(ii) Discount Pricing: It refers to the practice of offering a commission or discount to
intermediates such as advertising agencies, stock brokers, property dealers for rendering a
service. It may also be used as a promotional device to encourage use during low-demand
time slots or to encourage customers to try a new service (such as an introductory
discount).
(iii) Diversionary Pricing: It refers to a low price which is quoted for a basic service to
attract customers. A restaurant may offer a basic meal at a low price but one which
includes no soft drink or sweet dish. Once the customer is attracted because of the initial
low price he may be tempted to buy a drink or an ice-cream or an additional dish. Thus, he
may end up buying more than just the basic meal.
(iv) Guaranteed Pricing: It refers to pricing strategy in which payment is to be made only
after the results are achieved. Employment agencies charge their fee only when a person
actually gets a job, a property dealer charges his commission only after the deal is actually
transacted.
(v) High Price Maintenance Pricing: This strategy is used when the high price is
associated with the quality of the service. Many doctors, lawyers and other professionals
follow this pricing strategy.
(vi) Introductory Pricing: It is one in which an initial low price is charged in the hope of
getting more business at subsequently better prices. The danger is that the initial low price
may become the price for all times to come.
(vii) Offset Pricing: It is quite similar to diversionary pricing in which a basic low price is
quoted but the extra services are rather highly priced. A gynecologist may charge a low fee
for the nine months of pregnancy through which she regularly checks her patient, but may
charge extra for performing the actual delivery and post-delivery visits.
(viii) Competitive parity pricing: Prices are set on the basis of following those set by the
market leader.
(ix)Value based pricing: Prices are based on the service’s perceived value to a given
customer segment. This is a market driven approach which reinforces the positioning of the
service and the benefits the customer receives from the service.
(x) Relationship Pricing: Prices are based on considerations of future potential profit
streams over the lifetime of customers. Relationship pricing follows closely the market
oriented approach of value-based pricing but takes the lifetime value of the customer into
account.

2.5 PLACE
In order to bring the products to the customer, the marketer has to work with distribution
channels that are the interdependent set of organizations involved in the process of making
the goods or services available. Service marketers, like goods marketers, also have to
handle distribution channel problems. They too, have to make their services available to
target customers without which marketing cannot take place. Because of intangibility of
services, they cannot be stored, transported and inventoried. Similarly, because of
inseparability, that is, in case of services production cannot be separated from selling,
services must be created and sold at the same time. These characteristics of services make
distribution strategy more complex and difficult.

There are three critical issues that must be sorted out while evolving the distribution
channels for a service:

(i) Location of the service: Location is concerned with the decisions a firm makes about
where its operations and staff are situated. The importance of location for a service depends
upon the type and degree of interaction involved. When the customer has to go to the
service provider, location becomes very important. For a service business such as a
restaurant, location may be one of the main reasons for patronage. In this type of
interaction, service providers seeking growth can consider offering their services at more
than one location. Where the service provider can go to the customer, site location becomes
much less important provided it is sufficiently close to the customers for good quality
service to be received. In some circumstances, the service provider has no discretion in
going to customer as certain services must be provided at the customer’s premises. This is
the case with a wide range of maintenance services such as, lift repair, cleaning services
etc. However, when the customer and service organization transact at arm’s length location
may be largely irrelevant. Customers are not concerned with where the physical locations
are of suppliers of services such as electricity, telephone or insurance. There are three
important questions that would help service provider in deciding where to locate service:

 How important is the location of the service to the customers?

 Is the service, technology - based or people-based?
 How important are complementary services to the location decision?
The selection of location and site for a service depends on a number of factors and
tradeoffs among benefits and costs. The table 2.2 depicts the critical factors affecting the
location decisions, vary from one service to another.

Table 2.2
Critical factors affecting choice of location
Critical factor Services
Convenience Retail stores, health centers, banks,
repair services, theatres, personal
care.
Cost operating Specialty shops, wholesalers, clerical
services.
Proximity with Furniture, fast food, antique shops,
competition to share tailors, designers.
Support system availability Hotels, jewelers, tourism.

Geographic of environ- Beach resorts, Ski resorts

mental factors
Business climate Insurance companies, private educational
institutions, gambling resorts.
Communication networks Banks, financial services.
Transport facilities Mail order houses, couriers, ware houses.
Source : Harsh V. Verma, “Marketing of Services”, (Delhi; Global Business Press), 1993,
p. 62.

(ii) Channels through which services are provided: The second decision variable in the
distribution strategy is whether to sell directly to the customers or through intermediaries.
Traditionally it has been argued that direct sales are the most appropriate form of
distribution for services. Whilst this form of distribution is common in some service
sectors, e.g., professional services, companies in other areas of the service sector are
increasingly seeking other channels to achieve improved growth and to fill unused
capacity.

Many services are now being delivered by intermediaries and these can take a variety of
forms. The broad channel options for services are direct sales, agent or broker, sellers’ and
buyers’ agents, franchises or contracted service deliverers, etc. Table 2.3 provides an
illustrative list of the intermediaries who sell services.

Table 2.3
Typical intermediaries for services
Service Intermediaries
Hotels Travel agents, tour operators, airlines
Airlines Travel Agents, hotels
Life Insurance Agents
Shares Stock Brokers
Employment Employment agencies
Financial Services Banks, financial institutions
Source : L. Johari “Marketing of services : Conceptual framework”, ( IGNOU Study
Material on Service marketing) 1996, pp-22.

(iii) How to provide service to maximum number of customers: The third decision
variable in the distribution strategy is how to provide the service to a maximum number of
customers in the most cost-effective manner. Some of the innovations in the area are:
 Rental or leasing-leasing or rental offers an easy solution for companies which want
to expand and diversify but do not have the necessary resources to buy the required
plant and machinery. This trend is now also becoming popular in services. Today
we have the concept of time-sharing for holiday resorts.
  Franchising-franchising is the granting of rights to another person or institution to
exploit a trade name, trade mark or product in return for a lump-sum payment or a
royalty. In service industries franchises operate in the area of hotels, restaurants, car
rentals, fast food outlets, beauty parlors, travel agencies, couriers, computer
education, etc.
 Service integration - recent times have also witnessed the growth of an integrated
service system. Hotels offer local tours and airlines offer holiday resort services.
Travel agencies offer ‘package tours’ in which they take care of all formalities such
as visa, foreign exchange, reservations, local travel, etc.

All these trends highlight the importance of using innovative methods to overcome the
inherent characteristics of service products which make their distribution a complex affair.

2.6 PROMOTION
The promotion element of the services marketing mix forms a vital role in communicating
the positioning of the service to customers. Promotion adds significance to services; it can
also add tangibility and help the customer make a better evaluation of the service offer. The
fundamental difference which must be kept in mind while designing the promotion strategy
is that the customer relies more on subjective impressions rather than concrete evidence.
This is because of the inherent nature of services. Secondly, the customer is likely to judge
the quality of service on the basis of the performer rather than the actual service. Thirdly,
since it is difficult to sample the service before paying for it, the customers find it difficult
to evaluate its quality and value. Thus, buying a service is a riskier proposition than buying
a product. So, the service marketers must design a promotion strategy which helps the
customers overcome these constraints.

George and Berry have identified six guidelines for services advertising which really are
applicable to most elements of the communication mix. These apply to a wide range of
service industries, but not to all of them, because of the heterogeneous nature of services.
  Provide tangible clues- A service is intangible in the sense that a performance rather
than an object is purchased. Tangible elements within the product surround can be
used to provide tangible clues, e.g. seating comfort in aircraft.
 Make the service understood- Services may be difficult to grasp mentally because
of their intangibility. Tangible attributes of the service can be used to help better
understand the service offered, e.g. credit cards.
 Communication continuity- This is important to help achieve differentiation and
present a unifying and consistent theme over time. McDonalds and Disney logo
provide good examples of such continuity.
 Promising what is possible- Service firms need to deliver on their promises. If a
promise such as fast delivery cannot be consistently met, it should not be made at
all, e.g. Domino’s Pizza.
 Capitalizing on word of mouth- The variability inherent in services contributes to
the importance of word of mouth. Word of mouth is a vitally important
communication’s vehicle in services, as evidenced by the way we seek personal
recommendations for lawyers, accountants, doctors, bankers, etc.
 Direct communications to employees- In high contact services communication
should be directed at employees to build their motivation, e.g. cabin crew of
airlines.

The promotion mix of services include the following elements:

(i) Advertising: It is any kind of paid, non-personal method of promotion by an identified
organization or individual. The role of advertising in services marketing is to build
awareness of the service, to add to customer’s knowledge of the service, to help persuade
the customer to buy, and to differentiate the service from the other service offerings.
Relevant and consistent advertising is therefore, of great importance to the success of the
marketing of the service. Advertising has a major role in helping deliver the desired
positioning for the service. Since the core product is intangible it is difficult to promote,
and therefore, service marketers frequently choose tangible elements within the product for
promotion. Thus, airlines promote the quality of their cuisine, seat width, and the quality of
their in-flight service. Certain services such as entertainment, transportation, hotel, tourism
and travel, insurance, etc. have been advertising heavily in newspapers, magazines, radio,
TV to promote greater usage and attract more customers. However, certain service
professionals such as doctors and lawyers had rarely used advertising as a means of
increasing their clientele. But, this situation is changing and one can occasionally see an
advertisement in the daily newspaper giving information about the location and timings
that a particular doctor is available for consultation. These advertisements may also carry
the message ‘Honorary doctor to the president of India’ or ex-director of a prestigious
medical college, etc. Such messages help create a positive image and credibility.
(ii) Personal selling: Personal selling has a vital role in services, because of the large
number of service businesses which involve personal interaction between the service
provider and the customer, and service being provided by a person, not a machine. The
problem with using personal selling to promote services is that in certain types of services,
the service cannot be separated from the performer. Moreover, it is not a homogeneous
service in which exact standards of performance can be specified. In such situations,
personal selling implies using an actual professional rather than a salesman to sell the
service. A firm of management consultants may send one of its consultants for soliciting
new business. This kind of personal selling is certainly effective but also very expensive.
One way of making personal selling more cost effective is to create a derived demand by
tying up with associated products and services. A management consultant may associate
with a bank, so that the bank recommends his name as a consultant to any new
entrepreneur coming for a loan. A chain of hotels may team up with an airline to offer a
concessional package tour. The other way is to maintain a high visibility in professional
and social organizations, getting involved in community affairs and cultivating other
professionals so as to maximize personal exposure and the opportunities for getting work
from new sources. Personal selling has a number of advantages over other promotion mix
elements, such as,
  Personal contact- Three customer contact functions have been identified; selling,
servicing and monitoring. These personal contacts should be managed to ensure
that the customer’s satisfaction is increased or maintained at a high level.
 Relationship enhancement- The frequent and sometimes intimate contact in many
service businesses provides a great opportunity to enhance the relationship between
the seller/service provider and the customer.
 Cross selling- The close contact frequently provides the opportunity for cross-
selling other services. The sales persons are also in a good position to communicate
details of other services which they may offered to customers.
(iii )Sales promotion: In the case of services, the sales promotion techniques which are
used are varied and various in number. Traditionally, sales promotion has been used
mainly in the fast moving consumer goods market. However, in the recent past we have
seen a trend for many service firms to use sales promotion. Sales promotion tools are
aimed at these audiences:
 Customers - Free offers, samples, demonstrations, coupons, cash refunds, prizes,
contests and warrantees.
 Intermediaries- Discounts, advertising allowances, cooperative advertising,
distribution contests and awards.
 Sales force- Bonuses, awards, contests and prizes for best performer.

A number of activities can be undertaken which aim at providing incentive to encourage

sales. A doctor may charge lesser amount as fee on subsequent visits to encourage patient’s
loyalty, a car mechanic may offer a guarantee for repairs undertaken up to three months, a
chartered accountant may offer his services free for the first two visits to allow the
customer to evaluate his work.

In services, sales promotion techniques are also used to offset their perishability
characteristic, e.g., family discounts offered by hotels in off-season in which two children
under twelve are allowed free of charge. Sales promotion helps to overcome the problem
faced by customers in evaluating and judging the quality before making the purchase, thus,
it reduces the risk associated with the purchase.
(iv) Publicity: It is unpaid for exposure which is derived by getting coverage as a news or
editorial item. It is possible to get publicity when the service which one is offering is
unique and, therefore, newsworthy, by holding a press conference in which offered ser-
vices can be associated with some issues of greater social relevance or by involving the
interest of the newspaper or its staff in covering the service. The important point about
publicity is that the choice of newspaper, magazine and journal should be correct. The
vehicle which is chosen must be credible and enjoy a reputation of being trustworthy. A
wrong choice of media vehicle will result in adverse publicity.
(v) Word of mouth: One of the most distinctive features of promotion in service businesses
is the word of mouth communications. This highlights the importance of the people factors
in services promotion. Customers are often closely involved in the delivery of a service and
then talk to other potential customers about their experiences. Research points to personal
recommendations through word of mouth being one of the most important information
sources. Where people are the service deliverers personal recommendation is often the
preferred source of information. Thus, word of mouth can have a more important impact
than other promotion mix elements in a number of services, including professional and
health care services. Positive or negative word of mouth communication will then influence
the extent to which others use the service. However, negative experiences tend to have a
greater impact than positive experiences. Customers who are dissatisfied tend to tell more
than twice as many people of their poor experiences as those who are satisfied relate good
experiences.

2.7 PEOPLE
In services, ‘People’ refers to all human actors who play a part in service delivery and thus
influence the buyer’s perceptions; namely, the firm’s personnel, the customer, and other
customers in the service environment. All of human actors participating in the delivery of a
service provide cues to the customer regarding the nature of the service itself. How these
people are dressed, their personal appearance, and their attitudes and behaviors all
influence the customer’s perception of the service. If the service personnel are cold and
rude, they can undermine all the marketing work done to attract the customers. If they are
friendly and warm, they increase customer satisfaction and loyalty. Employee behavior is
often an integral part of the service product. This is not true in a manufacturing operation,
where employee behavior may affect product quality, but is not a part of the product.

People constitute an important dimension in the management of services in their role both
as performers of services and as customers. People as performers of service are important
because, a customer sees a company through its employees. The employees represent the
first line of contact with the customer. They must, therefore, be well informed and provide
the kind of service that wins customer approval. The firm must recognize that each
employee is a salesman for the company’s service. If these employees are not given
training in how to go about face-to-face customer contact, the entire marketing effort may
not prove to be effective. The importance of customers in services stems from the fact that
most services imply active and involved customer-organization interface. In many service
situations, customers themselves can also influence service delivery, thus affecting service
quality and their own satisfaction. Customers not only influence their own service
outcomes, but they can influence other customers as well. People can be subdivided into:

(i) Service personnel: Service personnel are important in all organizations but more so in
an organization involved in providing services. The behavior and attitude of the personnel
providing the service is an important influence on the customer’s overall perception of the
service and he can rarely distinguish between the actual service rendered and the human
element involved in it. Customer contact is very important concept in services, which refers
to the physical presence of the customer in the system. The extent of contact refers to the
percentage of time a customer ought to be in the system out of the total time it takes to
serve him. The low contact services include bank, post offices or retailing and the high
contact services include hotels, educational institutions, restaurants and hospitals. Services
with high contact are more difficult to control and manage because a longer customer
contact is more likely to affect the time of demand, and nature of service and its quality;
whereas, in low contact services such contact has much less impact on the service.
Therefore, the high contact personnel must be dexterous in public relations and inter-
personal skills, and the low contact personnel must have high technical and analytical
attributes. The quality and performance of service personnel can be improved through:
 Careful selection and training of personnel;
 laying down norms, rules and procedures to ensure consistent behavior;
 ensuring consistent appearance; and
 reducing the importance of personal contact by introducing automation and
computerization wherever possible.
(ii) Customers: Customers are important because they are a source of influencing
themselves, being actively involved in service delivery, and other customers as well. In
case of doctors, lawyers, consultants one satisfied customer will lead to a chain reaction,
bringing in his wake a number of other customers. So, it’s an important task of service
marketers to ensure complete satisfaction of the existing customers. The kind of customers
that a firm attracts exerts an important influence on prospective customers. The prospective
customer may feel attracted towards the organization e.g., club, restaurant, school, because
it has his type of customers or the customer may turn away if he perceives the existing
customers to be a kind with whom he would not like to associate.

2.8 PHYSICAL EVIDENCE

It refers to the environment in which service is delivered and where the firm and customer
interact, and any tangible components that facilitate performance or communication of the
service. The physical evidence of service includes all of the tangible representations of the
service such as, brochures, letterhead, business cards, report format, signage, equipment,
etc.

Packaging importance stems from the fact that it is what comes in between the product and
the customer’s eye. The product package is a visual representation of the whole marketing
effort. The customer judgement and evaluation are often based on the product packaging.
Physical evidence is to a service, what the packaging is to a product. In services, the
product itself being intangible, the need is to tangibles it as far as possible. Thus, physical
entities can be successfully employed to describe the service product and its distinguishing
qualities. Since the potential customers form impressions about the service organizations
on the basis of physical evidence, like building, furniture, equipment’s, stationery and
brochures, it becomes imperative that the marketers manage the physical evidence in a
manner that reinforces the proposed position and image of the organization.

Cleanliness in a doctor’s clinic, the exterior appearance and interior decor of a restaurant,
the comfort of the seating arrangement in a cinema hall, adequate facility for personal
needs at the airport, all contribute towards the image of the service as perceived by the
customer. The common element in these is that they are all physical, tangible and
controllable aspects of a service organization. There may be two kinds of physical
evidence:

(i) Peripheral evidence: It is actually possessed as a part of the purchase of service but by
itself is of no value. An airline ticket, cheque book, or receipt for a confirmed reservation
in a hotel are examples of peripheral evidence. A cheque book is of value only if customer
has money in the bank, without that it is of no significance. Peripheral evidence adds on to
the value of essential evidence, such as writing pad, pen, match box, complimentary
flowers and drinks, etc. in a hotel, which customer may take away. Such evidence must be
designed keeping in mind the overall image which the organization wishes to project and
the reminder value of the evidence in its ability to remind the customer about the
organization.
(ii) Essential evidence: Whereas the peripheral evidence is possessed and taken away by
the customer, the essential evidence cannot be possessed by the customer; the building, its
size and design, interior layout and decor, logo, etc. of the organizations are constituents of
essential evidence. The essential evidence is a very critical input in determining the
atmosphere and environment of the service organization.
Physical evidence can be used to build strong association in the customers’ minds and
service can be differentiated from the competitor’s similar offering. By making the service
more tangible and making it easier for the customer to grasp the concept of the service,
marketers can create the ideal environment for the service offering.

2.9 PROCESS
Process in services refers to the actual procedures, mechanisms, and flow of activities by
which the service is delivered- the service delivery and operating systems. In a service
organization, the system by which customer receives delivery of the service constitutes the
process. In fast food outlets the process comprises buying the coupons at one counter and
picking up the food against that at another counter. The process of a delivery function
which can be compared with that of operations management implies the conversion of
input into the finished product. But, in a service organization, there is no clear cut input or
output. Rather, it is the process of adding value or utility to system inputs to create outputs
which are useful for the customers.

The process by which services are created and delivered to the customer is a major factor
within the services marketing mix, as services customers will often perceive the service
delivery system as part of the service itself. Thus, decisions on operations management are
of great importance to the success of the marketing of the service. In fact, continuous
coordination between marketing and operations is essential to success in most services
businesses. Identification of process management as a separate activity is a prerequisite of
service quality improvement. The importance of this element is especially highlighted in
service businesses where inventories cannot be stored. Through the introduction of
automatic teller machines (ATMs) banks have been able to free staff to handle more
complex customer needs by diverting cash only customers to the ATMs. If the processes
supporting service delivery cannot, for example, quickly repair equipment following a
breakdown or provide a meal within a defined period, an unhappy customer will be the
result. This suggests that close cooperation is needed between the marketing and operations
staff who are involved in process management. By identifying processes as a separate
marketing mix element, its importance to service quality is duly recognized.

2.10 SUMMARY
Service industries have typically lagged behind manufacturing firms in adopting and using
marketing concepts. But, this is now changing. One of the most basic concept in marketing
is the marketing mix. The traditional marketing mix is composed of the four P’s: product,
price, place (distribution) and promotion. The specific nature of services i.e., intangibility,
heterogeneity, inseparability and perishability has service marketers to adopt the concept of
an expanded marketing mix for services. In addition to the traditional four P’s, the service
marketing mix includes people, physical evidence, and process.

2.11 KEYWORDS
Marketing Mix: Set of tools with the help of which marketing exercise is undertaken and is
comprised of 4 Ps namely Product, Price, Place and Promotion. In case of services, three
more Ps can be added – People, Process and Physical evidence.

People: Refers to all the human beings who play part in service creation and delivery
process.

Physical Evidence: The environment in which the service is delivered and where the firm
and customer interact and any tangible component that facilitate the performance of the
service.

Process: Actual procedure, mechanism and flow of activities by which the service is
delivered.
2.12 SELF ASSESSMENT QUESTIONS
1. What do you think are the main reasons for including the element of ‘People’ in the
marketing mix for services?

2. Do you think ‘physical evidence’ really matters in marketing of services? Explain.

3. Explain the ‘process’ as one of the important element of marketing mix with suitable
examples.

2.13 REFERENCES / SUGGESTED READINGS

1. Ravi Shanker, ‘Services Marketing: The Indian Perspective’, Excel Books.
2. Lovelock, ‘Services Marketing: People, Technology, Strategy’, Pearson Education.
3. Zeithaml and Bitner, ‘Services Marketing: Integrating Customer Focus Across the
Firm’, Tata McGraw Hill.
4. Rust, Zahorik, and Keiningham, ‘Service Marketing’, Addison Wesley.
5. Fitzsimmons and Fitzsimmons, ‘Service Marketing: Operations, Strategy, and
Information Technology’, McGraw Hill.
LESSON: 3
SERVICE PRODUCT DEVELOPMENT

STRUCTURE
3.1 Objectives
3.2 Introduction
3.3 Characteristic of Services
3.4 Components of Services
3.5 Management of Service Offer
3.6 The Product Life Cycle
3.7 Problem with the Product Life Cycle
3.8 New Service Development
3.9 New Service Development – Some Critical Issues
3.10 Summary
3.11 Keywords

3.1 OBJECTIVES
After going through this lesson, you will be able:
 To understand the concept and components of a service
 To know about the product life cycle
 To learn service product strategies
 To know service development process
3.2 INTRODUCTION

The growing importance of service industry in today’s context has forced the academic
interest towards the service sector. Basically industrial and economic activities have been
classified into three categories viz. primary, secondary and tertiary. Primary activities are
concerned with agriculture, fishing, mining and forestry. Secondary activities include
manufacturing and construction, whereas tertiary activities comprise services and
distribution. Before the industrial development, the primary and secondary activities were
the mainstay of the economy. But the process of commercialization has emphasized the
priority of service sector. In present era, it has become major industry and has apex
importance in the economy. However, the term service is very simple to say but it is very
difficult to explain in precise words because it is general in concept. Services are economic
activities that create value and provide benefits for customers. It is an act or performance
offered by one person another and which is especially separately identifiable, intangible,
non-transfer of ownership and perishable in character. Services includes a wide variety of
activities i.e. utilities, law enforcing, civil, administrative and defense, transport and
communication, distribution traders, business profession, leisure and recreation. The
growth of service industry is the result of economic development of the society and socio-
cultural change among the people. Sometimes, it may be possible that the specific service
industry is the result of a combination of several reasons.

Services are economic activities that create value and provide benefits to customers at
specific times and places as specified by the recipient of the service. Services are those
separately identifiable, essentially intangible activities which provide want-satisfaction,
and that are not necessarily tied to the sale of a product or another service. To produce a
service may or may not require the use of tangible goods. However, when such use is
required, there is no transfer of title (permanent ownership) to these tangible goods.

The Service Concept

The service concept is the core of the service offering. Two levels of service concept are
possible. The ‘general’ service concept refers to the essential product being offered (e.g. a
car hire company offers solutions to temporary transportation problems). In addition, there
will be ‘specific’ service concepts at the core of specific service (e.g. candle-lit dinners or
oriental foods for restaurants). The service concept has to be translated into the ‘service
formula’. This translation process, implies not only a clear definition of the service concept
(i.e. what consumer benefits is the service firm aiming to serve; which service attributes
best express the consumer benefit). It also demands attention to the service process; that is
the ways and means the service is produced distributed and consumed’ the market segment
has to be identified’ the organization-client interface has to be organized in a network’ the
service image has to facilitate clear communication between the service organization and
its potential clients. The service concept is the definition of the offer in terms of the bundle
of goods and services sold to the consumer plus the relative importance of this bundle to
the consumer. It enables the manager to understand some of the intangibles, elusive and
implicit that affect the consumer decision and to design and operate his organization to
deliver a total service package that emphasizes the important element of that package. The
marketing concept dictates that marketing decisions should be based upon customer needs
and wants. Buyers purchase goods and services to satisfy their needs and wants. Thus when
a buyer engages in a market transaction he perceives a bundle of benefits and satisfaction
to be derived from that transaction. However, he does not usually divide the market
offering into its component parts. From the sellers’ view point however the market offering
can be divided into its component parts. The marketing mix is the convenient means of
organizing all the variables controlled by the marketer that influence transactions in the
marketplace. It is a ‘checklist approach’ where marketer’s attempt to list and organize the
variables under their control which may be important in influencing transactions in the
market place.

3.3 THE COMPONENTS OF A SERVICE

The products that firms market do differ in extent to which they involve the transfer of
ownership of physical goods. However, intangible components inevitably play a pivotal
role in winning and maintaining a satisfied customer. To stress this point, we will refer to
all market offerings of firms as their services and point out that these services can be
broken down into four main components which are shown as diagrammatically:
 Service Delivery Service Product
Service Physical Product
Environment
Components of Service

The Physical product is whatever the organization transfers to the customer that can be
touched. It is tangible and physically real. Examples include houses, automobiles,
computers, books, hotel soap and shampoo, and food.

The Service product is the core performance purchased by the customer, the flow of events
designed to provide a desired outcome. It refers to that part of the experience apart from the
transfer of physical goods and typically includes interactions with the trim’s personnel’.

The service environment can also signal the intended market segment and position the
organizations. For example, a restaurant near a university campus might signal that it is
catering to college students by putting college memorabilia and pictures of students on the
walls. The service product is the result of “planning your work, “and the service delivery is
the result of working your plan. For example, the service may be that a fast-food customer
is greeted cheerfully within ten seconds, but the actual service delivery may be hindered by
the counter employee joking in the back of the store for five minutes with other employees.

3.4 MANAGEMENT OF SERVICE OFFER

The service offer is concerned with giving more specific and detailed shape to the basic
service concept notion. Management of services offer is concerned with making decisions
viz. what service will be provided, when they will be provided, how they will be provided
and so on. These decisions and thinking through the implication of actions affecting at least
components:
1. Elements of Service

The service elements are the ingredients of a total service offer; they are the particular
bundle of tangibles and intangibles which compose the service product. Service managers
face two particular problems in defining the composition of a service offer. First there is
the difficulty of articulating all of the elements that could make up a service offer. It is
usually easier to articulate the tangible elements than the intangible. Secondly there is the
difficulty of deciding upon the particular set of elements the service organization will
actually use in its service offer.

But some elements of a service offer are less controllable. Management can ensure that all
guests singing in at a hotel reception desk are formally greeted by the receptionist. There is
less control over the warmth of the greeting. Nevertheless, management must try to
anticipate some of these controllable elements and ensure that the climate of the
organization contributes to rather than detracts from the service offer.

2. Forms of Service
Service elements are offered to the marketplace in different forms. Service form is
concerned with examining in details the various options relating to each service elements.
The particular decision taken on the precise form of each service elements will depend
upon a number of factors including market requirements, competitors’ policies and the
need to obtain balance within, and between, the various elements that make up the service
product offer-what is called ‘cohesiveness and coherence of the set of services offered’.

3. Levels of Service
An offer can be viewed at several levels as follows:

Core or generic For consumer or industrial products this consists of the basic physical
product, e.g. 2 kg of sugar, a packet of self-tapping screws, or a camera. The core elements
for a camera, for example, consists of the camera body, the viewer, the winding
mechanism, the lens and the other core basic physical components which make up the
transactional utility in the form of deposits and withdrawals.
Expected: This consists of the generic product together with the minimal purchase
conditions which need to be met. When a customer buys a video cassette recorder they
expect an instruction book which explains how to programme it, a warranty for a
reasonable period should it break down, and a service network so that it can be repaired.
Augmented: This is the area which enables one offer to be differentiated forms another.
For example, IBM has a reputation for excellent customer service although they may not
have the most technologically advanced core product. They differentiate by ‘adding value’
to the core, in terms of service reliability and responsiveness. Potential: This consists of all
potential added features and benefits that are or may be of utility to some buyers. The
potential for redefinition of the product gives advantages in attracting new users or
‘looking’ in ‘existing customers. This could make it difficult or expensive for customers to
switch to another supplier.

3.5 THE PRODUCT LIFE-CYCLE

Introduction
In the beginning, sale of new products increases slowly. Factors influencing the growth of
sales at this stage include the relatively small number of innovative customers, problems of
building effective distribution, technical problems of assuring quality and reliability and
limited production capacity. Profits too may be low or non-existent at this stage because of
factors like the promotional costs involved in promoting sales.

Growth
In this stage sales grow. More consumers follow the lead of innovators, the market
broadens through policies of product differentiation and market segmentation, competitors
enter the market, and distribution broadens. Profit margins peak as experience effects serve
to reduce unit costs and promotional expenditures are spread over larger sales volumes.
Maturity

In this stage, sales are at peak. The growth rate in sales goes considerably down as most of
the consumers are already having the product where as new ones are difficult to add. Profit
margins are at peak and reduced unit costs and promotional expenditures are spread over
larger sales volumes.

Saturation
In this stage, sales level is almost stagnant. Growth is increasingly governed by factors like
population growth or attempts to stretch the cycle through market segmentation strategies.
Profits too decline because of the number of competitive offerings, cost reductions become
more difficult and smaller specialist competitors eat into the market.

Decline
In this stage sales decline because of changing tastes, fashions and technical advances
causing product substitution. Declining sales are accompanied by reducing profit margins
as too many competitors fight for the remaining market. Price cutting may be active and
marginal competitors fall out of the industry.

Problems with the Product Life-Cycle Concept

It is not surprising that the lifecycle concept has critics. Some attempts to derive the
conventional S-shaped curve of the cycle with its stage of introductions, growth, maturity
and decline have not been altogether convincing. In fact, some authors have even gone so
far as to suggest that the idea should be forgotten altogether. Some authors suggested that
the concept of product portfolio may be useful for a company to balance its tangible
products by stage of the lifecycle as part of its planning process. They argued that with
some exceptions (e.g. banks) most service organizations have only a very small number of
core services or do not have the flexibility for combining different services belonging to
the same category. They also highlight the importance of defining in what context the term
product lifecycle is used. This gives rise to a second set of problems.
The Intangible Nature of Services

The intangible nature of services means that it is often quite easy to produce slight variants
of an existing service with the result that the term ‘new service’ can mean anything from a
minor style change to a major innovation. The following may be the classification of new
services:

1 Changes in Style: These include changes in decor or logo the revised design of
telephone for example.
2 Improvement in Service: These involve an actual change to a feature of the service
already on offer to established market-computerizations of travel-agency
information and booking procedures, for example.
3 Extensions in Service Line: These are additions to the existing service product
range-new modes of study for an MBA course at a university, for example.
4 News services for Existing Customers: These are new services that are offered by
an organization to its existing customers, although they may be currently available
from its competitors-building societies offering current accounts, with cheques
books, standing-order facilities, etc., for example.
5 Innovations in Services: These are entirely new services for new markets-the
provisions of multi user ‘voice mail’ recording services, for example.

STRATEGIES OF SERVICE PRODUCTS

Decisions about an organization’s product mix are of strategic importance. A service
company may need to widen its product mix in order to remain competitive in the phase of
declining demand for its principal service line. For example, the increasing diversity in
food tastes has forced many specialized fast-food outlets to widen their range and
traditional fish and chip shops have often had to introduce new lines such as kababs or
home-delivery services.
The product strategies are available to a service firm for its main services:

1 Market penetration: An organization continues to supply its existing services to

its existing customer segments, but seeks to increase sales from them. This may be
achieved by increasing their total consumption of that type of service, or by taking
consumers from competitors.
2 Market extension: New types of consumer are found for existing services. For
example, a restaurant chain may extend its operations to a new overseas market, or
higher education institutions may promote their courses to new groups of mature
students.
3 Service development: New or modified services are developed to sell to the
current market. For example, a bank may offer a new type of charge card aimed at
its current customer base.
4 Diversification: New services are offered to new markets-for example, a traditional
package-holiday operator offering a conference-organizing service.

3.6 PROBLEM WITH THE PRODUCT LIFECYCLE

In reality, lifecycle patterns are far too variable in both shape and duration for any realistic
predictions to be made. A second difficulty in applying the lifecycle concept lies in the
inability of marketers to ascertain accurately where in the lifecycle a product actually is at
any time. For example, a stabilization of sales may be a movement into maturity or simply
a temporary plateau due to external causes. In fact, it is possible that the shape of the
lifecycle is a result of an organization’s marketing activity rather than an indication of
environmental factor to which the organization should respond-in other words, it could
lead to a self-fulfilling prophecy.

Another criticism of the concept is that the duration of the stages will depend upon whether
it is a product calls, form or brand which is being considered. For example, the lifecycle for
holidays is probably quite flat, whereas those for particular formulations of holidays and
for specific holiday operators’ brand become progressively more cyclical.
3.7 NEW SERVICE DEVELOPMENT (NSD)

1. Idea Generation
Ideas may be generated in many ways. They can arise inside the organization and outside
it, they can result from search procedures (e.g. marketing research) as well as informally;
they may involve the organization in creating the means of delivering the new service
product or they may involve the organization in obtaining rights to services product, like
franchise.
2. Idea Screening
This stage is concerned with checking out which ideas will justify the time, expense and
managerial commitment of further research and study. Two features usually associated
with the screening phase are:

i. The establishment or use of previously agreed evaluative criteria to enable the

comparison of ideas generated (e.g. ideas compatible with the organization’s
objectives and resources);
ii. The weighing, ranking and rating of the ideas against the criteria used.

3. Concept Development and Testing

Ideas serving the screening process then have to be translated into product concepts. In the
service product context this means concept development and concept testing.

(a) Concept Development

This phase is concerned with translating the service product idea, where the possible
service product is defined in functional and objective terms, into a service product concept,
the specific subjective consumer meaning the organization tries to build into the product
idea.

(b) Concept Testing

Concept testing is applicable in services contexts as well as in goods’ contexts. Concept
testing consists of taking the concepts developed after the stages of idea generation and
idea screening and getting reactions to them from groups of target customers.
4. Business Analysis
This stage is concerned with translating the proposed idea into a firm business proposal. It
involves undertaking a detailed analysis of the attractiveness of the idea in business terms
and its likely chances of success or failure. A substantial analysis will consider in detail
aspects like the manpower required to implement the new service product idea, the
additional physical resources required, the likely estimates of sales, costs and profits over
time, the contribution of the mew service to the range on offer, likely customer’s reaction
to the innovation and the likely response of competitors.

5. Development
This stage requires the translation of the idea into an actual service product for the market.
Typically, this means that there will be an increase in investment in the project. Staff may
have to be recruited or trained, facilities may have to be constructed, and communications
systems may need to be established. The tangible elements of the service product will be
designed and tested. Unlike goods the development stage of new service product
development involves attention to both the tangible elements of the service product
delivery system.

6. Testing
Testing of new service products may not always be possible. Airlines may introduce a new
class of service on a selected number of routes or a bank may make a new service available
initially on a regional basis like automated cash dispensers. But some new service products
do not have such an opportunity. They must be available and operate to designed levels of
quality and performance from their introduction.

7. Commercialization
This stage represents or organization’s commitment to a full-scale launch of the new
service product. The scale of operation may be relatively modest like adding an additional
service to an airline’s routes or large scale involving the national launch of fast service
footwear repair outlets operating on a concession basis. In undertaking the launch, the four
points may apply:

(a) When to introduce the new service product;

(b) Where to launch the new service product, whether locally, regionally nationally or
internationally;
(c) To whom to launch the new service product usually determined by earlier
exploration in the new service product development process;
(d) How to launch the new service product? Unit trusts for example may offer a fixed
price unit on initial investments for a certain time period.

3.8 NEW SERVICE DEVELOPMENT – SOME CRITICAL ISSUES

The buyer’s choice of a new service product may be influenced by features associated with
it. These features may be seen as a fundamental part of the ‘core’ service by the consumers
or as ‘peripheral’ to the core service. In tangible product marketing the brand, the color, the
design or the package may be important contributory factors to the consumer’s purchase
decision.

1. Branding
‘Branding, brand development and brand acceptance are usually not prominent in the
marketing of services’. Certainly branding is difficult because of the problems of
maintaining consistency of quality in service settings. Example: In a study of brand loyalty
in the context of the computer rental market it was found there was no one reason why
customers terminated rental agreements or maintained or renewed their agreements.

2. Patent
The intangibility of services means that there are no patents. It is thus difficult to prevent
competitors from copying service innovations though trade names can be protected. This
means that innovations can have short life-cycles because they are easy to copy.
3. Warranty
Warranties are usually related to product sales. However, they can be an important element
in the strategy of service marketers. In law a warranty is an undertaking on the vendor’s
part that the thing sold by the vendor is fit for use or fulfills specified conditions. Such
undertakings are of two kinds, implied and express.

Warranties can be of importance in marketing certain services. For example, investment

schemes which guarantee payments in spite of changes in external conditions can be a
useful factor in marketing financial services.

4. Service Product After-sale Service

After-sale service is usually associated with the sale of tangibles. However, it too has
relevance to services markets. For example, an airline can assist passengers to arrange hire
cars and book hotels as part of their service; an insurance company can advise clients on
changes they should make to their policies as their personal circumstances change; a
stockbroker can assist the client to readjust a portfolio of shares; a dentist can provide a
check-up sometime after providing dental treatment.

The elimination of service of service products of course is not easy and indeed
organizations may adopt a number of strategies before doing so like selling overseas,
optimizing profitability over whatever life remains or revitalizing the offering in some way.
But these moves do not ultimately remove the need for systematic procedures to assist with
decision making in this area.

3.9 SUMMARY
Services are economic activities that create and deliver value and benefits to the customers.
The components of a service are – service product, physical product, service delivery and
service environment. Like human beings, services also have a product life cycle which
includes different stages of a product namely, Introduction, Growth, Maturity, Saturation
and Decline. To meet the changing needs and wants of the customers, marketers of services
need to continuously redefine their services which call for development of new services.
The new service development is a process which needs to be undertaken very carefully.

3.10 KEYWORDS
Service concept: It is the core of the service offering.
Product life cycle: The stages through which a product undergoes during its life time.
Market penetration: Increasing the sales of the product by increasing the total consumption
of consumers or attracting competitors’ customers.
Market extension: Attracting new types of consumer for existing services.
Service development: Developing or modifying services to sell to the current market.
Diversification: Developing new services to be offered to new markets.
3.11 SELF ASSESSMENT QUESTIONS
1. What are the components of a service offer? Also discuss different levels of service.
2. What are the various product strategies available to a service firm? What are the
implications of each?
3. What is the relevance of the life cycle concept to service products?

3.12 REFERENCES / SUGGESTED READINGS

1. Heskett, J.L., “Managing in the Service Economy”. Harvard Business School Press.
2. Love Lock, Christoper H. 1991, “Service Marketing,” Prentice Hall Englewood
3. Cliffs, N.J. Balaji, B., “Service Marketing and Management”. S. Chand and
Company Ltd., New Delhi-2002.
4. Khurana, Rakesh, Kaushik Madhulika, Yadav, Kamal, “Marketing of Services,
Concept and Applications”. School of Management, Indira Gandhi National Open
University New Delhi.
 LESSON: 4
SERVICE CONSUMER BEHAVIOR

STRUCTURE
4.1 Objectives
4.2 Introduction
4.3 Consumer needs and expectations
4.4 Decision making roles
4.5 Factors influencing consumer’s behavior
4.6 How customers evaluate service performances
4.7 Service decision making process
4.8 Purchase process for services
4.9 Summary
4.10 Keywords
4.11 Self-Assessment Questions
4.12 References / Suggested Readings

4.1 OBJECTIVES
After going through this lesson, you will be able:
 To understand why it is important to have a proper knowledge of the consumer
 To identify the kinds of role that are played in purchase process.
 To know the factors influencing consumer behavior.
 To explain the consumer decision making process.

4.2 INTRODUCTION
The primary objective of service producers and marketers is identical to that of all
marketers: to develop and provide offerings that satisfy consumer needs and expectations,
thereby ensuring their own economic survival. In other words, service marketers need to be
able to close the customer gap between expectations and perceptions. To achieve this
objective, service providers need to understand how consumers choose and evaluate their
service offerings. Unfortunately, most of what is known about consumer evaluation
processes pertains specifically to goods. The assumption appears to be that services, if not
identical to goods, are at least similar enough in the consumer’s mind that they are chosen
and evaluated in the same manner.

This chapter challenges that assumption and shows that services’ unique characteristics
necessitate different consumer evaluation process from those used in assessing goods.
Recognizing these differences and thoroughly understanding consumer evaluation
processes are critical for the customer focus on which effective services marketing is
based. Consumers have a more difficult time evaluating and choosing services than goods,
partly because services are intangible and non-standardized and partly because
consumption is so closely intertwined with production. These characteristics lead to
differences in consumer evaluation processes for goods and services in all stages of buying
process.

4.3 CUSTOMER NEEDS AND EXPECTATIONS

Customers buy goods and services to meet specific needs, and they evaluate the outcomes
of their purchases based on what they expect to receive. Needs are deeply rooted in people
unconscious minds and concern long-term existence and identity issues. When people feel
a need, they are motivated to take action to fulfill it. Abraham Maslow identified five
categories of human needs- physiological, safety, love, esteem and self-actualization- and
proposed that basic needs such as food and shelter must be met before others can be
fulfilled. Greater prosperity means that increasing numbers of individuals are seeking to
satisfy social and self-actualization needs, which create demand for more sophisticated
goods and services. For instance, travel and leisure services have been a major beneficiary
of increased disposable income, leading many firms to develop a variety of enticing
vacation packages. However, as customer needs and preferences continue to evolve, the
leisure industry needs to adapt its offerings accordingly.

The shift in consumer behavior and attitudes provides opportunities for service companies
that understand and meet changing needs, continuing to adapt their offerings over time as
needs evolve. Customers’ expectations about what constitutes good service vary from one
business to another. Expectations are also likely to vary in relation to differently positioned
service providers in the same industry.

When individual customers or corporate purchasing departments evaluate the quality of a

service, they may be judging it against some internal standard that existed prior to the
service experience. Perceived service quality results from customers comparing the service
‘they perceive they have received’ against what ‘they expected to receive’. People’s
expectations about services tend to be strongly influenced by their own prior experience as
customers-with a particular service provider, with competing services in the same industry,
or with related services in different industries. If they have no relevant prior experience,
customers may base their pre-purchase expectations on factors such as word-of-mouth
comments, news stories, or the firm’s marketing efforts.

Customer expectations embrace several different elements, including desired service,

adequate service, predicted service, and a zone of tolerance that falls between the desired
and adequate service levels.

Desired and adequate service Levels-Desired service is the type of service customers hope
to receive. It is a wished-for level of service-a combination of what customers believe can
be and should be delivered in the context of their personal needs. However, most customers
are realistic and understand that companies can’t always deliver the level of service they
would prefer; hence, they also have a threshold level of expectations, termed adequate
service, which is defined as the minimum level of service customers will accept without
being dissatisfied.
Predicted service-The level of service customers actually anticipate receiving is known as
predicted service and directly affects how they define adequate service on any given
occasion. If good service is predicted, the adequate level will be higher than if poorer
service is predicted. Customers predictions of service may be situation specific.

Zone of tolerance-The inherent nature of services makes consistent service delivery

difficult across employees in the same company and even by the same service employee
from one day to another. The extent to which customers are willing to accept this variation
is called the ‘zone of tolerance’. A performance that falls below the adequate service level
will cause frustration and dissatisfaction, whereas one that exceeds the desired service level
will both please and surprise customers, creating what is sometimes referred to as customer
delight. Another way of looking at the zone of tolerance is to think of it as the range of
service within which customers don’t pay explicit attention to service performance. By
contract, when service falls outside the range, customers will react either positively or
negatively.

The zone of tolerance for individual customers depending on factors such as competition,
price, or importance of specific service attributes.

4.4 DECISION MAKING ROLES

In the buying decision process, at times, other people also influence the buying decision
and these people have a definite role to play. In the purchase of any particular service, six
distinct roles are played. These are:

Initiator-The person who has a specific need, and proposes to buy a particular service
Influencer-The person or the group of people who advise the decision maker. These could
be reference groups, both primary and secondary. It could be even secondary reference
group like word of mouth or media, which can influence the decision maker.
Gatekeeper-The person or organization or promotional material which acts as a filter on
the range of service which enter the decision choice set.
Decider-The person who makes the buying decision. Irrespective of whether they execute
the purchase themselves or not, they may instruct others to execute. It has been observed,
at times, more typically in household or family or individual related services that one
member of the family may dominate in the purchase decision.
Buyer-The person who makes the actual purchase or makes bookings for a services like
our lives travel, hotel room, hospital, bed diagnostic lab, etc.
User-The person who actually uses or consumes the product. It can be someone other than
the buyer. In a number of services, it has been observed that users are also the influencers.

4.5 FACTORS INFLUENCING CONSUMER BEHAVIOR

There are a number of factors or variables which affect buying behavior.
Situational factors
The situational factors influencing the buying behavior are- the influence of time pressure
in service and brand choice, the atmosphere of the service outlet, occasion of purchase, etc.
For example, if you are traveling, then demand for lodging and boarding will obviously be
there.
Socio-cultural factors
Buyers or consumers do not take buying decisions or the decision not to buy, in a vacuum.
Rather, they are strongly influenced by cultural and social factors.
Cultural Factors-Children acquire from their environment a set of beliefs values and
customs which constitute culture. These beliefs, values and customs go deeper and deeper
as a person grows. Therefore, it is sometimes said that culture is learned as a part of social
experience. The various sub-categories within a culture can be identified based on religion,
age, gender, occupation, social class, geographical location, etc.
Reference groups -There are certain groups to which people look to guide their behavior.
These reference groups may guide the choice of a product but not necessarily the brand.
Peer group and peer pressure has generally been observed to play an important role in the
purchase of credit cards, cell phones, etc. The knowledge of reference group behavior helps
in not only offering substitutes but also in pricing and positioning them.
Family-The family is another major influence on consumer behavior. Family consumption
behavior, to a large extent, depends on the family life cycle. The stages in family life cycle
include bachelorhood, newly married, parenthood with growing or grown up children,
post-parenthood and dissolution. Knowledge of these stages helps greatly in knowing the
buying process. Often family members play a significant role in the purchase of a particular
service.

Psychological Factors
Perception-It is the process by which buyers select, organize and interpret information into
a meaningful impression in their minds. Perception is also selective when only a small part
is perceived out of the total of what is perceptible. Buyer’s perception of a particular
service greatly influences buying behavior.
Attitude-An attitude is a learned predisposition to respond in a consistently favorable or
unfavorable manner with respect to a market offer (i.e., a brand, a particular shop or retail
outlet, an advertisement, etc.). Attitude is a dispositional term indicating that attitudes
manifest themselves in behavior only under certain conditions. Knowing a buyer’s attitude
towards a product without knowing the personal goals is not likely to give a clear
prediction of his behavior.
Motivation- Motivation is the driving force within individuals that compels them to action.
This driving force is subconscious and the outcome of certain unfulfilled needs. Needs are
basically of two types- first, the ‘innate needs’ are those needs with which an individual is
born and they are mainly physiological. They include all the factors required to sustain
physical life e.g., food, water, shelter, clothing, etc. Secondly, the ‘acquired needs’ are
those which a person acquires as he/she grows and these needs are mainly psychological,
like love, fear, esteem, acceptance, etc.

Personal factors
Personality- Personality can be described as the psychological characteristics that
determine how an individual will react to his or her environment.
Life Style-Life style as distinct from social class or personality is nothing but a person’s
pattern of living and is generally expressed in his/ her activities, interests and opinions.
Life style suggests differences in the way people opt to spend on different products or
services differently.
Demographic Factors-Buyers demographic factors like age, gender, education,
occupation, etc., also influence his/her purchase behavior. In sum, knowledge on all such
dimensions of the consumer will help in understanding his needs and wants and also help
in integrating all these elements in service offer which the consumer wants.

4.6 HOW CUSTOMERS EVALUATE SERVICE PERFORMANCES

Service performances-especially those that contain few tangible clues can be difficult to
evaluate. As a result, there is a greater risk of making a purchase that proves to be
disappointing. Customers who have purchased a physical good that subsequently proves to
be a poor choice can often recover easily from their mistake (for instance, they can return a
defective CD player, exchange clothing that is the wrong size, or have a car repaired under
warranty). These options are not as readily available with services, although recovery is
easier for some types of service than others. In the case of possession-processing services,
repeating the performance may be an acceptable option. For example, a cleaning service
can re-clean an office if a customer complains about the poor quality of the job. By
contrast, people-processing services that are performed on people’s bodies may be hard to
reverse. After all, a bad haircut must be grown out, and the consequences of a faulty
surgical operation or a poorly done tattoo may last forever!

Mental stimulus-processing services such as education, live entertainment, or sporting

events can also be difficult to replace if quality does not meet customers’ expectations.
Theatergoers cannot realistically ask for their money back if actors perform their roles
poorly or the script is bad, and neither can sports fans expect refunds if their favorite team
plays badly (instead, they use other methods to let the players know of their
dissatisfaction!). Similarly, universities don’t usually compensate students for poor-quality
classroom experiences. Even if a college were willing to let dissatisfied students repeat
classes free of charge with a different instructor, those students would still incur significant
extra time and mental effort.

Finally, information-based services can present challenges for customers when service
quality is unsatisfactory. Banking or accounting errors may not be noticed until later, by
which time damage may have been done to a customer’s reputation (for instance a check
was returned rather than paid or a faulty tax return was filed). Customers who receive a
consulting recommendation or medical opinion that they are not satisfied with, have the
option of seeking a second opinion, but that will involve extra money, time, and worry.

A continuum of product attributes

One of the basic differences between goods and services is that services are harder for
customers to evaluate. All products can be placed on a continuum ranging from “easy to
evaluate” to “difficult to evaluate” depending on whether they are high in search attributes,
experiential attributes, or credence attributes. These three attribute categories provide a
useful framework for understanding how consumers evaluate different types of market
offerings.

Search Attributes-Physical goods tend to emphasize those attributes that allow customers to
evaluate a product before purchasing it. Features such as style, color, texture, taste, and
sound allow prospective consumers to try out, taste-test, or test-drive the product prior to
purchase. These tangible attributes help customers understand and evaluate what they will
get in exchange for their money and reduces the sense of uncertainty or risk associated with
the purchase occasion. Goods such as clothing, furniture, cars, electronic equipment, and
foods are high in search attributes.

Experience Attributes-These are properties that can’t be evaluated prior to purchase.

Customers must experience these features to know what they are getting. Holidays, live
entertainment performances, sporting events, and restaurants fall into this category.
Although people can examine brochures, scroll through Web sites that explain the features
of a holiday destination, view travel films, or read reviews by travel experts, they can’t
really evaluate or feel the dramatic beauty associated with hiking in the Canadian Rockies
or the magic of scuba diving in the Caribbean until they actually experience these
activities. And neither can customers always rely on information from friends, family, or
other personal sources when evaluating these or other types of services. Consider your own
experiences in following up recommendations from friends to see a particular film.
Although you probably walked into the theater with high expectations, you would have felt
disappointed after viewing the film if it did not live up to your expectations. Different
people may interpret or respond to the same stimuli in different ways.

Credence attributes- Product characteristics that customers find impossible to evaluate

confidently even after purchase and consumption are known as credence attributes because
the customer is forced to trust that certain benefits have been delivered even though it may
be hard to document them. For example, relatively few people possess enough knowledge
about financial markets to assess whether their stock broker got the best possible returns on
their invested funds. Patients can’t usually evaluate how well their dentists have performed
complex dental procedures. And most college students must simply have faith that their
professors are providing them with a worthwhile educational experience!

In summary, most service tend to be located from the center to the right of the continuum,
reflecting two of the basic differences between goods and services, intangibility of service
performances and variability of inputs and outputs (which often leads to quality control
problems). These characteristics present special challenges for service marketers, requiring
them to find ways to reassure customers and reduce the perceived risks associated with
buying and using services whose performance and value can’t easily be predicted.

4.7 SERVICE DECISION-MAKING PROCESS

Consumer decision-making process have four main categories: (1) information search, (2)
evaluation of alternatives, (3) purchase and consumption, and (4) post-purchase evaluation.
In purchase of services, these categories do not occur in a linear sequence the way they
most often do in the purchase of goods.

(a) Information search

Use of personal sources- Consumers obtain information about products and services for
personal sources (e.g., friends or experts) and from non-personal sources (e.g., mass or
selective media). When purchasing goods consumers make generous use of both personal
and non-personal sources because both effectively convey information about search
qualities. When purchasing services, on the other hand, consumers seek and rely to a
greater extent on personal sources.

Perceived risk-While some degree of perceived risk probably accompanies all purchase
transactions, more risk would appear to be involved in the purchase of services than in the
purchase of goods because services are intangible, non-standardized, and usually sold
without guarantees or warranties.

First, the intangible nature of services and their high level of experience qualities imply
that services generally must be selected on the basis of less pre-purchase information than
is the case for products. Second, because services are non-standardized, there will always
be uncertainty about the outcome and consequences each time a service is purchased.
Third, service purchases may involve more perceived risk than product purchases because,
with few exceptions, services are not accompanying by warranties or guarantees. The
dissatisfied service purchaser can rarely “return” a service; he or she has already consumed
it by the time he or she realizes his or her dissatisfaction.

(b) Evaluation of service alternatives

Evoked set-The evoked set of alternatives-that group of products a consumer considers
acceptable options in a given product category- is likely to be smaller with services than
with goods. One reason involves differences in retailing between goods and services. To
purchase goods, consumers generally shop in retail stores that display competing products
in close proximity, clearly demonstrating the possible alternatives. To purchase services,
on the other hand, the consumer visits an establishment (e.g., a bank, a dry cleaner, or a
hair salon) that almost always offers only a single “brand” for sale. A second reason for the
smaller evoked set is that consumers are unlikely to find more than one or two businesses
providing the same services in a given geographic area, whereas they may find numerous
retail stores carrying the identical manufacturer’s product. A third reason for a smaller
evoked set is the difficulty of obtaining adequate pre-purchase information about services.
Emotion and Mood-Emotion and mood are feeling states that influence people’s (and
therefore customers’) perceptions and evaluations of their experiences. Moods are
distinguished from emotions in that moods refer to transient feeling states that occur at
specific times and in specific situations, whereas emotions are more intense, stable, and
pervasive.

Because services are experiences, moods and emotions are critical factors that shape the
perceived effectiveness of service encounters. If a service customer is in a “bad mood”
when he enters a service establishment, service provision will likely be interpreted more
negatively than if he were in a buoyant, positive mood. Similarly, if a service provider is
irritable or sullen; his interaction with customers will likely be colored by that mood.
Furthermore, when another customer in a service establishment is cranky or frustrated,
whether from problems with the service or from existing emotions unrelated to the service,
his or her mood affects the provisions of service for all customers who sense the negative
mood. In sum, any service characterized by human interaction is strongly dependent on the
moods and emotions of the service provider, the service customer and other customers
receiving the service at the same time.

(c) Service purchase and consumption

Service provision as Drama-Researchers and managers of service businesses have
compared service provision with drama, observing that both aim to create and maintain a
desirable impression before an audience, and both recognize that the way to accomplish
this is by carefully managing the actors and the physical setting of their behavior. In fact,
the service marketer must play many drama-related roles (including director,
choreographer, and writer) to be sure the performances of the actors are pleasing to the
audience.

The skill of the service “actors” in performing their routines, the way they appear, and their
commitment to the “show” are all pivotal to service delivery. While service actors are
present in most service performances, their importance increases when the degree of direct
personal contact increases (such as in a hospital, resort, or restaurant), when the services
involve repeat contact, and when the contact personnel as actors have discretion in
determining the nature of the service and how it is delivered (as in education, medical
services, and legal services).

Services roles and scripts-If we think of service performances as drama, we can view
each players as having a role to perform. Roles have been defined as combinations of
social cues that guide ad direct behavior in a given setting. The success of any service
performance depends in part on how well the “role set” or players- both service employees
and customers- act out their roles. Service employees need to perform their roles according
to expectations of the customer; if they do not, the customer may be frustrated and
disappointed.

One of the factors that most influences the effectiveness of role performance is a script- a
“coherent sequence of events expected by the individual, involving them either as a
participant or as an observer”. Service scripts consist of a set of ordered actions, actors, and
objects that, through repeated involvement, define what the customer expects. Con-
formance to scripts is satisfying to the customer, while deviations from the script lead to
confusion and dissatisfaction.

(d) Post purchase evaluation

Attribution of dissatisfaction- When consumers are disappointed with purchases-because
the products did not fulfill the intended needs, did not perform satisfactorily, or were not
worth their price- they may attribute their dissatisfaction to a number of different sources,
among them the producers, the retailers, or themselves. Because consumers participate to a
greater extent in the definition and production of services, they may feel more responsible
for their dissatisfaction when they purchase services than when they purchase goods. As an
example, consider a female consumer purchasing a haircut; receiving the cut the desires
depends in part upon her clear specifications of her needs to the stylist. If disappointed, she
may blame either the stylist (for lack of skill) or herself (for choosing the wrong stylist or
for not communicating her own needs clearly).

Innovation diffusion- The rate of diffusion of an innovation depends on consumers’

perceptions of the innovation with regard to five characteristics: relative advantage,
compatibility, communicability, divisibility, and complexity. An offering that has a relative
advantage over existing or competing products; that is compatible with existing norms,
values, and behaviors; that is communicable; and that is divisible (i.e., that can be tried or
tested on a limited basis) diffuses more quickly than others. An offering that is complex,
that is, difficult to understand or use, diffuses more slowly than others.

Brand loyalty- The degree to which consumers are committed to particular brands of goods
or services depends on a number of factors: the cost of changing brands (switching cost),
the availability of substitutes, the perceived risk associated with the purchase, and the
degree to which they have obtained satisfaction in the past. Because it may be costlier to
change brands of services, because they may have more difficulty being aware of the
availability of substitutes, and because higher risks may accompany services, consumers
are more likely to remain customers of particular companies with services than with goods.
Greater search costs and monetary costs may be involved in changing brands of services
than in changing brands of goods. Because of the difficulty of obtaining information about
services, consumers may be unaware of alternatives or substitutes for their brands, or may
be uncertain about the ability of alternatives to increase satisfaction over present brands.
4.8 PURCHASE PROCESS FOR SERVICES

When customers decide to buy a service to meet an unfilled need, they go through what is
often a complex purchase process. This process has three separate stages-the pre-purchase
stage, the service encounter stage, and post-purchase stage.

Pre-purchase stage
The decision to buy and use a service is made in the pre-purchase stage. Individual needs
and expectations are very important here because they influence what alternatives
customers will consider. If the purchase is routine and relatively low risk, customers may
move quickly to selecting and using a specific service provider. But when more is at stake
or a service is about to be used for the first time, they may conduct an intensive
information search. The next step is to identify potential suppliers and then weigh the
benefits and risks of each option before making a final decision.

Service encounter stage

After deciding to purchase a specific service, customers experience one or more contacts
with their chosen service provider. Contacts may take the form of personal exchanges
between customers and service employees or impersonal interactions with machines or
computers. In high-contact services, such as restaurants, health care, hotels, and public
transportation, customers may experience a variety of elements during service delivery,
each of which has the potential to provide clues to service quality.

Service environments include all of the tangible characteristics to which customers are
exposed. The appearance of building exteriors and interiors; the nature of furnishings and
equipment; the presence or absence of dirt, odor, or noise; and the appearance and behavior
of other customers can all serve to shape expectations and perceptions of service quality.

Post-purchase stage
During the post-purchase stage, customers continue a process they began in the service
encounter stage- evaluating service quality and their satisfaction or dissatisfaction with the
service experience. The outcome of this process will affect their future intentions, such as
whether to remain loyal to the provider that delivered service and whether to pass on
positive or negative recommendations to family members and other associates.

Customers evaluate service quality by comparing what they expected with what they
perceive they received. If their expectations are met or exceeded, they believe they have
received high-quality service. If the price-quality relationship is acceptable and other
situational and personal factors are positive, then these customers are likely to be satisfied.
As a result, they are more likely to make repeat purchases and become loyal customers.
However, if the service experience does not meet customers’ expectations, they may
complain about poor service quality, suffer in silence, or switch providers in the future.

4.9 SUMMARY
Gaining a better understanding of how customers evaluate, select, use, and occasionally
abuse services should lie at the heart of strategies for service design and delivery. In this
chapter, we discovered that several of the unique characteristics of services (especially
intangibility and quality control problems) mean that customer evaluation processes often
differ from those involved in evaluating physical goods and thus present unique challenges
for services management.

4.10 KEYWORDS
Culture: A set of beliefs, norms, values and customs.

Perception: It is the process by which buyers select, organize and interpret information into
a meaningful impression in their minds.

Attitude: It is a learned predisposition to respond in a consistently favorable or unfavorable

manner with respect to an object.
Motivation: It the driving force within individuals that impels them to act in a particular
direction.

Personality: It can be described as the psychological characteristics that determine how an

individual will react to his or her environment.

Life style: It is a person’s distinct pattern of living and is generally expressed in his/ her
activities, interests and opinions.

4.11 SELF ASSESSMENT QUESTIONS

1. Describe search, experience and credence attributes and give examples of each.
2. Explain why services are often harder for customers to evaluate than physical goods.
3. Discuss the three stages in the purchase process for services.
4. Elaborate the various steps involved in consumer decision making process for services.
5. Identify the kinds of role that are played in services purchase process. Also write
important factors influencing consumer behavior.

4.12 SUGGESTED READINGS

1. Ravi Shanker, ‘Services Marketing: The Indian Perspective’, Excel Books.
2. Lovelock, ‘Services Marketing: People, Technology, Strategy’, Pearson Education.
3. Zeithaml and Bitner, ‘Services Marketing: Integrating Customer Focus Across the
Firm’, Tata McGraw Hill.
4. Rust, Zahorik, and Keiningham, ‘Service Marketing’, Addison Wesley.
5. Fitzsimmons and Fitzsimmons, ‘Service Marketing: Operations, Strategy, and
Information Technology’, McGraw Hill.
LESSON: 5
PACKAGING, BRANDING AND ADVERTISING FOR SERVICES

STRUCTURE
5.1 Objectives
5.2 Introduction
5.3 The Marketing Mix in Services
5.4 Packaging of Services
5.5 Branding in Services
5.6 Advertising of Services
5.7 Summary
5.8 Keywords
5.7 Self-Assessment Questions
5.8 References / Suggested Readings

5.1 OBJECTIVE
After going through this lesson, you will be able:
 To explain the marketing planning process for branding and packaging,
 To suggest promotional strategies for service organizations.

5.2 INTRODUCTION
Commonly, the core of marketing is considered to be the marketing mix. It is also accepted
in general that a marketer is viewed as a ‘decider’, or an ‘artist’ or a ‘mixer of ingredients’
who plans various means of fighting competition. He may follow a recipe prepared by
others, or prepare his own as he goes along, or adopt a recipe to the ingredients
immediately available, or experiment with or invent ingredients no one else has tried.
Further, it is logical to proceed from a realization of the existence of a variety of marketing
mixes to the development of a concept that would comprehend not only this variety, but
also the market forces that cause managements to produce a variety of mixes. It is the
problems raised by these forces that lead marketing managers to exercise their wits in
devising ‘mixes or programmes to fight competition.

5.3 THE MARKETING MIX IN SERVICES

The concept of marketing mix was given due recognition in the marketing theory and the
concept of marketing mix was accepted as the set of marketing tools that a firm uses to
pursue its marketing objectives in the target market, influenced by specific environmental
variables. According to McCarthy, the elements of marketing mix are 4Ps - product, price,
place (i.e. distribution) and promotion. He even clarified that the customer is not a part of
the marketing mix; rather, he should be the target of all marketing efforts. For service
industries, Frey proposed that all marketing decision variables or service mix, which can be
put under two subheads – the offering and the product. In goods marketing, we always say
that there is a tangible component to which some intangibles like style, after-sales-service,
credit, etc., are integrated. On the other hand, in the case of services, the tangible
component is nil. Traditionally, a product is described as an object, which is developed,
produced, delivered and consumed. However, in services there is nil or only a little tangible
element because of which they are considered as benefits which, are offered to the target
market. There are two important things to note first, a service is a bundle of features and
benefits and secondly, these benefits and features have relevance for a specific target
market. Therefore, while developing a service product it is important that the package of
benefits in the service offer must have a customer’s perspective. Kotler has identified five
levels of a product, taking the example of the hotel industry. It is the core and the basic
which might be the same for most of the competing products while it is the other levels
which make them different. These five levels and their meaning are depicted in table 5.1.
Similarly, the services consist of three levels. The first level is that of the basic service
package which includes core service, facilitating services and supporting services. The
second level is that of an augmented service offering where accessibility, interaction and
customer participation is given equal importance in delivering the service product. The
third level is that of the market communication of the service offering as in its absence the
augmentation service package does not have any relevance to the customer.

5.4 PACKAGING OF SERVICES

The ‘package’ concept of service product suggests that what you offer to the market is a
bundle of different services, tangible and intangible, but there is a main or substantive or
‘core’ service and around it are built the auxiliary or peripheral or facilitator services. It is
important to note that facilitating services are mandatory and if these are left out, the entire
service would collapse, although, there are other types of services in the service package,
called supporting services. The basic difference between the two is that supporting services
do not facilitate the consumption of core services, but are used to increase the value, and,
thus, differentiate it from competition.

For example, in a 200-rooms hotel the core service is lodging and room service. Bellboy
services are facilitating services and health club, car rental are support services. However,
it may not always be possible to draw a line of distinction between facilitating and support
services. For example, in a typical city hotel, business center might be the support service,
but in a business and convention hotel, the same service would be facilitating service.
Nevertheless, while developing the service product pack-age, it is important to consider all
the three levels of service: core, facilitating and supporting. Accessibility of the service,
interaction with the service organization and consumer participation is also integral
elements. The basic service package is not equivalent to the service product the customer
perceives, which is, in fact, based on customer’s experience and evaluation. Therefore,
there is a need to involve the customer in the production of service offering and thereby
reinforcing that the basic service package has to be expanded to a more holistic model of
augmented service offering. Hence, it may be suggested that issues related to the
accessibility of the service, interaction with the service organization and consumer
participation are also to be integral elements of the service product. The details of the
augmented services offering are summarized in Table 5.2.
Source: This table is based on Christian Gronross, Services Management and Marketing
(Toronto: Laxington Books 1990), pp 76-80.

In the formulation of a sound product mix, it is important that the organizations also think
about developing a sound package because it is not possible to develop the new product
frequently and moreover, it is not a commercially viable. The term packaging focuses here
on the formulation of an effective mix of different services and schemes, which is
efficacious in attracting the customers/users. We can’t negate that the development of an
effective or attractive package requires professional excellence and therefore, the
executives serving an organization bear the prime responsibility of understanding the
preferences of customers/users and to design a package in tune with their changing taste
and temperament. What the package should basically be or do for the particular target is
found significant. We are aware of the fact that a number of schemes and services are
included in the service mix and it is quit natural that all the customers do not prefer all the
services. This makes it essential that the executives have an in-depth knowledge of the
changing needs and requirement of customers / users of different segments. The motive is
to influence them the tourist organizations, the banking organizations, the transport
organizations and albeit others are found developing a package to tap the market potentials.
The importance of packaging thus can’t be undermined considering the functions it
performs in attracting and satisfying the customers. In addition to other aspects, we also
find it instrumental in creating the market potentials since a number of users/customers
take a positive decision being influenced by the outstanding properties of a package. The
executives here bear the responsibility of making the package attractive and competitive.
This necessitates a study of the emerging competitors, identifying the properties of their
package, under-standing the preferences of customers, incorporating the necessary changes
in the package and offering the same to the customers in a decent way and at the right
moment.

The service generating organizations with a sound package may attempt to motivate the
customers. They are supposed to establish an edge over the competitors and this requires
world-class professional excellence. The combination of different services, schemes in one
package act as a motivation tool, if the professionals perform it intelligently. The main
thing is to make the package attractive vis-à-vis competitors. It is right to mention that an
ideal package succeeds in minimizing the promotion budget. We accept the fact that the
task of selling is found more difficult to be more specific when the market is found
competitive. The professional excellence of executives plays here an incremental role. At
the same time it is also impact generating that services generated and offered are of world
class, which succeed in establishing an edge over the services of competitors. This makes it
essential that the professional’s show their excellence in adding attractiveness to their
service mix. In a true sense, the customers don’t buy the goods or services or the core
product but the package or the benefits of the package made available to them. The service
generating organizations work with two objectives: conveying the benefits of the core
services and projecting a product difference with the services offered by their competitors.
Thus, the main task is to make the services attractive. It is against this background that the
service-generating organization needs to devise ways that how and in what way the
services included or to be included in the mix can be made attractive. Strategically, the
core services are the prime benefit that the customers seek from the provider. The core
service often becomes a commodity as a service industry matures. The customers expect
that the service generating organizations are sound enough to provide the world-class core
services for which they are charged. The result is that the peripheral services often become
the way through which we inject attractiveness to our services and scheme and thus
succeed in winning the heart of customers. The more attractive the services we offer, the
more easy the process of sensitizing the prospects/customers. We should not forget that the
key dimension to service quality is reliability, which is the ability to perform as promised.
It is also responsiveness, which is meant the willingness to help customers and to provide
prompt service. It is security, which is meant freedom from risk. It is a combination of a
number of benefits, which is meant product attractiveness.

It is a combination of a number of benefits, which is meant as attractive package. Thus the

task is to make the services attractive and this is possible when we make our services
different to others by incorporating the outstanding properties. It is in this context that we
focus on some of the properties or features helping the organizations substantially in
making the services attractive vis-à-vis competitive. In addition to above, there are some
considerations, which may be followed for the service attractiveness in terms of service
offering or a sound package of services.

Enrich the peripheral services: We find a number of service generating organizations

concentrating on the core services resulting from which we find the peripheral services
neglected. The organizations enriching their peripheral services thus succeed in attracting
the customers. This makes it essential that the service generating organizations make
innovative efforts to enrich their peripheral services and simplify the task of winning the
heart of customers.
Understanding the service quality expectations: In almost all the service generating
organizations, we consider it to be an important force to sensitize the impulse of
customers/prospects. The expectations of customers can’t re-main static. The innovative
services of the leading organizations help in shaping and reshaping the expectations, which
change the perception of standard specification or quality. It is impact generating that the
professionals bear the capacity of understanding the expectations and making efforts to
improve the quality. Like the goods manufacturing organizations, they are also required to
promote the principle of ‘making things happen’, which advocates creating a quality-gap
by speeding the process of innovation. Innovation makes the ways for attraction.

An overriding priority to the behavioral profile: Making the services attractive is an art that
in addition to the quality that you develop also required decent way of offering the
services. This makes it essential that we assign due weightage to the behavioral profile of
customers and intensify efforts to make available to the providers an in depth know ledge
of behavioral management. Of course, a majority of the service generating organizations
hardly incorporates this dimension of the mix while offering the services. There is no doubt
in it that you bear the responsibility of offering the world class services but at the same
time you are also supposed to offer the same in a decent way. Your behavior, dialogues,
approaches, attitudes and empathy play an incremental role in transforming the negative
into positive. May be that your customers are aggressive, short tempered; may be that
regulations and laws are making your task a bit difficult but you should not forget that your
behavior while dealing with the customers occupies a place of outstanding significance.

Take the support of information technologies: Being a professional, you bear the
responsibility of making your service mix attractive and this makes it essential that you
promote the use of technologies helping you in serving the customers/users fantastically.
The well established service generating organizations have been found using technologies
for different purposes, such as billing machines, computers for filing and documentation,
tele-marketing to make the services convenient, credit-debit machines used by a few of the
banking organizations, ATMs by the banks for fast services or so. By using technologies,
they serve the customers in many ways and at the same time also keep their records crystal
clear. The use off ax machines, e-mail, Internet services help them substantially in dealing
with the large-sized customers. We can’t deny the fact that the use of technologies
simplifies your task of building and projecting a fair image.

Product for all: Of late, we find nucleus marketing gaining popularity in the business
world. We talk about the attractiveness in the services offered. The service mix should
assign due weightage to the customers of different age groups and both sexes representing
a family. If some of the services are for youths, we also find some of the services for kids
and teens. If some of the services are for women, we also find some of the services are for
men If some of the services are for women, we also find some of the services for poor
sections. Thus you promote the concept of nucleus marketing and get an opportunity to tap
the available total market potentials. It is essential that you are well aware of the changing
needs and requirements of the different sections/ segments and formulate a service mix that
serves the interests of all.

The aforesaid properties if incorporated in the service mix in terms of advertising would
provide ample profitable opportunities to tap on. Your services would be distinct to your
competitors and the customers would conveniently be motivated. Attraction simplifies
promotion. The service mix is found instrumental in informing, sensing and persuading the
potential customers. The marketers bear the responsibility of using the different
components of promotion in such a way that the measures adopted for promoting the goods
or services are found productive. The promotion communicates to customers’ information
on the other elements of marketing mix, such as product, pricing and place. The advantage
of product itself, details on the place through which it is sold and details on the pricing are
transmitted through promotion. We can’t negate the fact that more creative the promotional
measures, more proactive we find our sensitizing efforts. Creativity is found to be an
integral part of communication. It is against this background that we find even the services
generating organizations very much instrumental in using the different components of
Sales such as Advertising, Publicity, Word of mouth promotion, and Telemarketing
5.5 BRANDING IN SERVICES
To avoid the consequences of a commodity classification, service firms use branding to
assure the consumer they will receive uniform service, the quality of food and service
provided at Burger King tends to be the same across all locations. Consumers know what
to expect regardless of which outlet they patronize. Because consumers know what to
expect, in new situations they will often choose a Burger King or other brand name fast-
food facility rather than choose a local firm with which they have no experience with. For
service firms, branding provides value by enhancing the efficiency and effective ness of the
marketing programs. Brand loyalty and repeat purchase leverage their positions through
brand extensions, higher prices, and higher margins. A highly established brand name can
provide a firm with a strong competitive advantage. Holiday Inn was the first to introduce a
brand name to the hotel industry. The brand name was a major reason for Holiday Inn’s
tremendous growth. It allowed the Holiday Inn to transform a commodity type service into
differentiated service. To maximize the benefit of a brand, service providers should meet
the following g characteristics:

 The brand is distinctive.

 The brand is relevant
 The brand has a tangible quality.

The company’s most important services are branded and linked. In branding, a company
must decide if it wants to use a single brand or multiple brands. The primary reason for
using a single brand name is to capitalize on strong brand name that will demonstrate
consumer preference. As the low end of the hotel segment are single brand firms such as
Motel 6, Red Roof, etc. at the high end are single brand firms such as Hilton, Hyatt, etc. In
the middle segment are firms such as Quality Inn, Holiday Inn, etc. As services are not
physical objects, they cannot be touched, seen or smelt. Physical goods can be touched,
seen, tasted, smelt or heard before they are bought. We can market services by emphasizing
the benefits and the satisfaction offered. Service itself cannot be a primary object of
promotion. Credit cards per se are useless pieces of plastic. However, the power to buy a
variety of things at 90,000 different establishments with this piece of plastic makes it a
useful product. Services carry with them an array of perceptions. It is an abstract concept.
However, there are always some tangible elements, which enable us to evaluate services,
e.g., in a flight, the tangible elements are the experience at the airport, on-board services
and the in-flight entertainment. But these are not comparable to a TV set or a suit where the
total product is seen. As services are abstract, they are given reality through tangible
elements, e.g., a law firm is evaluated on the basis of its turnover, size, track record, and
location. All these elements create a brand image. Further, these are intangible elements are
associated with service brands; these brands tend to be commoditized. Service brands are
made tangible so as to make their perception consistent and common amongst consumers.
The tangibility is imparted by using as many physical elements as possible which could be
associated with the brand, e.g., staff uniforms, ambience, interior decor, music when
customers are on hold, use of colors, stationery, brochures, pack-ages, design of physical
facilities. These elements must be consistent with the service. There should be a holistic
approach; Physical evidence must go well with the brand, convey a consistent message,
and appeal to the target audience. We should seek the additional opportunities to provide
physical evidence for the service.

Service Brands and Manpower

Services are represented by the manpower. In so many cases, they are the only point of
contact for the consumer. If the staff is properly trained arid well behaved, the chances of
the service brand being successful are greater. Service quality is influenced by the
following factors related to the manpower:

 Appearance: Elegantly dressed staff is a must for the service brand. Shabbily
dressed staff cannot sell high profile services.
  Responsiveness: Manpower should be sensitive of the needs of the consumers. In a
cinema hall, a family can be given corner seats.
 Assurance: If there are snags, the manpower courteously informs the consumers
and also informs them about the steps being taken to rectify the problem.
 Empathy: A crying child is given a Choco bar in a restaurant. Manpower tries to
comfort the child, and of course, the family and fellow customers too.
 Reliability: Track record is built by providing reliable service. Manpower who is
satisfied on the job leads to consumer satisfaction. ‘Staff motivation is an. area
which requires utmost managerial attention. Right from manpower planning to
selection to supporting and retention of manpower, the personnel aspects do go a
long way in developing the right service brand. Customer service should become
the second nature for all employees. Such an organization culture cannot be created
overnight, but it is worth the effort to accept the challenge.

Service Brands and Consumer Participation

Consumer participation greatly influences the perception of a service brand. A particular
swimming pool may be very good, but a person whose experience with the swimming
coach is not good, may complain about the quality of the swimming pool itself. There are
different degrees of consumer participation. There is low participation in restaurants and
air flights. Here the consumer’s presence is necessary, and the service personnel render the
whole service. Even courier services have low consumer involvement. Consumers rarely
see their infrastructure. They interact telephonically with the courier company for a short
while. We can provide standardized offerings of such services. The procedures are well
defined. In the financial sector, the participation is limited, say in a bank branch, consumer
is expected to fill in a pay in slip while depositing cash, and tender the cash across the
counter, and get back duly stamped acknowledgement. But the bank staff does the major
portion of work. But in a health club or business management school there is higher level
of consumer participation.
They take active part in a weight reduction programme. They hold themselves responsible
if the results are not satisfactory. They are very happy when the service provider tries to
solve the problem. Because of high degree of participation, organizations design
customized offerings for the consumers. Consumer participation is also an educative
process. A consumer must master telephone banking or mobile banking before getting its
benefits. Even Internet banking is a participative process requiring effort on the part of the
consumer. But consumers gain benefits on account of such participation, e.g., utility bills
can be paid through Internet from anywhere.

5.6 ADVERTISING OF SERVICES

Service firms have several meanings of promoting their firm. Advertising, sales promotion,
and personal selling are the major components. Since services are experiential in nature,
promoting a service is more complex than promoting a good. For example, on promoting a
particular brand of automobile an advertiser can discuss gas mileage, style, comfort, and
other physical dimensions. But if an attorney wants to promote his or her services, what
should be advertised? There are no tangible characteristics that can be discussed. Instead,
the advertiser must use intangible cues and thoughts to convey a message. It is now
established that there are clear differences in information usage between goods and
services. First, the difference is that consumers of services are less likely to purchase
without information than those of goods. Second, the consumer of services will prefer
personal sources to impersonal sources of information. And third, the basic characteristics
of services have implications for communication strategy. For example, in hospitality
industry, the intangible service offer is made tangible and represented in the promotional
material and; customers decide to buy or not to buy on the strength of the description and
representation of the service offer in the promotional material. Advertising is a paid form
of persuasive promotion. The creativity is found to be an essential aspect of advertising,
which increases the importance of professional excellence in making the advertising
processes productive. The professionals are supposed to take into consideration the
following facts while advertising. This would help them in making possible creativity
besides optimizing the advertisement budget.
Advertising Objectives
Although, there could be a variety of objectives to promote or advertise the service, but the
basic objectives of it are as follows:
 Make a strong impression of competency, honesty and sincerity (professional
orientation to service transaction so as to win buyer’s confidence in seller’s abilities
to deliver the service).
 Should be able to use indirect selling techniques (creating derived demand or act as
a buying consultant).
 Manage to maintain a fine image by positive word of mouth.
 Packaging and customization.
 Target Audience to be specified.

Planning For The Advertising

In the case of services, a customer is buying the performance of the service personnel and
therefore the advertising in service industries should not only restrict it to encourage
consumption, but also it should encourage employees to perform well. The following six
basic guidelines may help to design effective advertising programmes.
 The advertising should have positive effects on contact personnel. .
 It should capitalize on the word of mouth.
 It should provide tangible clues to the customers.
 It should make the service offering easily understood.
 It should contribute to the continuity.
 It should promise only what is possible.

Consumer Promotions in Service Marketing

A service provider can use six basic elements, namely, product scope, market scope, value,
timing, identification of the beneficiary and protection against competition. It may be
further suggested that unlike physical goods the variety of schemes available as consumer
sales promotion schemes are highly limited. For example:
 Sampling cannot be used frequently because of the cost of service.
 Premiums are frequently used to give an element of tangibility.
 Price/Quantity promotion can help in generating long-term commitment from
consumers, e.g., group rates for hotels.
 Coupons are not used much.
 Refunds and future discounts are also not much in practice.
 Prize promotions can be used effectively and add excitement and involvement.

Guidelines For Selling Services

There are some guidelines those may be followed by service organizations. First, the
service salesperson should develop a personal relationship with the client. Generally, it is
the personal relationship rather than the service itself that results in satisfaction or
dissatisfaction with the service. If there is a distinct need for a high quality personalized
service, then one must pay more attention to its organizational structure. Second, one must
adopt a professional orientation, as the key to most service transactions is the buyer’s
confidence in the seller’s ability to deliver the desired results. It is, therefore, important that
a service salesperson must make a strong impression of competency, honesty and sincerity.
Third, service sales personnel have to use indirect selling techniques, as what he/she is
promoting is intangible. This can be done either by creating a derived demand or by
playing the role of buying consultant. Most hotels first sell the location and then their hotel
to the customer. Fourth, they have to build and maintain a favorable image. The public
opinion plays a very important role in marketing a service; therefore, managing word-of-
mouth publicity is important. And lastly, a service seller sells services and not a service. At
any given point of time, a service seller is dealing with a host of services rather than one.
Their thoroughness on each and ability to package them to suit each customer’s needs
would determine the success. In other words, the ability of seller to customize the service
offering is very important.
Guidelines For Public Relations and Publicity
In certain service industries it is not possible to use the conventional promotion tools with
success. For example, in advertising industry, mass media advertising is really rare. There
are some services where the size of the operation is not large enough that one can afford
heavy promotional budgets. There are others who cannot afford to cope up with their
existing workload. There are still others who find it difficult to advertise or promote as it
might lead to a bad taste. For example, a hospital might find it very difficult to promote
abortion services. Similar could be the case for open-heart surgery or other services.
Arising out of these reasons, the conventional promotional tools have a limited use.
Duncan suggested that the services sector industries have to think about other promotional
tools like public relations and publicity. There are very successful examples like a medical
doctor specializing in eye care running his own clinic-cum-nursing home and organizing
free eye camps all over the region. This community service not only spreads his name but
also proves his competence. The local newspapers might carry stories about such camps to
give further boost to the promotion. Therefore, promotional activities like community
relations, event management, media blitz, corporate identity programmes have relevance
and they should be used innovatively and effectively.

Suggestions For Advertising Strategy

The service generating organizations also need to advertise carefully after considering the
following points:

Finalizing the advertisement budget : The involvement of finance is an important

consideration and any organization either producing goods or generating services can’t
undermine it. They need to formulate a pragmatic budget so that the financial constraint is
not to aggravate the problem. It is very natural that the scale of business of an organization
would be a dominating factor while designing the advertisement budget. The professionals
are supposed to know about the budgets of the leading competitors arid to incorporate
necessary changes felt essential to make the advertisement attractive and informative. They
are also required to know the stages though which their services or schemes move. This
would help them in rationalizing the financial requirements.

Selecting a suitable vehicle: Another consideration that requires due attention of the
professionals is the suitability of vehicles through which the advertisements regarding the
services product move. There are a number of devices to advertise such as print media,
broadcast media and the telecast media. The nature of product, intensity of competition, the
quality of target market, costs, etc., are some of the considerations to be given due
weightage while selecting a medium. The involvement of cost and the rate of sensitivity in
different media can’t be uniform. They can’t negate that telecast media is found very much
effective but at the same time very expensive. All the organizations can’t make a provision
for TV advertising. The broadcast media has a big network and some of the organizations
also prefer to advertise through Radio. It is right to mention that the broadcast media is
found economic but not very much effective. To be more specific for the service generating
organizations, we find print media suitable since it is economic as well as effective in
throwing a positive impact. The organizations requiring more space for placing the
message find the print media suitable. The professionals need to select a suitable vehicle
depending upon their potentials and requirements.

Using creativity: It is important to mention that promotion without creativity carries no

meaning. Creativity helps in making the message more attractive and enhancing its impact.
The messages, appeals, slogans are instrumental in attracting the customers. Of late, there
are a number of adverting agencies where world-class professionals use creativity to
develop great advertising campaigns. The creativity in advertisement would substantially
simplify the task of professionals since the persuasion process would be found proactive.

Testing the effectiveness: It is only not sufficient that we advertise. It is much more impact
generating that our advertisements are effective. This is meant we are getting a profitable
return for our investments in advertisement. The messages, slogans, appeals continue for a
long time and the persuasion processes are found instrumental in trans-figuring the
 prospects into customers. Our focus is here on the life expectancy of advertisements. We
can’t deny that creativity and sensitivity make the ways for effective advertising.

Instrumentality of executives: The executives hear the responsibility of advertising locally

at micro level. They are supposed to have in-depth knowledge of local market and target
population. Of course, we find a budget at apex level or at macro level but provisions at
micro level are found very much productive. If we talk about the cause related marketing
the professionals working locally know about the local events, customers, prospects
problems or so. How to influence the local population for getting a positive response? The
professionally sound executives can make it possible.

Characters and themes: The sensitivity of advertisement is considerably influenced by the

characters, themes, and events; selected for advertising. It is essential that while
advertising, the professionals know about the characters and themes.

5.7 SUMMARY
In service organizations also it has been observed that their 4Ps are equally relevant,
however, with a difference in terms of the offering, advertising, branding and packaging of
services. For example, services are intangible, therefore the ‘product’ issues relate to
bundle of ‘core’, ‘facilitating’ and ‘support’ services. Promotional issues are also unique in
service industries and typically public relations take a front seat, while advertising is more
of ‘corporate advertising’.

5.8 KEYWORDS
Packaging: Formulating an effective mix of different services and schemes.

Branding : The process of assigning a name to a service.

Advertising: Non-personal form of communication about a product / service / person or idea by a clearly
identified sponsor directed at a specific audience.

Publicity: Non paid media coverage of commercially significant information about a company or its
products.
5.7 SELF-ASSESSMENT QUESTIONS
1. “Since services are intangibles, they cannot be branded.” Comment on this statement.
2. What steps may be considered for advertising campaign for service? Explain.
3. Think about some of the services that you use frequently, for example, restaurant or
outdoor catering. From the lowest end eating out joint to the most
exclusive restaurant you visited, identify how the advertising and packaging of these
services are expressed. How does the package reflect the other elements of the total
service offer?
4. Enlist those services in which there is non-price competition. Identify reasons,
thereafter, for non-pricing strategies in these services.
5. If you are the chief of marketing planning for Lucky’s outdoor catering service (to be
launched), what steps would you consider in developing this product offer and why?

5.8 REFERENCES / SUGGESTED READINGS

1. Jha, S. M., “Services Marketing”(6th ed.), New Delhi: Himalaya Publishing House,
2003.
2. Chunawalla, S.A., “Compendium of Brand Management”(1st ed.), New Delhi:
Himalaya Publishing House, 2004.
3. Woodruffe, Helen, “Service Marketing: Operation, Management and Strategy”, New
Delhi: Macmillan India Limited, 2000.
4. Clow, Kenneth E. and Kurtz, David L., “Service Marketing”(2nd ed.), New Delhi:
Biztantra, 2003.
5. Shankar, Ravi, “Services Marketing: The Indian Perspective”(1st ed.), New Delhi:
Excel Books, 2002.
LESSON: 6
EXTERNAL AND INTERNAL MARKETING

STRUCTURE
6.1 Objectives
6.2 Introduction
6.3 External marketing
6.4 Components of external marketing
6.5 Themes of external marketing campaigns
6.6 Internal marketing
6.7 Roles of a service employee
6.8 Components of internal marketing
6.9 Summary

6.1 OBJECTIVES
After studying this lesson, you will be able:
 To learn about the interaction of the service organization with the target market.
 To understand the decision areas in designing communication programme.
 To learn about the critical role of employees in service organizations.

6.2 INTRODUCTION
The unique characteristics of services; intangibility, inseparability, variability and
perishability make them different from goods. Therefore, it is imperative for marketers to
address the service issues in a different manner. In service marketing, apart from external
marketing (i.e., the efforts of the marketers directed at the final consumers that are in form
of marketing mix – 7 Ps) two more marketing strategies namely internal marketing and
interactive marketing are used. Interactive marketing focuses on managing the interaction
of the service organization with the customers because the customer satisfaction depends as
much on interaction as on what service is delivered to them. Whereas internal marketing
encompasses the service organization’s efforts directed at the employees because customer
satisfaction depends upon employee’s satisfaction. External marketing includes all such
communication campaigns by the service organizations that inform, educate, persuade,
train, and influence the customers to purchase services. Internal marketing emphasizes that
employees are critical resource for any service organization, who determine the future of
enterprise by achieving organizational objectives. It is essential to understand and satisfy
the needs and wants of the employees in order to serve the consumers better.

Organization

Internal Marketing External Marketing

Employees Customers
Interactive Marketing

Service Marketing Trinity

6.3 EXTERNAL MARKETING

The objective of external marketing is to attract every customer to participate in the service
process. All consumers are over exposed to marketing communication. Service companies
should design an effective promotional campaign to inform, educate, persuade, train, and
encourage buying and experiencing the service offered. Consumers do have certain service
expectations. Managing these expectations is one of the major purpose of external
marketing. ‘Services promised’ in external marketing should be delivered effectively.
Developments of promotional mix strategies are vital to the success of external marketing.
The most powerful media in services is word of mouth communication. Service
organization should be careful of negative word-of-mouth. In the absence of relevant and
effective communication, consumers may have doubts and suspicions about the service
offering. Campaigns through appropriate media provide customer with evidence. Service
quality depends, to a large extent, on the ability and effective participation of customers.
Participation ability, skill, involvement, etc. of consumers depend upon the way they are
informed, educated, and trained through external marketing.

6.4 COMPONENTS OF EXTERNAL MARKETING

External marketing in services is popularly known as promotion in traditional marketing.
There are five major components of external marketing:

(i) Advertising: It is any kind of paid, non-personal method of promotion by an identified

organization or individual. The role of advertising in service marketing is to build
awareness of the service, to add to customer’s knowledge of the service, to help persuade
the customer to buy, and to differentiate the service from the other service offerings.
Relevant and consistent advertising is therefore, of great importance to the success of the
marketing of the service. Advertising has a major role in helping deliver the desired
positioning for the service. Since the core product is intangible, it is difficult to promote
and service marketers therefore, frequently choose tangible elements within the product for
promotion. Thus, airlines promote the quality of their cuisine, seat width, and the quality of
their in-flight services. Certain services such as entertainment, transportation, hotel,
tourism and travel, insurance, etc. have been advertising heavily in newspapers, magazines,
radio, TV to promote greater usage and attract more customers. However, certain service
professionals such as doctors and lawyers rarely use advertising as a means of increasing
their clientele. But, this situation is changing and one can occasionally see an
advertisement in the newspapers giving information about the location and timings that a
particular doctor is available for consultation. These advertisements may also carry the
message ‘Honorary doctor to the president of Philippines’ or ex-director of a prestigious
medical college, etc. Such messages help create a positive image and credibility.

(ii) Personal selling: Personal selling has a vital role in service making as a large number
of service businesses involve personal interaction between the service provider and the
customer, and service is provided by a person, not a machine. The problem with using
personal selling to promote services is that the service cannot be separated from the
performer. Moreover, it is not a homogeneous service in which exact standards of
performance can be specified. In such situations, personal selling implies using an actual
professional rather than a salesman to sell the service. A firm of management consultants
may send one of its consultants for soliciting new business. This kind of personal selling is
certainly effective but also very expensive. One way of making personal selling more cost
effective is to create a derived demand by tying up with associated products and services.
A management consultant may associate with a bank, so that the bank recommends his
name as a consultant to any new entrepreneur coming for a loan. A chain of hotels may
team up with an airline to offer a concessional package tour. The other way is to maintain a
high visibility in professional and social organizations, getting involved in community
affairs and cultivating other professionals so as to maximize personal exposure and the
opportunities for getting work from new sources. Personal selling has a number of
advantages over other promotion mix elements, such as, Personal contact- Three customer
contact functions have been identified; selling, servicing and monitoring. These personal
contacts should be managed to ensure that the customer’s satisfaction is increased or
maintained at a high level.

Relationship enhancement- The frequent and sometimes intimate contact in many service
businesses provides a great opportunity to enhance the relationship between the seller/
service provider and the customer.
Cross selling- The close contact frequently provides the opportunity for cross-selling other
services. The sales persons are also in a good position to communicate details of other
services which they may offer to customers.

(iii) Sales promotion: In the case of services, the sales promotion techniques which are
used are varied and various in number. Traditionally, sales promotion has been used
mainly in the fast moving consumer goods market. However, in the recent past we have
seen a trend for many service firms to use sales promotion. Sales promotion tools are
aimed at these audiences:

Customers - Free offers, samples, demonstrations, coupons, cash refunds, prizes, contests
and warrantees, early bird incentive etc.

Intermediaries- Discounts, advertising allowances, cooperative advertising, distribution

contests and awards.

Sales force- Bonuses, awards, contests and prizes for best performer.

A number of activities can be undertaken which aim at providing incentive to encourage

sales. A doctor may charge lesser amount as fee on subsequent visits to encourage patient’s
loyalty, a car mechanic may offer a guarantee for repairs undertaken up to three months, a
chartered accountant may offer his services free for the first two visits to allow the
customer to evaluate his work.

In services, sales promotion techniques are also used to offset their perishability
characteristic, e.g., family discounts offered by hotels in off-season in which two children
under twelve are allowed free of charge. Sales promotion helps to overcome the problem
faced by customers in evaluating and judging the quality before making the purchase, thus,
it reduces the risk associated with the purchase.
(iv)Publicity: It is unpaid for exposure which is derived by getting coverage as a news or
editorial item. It is possible to get publicity when the service offering is unique and,
therefore, newsworthy, by holding a press conference in which offered services can be
associated with some issues of greater social relevance or by involving the interest of the
newspaper or its staff in covering the service. The important point about publicity is that
the choice of medium should be correct. The vehicle which is chosen must be credible and
enjoy a reputation of being trustworthy. A wrong choice of media vehicle will result in
adverse publicity.

(v) Word of mouth: One of the most distinctive features of promotion in service businesses
is the ‘word of mouth’. This highlights the importance of the people factors in services
promotion. Customers are often closely involved in the delivery of a service and then talk
to other potential customers about their experiences. Research points to personal
recommendations through word of mouth being one of the most important information
sources. Where people are the service deliverers personal recommendation is often the
preferred source of information. Thus, word of mouth can have a more important impact
than other promotion mix elements in a number of services, including professional and
health care services. Positive or negative word of mouth communication will then influence
the extent to which others use the service. However, negative experiences tend to have a
greater impact than positive experiences. Customers who are dissatisfied tend to tell more
than twice as many people of their poor experiences as those who are satisfied relate good
experiences.

Each of these components of external marketing has distinctive capabilities and also
limitations of suitability. The major task for service marketers is to design a proper mix of
it. The effectiveness of external marketing depends upon how effectively the mix of
components is designed.
6.5 THEMES OF EXTERNAL MARKETING CAMPAIGNS

Service organizations need to focus on the different themes of external marketing in order
to achieve organizational objectives. The important themes are given below:

(a) Information: Information relating to the service offering package will be the focal
theme in different situations. When a service company introduces a new or modified
service; or introducers the service in a new market through a new channel; or introduces
change in marketing mix, information becomes the central theme of the communication
programme.

(b) Education: customers need to be educated properly before they participate in service
production and consumption. In service organizations production and consumption are
simultaneous, so educated customers may help in improving service quality. The
educational theme aims at managing service promises and influencing consumer
expectations of the service. The management of service promises involves coordinating all
promises made by the company and the employees in order to ensure that execution is
consistent and feasible. Service organization should make only realistic promises. It is
necessary to offer service guarantees in order to strengthen the organization’s stand on the
service promise. In case of any deficiency or failure in service, the company should assure
compensation on the loss suffered by the customer. Innovation is a continuous process in
services. The changes brought in the service package and process need to be communicated
to consumers, otherwise there may be a danger of misunderstanding between the company
and customers.

‘Customer expectation management’ is another important responsibility of the service

organization that can be achieved through customer education. It is necessary to study the
level of service expectations by the customers and design a communication programme to
influence the customers to have proper and correct expectations. Some customers develop
unrealistic expectations. The organization should negotiate these unrealistic expectations
and bring them down to realistic propositions without hurting customer’s feelings. Service
employees should have transactional skills to effectively negotiate customer expectations.
When a company wants to down size its activities or shift focus to such services which
yield more revenue, it is necessary to reset consumer expectations gracefully without
affecting sales potential.

(c) Persuasion: Persuasive communication aims at influencing the decision making

process of consumers. By showing the reasons for preferring a service and particular
service provider, as well as the special benefits and values to consumers, service
organizations persuade the target market to become the customers of the organization.
Persuasive communication is used against the defensive or offensive approaches of
competition.

(d) Reinforcement: This aims at developing loyalty among the customers. It focuses on the
credibility, reliability, and continuity of all the quality factors and gives an assurance to the
target market that they can have similar or better experiences by using the service.
Reinforcement reduces cognitive dissonance among consumers. It supports and strengthens
the earlier decision of using a service and encourages consumers to continue with the same
service.

(e) Training: In services, production and consumption are simultaneous and consumers are
co-producers. The expertise and involvement of the service provider coupled with the
expertise and involvement of the consumer in service production process results in better
service quality. Service organizations cannot expect all consumers to have the ability and
expertise to participate in service production process. Service organizations are responsible
for training the customers. They are the joining phase, production process phase, and
detachment phase. The series of activities the consumer has to pass through and the
activities he has to perform need to be communicated and proper assistance provided to
ensure that consumers are performing their tasks affectively. Designing consumer support
systems and training customers to access such systems is an important dimension of service
communication programme.
(f) Efficiency: Service organizations may choose several parameters to communicate their
efficiency. The growth achieved over a period in market expansion and networking, the
loyal consumer network, the success percentage in service, the relationship networking
with other services, and the size and strength of the corporate group in the economy are
some of the themes used to communicate efficiency.

(g) Leadership: A leader can attract better prospects. Leadership positioning, either in
terms of market share or innovations, creates a solid position for the organization in the
market. Thus theme can be undertaken only by leaders either at the corporate level or at the
local level.

(h) Relationship: Service organizations are taking up special programmes for building,
maintaining, and enhancing relationships. The theme focuses not only on customer
retention but also on turning each customer into a brand ambassador and some indirect
sales personnel of the organization.

(i)Image building: A company cannot buy its image overnight. It has to build it over a
period of time through service excellence. Image building programmes are essential for
service organizations because the image influences customer’s perceived quality.

(j) Price v/s Quality: The price v/s quality communication programme focuses on
attracting different market segments. It also motivates consumers to compare the price-
quality offerings of the company with the competitive offerings. The campaign helps
customers to choose a service that suits their economic conditions and develop
expectations accordingly.

6.6 INTERNAL MARKETING

Internal marketing is a term commonly used to describe the programmes necessary to
instill and maintain a strong service mentality throughout the organization. For every
service, employees remain the primary ingredient of success. A survey of consumers found
that the most common definition of quality for service was employee contact skills such as,
courtesy, attitude, or helpfulness. The importance of employees in marketing of services is
well recognized and captured in the ‘people’ element of the marketing mix. It is a well
proven fact that only satisfied employees can deliver quality services to customers.
Employees should be fast and efficient at executing operational tasks, as well as courteous,
and helpful in dealing with customers.

Internal marketing is a management strategy that focuses on how to develop customer

conscious employees. Employees must be skilled, have customer orientation and be service
minded so that they can influence customer perceptions positively in interactions during
production, delivery, client handling, technical service, and other related activities.
According to Christian Gronroos, the concept of internal marketing states that the internal
market of employees is best motivated by an active, marketing- like approach, where a
variety of activities are used internally in an active and coordinated manner. The purpose of
internal marketing is to integrate multiple functions of the firm and operate the service firm
as holistic management process. It ensures that all employees understand and experience
various business activities and campaigns and are also prepared and motivated to act in a
service-oriented manner. The necessary condition is that the internal exchange between the
organization and its employees should operate effectively before facing external markets.

The marketing goal of every service organization is to achieve customer satisfaction and
customer retention. Research studies have proved that the marketing goal can be achieved
only when employees are satisfied. Hence, service organizations should study employee
expectations, and gear up the policy framework to satisfy them. Employee satisfaction will
not only increase employee productivity but also result in employee retention. The
performance of a satisfied employee results in customer satisfaction and the satisfied
customer becomes loyal to the service organization. A loyal customer base increases
revenue as well as profitability of the organization. Therefore, employee satisfaction has a
chain of positive effects to the service organizations. Employees of service organizations
are also known as ‘boundary spanners’ because they operate at the boundary of the
organization. They have to interact with external environment as well as internal
environment. Frontline employees require extraordinary ability to handle interpersonal and
inter organizational conflicts. While participating in service encounters, they need to be
cheerful, make eye contact, show interest, and engage in friendly conversation with
customers. The performance of this service function requires the emotional involvement of
the employees. Internal marketing programmes have three important purposes. First, they
guarantee that all employees have a firm understanding of the structure of the business, its
mission, and its customer-orientation. Secondly, these programmes should be designed to
keep employees motivated and suitably trained to act in service-oriented ways. Finally,
they can be very helpful in attracting and keeping good employees.

6.7 ROLES OF A SERVICE EMPLOYEE

Service employees are required to perform varied roles in a service organisation.
Employees who are involved in the service production process are required to perform the
following roles effectively.

Product designer: The Basic Service Package (BSP) formulated by the service
organisation serves as a basic input for the contact employee. Each customer may require a
different service for solving his specific problems. Service employees should ascertain
each customer’s specific service requirements and design a distinctive service product by
taking into consideration the resources and competencies of the service organisation.

Performer: A service employee is the performer in the service production process. He has
to interact with uncontrollable elements (consumers) and extract quality performance, by
influencing the customers to get involved in the process.

Technician: Some services require the use of equipment and the service employee who
possesses the skills to operate such equipment.
Associate: Service employees and service consumers together produce service. The
expected role of an employee is to associate with the consumer and produce quality
service.

Friend: A service employee has to play the role of a friend with consumers as well as co-
employees in a team. Co-employees and customers look for help, cooperation, guidance
and support from others on various issues. Every employee of the service organisation
should respond to such needs positively.

Empathiser: Empathy is the key quality parameter in service. Consumers feel comfortable
and perceive better quality when contact employees are empathetic. Service employees
should have the patience and inclination to be empathetic towards customers.

Assurer: Service employees’ words and actions should reflect assurance to customers. As
services are intangible, variable and perishable, customers seek assurance in every
production process. The consumer contact employees are the representatives of the service
company; this is why a contact employee needs to perform the role of an assurer.

Salesman: The performance of a service employee builds a positive image for the service
company. The customers of a service are likely to become consumers of other services
offered by the company. Contact employees will have an opportunity to interact closely
and intimately with customers. Therefore, their role in influencing and persuading the
customers is vital. Service companies can use their contact employees as sales personnel.

Marketing intelligence: One of the most prominent sources of marketing intelligence is

contact employees. They are the right personnel to gather data relating to day-to-day
happenings.

6.8 COMPONENTS OF INTERNAL MARKETING

Internal marketing is a philosophy of managing personnel and developing and enhancing a
service culture systematically. The activities of internal marketing should promote service-
mindedness and customer orientation. Most of the internal marketing activities are part of
human resource management and development. A combination of management and
development strategies are needed to ensure that right kind of people are entrusted with the
right kind of jobs. They must have customer orientation, service mindedness and the
capacity to stay motivated to perform services. There are eight major components of inter-
nal marketing:

(a) Staffing- A proper assessment of what kind of people are required and how many
is
the starting point in human resource policy of any service organisation. The three important
issues in staffing are manpower planning, recruitment and selection.

Manpower planning. In service business, manpower often becomes the core competence
for companies. To build the organisation with competent personnel, it is necessary to have
proper manpower planning. Besides planning the right size of employment at various
service points, manpower planning ensures that the right people occupy right positions. It
also develops supplementary plans for manpower expansion and contraction, according to
demand fluctuations.

Recruitment. In order to get the right people, organisations should know who the best
people are, where they are available and then compete with other organisations to hire
them. It suggests that the traditional approach of recruitment such as advertising for posts
and calling applications may not be suitable or sufficient. Other recruitment ideas, such as
campus interviews at reputed universities and institutions, career fairs and encouraging cur-
rent employees to identify potential employees can be used. Service firms should be
prepared to spend time, energy and money to get the best people. It can be said that
spending money and time is worth it when finding a right person, rather than losing crores
of rupees because of the entry of a wrong person in the organisation.
Selection. Service competencies include skill and knowledge of the employees. Some
services do not require knowledge and skill in a specific discipline, or trained people may
not be available. In such cases, the companies have to prescribe minimum qualifications
and identify those who have the best credentials. A proper selection process needs to be
designed. The selection process may vary according to the needs of the service
organisation.

Besides finding qualified people, it is necessary to examine whether they have an

inclination to the service or not. People in service firms should possess an aptitude and
willingness to serve. The attitude towards the service job and orientation to serve people
are important criteria to test. Although all the applicants for service jobs may have some
level of service inclination some will be more service driven. Such people must be spotted
and selected for the service. The employer should look for people who have both the
qualifications and the inclination. A variety of tests and interviews may be designed to
identify the right candidate for the job.

The ability to attract the right people depends upon, among other things, the image of the
organisation as an employer. The internal marketing efforts, the satisfaction of the existing
employees, the employee turnover, the growth prospects of the firm and career prospects of
employees are some of the measurement points used by the people to join an organisation.
Therefore that ensures employee prosperity.

(b) Training- Service firms may have a training system and infrastructure or may hire a
specialist organisation for its training needs. Training employees on relevant aspects is an
absolute necessity for service firms. Gronroos has identified the following three kinds of
training tasks:

 Developing a holistic view of how a service strategy works and what is the role of
each individual in relation to other individuals, functions within the firm and
relations with customers.
  Developing and enhancing a favourable attitude towards a service strategy and part-
time marketing performance.
 Developing and enhancing communication skills and service skills among
employees.

The training programme should aim at basically three important skills for employees. They
are:
 Technical skills relating to job specification and expected role performances.
 Interactive skills relating to providing courteous, caring, responsive and empathetic
service. It includes communication, listening, problem-solving and interpersonal
skills.
 Social skills relating to building personal relationships and recognising and treating
regular customers differently.

Training in service organisations should not be limited only to new employees. It should be
an ongoing process. The ever changing market environment necessitates change in service
organisations and the need for improved service skills. Continuous training is important for
firms to offer better quality service.

(c) Organising: Employees of service organisations need to be organised properly to

achieve better results. The following are the four important dimensions of organising
employees:

Work assignment- Classification of service jobs and assigning them to such personnel who
have the capability as well as willingness to serve is a critical task. The qualities, quali-
fications and interests of the employee have to be thoroughly assessed before assigning a
service job. A wrong assignment not only makes the service a failure, but also causes loss
of customers. There is a lot of difference between handling a job and handling a job
efficiently. Consumers normally possess the ability to perceive the difference in handling.
Empowerment- In service production and delivery process, frontline employees have to
assess the exact needs of the customer and develop a customized service product. To per-
form these activities on the spot effectively, frontline employees need to be empowered.
According to Zeithaml and Bitner, “Empowerment means giving employees the desired
skills, tools and authority to serve the customer”. The key factor in empowerment is
delegation of authority to allow employees to take decisions relating to interactive market-
ing. Empowerment makes the employee feel free in attending to unpredictable activities
with customers, motivates him to modify the process and also makes him an innovator.
Minor improvements are capable of attracting major responses from customers. Frontline
employees can be the major source for developing minor improvements in service
processes.

Service culture- Culture is a broad term that reflects the norms and values of a society.
Culture explains why people do certain things, think in common ways, and appreciate
similar goals, routines, even jokes, just because they are members of the same organisation
(Gronroos). Devis defined corporate culture as the pattern of shared values and beliefs that
give the members of the organisation meaning, and provide them with the rules for
behaviour in the organisation. A strong corporate culture empowers the people to act in a
specific manner and to respond to various stimulations in a uniform way. A strong service-
oriented culture in an organisation gets easily picked up by new employees. The existing
employees help by sharing the norms and values. On the other hand, a weak corporate
culture creates an insecure feeling for the new incumbent of the organisation. He or she
may be under confusion as to how to respond to various dues and how to react in different
situations.

A service culture cannot be developed overnight. Continuous and sustained efforts of the
management over a period of time in designing work environment, human resource
policies and efficiency of execution will naturally result in the development of a service
culture. Good culture once developed becomes the core competency of the organisation.
Team work- Customers often perceive better experiences when employees work together as
teams. Due to the nature of service jobs, which is sometimes frustrating, demanding or
challenging, team work reduces the stress and strain of individual employees and helps
them to maintain enthusiasm in work. Team work should be developed and promoted. It
may require restructuring the organisation to develop market-based grouping. Creating
teams and supporting effective team work, especially across functions, is important. There
are many barriers and obstacles to overcome while implementing such strategies in most
traditional organisations. However, if this exercise is done well, the benefits to both
employees and customers will be tremendous.

(d) Supporting- Service employees need support systems to be efficient and effective in
their jobs. The quality of service provided will be greatly dependent on the adequacy of
support systems. A medical practitioner requires a system that provides information
relating to the patient, testing facilities, equipment to handle and support services, to
perform effectively. Similarly, a professor requires a good library, teaching aids, supply of
student information and feedback, secretarial assistance to develop notes and reading
material and facilities to counsel students, in order to perform well. Therefore, service
firms should design effective support systems for their employees.
Basically, service employees require two types of support-technical support and process
support.

Technical support. The quality of the work by the employees gets enhanced with the
support of technology and equipment. Tools, machines, other tangibles and systems
provided to the employees not only increase speed and accuracy but also provide comfort
and convenience in service performance. The EPBAX system, computerization and other
instruments in a service outlet would certainly provide convenience to both employees and
customers. A teacher’s classroom performance would be greatly influenced by the quality
of support systems such as audio visual equipment, multimedia system, supply support of
material to the students and the like provided to him.
Process support- Support services are necessary to service employees and customers for
their efficient functioning in service production as well as consumption. Secretarial as-
sistance, documents, information networking, communication system, mobility, scheduling
and routing, will influence the performance of employees and customers in the service
process.

(e) Motivating- Employee motivation is the key element for internal marketing. Employee
motivation is particularly significant in services because of the human impact on buyer-
seller interactions. Employees are often required to respond to new situations, unforeseen
or even awkward to them. A motivated person alone can handle such situations properly
and, thus, build the reputation of the organisation. What motivates an employee to perform
quality service and to continue with the service organisation is the question for which the
management has to search an appropriate answer. There are two important issues the
management has to take care of particularly in motivating employees. They are promotions
and treating employees as customers.

Promotions- Every employee looks for improvement in rank within an appropriate time
span of his career. If an organisation does not provide opportunities to move forward in
their careers, employees get frustrated and de-motivated. If they find opportunity get
frustrated and de-motivated. If they find opportunity elsewhere, they will quit the
organisation. Service companies should realise the need for creating promotional
opportunities for employees. If promotion is purely given by merit, the management can
create a healthy competitive environment among the employees and motivate them to
perform better.

Treating employees as customers- The basic concept of internal marketing propagates the
theme of treating employees as customers. Employee-employer relations play a vital role in
service performance. The management need to understand the needs and want of the
employees and offer value satisfaction to them, only then the employees may be expected
to give their best to the organization and are likely to stay with the organisation. An
organisation can become the best place to work if four important principles are followed.

(1) Treating employees as customers

(2) Involving employees in decision making
(3) Ensuring employee satisfaction and
(4) Benchmarking and incorporating the best practices of human resource
management.

In order to design programmes to satisfy the needs of employees, internal research and
employee segmentation are useful approaches. Advertising and other forms of
communication directed at employees can also increase their sense of value and enhance
commitment to the organisation.

(f) Evaluating- Evaluation of performance of the employees is vital in internal marketing.

It is necessary to develop systems that measure the performance of the employees.

Feedback to management- Management of service firms should collect feedback on

employee performance regularly for several purposes. The feedback helps the management
to identify areas for improvement, defects, and deviations from the quality specifications
and initiate appropriate corrective action.

Feedback to employees- In the service industry, direct supervision may not be effective in
assessing the performance and such measures, sometimes, become counter productive.
Employees of service firms need to be provided support systems that can help evaluate
performance by themselves and also report such performance to the top management.
Therefore, the evaluation system not only has the capability of measuring performance but
also has the capability of providing timely feedback to employees as well as to
management. Corrective action can then be initiated when something is not in the order. A
survey by internal employees, customer feedback surveys and so on are useful in designing
and evaluating the system.

Measuring performance- Service firms need to develop an acceptable methodology for

measuring the performance of employees. The measures should help employees to know
their level of performance so that they can plan for further improvement. The performance
measures help the management to recognize the merit, to identify training needs and to
develop plans for motivating employees, if necessary.

(g) Rewarding- One of the prime concerns of any employee is the reward that he or she
gets for the service rendered to the organisation. The rewarding system primarily should
contain the following three dimensions to be effective in service business:

Competitive compensation. In whatever form (wage, salary commission or brokerage)

compensation is offered to service personnel it should be competitive. Since employees get
distinctive identities in service performance and such identities are linked to a company’s
capability, credibility, reliability and responsiveness, competitors always try to attract the
employees of other organisations. During the software boom of the 1990s, software
companies faced a severe threat of employee turnover. The only approach that helped
organisations retain software exports was a competitive compensation policy. Service firms
need to review their compensation package periodically to motivate the employees and
promote morale in them.

Extended benefits. Besides direct compensation, service firms provide extended benefits to
the employees. The extended benefits include employee welfare measures within the
organisation, employees’ family welfare measures, employee children education, functions
and social interaction. Managements can be innovative in providing extended benefits.
They can touch upon the sensitivities of employees and can create a positive inner feeling
among employees for the service organisation. Such benefits promote the sense of
belongingness among employees and help build a strong morale.
Reward for excellence- A rewarding system, to be effective, should be capable of
identifying the best performers and rewarding them to the level of their excellence. The
measures adopted to identify the performers are often subjected to severe criticism by
employees. If the system is not properly received by employees, it may prove harmful to
the organisation. It is necessary, therefore, to involve the employees in developing the
measurement system and the related reward policy.

(h) Retaining- Hiring the right people is the beginning of a human resource policy.
Retaining them is the real essence of the policy. When experienced and efficient personnel
move out of the service organisation, the reputation, image and performance of the
company will suffer. Service companies have to develop strategies to retain employees.

Inclusion in the company vision- One of the key elements of the retention strategy would
be inclusion of employees in the ‘company’s vision’. When the employees are made part of
the company’s vision, they share not only the present benefits but also the benefits to be
generated in future. This step helps employees to relate their personal goals with
organisational goals. They try to share an understanding of the organization’s vision. They
feel motivated and committed to the organisation, when they understand how their work
fits into the big picture of the organisation and its goals. Service companies should prepare
a vision document and communicate it to all employees frequently to reorient them to
achieve their organisational goals.

Retaining the best employees- In spite of an efficient process of recruitment, selection and
training, it is impossible for any organisation to ensure that all the people hired are good
and efficient. However, service firms cannot afford to retain inefficient and incompetent
people in the organisation. It is important to retain the best employees and keep away
unwanted employees. Employee retention strategy is not applicable to all the employees
but only to the best performers.
6.9 SUMMARY
External marketing is to make every customer ready in all respects to participate in the
service process. Service organisations should design an effective promotional campaign to
inform, educate, persuade, train, and encourage buying and experiencing the service
offered. The most powerful media in services is ‘word-of-mouth] communication. Internal
marketing is an approach to handle human resources in an organisation. A service
employee plays varied roles in the service production process. There are eight important
components in internal marketing. All these components are focused to make every
employee involved in the service process with customer orientation. There is a need to
integrate external marketing with internal marketing for better results in service
organisations.

6.10 KEYWORDS
External Marketing: The efforts of the marketers directed at the final consumers that are in
form of marketing mix – 7 Ps).

Internal Marketing: Internal marketing encompasses the service organization’s efforts

directed at the employees because customer satisfaction depends upon employees’
satisfaction.

Interactive Marketing: Interactive marketing focuses on managing the interaction of the

service organization with the customers because the customer satisfaction depends as much
on interaction as on what service is delivered to them.

6.11 SELF ASSESSMENT QUESTIONS

1. Discuss the components of external marketing with suitable illustrations.
2. Write a detailed note on themes of external marketing campaigns.
3. Explain the various roles of employees in service performance with suitable examples.
4. What are important components of internal marketing?
5. Write short notes on:
 (a) Employee behaviour and service quality.
(b) Word of mouth communication.
(c) Need of external and internal marketing.

6.12 REFERENCES / SUGGESTED READING

1. Ravi Shanker, ‘Services Marketing: The Indian Perspective’, Excel Books.
2. Lovelock, ‘Services Marketing: People, Technology, Strategy’, Pearson Education.
3. Zeithaml and Bitner, ‘Services Marketing: Integrating Customer Focus Across the
Firm’, Tata McGraw Hill.
4. Rust, Zahorik, and Keiningham, ‘Service Marketing’, Addison Wesley.
5. Fitzsimmons and Fitzsimmons, ‘Service Marketing: Operations, Strategy, and
Information Technology’, McGraw Hill.
6. K. Rama Mohana Rao, ‘Services Marketing’, Pearson Education, New Delhi, 2005.
LESSON: 7
SERVICE FAILURE AND RECOVERY

STRUCTURE
7.1 Objective
7.2 Introduction-Background
7.3 Steps in Service Design
7.4 Services Failure
7.5 Customer’s Reaction towards Service Failure
7.6 Elements of an Effective Service Recover System
7.7 Guidelines for Effective Service Recovery System
7.8 Solving Problems and Preventing Their Recurrence
7.9 Discontinuation of Services
7.10 Summary

7.1 OBJECTIVES
After going through this lesson, you will be able:
 To get insight into service failure.
 To learn about recovery strategies.

“If anything can go wrong, it will”

- Murphy’s Law
 7.2 INTRODUCTION
Marketing is the performance of those business activities that direct the flow of goods or
services from producer to ultimate consumer. The customers may have different likes and
dislikes, preferences and attitudes. These things play a crucial role to develop a product or
service, which is appropriate according to the aspiration of the customers. Further the
relevance of product or service to the aspiration of the customers decides the final success
or failure of the product or service. Thus customer’s requirements and the performance
standards that the service needs to satisfy form the specifications for design. The design
consists of four related components:

(i) Product design

(ii) Facilities design
(iii) Service operations process design.
(iv) Customers service process design.

Service product design refers to the design of the physical attributes of the service. The
subscription options for home cable television service or the banking transactions that are
available through an automatic teller machine are examples of such attributes. These
attributes may involve the assembly of raw materials or developing software.

Further the service facility design refers to the design of the physical layout of the
facilities. Customers’ perceptions of the quality of the service are influenced by attributes
such as the cleanliness, spaciousness, lighting and layout of the environment, where the
service takes place. In addition to these facilities, other additional facilities such also need
to be designed. The efficiency of service operations depends on the configuration of these
facilities.

Service operations process design refers to the activities that are needed to deliver or
maintain a service. The activities that make up the operations processes are those required
for the service to deliver its output. By contrast, the activities comprising the customer
service process design pertains to the interactions between the customer and the service
provider. For example, in the car rental example described above, in addition to the
operational steps, the representative may greet the customer on arrival, refer to him by
name, ask him for his preference of cars, and bid him farewell on departure. The customer
service and service operations activities together make up the car rental process. The
quality of the service experience depends on the performance of both types of activities.
These activities therefore need to be designed together.

7.3 STEPS IN SERVICE DESIGN

A real design exercise involves the complex interactions of a variety of technical and non-
technical factors that affect the quality of the design. In order to design a product, it is
important to employ a methodology that integrates the technical aspects of the design with
the marketing and management principles that are required to ensure the commercialization
of the product. Such a methodology is referred to as total design.

Step 1: To involve the customer in designing process.

Step 2: To determine the specifications of the design from these customers.
To determine the technical aspects of the design from these customer
Step 3: as per the specifications. The technology should be a derivative of the
customers need and not the other way around.
Step 4: To design the service using a multi-function team with.
Step 5: To test the design in the marketplace, and not in the laboratory. A
successful design should not only be one that creatively applies the
latest technology, but should also be one that customers like, purchase,
and use.
Blueprinting and Service mapping
Blueprinting is a technique that helps to understand the totality of a service as a process, so
that “fail points,” those stages of the service that have a high statistical probability of
generating problems, can be identified and properly understood. The blueprint is an
objective, graphical depiction of the service.

The key steps in preparing the service blueprint as follows:

1. To identify the activities involved in delivering the service and present these in a
diagrammatic form. The level of detail will depend on the complexity and nature of
the service.
2. To identify the critical points. These are stages where things may go wrong. The
corrective measures at this stage must be determined, and systems and procedures
should be developed to reduce the occurring in the first instance.
3. To set standards against which the performance should be measured.
4. To analyze the profitability of the service delivered, in terms of the number of
customers served during a period of time.

On the other hand, service maps are to be built up on blueprints and two additional features
are to be provided to add to management information.

 To pay greater attention to customer interaction with the service organization.

Further the clear diagrammatic distinctions should be made between actions of
customers and of service contact personnel. In effect, more should be provided on
the front stage activities in blueprints.
 Additional vertical layers to the diagram are to be drawn in service maps to provide
a visual representation of the structure of the service.
 In particular, the backstage activities are to be divided into those provided by
frontline employees, support staff and management services.
7.4 SERVICES FAILURE
Every effort should be made to develop an appropriate product or service. However, it is
not always possible that the service or product would be successful. The success or failure
of a product or service depends upon a number of other forces, which are dynamic in
nature and changes time-to-time and situation-to-situation. Whatever the methods of
service design are adopted, a specific service map or a concept service map - one of the
main aims will be to identify the potential points in the process which may result in a
service failure. It is probably possible that at some time either result service failure.
Therefore, efforts should be made to anticipate these occasions well in advance, so that
mistakes could be prevented from turning into a service defect and also a service failure. In
this way a service design can also be justified. An organization should try to identify those
critical aspects which may results in service failure. Once these aspects have been
identified, it can be helpful to design the mechanism as to reduce the risk of human
mistakes turning into actual service failures. As old people say, “Prevention is better than
cure”. Thus service failure is the end result of all the unwanted things and mistakes made
by either party, whether he is customer or server. Customer errors can be classified as
relating to preparation for the service provider, the encounter itself, or to the resolution of
the encounter.

 Preparation errors may result from the failure of customers to bring the necessary
materials to the encounter, or to understand their roles in the service encounter.
 Encounter errors include failure or customers to remember steps in the service
process to follow the system flow or to specify desires or follow instructions.
 Resolution errors include failure of customers to signal service failures, learn from
experience, adjust expectation, or execute appropriate post encounter action.

7.5 CUSTOMERS’ REACTION TOWARDS SERVICE FAILURE

The question arises that what will be the reaction of the customers in case of a service
failure. In other words, how customers react in case the services are not accordance to their
expectations. What options are open to customers when they experience a service failure?
The customer may pursue the following four major courses of action:
  Do nothing.
 Complain to the service firm.
 Action through a third party viz. consumer advocacy group, consumer affairs or
regulatory agencies, civil or criminal court, etc.
 To stop the services of same supplier and to discourage other people from using the
services of similar supplier.

Thus how will a customer react towards failure of service, depends upon knowledge of the
customers, resources, attitude and circumstances at the time of purchase. Generally
innocent customers respond smoothly and almost do not resist. But active, experienced and
educated customers resist strongly and take all those steps, which they feel appropriate.
This kind of people do not want any compromise on service quality and the organization
must see to it that they are satisfied otherwise they may depreciate the goodwill of the
company and can motivate people for not purchasing by negative word of mouth.

Service Recovery and Meeting Customer Complaints

Service recovery is an umbrella term for systematic efforts by a firm to correct a problem
following a service failure and retain a customer’s goodwill. Service recovery plays a
crucial role in restoring customer’s satisfactions level in any organization. Things may
occur that have a negative impact on its relationships with customers. The true test of a
firm’s commitment to service quality satisfaction level isn’t in the advertising promises or
the décor and ambience of its offices, but in the way it responds when things go wrong for
the customer. The firms don’t react always in ways that match their advertised promises.
Effective service recovery requires thoughtful procedures for resolving problems and
handling these customers. It is critical for a business organization to have an effective
recovery strategy, because even a single service problem can destroy a customer’s
confidence in a firm under the following conditions:

The failure is totally outrageous. The problem fits a pattern of failure rather than being an
isolated incident. The recovery efforts are weak, serving to compound the original problem
rather than correct it.
7.6 ELEMENTS OF AN EFFECTIVE SERVICE RECOVERY SYSTEM:
Service failure leads to human problems - real or imaginary. Whatever the cause, the
approach should be humane. Sensitivity and empathy are required to handle such problems
diligently. So they need to be handled with care the way you handle glass. Customers
problems should be handled promptly because “Justice delayed is justice denied”
Managers face a number of challenges in designing a redressal system that provides
accurate feedback in a timely and economic fashion that is acceptable to organization and
its customers. One must know the various elements of the service recovery system in order
to handle or tackle problems promptly, so that one can design an appropriate recovery
system. It is not necessary that a particular system is applicable for all organizations and
for all types of problems, because the various factors that go into redressal process may
differ from organization to organization and situation to situation. Thus a recovery system
is applied to various types of problems. The different elements of this system are given
below:

From the above diagram it is clear that a recovery system consists of three steps viz. first of
all we should do the thing in right way. But it is not always possible that all things are
right, there is always a probability of doing thing wrong. If it happened, then problems
should be handled through an effective procedure for complaint handling. It constitutes the
second step. Finally, effective problem handling leads to customer satisfaction and loyalty.
A brief description of important steps is given below:

(i) Do it right first time and always: At the very beginning, the marketer should
concentrate on doing the job right in first attempt. For this the marketer should
consider every possible effort in this regard. The marketer should consider customers’
aspirations, needs, requirements and further he must develop an appropriate service
design system. The marketer should avoid personal biases. Market research can
facilitate in this stage significantly.
(ii) Identification of the Problem: If a service fails due to any reason, then marketer must
go through an effective complaint handling procedure. For this the first step is to
identify the real problem. Since a particular decision is made in the context of real

problem. A problem is a need and a question thrown forward for its solution. It is just
like the diagnosis of patient by the doctor. Thus at this stage effort should made to
identify the real issue. The emphasis should be given on the cause of the problem,
that what real issue is. Furthermore, efforts are to be made to establish cause and
effect relationship. The identification of problem is half solving in itself. There are
various methods which helps us in identification of problem such as market research
to monitor complaints, develop “complaints as opportunity” culture, etc.
(iii) To Resolve Problems Effectively: When the problem is identified the second step is to
resolve the problem in the best possible way. There may be different kinds of alter-
natives which can resolve the problem. An alternative may be defined as future
course of action. It is pertinent to mention here that every organization may have
different approaches to handle problems. It depends upon the size of an organization,
financial position, managerial attitude, administrative efficiency and other
circumstances. However, a general approach which is applicable in most cases is:
(a) Problem identification.
(b) Development of alternatives
(c) Evaluation of alternatives
(d) Selection of alternatives
(e) Implementation
(f) Feed back
For this marketers should develop effective systems and training in complaints handling.

(iv) Learn from the Past Experience: It is always beneficial for the marketers to avoid
recurring of mistakes. Because it involves wastage of time and money. Thus an
intelligent marketer always try to learn from the past experience and take action
accordingly. The marketer should emphasize what has happened good in past and
avoid what has happened adverse. For this he should adopt root cause analysis.
Keeping in view past experience he can develop his efficiency and can become
competent and efficient.

7.7 GUIDELINES FOR THE EFFECTIVE SERVICE RECOVERY SYSTEM

1. Prompt action: If the complaint is made during service delivery, then time is of
essence to achieve a full recovery. Whenever the complaints are made after the fact,
many companies have established policies of responding as soon as possible. Even
when full resolution is likely to take longer, fast acknowledgement remains very
important.
2. Admit mistakes but don’t be defensive: Be aggressive: Acting defensively may
suggest that the organization has something to hide or is reluctant to fully explore the
situation. Therefore, one should be aggressive in his approach.
3. To see and understand the problem from customer point of view: Seeing
situations through the customers’ eyes is the only way to understand what they think
has gone wrong and why they are upset. Service personnel should avoid jumping to
conclusions with their own interpretations.
4. Participative environment: The goal should be to reach at a mutually acceptable
solution, not to win a debating contest or prove that the customer is an idiot. Arguing
gets in the way of listening and seldom defuses anger.
5. Try to understand the customer’s feelings: The employees must develop an
attitude ‘I can understand why you’re upset’. This would help in building a rapport
and is the first step in rebuilding a bruised relationship.
6. Give customers the benefit of the doubt: Not all customers are truthful and not all
complaints are justified. The customers should be treated as though they have a valid
 complaint until clear evidence to the contrary emerges. If a lot of money is at stake
(as in insurance claims or potential lawsuits) careful investigation is warranted; if the
amount concerned is small, then it may not be worth haggling over a refund or other
compensation. If there is a past history of complaints by the same customer. It is
better to go in detail about the past records.
7. Open system to solve the problem: Whenever instant solutions aren’t possible,
telling customers how the organization plans to proceed shows that corrective action
is being taken. It also sets expectations as to the time frame.

8. Feedback to customers about progress: Nobody should be kept in the dark.

Uncertainty breeds anxiety and stress. People tend to be more accepting of
disruptions if they know what is going on and receive periodic progress reports.
9. Envisaged compensation either by monetary form or by equivalent services:
When customers did not receive the service as per the commitments, or suffered
serious inconvenience because the service failed, then either a monetary payment of
offer or equivalent service in kind should be provided. Such action may also be
helpful to reduce the risk of legal action to be taken by the customer. Service
guarantees often lay out in advance. In many cases, what customers want most is an
apology and a commitment to avoid similar problems in the future.
10. Disappointment of customer due to service failure: one of the biggest challenges is
to restore the confidence of the customer to maintain the relationship for the future.
This may be helpful for the perseverance and to follow through, not only to defuse
their anger but also to convince them that actions are being taken to avoid a repetition
of such type of problems. The recovery efforts should be made effectively in building
loyalty and referrals.

7.8 SOLVING PROBLEMS AND PREVENTING THEIR RECURRENCE

Problems may be due to internal forces or external forces. When a problem is caused by
controllable, internal forces, in that case there is no excuse for allowing it to repeat it. In
fact, maintaining customers’ relations after a service failure depends upon by keeping
promises made to the effect “we’re taking hard steps to ensure that it doesn’t happen
again.” With prevention in mind, let’s look briefly at some simple, but powerful, quality
tools for monitoring service quality and determining the root cause of specific problems
that upset customers.

Flowcharting
Once manager understand the underlying processes behind service delivery and the needs
and requirements of the customers, it’s easier to identify potential failure or strategic points
which may be a weak links in the chain. Knowing what can go wrong and where it can be
an important step towards preventing service quality problems.

Control Charts
These can offer a simple method of displaying performance over time against specific
quality criteria. Since they are visual and trends can also be easily identified. It shows the
performance on the basis of important criterion and suggesting that their issues and needs
shall be addressed by management, since performance is erratic and not very satisfactory.
Of course, control charts are only as good as the data on which they are based.

Analysis of Cause and Effect Relationship

Cause-and-effect analysis employs a technique to analyze the cause and effect
relationships. It is developed by the Japanese quality expert, Kaoru Ishikawa. Groups of
managers and staff brainstorm all the possible factors that might cause a specific problem.
The resulting factors are then categorized into one of five groupings - Equipment,
Manpower (or People), Material, Procedures, and Other - on a cause and effect chart,
popularly known as a fishbone chart because of its shape. This technique has been used for
many years in manufacturing and, more recently, in services.

Pareto Analysis
Pareto analysis tends to identify the principal causes of observed outcomes. This type of
analysis underlies the so-called 80/20 rule, because it often reveals that around 80 per cent
of the value of one variable (in this instance, number of service failures) is accounted for
by only 20 per cent of the causal variable (i.e. number of possible causes).

7.9 DISCONTINUATION OF SERVICE

It is pertinent to mention that good product management depends upon reliable marketing
information. The service organizations must also have the courage to discontinue offering
services that are no longer profitable to the organization as a whole. The service
organization should successfully maintain the service quality and should also to invest
carefully in new ones. This implies a need for the following:

 Establishment of targets for each service.

 Periodic reviews of each service’s performance.
 Modification of existing services when necessary.
 Elimination of services where necessary.
 Development of new services.

In reality, an organization’s portfolio of products/ services is often the result of a number of

factors:

 Ad hoc responses to competitive challenges

 The history and culture of the organization.
 Requests from customers
 Responses to technological opportunities.
 Take-over and mergers.

In general, there is a tendency to add-on rather than subtract, and thus many products/
services continue to consume resources of an organization which could be better used
elsewhere. In addition, there are a number of ‘hidden’ costs of supporting dying products /
services that need to be taken into consideration since an old product may not cover even
overhead cost. The following are the examples of some hidden costs which requires due
consideration:

 A disproportionate amount of management time is spent on them.

 Short and relatively uneconomic ‘production’ runs may be required where a service
has not been deleted and there is irregular demand for it.
 It often requires frequent price adjustments.
 It searches for new products and services is delayed, as so much time is spent on
existing products/ service that the desired allocation of time to consider new ones is
inadequate. Firms should therefore have a logical planning system that incorporates
product/ service deletion. It would be important, however, to assume that deletion is
a simple process. In reality, there are number of reasons why logical deletion
procedures are not readily followed.
 Often firms do not have the information and results whether a product/ service
needs to be considered for elimination. Even if an organization is aware of a
potential deletion, the reasons for its failure may not be known, and thus
management may just leave things as they are and hope that problem will go away
by itself.
 Mangers often become biased about products/ services. They are hoping that sales
will pick up when the market improves. Sometimes, particular elements of
marketing strategy will be blamed for lack of success. Further, there is the belief
that a change is promotion or pricing and will improve the situation.
 Within an organization there may be politics in seeking to delete a service. Some
individuals may be having their vested interests in a service and they may fight
elimination efforts. As a result, the staff may hide the true facts of a service’s
performance to ensure that deletion is not considered at all at any cost.
 Finally, there is sometimes it may be a perception in the mind that the sales of other
products and services are tied into the product/ service being deleted. For example,
a car dealer who binds up its sales department of new car may lose its business in
servicing and repairs department also. Furthermore, such elimination may be sold to
the small number of important customers, leading to fears that deletion would cause
all of their business to shift elsewhere. In general, it is observed that majority of
companies handle product/ service elimination as a last alternative. They envisaged
elimination when a service is seen to be losing money and it is not lucrative from
organization point of view. To determine the existing position of the present
products/ services requires the need for a systematic and objective approach. It
comprises review of every product/ service in terms of its market share,
potential, growth, sales, profitability, average cost, competitor’s share and competitors’
prices, etc.
The above overall information helps marketer to identify weak and strong elements of the
overall product or service mix. This will lead to differentiate poor products/ service from
good one. Thus a marketer can adopt an appropriate marketing strategy. Different authors
have developed their own methods to deciding which product/ service to eliminate among
these one of the most important is product/ service retention index. It includes a number of
factors, each of these factors are being individually weighted according to their importance
in a particular firm. The importance of particular factor may different from firm to firm.
Because the importance of a specific factor is depending upon a number of forces which
are extremely different in each organization. Each service is then ranked according to each
factor. The product/ service retain index thus being equal to the sum of the products of the
weighted index. The above mentioned factors may be different kinds viz. potential share of
product or service, how much should be earned from modification, how much to the
product or service contribution beyond direct costs, how much is the product or service
contributing to the sale promotion of the other products/ services of the company or how
much is the product or service helpful to company’s point of view in either way keeping in
mind these factors a company can differentiate its poor products/ services and can take
appropriate steps in the right direction.

7.10 SUMMARY
Despite the best efforts of the marketers the service may fail. Some reasons for service
failure may be beyond the control of the marketer and some may be on account of
employees’ incompetence / mistake / negligence. All efforts must be made by the
marketers to avoid service failures, and in case service failure occurs service recovery must
be affected. The organization must have a proper complaint handling mechanism which
tracks the reasons for service failure and monitor service recovery.

7.11 KEYWORDS
Service failure: Inability of the service provider to render promised service / as per the
customer expectation.

Service recovery: Systematic efforts by a firm to correct a problem in case of a service

failure.

7.12 SELF ASSESSMENT QUESTIONS

1. What are the different elements of service design system? Discuss.
2. What do you understand by blueprinting and service mapping? What are the
similarities and dissimilarities between blueprinting and service mapping?
3. Define service failure. How is the identification of points of potential services
failure of paramount importance for marketer?
4. What are the different elements of service recovery system? How can a marketer
make service recovery system effective?

7.13 REFERENCES / SUGGESTED READINGS

1. Balaji, B., “Services Marketing and Management,” S. Chand and Company Ltd., New
Delhi, 2002.
2. Khurana Rakesh, Kaushik Madhulika, “Marketing of Services: Concepts and
Applications, School of Management, I.G.N.O.U.”
3. Chidambaram, P., “Service Marketing,” Manas Publications, Delhi.
LESSON: 8
QUALITY MANAGEMENT IN SERVICES

STRUCTURE
8.1 Objective
8.2 Introduction
8.3 Defining service quality
8.21 Process vs. Technical outcome quality
8.4 Dimensions of service quality
8.31 Reliability
8.32 Responsiveness
8.33 Assurance
8.34 Empathy
8.5 Gaps in service quality
8.41 Gap model
8.42 Advantages of gap model
8.43 Limitation of gap model
8.6 Improving service quality
8.51 Benchmarking
8.52 Service blueprinting
8.7 Summary
8.1 INTRODUCTION
In the present times, no marketer can ignore the importance of services. However, merely
providing the service is not source of competitive advantage because every marketer is
providing the same. In order to outsmart the competitors, it is important that ‘better’
service is provided to the customers. The issue of improving customer focus concerns the
relationship between the service organization and its customers. This involves
consideration of the relation-ship marketing approach. The relationship marketing concept
brings quality, customer service and marketing together. The specific linkage between
these elements are shown in Figure 8.1.

Figure 8.1: Linkages between quality, customer service and marketing

Just as many service companies have not been as successful as they would have liked in
achieving a customer focus through their marketing activities, so success has evaded many
organizations in their quality and customer service initiatives. Despite the advent of the
concepts like TQM (Total Quality Management) and ISO etc., many service organizations
continue to address quality primarily on the basis of an operations perspective concerned
with conformance to specifications, rather than customer-perceived quality. However, any
viewpoint of services, if imposed by the marketers, without considering the customers’
perspective, is bound to fail the marketplace. Right approach to marketing starts from the
customer and re-mains with the customer. Before discussing the concept of quality in
relation to services, it is pertinent to define the same.

8.2 DEFINING SERVICE QUALITY

Being an intangible concept, defining service quality poses a lot of problems. It is very
difficult to quantify the abstract elements of service quality, which are highly idiosyncratic
and customer-specific. Several attempts have been made to define the same. However, the
most commonly accepted definition of service quality is:

Service quality is the delivery of excellent or superior service relative

to customer expectations. - Zeithaml and Bitner

This is the simplest way to understand service quality, although this definition is far from
being adequate. In general terms, quality is defined as ‘conformance to standards’.
Therefore, when service measures up to some predefined parameters of performance, it is
said to be of higher quality. The real issue is in identifying these parameters of
performance and then measuring the service in relation to these parameters. For example,
for some person, waiting for 15 minutes at a bank counter is ‘OK’, while it may be ‘too
much’ for another. If a teller disposes off the customer in 10 minutes, the first customer
would be very delighted, but the second customer will be protesting for the delay. The
problem for the banker would lie in establishing the ‘normal’ time, which a customer
should wait at the counter. Despite these short-comings, a lot of research has been done to
understand service quality and now it is quite possible to quantify the same.

8.21 Process vs. Technical Outcome Quality

Ultimately, consumers judge the quality of services on their perceptions of the technical
outcome provided and on how that outcome was delivered. For example, a patient will
judge the quality of services of a doctor by how well his sickness was cured, and also the
quality of the process. The doctor’s diagnosis and treatment would constitute the technical
dimension of quality. Process quality would include such things as the doctor’s timeliness,
his responsiveness in attending to the patient, empathy for the patient, courtesy and
listening skills. Similarly, a restaurant customer will judge the service on his perceptions of
the food and on how the meal was served and how the employees interacted with him. In
this example, the food would constitute the technical dimension of the quality while
employees’ behavior would be the process dimension of the quality.

If the service has a specific outcome, for example, getting fully cured by the doctor, the
customer can judge the effectiveness of the service on the basis of that outcome. However,
many services offered by lawyers, doctors, engineers, teachers, accountants, scooter and
automobile repair etc. are highly complex and a clear outcome is not always evident. In
these situations, the technical quality of the service - the actual competence of the provider
or effectiveness of the outcome - is not easy for the customer to judge. The customer may
never know for sure whether the service was performed correctly or even if it was needed
in the first place. For example, a car mechanic may charge any amount for repairing even
for a small defect because of the ignorance of the customer. A doctor can extract any
amount out of a patient’s pocket for his advice. A customer’s satisfaction or dissatisfaction
would be known only after he has consumed the service.

When customers cannot accurately evaluate the technical quality of a service, they form
impressions of the service including its technical quality from whatever sources exist, using
their own “shorthand” or cues that may not be apparent to the provider. Consider the
services that college professors provide to their students. Most students are in school to
learn what they do not know. However, not knowing the subjects they are studying does
not prevent them from making judgments about their professors.
Cues such as the tangibles that accompany the service (overheads and other presentation
materials) the professor’s appearance of nervousness, the degree of confidence
communicated, or even whether the professor starts and ends class on time are used to infer
competence. Understanding the cues used to signal the presence or absence of technical
quality allows professors and other marketers some control over their customers’
impressions. These two dimensions of service quality highlight the subjective nature of
quality assessments. Generally, the consumers face difficulty in distinguishing between
‘good’ and ‘bad’ quality.

Their judgements are subjective and depend upon how well they are treated by the service
provider. The service provider’s image also has an important role in shaping customer’s
perception of service quality and their satisfaction or dissatisfaction, resulting thereof. A lot
of research has been done to identify and understand the factors that influence service
quality.

8.3 DIMENSIONS OF SERVICE QUALITY

It has been found that customers do not perceive quality as a one-dimensional concept. The
customers’ assessments of quality include perceptions of multiple factors. For example, it
has been suggested that the following eight dimensions of quality are applied to all goods
and services:

1 Performance,
2 Features,
3 Reliability,
4 Conformance,
5 Durability,
6 Serviceability,
7 Aesthetics, and
8 Perceived quality.
The dimensions of quality are meaningful when applied to categories of products (for
example durable goods, packaged good services. There is a lot of diversity in these
dimensions of service quality, when applied to different products. For example, take the
case of two services - teaching and medical service. The diversity of the dimensions of
service quality can be shown in the form of the table 8.1.

Education Services Medical Services

Knowledge of Teacher Skill of Doctor
Campus Facilities at hospital
Classroom Cleanliness and hygiene
Audio-Visual Aids Past record
Reputation Reputation
Placement Medical Instruments
Table 8.1: Dimension of service quality

Research done by Zeithaml and Berry has identified five basic key areas of service quality,
which seem to fit in for most of the services. These key areas of service quality and their
respective components are shown in Table 8.2 in pictorial

Table 8.2: Key areas of service quality

These dimensions represent how consumers organize information about service quality in
their minds. On the basis of exploratory and quantitative research, re-searchers have found
these five dimensions relevant for many services, including banking, insurance, appliance
repair and maintenance, securities brokerage, long-distance telephone service, automobile
repair service. The dimensions are also applicable to retail and business services. These
dimensions are discussed in detail in the following discussion.

8.31 Reliability
Out of the five dimensions of service quality, reliability has been consistently found to be
the most important determinant of perceptions of service quality. It is defined as the ability
to perform the promised service dependably and accurately. It is an indicator of how a
company delivers its promises about delivery, service provision, problem resolution, and
pricing. Customers want to do business with companies that keep their promises,
particularly their promises about the core service attributes. For example, in railway time
table Shabubu Express leaves a station at say 1430 hours. Reliability will be the measure of
whether CDO Railways will be able to adhere to its promised departure time or not.

All firms need to be aware of customer expectations of reliability. Firms that do not
provide the core service, that customers think they are buying, fail in the eyes of their
customers in the most direct way. The importance of reliability is further dramatized by the
finding that customers’ expectations for service are likely to go up when the service is not
performed as promised. When service failures occur, customers’ tolerance zones are likely
to Shrink and their adequate and desired service levels are likely to rise. For example, the
expected core service of railways is transportation. Hence Shabubu has to leave the station
at promised 1430 hours. If it is late by, say more than say 30 minutes every day, customers
are likely to lose faith in the service and may resort to airlines or use their own car.

8.32 Responsiveness
Responsiveness is the willingness of the service providers to help customers and to provide
prompt service. This dimension emphasizes attentiveness and prompt-ness in dealing with
customer requests, questions, complaints, and problems. There are strong similarities
between the employee behaviors noted in those critical service encounters and the
responsiveness dimension of service quality. Responsiveness is communicated to
customers by the length of time they have to wait for assistance, answers to questions, or
attention to problems. Responsiveness also captures the notion of flexibility and ability to
customize the service to customer needs. For example, if a customer wants to know the
exact departure time of Shabubu, the rail fare, facilities available, CDO Railways has to
provide for the same. If a customer rings up inquiry office and nobody picks up the phone,
the service is likely to be viewed negatively by the customer. The customer will feel
neglected.

To excel on the dimension of responsiveness, a company must be able to view the process
of service delivery and the handle the requests queries or complaints of from the
customers. It must be able to understand customers’ point of view rather than impose its
own point of view. Standards for speed and promptness that reflect the company’s view of
internal process requirements may be very different from the customer’s requirements for
speed and promptness.
8.33 Assurance
Assurance is defined as employees’ knowledge and courtesy and the ability of the firm and
its employees to inspire trust and confidence. This dimension is likely to be particularly
important for services that the customer perceives as involving high risk and/or about
which they feel uncertain about their ability to evaluate outcomes, for example, banking,
insurance, brokerage, medical, and legal service.

Trust and confidence may be embodied in the person who links the customer to the
company, for example securities brokers, insurance agents, lawyers, counselors. In such
service contexts the company seeks to build trust and loyalty between key contact people
and individual customers. The “personal banker” concept captures this idea-customers are
assigned to a banker who will get to know them individually and who will coordinate all of
their banking services.

In the early stages of a relationship, the customer may use tangible evidence to assess the
assurance dimension. Visible evidence of degrees, honors, and awards and special
certifications may give a new customer confidence in a professional service provider. Even
in the public sector banks, the concept of personal banking and customizing the services is
gaining popularity. Despite heavy marketing of private sector banks, people feel assumed
of the security only with the public sector banks. This is the ‘assurance’ dimension,
encompassing trust and confidence.

8.34 Empathy
Empathy is defined as the caring; individualized attention the firm provides to its
customers. The essence of empathy is conveying, through personalized or customized
service, that customers are unique and special. Customers want to feel understood by and
important to firms that provide service to them. Personnel at small service outlets often
know customers by name and build relationships that reflect their personal knowledge of
customer requirements and preferences. When such a small firm competes with larger
firms, the ability to be empathetic may give the small firm a clear advantage.
In business-to-business services, customers want supplier firms to understand their
industries and issues. Many small computer consulting firms successfully compete with
large vendors by positioning themselves as specialists in particular industries. Even though
larger firms have superior resources, the small firms are perceived as more knowledgeable
about customer’s issues and needs and able to offer more customized services.

8.35 Tangibles
Tangibles are defined as the appearance of physical facilities, equipment, personnel, and
communication materials. All of these provide physical representations or images of the
service that customers, particularly new customers, will use to evaluate quality. Every
service has an element of tangibility, although its significance may vary. For example, in
medical services, hospital, equipment, medicines are the tangible dimensions. Despite
being of very high value, the service is incomplete in absence of a skilled doctor.
Alternatively, despite having a skilled doctor, a hospital is likely to be rejected if it is dirty
and unhygienic. Service industries that emphasize tangibles in their strategies include
hospitality services where the customer visits the establishment to receive the service, such
as restaurants and hotels, retail stores, and entertainment companies.

Tangibles are often used by service companies to enhance their image, provide continuity,
and signal quality to customers.

8.4 GAPS IN SERVICE QUALITY

Quality can be viewed from two perspectives - internal and external. Internal quality is
based on conformance to specifications. External quality is based on relative customer-
perceived quality. The important point is that quality must be seen from the customer’s
viewpoint, not the company’s. It is essential that quality be measured from the customer’s
perspective, not from what managers within a company think their customers’ views are:
Several reasons have been identified as to why it is unsafe to rely on managerial opinions
of customer perceptions. These include the following:

1. Management may not know what specific purchase criteria users consider
important. For example, customers frequently identify key purchase criteria not
identified by management. Even when the criteria are correctly identified,
management may misjudge the relative importance of individual criteria.
2. Management may misjudge how users perceive the performance of competitive
products on specific performance criteria. These differences in perception of
performance may exist for the most basic of criteria.
3. Management may fail to recognize that user needs have evolved in response to
competitive product developments, technological advances, or other market or
environmental influences.

8.41 Gap model

A model has been developed by Parasuraman and his colleagues which helps identify the
gaps between the perceived service quality that customers receive and what they expect.
The model identifies five gaps:
Source: A. Parasuraman, V. A. Zeithaml and L. L. Berry, ‘A conceptual model of services
quality and its implications for future research’, Journal of Marketing, vol. 49, Autumn
1985.

Gap - I
The first gap is the difference between consumer expectations and management perceptions
of consumer expectations. Research shows that financial service organizations often treat
issues of privacy and confidentiality as relatively unimportant, whilst consumers
considered them very important.

In Philippines, very little research is done by the companies to know the customers’
expectations. Often, management believes that their estimate of what customers want is
final. They make as error of judgment at this stage. The customers themselves are also to
be blamed because they do not protest or complaint, when they do not get the desired
service. This keeps the management in dark and they continue to live by their belief that
what they think is correct.
Gap - II
The second gap is the difference between the management perceptions of consumer
expectations and service quality specifications. Managers will set specifications for service
quality based on what they believe the consumer requires. How-ever, this is not necessarily
accurate. Hence, many service companies put much emphasis on technical quality, when in
fact the quality issues associated with service delivery are perceived by clients as more
important.

Gap - III

The third gap is the difference between service quality specification and the service
actually delivered. This is of great importance to services where the delivery system relies
heavily on people. It is extremely hard to ensure that quality specifications are met when a
service involves immediate performance and delivery in the presence of the client. This is
the case in many service industries: for example, a medical practice is dependent on all the
administrative, clerical and medical staff performing their tasks according to certain
standards. The practice may set a goal of a maximum fifteen-minute patient waiting time,
however, a doctor who keeps a poor schedule will upset the system for all of the staff.

Gap - IV
The fourth gap is the difference between service delivery intention and what is
communicated about the service to customers. This establishes an expectation within the
customer which may not be met. Often this is result of inadequate communication by the
service provider.

Gap - V
The fifth gap represents the difference between the actual performance and the customers’
perception of the service. Subjective judgement of service quality will be affected by many
factors, all of which may change the perception of the service, which has been delivered.
Thus a guest in a hotel may receive excellent service throughout his stay, apart from poor
checking out facilities. But this last experience may damage his entire perception of the
service, changing his overall estimation of the quality of the total service provided from
good to poor.
8.42 Advantages of gap model
The gap model has following advantages:
 It provides a framework for understanding the factors of service quality.
 It helps in identifying shortfalls in service quality.
 It suggests the means to fill the gaps.

8.43 Limitation of gap model

The problem of the gap model lies in defining and quantifying various specifications to
identify these gaps.

8.5 IMPROVING SERVICE QUALITY

Improving service quality is an important activity, which needs to be followed. Some of the
commonly used techniques for improving service quality are:

8.51 Benchmarking
8.52 Service Blueprinting

8.51 Benchmarking
In order to evaluate service quality, it is important to establish a firm’s performance
relative to its competitors. Benchmarking involves looking for the best ways to achieve
competitive advantage. It stems from the Japanese practice of ‘dantotsu’ which means
striving to be ‘best of the best’. The company’s products, service and practices are
continually compared with the standards of the best competitors and identified industry
leaders in other sectors. By observing and measuring the best within and outside the
industry it is possible to improve the performance of the company.
An early firm to adopt benchmarking was Xerox Corporation who use it as a major tool in
gaining competitive advantage. Xerox first started benchmarking in their manufacturing
activities and focused on product quality and feature improvements. Xerox is now seen as a
world role model for quality improvement with some 240 different functional areas of the
company routinely involved in benchmarking against comparable areas. Service companies
can identify improvement opportunities from a wide range of different industries, not just
services. The value chain concept developed by Michael Porter can be especially useful in
benchmarking competitors. By systematically comparing processes within each element of
the firm’s value chain with those of competitors, areas for improvement can be identified.
Such systematic comparisons can make transparent areas where competitive advantage can
be secured. Benchmarking can be used to improve service quality or reduce cost. For
example, it may show where competitors are subcontracting activities out to third parties at
prices lower than it would cost them to perform the activities themselves.

8.52 Service blueprinting/process analysis

Service companies who wish to achieve high levels of service quality and customer
satisfaction need to understand all the factors which may influence customer perception.
‘Blueprinting’ or service process analysis is a concept which breaks down the basic
systems and structures of an organization in order to develop a greater understanding of the
service process. The approach requires the identification of all of the points of contact
between the customer and the service provider. Possible breakdowns in the service
encounter can then be identified. These can then be acted upon and improved, thereby
improving service quality. Several approaches to carrying out a blueprinting exercise have
been suggested:

a) Blueprinting/cycle of service analysis:

The concept suggests that each contact with the customer is a ‘moment of truth’, each
being an opportunity to either increase or decrease customer satisfaction. The customer’s
perception is a continuous stream of experiences which together determine the service
quality. The company will very often not perceive the service in this way as their
employees are constrained in their view by the particular part of the overall service with
which they are involved.

The blueprinting/cycle of service approach enables a service company to shift its

employees’ perception so that they have a better understanding of the customer’s
experience.

b) Value chain analysis:

This important analytical tool involves breaking down each of the activities of a firm into
its various activities, and showing where value is added for its customers. Each activity can
be analyzed to determine its contribution to customer satisfaction and service quality.

c) Storyboarding:
This concept was developed by the Walt Disney organization in designing its theme parks
in order to engineer the customer experience and ensure the greatest customer satisfaction.
When a film is made, each scene is outlined in advance, using a series of sketches arranged
in a sequence known as a storyboard. Similarly, sketches of each contact a customer has
with the service provider can be used to identify points for improvement in customer
service. Scenes can be rearranged to improve the quality of the customer experience.

8.6 SUMMARY
Service quality has great potential of offering competitions advantage to the marketers.
Being a highly intangible concept, it is amenable to different interpretation. However, there
are several common dimensions of service quality, which have been identified by the
researches. Many firms have also developed specific techniques for improving service
quality.

8.7 KEYWORDS
Service quality: Ability of the service to live-up to customers’ expectations.

Technical quality: Quality of ‘what’ service is delivered to the customer.

Service quality specifications: Based on customers’ expectations, the organizations develop

standards of service performance.

Benchmarking: The practice of identifying the best management practices may be from
even unrelated fields and adopting the same may be with certain modifications.

8.7 SELF ASSESSMENT QUESTIONS

1. Define service quality what are some of the ways to perceive the same?
2. Write an essay on ‘gap model’ of service quality. Discuss its applications.
3. What are various dimensions of service quality? Is it possible to study service quality
from these dimensions only?
4. What are various techniques of improving service quality ?

8.8 REFERENCES / SUGGESTED READINGS

1. A.H. Payne, The Essence of Services Marketing, PHI, New Delhi.
2. Zeithaml V.A. and Bitner, Services Marketing, McGraw Hill.
3. Ravi Shanker, Services Marketing, Himalaya Publication
4. Lovelock, Christopher H., Service Marketing, PHI, 1996
LESSON: 9
MANAGING THE PRODUCTIVITY AND DIFFERENTIATION IN
SERVICES

9.1 Objectives
9.2 Introduction
9.3 Productivity
9.4 Strategies for Productivity
9.5 Managing Capacity
9.6 Differentiation
9.7 Steps in Differentiation
9.8 Summary
9.9 Keywords

9.1 OBJECTIVE
After going through this lesson, you will be able:
 To understand the concept of productivity and its relevance in service organization.
 To identify ways of optimizing the productivity in service sector.
 To identify the problems in creating differentiation in service industries
 To know how competitive forces have influenced differentiation
 To get familiarized with the value chain concept used as the basis for competitive
differentiation.
9.2 INTRODUCTION
It is difficult to differentiate one’s services from those of the competitors due to
intangibility. The problem assumes a still larger dimension in those services where prices
are regulated or in case where the competition is non-price one. However, with a view to
obtain a competitive edge, the solution lies in a differentiated offer, delivery and image.
Managing productivity is yet another strategic issue in service organizations. In fact, it is
said that services are not produced but they are performed. Nonetheless any service
operation has some capital investment and operating costs. Therefore, in service
organizations the productivity issue can’t be overlooked. Today, it is recognized as a major
strategic issue in all service organizations.

9.3 PRODUCTIVITY
Generally, it is submitted that productivity enhancing is the way to increase the profits of
firms. And, the productivity is usually described as the ratio of output of a production
process to an aggregate value of inputs. Such a concept of productivity revolves around
two basic assumptions. First, the factors of output are perfectly defined so that they can be
measured and second, the utility of output is not questioned. This concept of productivity
has been developed on the basis of experiences in the manufacturing sector. However,
services are basically different from goods in the following ways:

(i) Services are performed and not produced,

(ii) Service facilities must exist before they are used,
(iii) Services can’t be stored,
(iv) Quality varies in services sector, and consumers are an integral element in
service productivity.

All such factors complicate the issue of productivity measurement in services sector.
Nonetheless the relevance of productivity management can’t be overlooked. The other
problem in services sector is that lower productivity is influenced by a number of factors,
which are unique to services industry. For example, service in industry is more labor
intensive as against the manufacturing sector, which is capital intensive. In services, if you
have to achieve higher output, you have to proportionately increase the workforce. The
second problem is that of fewer opportunities because of economies of scale, lack of
specialization and independence on the human element. The third problem is the size of
service operations. A number of service organizations are run by a handful of people. A
nursing home, a lawyer, a consultancy service are some such examples. Here neither is
division of labor possible nor specialization. All these problems make the task of managing
productivity much more challenging in service organizations, and therefore it is considered
to be a major strategic issue.

9.4 STRATEGIES FOR PRODUCTIVITY

Nevertheless, many suggestions for improving productivity can be put forward, discussed
as follows:

 Improving Staff Performance through Training: The staff in contact with the
customers provides a visible element of the service. They should be trained to
provide better service not only through hard work but also with skills. This would
result in better productivity and also higher customer satisfaction.

 Introducing Systems and Technology: Production-line approach to services

recommends that service companies should industrialize their services and adopt a
manufacturing attitude towards producing services. He observed” that service
industry executives should begin to think seriously that they are actually
manufacturing products. They would then ask what technologies and systems are
required, what machines can replace people, what systems are needed in place of
serendipity. For industrialization of services, technology can be applied in three
ways. First is the hard technology, which implies substituting machinery for people’
(e.g., airport surveillance of baggage with x-ray equipment). The second, the soft
technology that implies substituting pre-programmed systems for individual service
operations (e.g., fast food operation). The third, hybrid technology, which
 implies combining the above two, i.e., equipment with planned systems to gain
greater order, speed and efficiency.

 Reducing Service Levels: Productivity can be improved by reducing quality of

service (e.g., a doctor can give less time to a patient and the preliminary
investigation or patient’s history can be documented by a junior doctor). But here
one has to strike a balance between quantity and quality of service delivered.
Alternatively, as a strategic tool, one can differentiate their services by broadening
the quantity and thereby quality.

 Substituting Products for Services or Adding New Services: One can increase
productivity by increasing number of services. For example, Department of Post
introduced courier service and followed it by introducing the non-document courier
service thus adding to their services. A hotel can add parties and marriages to their
banquet services to introduce productivity.

 Customer Interaction: Involving the customer in the service delivery process in

place of your own employees can enhance the productivity, e.g., a self-service
restaurant. However, there could be situations where the customer is willing to pay
more rather than ‘waiting’. Hospitals are such examples where customers don’t
want to participate in the production of services but want to leave everything on the
hospital staff. Therefore, one has to understand consumer behavior and the causes
of such behavior before educating and expecting the customer to participate in the
production process.

 Reduce Mismatch Between Supply and Demand: The concept of de-marketing

suggests a strategy to discourage the customers on a temporary or permanent basis
to achieve synchronization between the demand and supply. The strategy should be
either to manage demand or supply or both. There are some basic strategies to alter
demand so as to fit it within the available capacity. In such situations where
capacity is restricted, the four strategic options are: developing off-peak pricing
schemes, non-peak promotion and demand creation, developing complementary
services, and creation of reservation system.

Developing off-peak pricing schemes will help in shifting the demand from peak
periods to non-peak periods. Resorts and hotels do offer off-season packages to
shift the demand and even the telephone corporations have differential pricing to
shift demand to non-peak hours. Retail chains or depart-mental stores offer straight
discounts on the total bill if purchases are made during non-peak hours.

However, such a strategy may not always work. It has also been observed that
organizations, during the slack season, impart training their staff, do maintenance of
equipment, clean premises to prepare for next season. During this period if demand
builds up, there are chances of customers walking out dissatisfied. It might even
affect the business in the peak season because of negative word of mouth.

Another method, which can help in shifting demand from peak, period, is
developing complementary or facilitating services. Such services would not only
attract consumers away from bottleneck operations at peak times but might also
provide an alternative service while they are in queue for the capacity restricted
operations. For example, at a casino, a lounge with wide screen television showing
some exciting movie or a bar would shift some of the tourists from restricted
capacity service operations. Such a strategy would not only give additional revenue
but also an opportunity to differentiate the service offer from the competitors.
Lastly, the reservations strategy can also help in managing demand and, thus,
customer satisfaction. Table reservations in a restaurant, reservation of cinema
tickets in advance are some examples of such a strategy.
9.5 MANAGING CAPACITY

The other set of strategic options are related to managing capacity and controlling the
supply side by selecting out of the following strategic options: using part-time employees,
increasing efficiency of existing personnel involving customers, sharing capacity with
others, and investing in expansion options.

Employing part-time employees (moonlighters) is one of the solutions to increase capacity.

At a resort hotel, local students can be engaged during peak seasons to cater to the
customers. The most appropriate example is management institutions, which run their
regular courses with part-time/guest faculty.

The other option is to maximize the efficiency of existing employees by imparting training.
By training the staff in multiple functions, most employees can be engaged in essential
tasks of delivering the service during peak hours and the support tasks are deferred to slack
periods. A smaller hotel can successfully use this method where a handful of people can
provide room service, housekeeping and restaurant service.

The third method is that the consumers participate in delivery of service and, thereby,
lower the labor requirements of the producer. Self-service groceries floor or restaurants are
examples of such a strategy.

The fourth method is that of sharing capacity with others rather than creating capacity in-
house. Hospitals, for example, participate with pathological labs, X-ray clinics, CAT-
scanning labs, etc., rather than investing in expensive equipment themselves.

Even restaurants are selling branded ice creams rather than investing in ice cream making
facilities in-house. Lastly, of course, is the option of increasing capacity by investing in
expansions so as to cater to the increase in demand. This strategy is best suited if the
increase in demand is of a permanent nature.
Although, productivity would result in better profitability, service managers should not
push it so hard that quality is affected in some or the other way. It might be that the quality
delivered is the same but the customer has perceived a reduction in quality. Therefore, one
has to balance out between productivity, standardized quality and. customers.

9.6 DIFFERENTIATION
The important thing, which needs to be understood, is the level of service package. One has
to understand the primary service package and the secondary package in relation to a
specific service and then create differentiation. If we take the example of recent changes,
which have come about in the Philippine aviation industry, the strategies package for civil
aviation industry includes punctuality. If these Airlines have achieved 97 percent on time
departures, they are able to differentiate themselves from the public sector airlines. The
other strategies towards differentiation include free on board liquor, non-Philippine cabin
crew, quality of food, etc. From this example we observe that most innovations in service
industries are capable of being copied.

Although this is a reality in service industries, a marketer still keeps introducing newer
innovations to sustain the competitive edge. For example, Citibank was not permitted to
open branches beyond a limited number affecting “retailing of their services”. They made
innovative arrangements with other parties for increased distribution of their loan services
to purchase house, scooter, car, durables and other household appliances. This arrangement
gave Citibank a competitive edge. Gaining a competitive edge by product differentiation,
product positioning, market segmentation, new product planning, innovations, product
quality, etc. has become the foundation of marketing strategy with the purpose being to win
a long-term commitment from key customers. The consumer orientation of business
strategy has become far more important because of growing competition, and, as a result,
knowing your business, your markets, your customers and your products with specific
reference to you competitors has become the new strategic tool.
According to Michael Porter, it is difficult to understand competitive advantage by looking
at a firm as a whole. Instead, each of the activity, which a firm performs to design,
produce, market, deliver and support its product, should be examined and the interaction of
each with the rest should be analyzed to identify the sources of competitive advantage. But
is it that one always has to develop competitive policies, and do such policies always pay?
The competitive forces had a direct impact on a firm’s profitability and, therefore,
marketing or business strategy should take competition into cognizance.

The differentiation is a major issue in service industries as most service innovations can be
easily copied. Service companies, therefore, face the challenge of continuously developing
new innovations to gain a succession of temporary advantages over their competitors. The
firms invariably view the potential sources of differentiation too narrowly. A firm need to
differentiate its offer from that of competitors by providing something unique that is
valuable to the buyer. If this is successfully achieved the firm can command a premium
price, sell more of its product in the long run and win greater loyalty.

Further, the products are differentiated by the company’s image and reputation, the
salespersons with whom the customer interacts and a bundle of other intangible attributes.
Differentiation stems from each of the specific activities a firm per-forms and how they
affect the buyer. Therefore, differentiation, in fact, grows out of the firm’s value chain.
Though the concept of value chain was devised keeping the manufacturing companies in
focus, however, this concept applies equally well to the service industry. The value chain
desegregates a firm into strategically relevant activities with corresponding cost
implications. A firm can gain competitive advantage by performing these strategically
important activities mare economically or better than its competitors to gain an advantage
over them.

Value chain activities are broadly categorized under two heads. First are the primary
activities like inbound logistics, operations, outbound logistics, marketing, sales arid
servicing. The second are the support activities, which include infrastructure, human
resource management, technology development and procurement.
In fact, the support activities are integrating functions that cut across the various primary
activities, which can be further subdivided into specific and discrete primary activities,
which contribute to the value chain.

Generally, it can be observed that value activities are discrete building blocks of
competitive advantage. How each value activity is performed with its economics of cost in
relation to the competitors would determine its contribution to the buyers needs and,
thereby, create a differentiation and a discrete competitive advantage. Similar to the firm,
buyers also have value chains. It is difficult to construct a value chain that covers
everything an individual buyer or a household and its occupants do. But it is possible to
construct a chain for activities that are relevant to how a particular product is used. A chain
need not be constructed for every household but chains for representative households or
individuals can provide an important.

9.7 STEPS IN DIFFERENTIATION

Porter recommended an eight-step approach to determine the bases of differentiation and
selecting a differentiation strategy. More specifically, the differentiation exercise would
follow the following steps:

The first step is to determine who the real buyer is. In other words, within the overall
buying cycle who would interpret your offer and decide. It is possible that apart from the
end user, channel members may also be the buyers.

The second step in this process is that the firm must identify the direct and indirect impact
on its buyer’s value chain to determine the value the firm should create for its buyers. A
firm must explore all possible options to influence the buyer’s value chain in its direction.
Such an analysis of buyer’s value chain would provide a foundation for determining the
buyer purchase criteria (BPC)
Therefore, logically, the third step is to rank the buyer purchasing criteria. At times, such
an analysis might suggest purchase criteria that the buyer does not currently perceive.
However, the same must be identified in a manner that it can be operationalized, and their
list of buyer purchase criteria on a continuous basis to sustain competitive advantage. Such
an inventory of BPC is then divided into two categories; use criteria and signaling
criteria.

The fourth step is that the firm must identify its existing sources of uniqueness in relation
to its competitors and also the potential new sources of uniqueness, because differentiation
stems from the uniqueness of firm’s value chain. Since differentiation is always relative, a
firm’s value chain must also be compared with the value chain of competitors. Such an
exercise should result in the identification of specific factors of uniqueness, termed as
‘drivers’.

The fifth step then is to study the cost implications of all the indemnified factors, both use
criteria and signaling criteria, which can lead to differentiation.

The sixth step is to choose the configurations of value activities that create the most
valuable differentiation for the buyer.

The seventh step is to check the sustainability factor of your chosen differentiation
strategy. Sustainability has to be checked against erosion or imitation. Kotler has observed
that in services industry imitation is easy to copy, but some companies have been able to
cross this stage successfully.

The last stage is that of cost reduction in activities that do not affect the chosen forms of
differentiation. Such a strategy would not only improve profitability but also reduce
vulnerability to competitors because of price premium.
In fact, successful differentiation strategies communicate multiple forms of differentiation
throughout the value chain. After all, the value created for the buyer must be perceived by
the buyer if it is to be rewarded with a premium which means that the firm must
communicate their value to the buyer through an appropriate marketing communication
mix. If these stages are carefully analyzed, then one can develop such differentiation
strategies, which are not only implementable but also sustainable, and give a competitive
advantage to the organization.

9.8 SUMMARY
It is observed that the productivity is relevant in service organizations. There are six major
ways in which improvements in productivity can be brought out: improving staff
performance through training, introducing systems and technology, reducing service levels,
customer interaction, and managing capacity by controlling supply. In certain service
organizations the capacity is fixed and it is rather difficult to increase the same, as the
industry might be capital intensive. It could also be that demand exhibits a certain
seasonality pattern. In such service organizations, one of the major marketing challenges is
demand management. It might be generating demand during low demand periods or
shifting demands to low demand periods during peak hours, when demand exceeds
capacity. Managing differentiation is one of the major challenges a service marketer faces.
The problem with service industries is that others can copy whatever you want to do to
seek differentiation. You may be aware that one ‘air-taxi-operator’ started offering liquor
on board on the domestic routes and others followed. Nevertheless, service industries must
strive for differentiation strategies for competitive advantage. In this chapter, you have
been taken through the eight steps of Porter’s model and it was suggested that
differentiation strategies must communicate multiple forms of differentiation throughout
the- value chain.

9.9 KEYWORDS
Productivity: The ratio of output of a production process to an aggregate value of inputs.

Differentiation: Creating a set of meaningful differences in your brand so that it may be

distinguish from the competing brands.
9.10 SELF-ASSESSMENT QUESTIONS
1. What do you understand by ‘productivity’ and how is it relevant in a service
organisation?
2. Is it possible to improve productivity in an organisation where employees are not
willing to cooperate? Give justification to your answer by taking the case of a specific
service organisation.
3. Visit a nearby star category hotel and identify what methods it adopts to manage
productivity when the demand for its services goes up during the wedding season.
4. What do you mean by differentiation? How it is possible in service industry?
5. What are the steps in differentiation strategies in services?

9.9 SUGGESTED READINGS

1. Jha, S. M., “Services Marketing”(6th ed.), New Delhi: Himalaya Publishing House,
2003.
2. Chunawalla, S.A., “Compendium of Brand Management”(1st ed.), New Delhi:
Himalaya Publishing House, 2004.
3. Woodruffe, Helen, “Service Marketing: Operation, Management and Strategy”, New
Delhi: Macmillan India Limited, 2000.
4. Clow, Kenneth E. and Kurtz, David L., “Service Marketing”(2nd ed.), New Delhi:
Biztantra, 2003.
5. Shankar, Ravi, “Services Marketing: The Indian Perspective”(1st ed.), New Delhi:
Excel Books, 2002.
LESSON: 10
MARKETING OF FINANCIAL SERVICES

Subject: Marketing of Service Paper Code: MM-411

Author : Dr. Kulbhushan Chandel Vetter : Prof. Harbhajan Bansal

STRUCTURE
10.1 Objectives
10.2 Introduction
10.3 Process of Financial Services Market
10.4 Financial Services and Consumers
10.5 Financial Institutions and Financial Products
10.6 Physical Distribution of Financial Services
10.7 Advertising of Financial Services
10.8 Branding of Financial Services
10.9 Management of Banking Services
10.10 Mutual Fund Marketing
10.11 Summary
10.12 Keywords
10.13 Self Assessment Questions
10.14 References / Suggested Readings

10.1 OBJECTIVES
After going through this lesson, you will be able:
 To learn about the process and marketing of financial services.

10.2 INTRODUCTION
Finance refers to funds of monetary resources needed by individuals, business houses and
the government, individuals and households requires funds essentially for meeting their
current requirements or day to day expenses or for buying capital goods commonly known
as investment. On the other hand a firm needed funds for the payment of wages and
salaries and for purchasing raw material and other assets. In the same way traders require
funds for buying and stocking goods in their shops and go-downs. Finally the government
needs funds to meet its expenditure on goods and services and finance its development
programmes. The financial system refers to the system of borrowing and lending of funds
or the demand for and the supply of funds of all individuals, institutions, companies and of
the government. Generally the financial system is classified into:

(1) Industrial Finance- Funds required for the conduct of industry and trade.
(2) Agriculture Finance- Funds needed for conduct of agriculture and allied activities.
(3) Development Finance- Funds needed for development.
(4) Government Finance- It comprises the demand and supply of funds to meet
government expenditure.

India’s financial system includes the many institutions and the mechanism which affects
the generation of savings by the community, the mobilization of savings and the effective
distribution of the savings among all those who demand the funds for investment purpose.
Broadly, therefore the Indian financial system is comprised of:

 The banking system, the insurance companies, mutual funds investment funds and
other institutions which promote saving among the public, collect their savings and
transfer them to the actual investors.
 The investors in the country comprised of individual investors, industrial and
trading companies and the government-these enter the financial system as
borrowers.

In the consumer services, the financial services are considered more significant because
money plays a vital role in every area. Marketing of financial services is beset with the
problem that the more or less a uniform or identical financial products are offered by
competing organizations. Thus, it is advocated that the production and planning of
financial services should be reviewed in terms of consumer satisfaction because consumer
is the king of market. The whole success or failure depends upon the attitudes of the
customers towards particular product, service and company. Like a manufacturing of
commodity there should be product planning as the financial institutions are regarded the
manufacturers and dealers in money and credits.

10.3 PROCESS OF FINANCIAL SERVICES MARKET

The term process refers to the systematic sequence of different activities, events towards
certain ends. A process is basically a dynamic concept rather than static. Events and
relationships are dynamic, continuous and flexible and must be considered as a whole in
which many forces interact, a force affecting others and being affected by others. There are
generally three key players in the financial service business viz. the lender, the finance
company/ bank and the borrower. Lender-Banks/ Finance Company-Burrower:

Basically it functions on the simple principle that the bank/ finance company:

Borrowers at interest rate a

Levels at interest rate b
And earns (a-b)

Furthermore, this simple process in existence for long has assumed various forms and
shapes which we could describe as financial product. For example in a bank against a
savings account interest rate of, say 6%, the fixed deposit rate could be 11 per cent for a
period of one year. However, if this very amount is lent by the bank to a borrower the rate
could be anywhere around 17 per cent.
Now this very amount if received by a finance company as a fixed deposit would fetch a
higher rate of return to the lender. Correspondingly, the borrower pays a higher rate of
interest than 17 per cent.

Banks and Finance companies may also receive money either for themselves or others by
way of equity (which is partaking in an investment on a risk/profit sharing basis). Here the
return, also known as dividend could range from nothing to abnormally high returns. There
have been cases where the dividend rate has been as high as 11 per cent.

From the above, what one can point out is that money is raised broadly in the form of
either debt (i.e. money lent at a pre-determined rate of interest) or equity (i.e. money lent
provided in an investment scheme where the return is risk-determined).

10.4 FINANCIAL SERVICES AND CONSUMERS

In this business, the consumer can be of two types:

Consumer as an Individual for products such as bank deposits, company fixed deposits,
units, company shares and debentures, etc. LIC policy, provident fund, consumer durable
loan, credit cards etc.

Consumer as a Corporate Entity for terms loans from financial institutions, working capital
loan from commercial banks, inter-corporate deposits, equity by way of shares/debentures,
etc.

Consumer as a Corporate Entity for terms loans from financial institutions, working capital
loan from commercial banks, inter-corporate deposits, equity by way of shares/ debentures,
etc.
The larger the bank or the finance company, usually the more difficult it is for them react
to individual needs. Hence a way is to be sought for clustering consumer traits as
empathetically as possible.

For long the consumer has been defined in terms of social class (upper-middle class,
working class etc.), age range and whether they have the money to go in for a financial
product.

While one could talk about targeting the 35-55 age group, of middle class who are male
and prudent investors with Rs. One lakh plus annual income, it may not be quite an
accurate goal to aim at. It is not possible to understand needs of clientele just on this simple
information. Since people within that group could react very differently to investments and
other financial purchases, strict adherence to the above segments misses out the
consumers’ attitudes and his emotional disposition to his purchasing. For instance no
prudent investor views gold with any consideration, he runs to the stock market instead.
That is a vast change in attitude from just a decade ago.

Regardless of limited funds on hand the Indian consumer today does not mind borrowing.
Today, broadly he borrows for:

 House Purchase
 Vehicle Purchase
 Consumer Durable Purchase
 Purchase against Credit cards.

The attitude of this new generation shows the change in the mindset which is moving
towards cult. We are in the environment of personal expression. Successful brands being
the ones which sell themselves by allowing consumer to feel it is their choice e.g. Citibank
Diners Club Credit Card, ‘The Reward For Success’ campaign).
10.5 FINANCIAL INSTITUTIONS AND FINANCIAL PRODUCTS
In order to appreciate the range of financial products available to us in the country we shall
briefly discuss about their “providers” and that how financial services have come to
blossoms.

Since bank nationalization in July 1969, banking and finance industry constituents have
been broadly identified into 7 categories.

1. Nationalized banks such as Syndicate Bank, Bank of India, Canara Bank, Punjab
National Bank, etc.
2. Insurance companies such as Life Insurance Corporation of India, General Insurance
Corporation, ICICI Prudential Life, HDFC Standard Life Insurance, etc.
3. Unit Trust of India.
4. State Bank of India and its associate banks such as State Bank of Patiala, State Bank of
Hyderabad, etc.
5. Private sector banks such as Bank of Madura, Vysya Bank, Federal Bank, etc.
6. Foreign banks such as American Express Bank, ANZ Grindlays Bank, Bank of
America, etc.
7. Non-banking finance companies such as First Leasing Sundaram Finance, etc.

Till early eighties, no one in the highly regulated banking / finance industry showed any
inclination to innovate or market new financial products; given their respective roles as
bankers or finance companies all offered absolutely the same products.

Product development or innovation of financial products interestingly requires very little or

no additional investment. But the downside is that no brand can boast of a Unique Selling
Proposition (USP) for long, as it can be copied immediately. Of course, the safeguard to
some extent here is the very branding of the product.
Financial Products
1. Savings and Recurring Account: These are products available only with banks,
providing relatively low yield but offer advantage of instant liquidity.

2. Current Account: Again, available only with banks but can be operated only by
corporate entities. There is zero-yield from this product. It exits only to facilitate day-
to-day company transactions and availing of credit facilities from the bank, if any. It
also serves as a reference point to check on creditworthiness.

3. Fixed Deposits: This product is made available by banks, finance companies and
certain companies. Currently, the status is that the banks offer the lowest yield on
deposits. Companies pay more and the highest is offered by finance companies.

4. Retail Loan Products: This covers the grant of auto loan, housing loan, consumer
durable loan etc. Here making the consumer finance scheme more attractive from the
point of its affordability is that sells.

Today, possession of a well-known brand of car has a reason to satisfy the status and
recognition needs of the human self thus helping him to reach the fourth step of esteem
needs in Maslow’s hierarchy. This facility is available both from banks as well as
finance companies, the effective rate of interest charged being comparably lower in the
case of banks vis-a-vis finance companies.

5. Commercial Loans: This could broadly be split into long-term borrowings (beyond a
period of one year) and short-term (less than a period of one year) borrowings.
Generally long terms loans are provided by financial institutions such as Industrial
Finance Corporation of India (IFCI), Industrial Development Bank of India. Short-term
loans, also known as working capital are made available by all commercial banks.
 Non-banking finance companies assist corporate entities by arranging bulk amounts as
deposits from third party companies, at rates of interest higher than bank’s lending rate
and, for shorter periods, say, 90 days and one year, etc.

6. Leasing and Hire Purchase: This facility is made available both to individuals and
firms, by only finance companies. Both leasing and hire-purchase as a method of
financing are essentially a provision of credit to the prospective user who does not have
the immediate purchasing power to buy these goods but will have the capacity to make
periodic payments for the use of such goods for specific period.

There is difference between the two terms, Leasing can be defined as a method of
financing equipment/ vehicles wherein the prospective ‘user’ known as “lessee” in
consideration of making periodic payments is allowed the ‘use’ of equipment/ vehicle
during the period of lease while the legal ownership in the equipment/ vehicle vests in
the hand of the finance company, otherwise known as the “lessor”.

7. Credit Cards: Several banks, both Indian and foreign have moved into the credit card
business. Also known as “plastic money”, it offers the individual an opportunity to buy
rail/air tickets, make purchases from shops, have meals and stay at hotels when they
need it. And pay at leisure.

Regulatory Framework in India

All functions and responsibilities of banks (both Indian and foreign) and finance-
companies are governed by the regulations stipulated by the Reserve Bank of India (RBI).
For banks the two critical elements of Cash Reserve Ratio and Statutory Liquidity Ratio
are fixed by RBI.

From time to time strictures are issued for matter such as revision of interest rates; change
of policy; foreign exchange regulations.
Technology Power for Financial Products
The growth of banking concept has been dramatic in recent times. While banks have been
instrumental for various technological innovations, they have also been adapting the
breakthrough to further their service by adding newer dimensions.

Apart from the extensive use of computers for accounting purposes and communications
network of the general order, banks have introduced innovative concepts like Magnetic Ink
Character Recognition (MICR), cheques, Bankers Automated Clearing Services (BACS),
Clearing House Automated Payment Systems (CHAPS), Cash Dispensers (CDs),
Automated Teller Machines (ATMs) are towards instant operational retail banking
transactions. Laser Cards have enhanced the utility of credit cards. The formation of
Society for Worldwide Inter Financial Telecommunications (SWIFT) coordinates
international banking transactions through Satellite communications.

Pricing of Financial Products

Since all Indian banks and finance companies go by the dictates of the Reserve Bank of
India, it becomes clearly mandatory that the pricing of all their products conform to RBI
regulation).

In market share pricing once ownership is achieved and price control is firmly within the
company’s grasp, high profits can be attained.

In spite of the increased use of other factors in the marketing mix, price is an important
element, and successfully fixing a price is especially challenging for new products and
services. Attention must be paid to the pricing objective, policies and procedures. But
above all, good knowledge of the costs of administration and selling, understanding of
consumer demand and an awareness of the competitions likely reactions determine how
successful the chosen price will be.

10.6 PHYSICAL DISTRIBUTION OF FINANCIAL SERVICES

Banks and finance companies use basically three ways in which they can sell to their
customers:

 Direct face-to-dace sale: something very commonly noticed in the case of

insurance companies, mutual fund schemes, Unit Trust of India.

 An indirect face-to-dace sale: This occurs when financial products are provided
through intermediaries. Examples could be project consultants helping their clients
to raise finance from banks, departmental stores stocking application forms for
credit card membership, housing societies and car dealers making arrangements for
loans.

The choice of distribution channel used for delivering the institution’s products is affected
by many variables. The merits and demerits of different alternative are listed below:

Merits Demerits
a) Direct Advantage of full control Distribution Network
Face-to-Face Expensive
b) Indirect No investment is required to Clear lack of control
Face-to-Face setup this channel intermediary decides how
much to sell and of which
company
c) Direct Targeted individuals receive Vulnerability of being
Marketing sales proposals through letter- treated as junk mail
box and tele-marketing

One of the most challenging tasks in delivering products through an established agent field
force (as in the case of LIC or UTI) is the difficulty of controlling the sales staff who in
general are extrovert personalities and free-thinking individuals. If not handled carefully
this could lead to drop in their morale.

Motivation is the key to a successful sales team. It can be achieved through financial
incentives, sales contests, etc. (insurance companies have the exclusive Chairman’s Club
where star salesmen are granted membership). Some of the key success factors for a
financial services company are:

 Product Differentiation
 Accurate Credit Appraisal System
 Strong Management Information Systems
 Effective Account Receivable Management
 Regular Debt Follow-up

10.7 ADVERTISING OF FINANCIAL SERVICES

Advertising is a very useful tool for promotion of financial products and services. Financial
advertising is big business today. The middle class, flush with funds, has entered the stock
market in a big way over the last decade by virtue of which India is emerging as one of the
largest stock markets in the world. Financial advertising has also grown in India over the
last decade to cater to the upcoming market.

The aim of financial advertising is to promote financial products so as to persuade the new
breed of investors to put their money into the market. In India, as the investor is still new to
the gamut of financial products and services being offered to him, the task of promotion
thus, become much more challenging and exciting.

The financial products being offered today are very similar in various aspects. Examples
are SBI Magnum Express, SBI Magnum Triple Plus, Canstar etc. This leaves the investor
very confused and unable to decide which one to go for. This sort of situation calls for
financial advertising which can distinguish the financial products of a company from those
of its competitors. Mutual Funds in the market today indulge too much in the ‘me too’ type
of advertising and have created a very confusing scenario.

When promoting financial products, it is important to see that people get all the facts in
front of them. Unlike the advertisements of consumer non-durable like cigarettes, soaps
etc., a financial product can’t be explained using smart one-liners. Instead the copy needs
to bring out all the features of the financial product. The intangible financial service has to
be tangibilized through the medium of the advertisement. A person interested in investing
his money is bound to go through each and every detail of such advertisements. The
advertisement should be in concordance with people’s emotions, speak their language and
reflect their trust.

Financial markets display trends towards two types of advertising - Corporate awareness
advertising and product advertising. Corporate Awareness Advertising is done by
companies not just so that the prospective and existing customers will feel comfortable
with the products they are using, but rather that this helps differentiate a product through
building a brand personality.

Sometimes back Tata Steel ran a corporate campaign just before its public issue. The
advertisement carried a long list of the activities the company was involved in. The
memorable parting line-“We also make steel”.

Amongst the factors influencing the success of a corporate awareness campaign are:
a) Competitors’ activities.
b) Underlying changes in the market.

Product Advertising
Financial product advertising has finally come of age. Over the last decade, the flourishing
Indian middle class has discovered the scope of making investments in various financial
products such as shares, debentures, mutual funds etc. The market has responded by going
in for active advertising of these products.

So far in India, financial advertising has not been quite spectacular. The major reason could
be that the subject of finance cannot be treated alike other product advertising. It is
particularly difficult when the financial instruments offered by different competitors are
very similar.

The following points should be adhered to in financial advertising:

a) Give the prospects all possible information that would help them.
b) Avoid jargon and convey information in language the public can easily understand.
c) The more the advertisement explains, the more likely a sales is. In financial advertising
all evidence points to the fact that long copy does get read.

10.8 BRANDING OF FINANCIAL SERVICES

Financial products or instruments are basically documents evidencing transfer of funds
from the saving community, i.e., investors, to the business community, where it can be
gainfully deployed, on certain predetermined terms and conditions such as rate of return,
repayment schedule, liquidity, and hence fits etc. Since these terms and conditions are very
crucial to investment decision-making, companies and banking/ insurance institutions
dealing in financial products must consciously endeavour to highlight them in order to win
the confidence of investors. This is where the concepts of marketing come in. A number of
factors can be identified, which have necessitated the adoption of an aggressive marketing
strategy for such products:

1. Growing investor awareness

2. Growing number of companies/ institutions turning to capital market for funds
3. Liberalization of economy
4. Recent credit squeeze and freezing of interest rates
5. Stagnant saving level as a percentage of BNP.
6. Sudden explosion of Mutual Funds’ activities.
7. Ever-increasing popularity of equity stock and bonds.

Branding
Branding is a major input in the marketing strategy of commercial products. Brand is a
broad term that includes practically all means of identifying a product e.g., the LIC logo,
Citibank’s “City” schemes, Canara Bank’s “Can”- schemes. Brand name is that part of the
brand which can be verbalized e.g., Citihome, Canstar etc. Brand mark is that part of the
brand which can be recognized but is not utterable e.g., the LIC folded hands symbol,
Citibank’s distinctive lettering etc. These constitute the logo of the company.

The concept of branding of financial products offers several advantages. Brands command
customer loyalty for the product. Each brand has a consumer franchise which can be used
to its advantage. Financial products aim to attract the investor to bring his savings into the
market. This is quite a delicate task because the investor’s money is involved. Most of the
financial instruments are very similar. This is where the advantages of branding can be
exploited. Branding can help in creating differentiation between the various financial
products. It can help create a distinctive identity for the financial product or public issue.
Branding can also help to create some insulation from the competitor’s promotional
strategy.

In umbrella branding, the advertising and promotion costs of subsequent products can be
reduced considerably. This is because the brand-name recognition and preference is
already there. For instance, if Indian Bank comes out with another scheme in its
“Indsagar”, “Indmoti” series, it does not have to start advertising from scratch to
popularize it. Investors will know that this scheme is from Indian Bank and the overall
thrust and confidence which had been built-up for the previous schemes will be extended to
this too.
Developing a brand requires a great deal of long term investment especially advertising,
promotion etc. It is quite an expensive proposition and hence is worth while mostly for
large public issue or long tem plans like a bank’ s schemes. Nonetheless, the advantage of
branding can easily be exploited by the marketers of financial products. With a little bit of
caution and planning, branding can be as successful for public issue as it is for toothpaste
or cigarettes.

10.9 MANAGEMENT OF BANKING SERVICES

Banking sector has occupied paramount importance in the service sector. Thus the
production and planning of banking services should be in accordance to customers needs
and requirements. Basically banks deal with money and credit. The safety of deposited
amount, time honoured drawing facilities, service relating to the collection of cheques and
bills, accuracy, promptness are a few points, specially to make the services biased to the
consumers. The products sold by a bank should result in the highest degree of satisfaction
to the consumers or the account holders. While planning for the banking services, the
bankers should not forget demographic pressure.

The offering of right products to the right people at the right time and at the reasonable
prices should be given the topmost priority. Particularly in the banking services, the
location of banks should be at the places where a large number of consumers eventually
come, the transpiration services are easily available and the police posts are inside. Of late,
we find frequent cases of bank robbery. No doubt, it is a convenience business and so, the
selection of bank location carried outstanding significance. The distribution of services also
needs our priority attention.

For the optional distribution of the banking services, it is essential that bankers are
impaired adequate training. For this, the bankers should have an in-depth knowledge of
behavioural management. Up till now, we find untrained staffs. The selection and training
facilities need revamping, particularly with the motto of making the services consumer
oriented. No doubt, the linking of bankers’ remuneration with the changing price index
would be a suitable device.

In the marketing mix of the banking services, the promotion mix also deserves special
attention. In respect of personal selling, the bankers need proper training so that they do a
lot for the development of banking business or accretion of deposits. How to impress the
customers is an important aspect which would help the bankers particularly while
motivating the customers. For this, we realize the importance of personal selling. Not only
this, the management of advertising or impersonal communication also need special care.
The bank marketing programmes should be advertised in the leading or reputed journals so
that the general masses go through the service offered by the bankers. It would be right to
mention that an advertisement in bank marketing is a promise – the promise of satisfaction.
The banks should also utilize other media of advertisements like TV, cinema, radio and so
on. Besides, we also realize the significant contribution of sales promotion devices. The
public relation services would be helpful to the bankers. In addition, the provisions for
advertising specialties like ball pens, calendars, diaries, note pads, booklets and brochures
covering details of banking services would motivate the customers or prospects.

In the marketing mix of the banking services, we also need to divert our attention on the
pricing management. In this context, the commission or the rate of interest charged by the
bankers need special mention. No doubt, the introduction of modern computerization
facilities would maintain economy in the cost of operation. To maintain economy in the
cost of operation, the administration cost is required to be minimized. But the curtailment
in the administration expenses may result into large scale retrenchment of employees.
Hence, it would be reasonable that old employees are imparted modern training facilities.
The personal selling or advertising or sales promotion need a scientific approach.

10.10 MUTUAL FUND MARKETING

There has been a significant expansion of Indian financial sector in terms of scope and
content during the last decade. A well developed financial infrastructure, a number of
financial institutions and a variety of financial instruments have been promoted to cater to
the needs of growing savings and expanding capital market in India. However the most
remarkable development during 1980s was the entry of Mutual Funds as an important
linkage between savings and capital market. The Mutual Funds however are going to face
increasing challenges in the emerging financial market due to the ongoing process of
liberalization, deregulation and attempt to globalize Indian financial sector.

Types of Mutual Fund Services

Mutual Funds offer the alternative savings revenue with better rate of return linked to stock
market movement. The entry of mutual Funds in India in late 1980s was at the time when
stock market was ready for explosive growth.

Though Unit Trust of India was operating in Indian financial market since 1964, it was late
1980s which witnessed the entry of mutual Funds as an alternate to the existing savings
media. Public Sector, Commercial banks and financial institutions took lead in establishing
Mutual Funds as Trusts. State Bank of India and Canara Bank set up Mutual Funds in
1987. Life Insurance Corporation and Indian Bank set up their Mutual Funds in 1989 while
Punjab National Bank and Bank of India set up their Mutual Funds in 1990. General
Insurance Corporation established its Mutual Fund in 1991. Therefore, till November 1992,
there were Mutual Funds operating in Indian Financial market.

Mutual Fund schemes are broadly classified as given below:

1. Aggressive Growth Funds: Funds invested in stocks of fledgling companies/

industries-goal is maximum price rise-current income is very low-safety is very low.
2. Growth Funds: Funds invested in stock of settled companies/ industries-goal is high
capital appreciation-current income and safety is low.
3. Growth and Income Funds: Funds invested in companies with solid track record-goal
is price rise and moderate current income-safety is low to moderate.
4. Fixed Income and Equity Income Funds: Investment is made in high yielding stocks
and bonds-goal is high current income-safety is low to moderate.
5. General Money Market Funds: Funds invested in short term debt instruments-goal is
moderate to high current income-safety is very high.
6. Balanced Funds: Funds invested in mixture of bonds, preference and common stocks-
goal is current income and long term growth-safety is high.
7. Tax Saving Funds: Fund invested in permissible stocks/ debentures-goal is tax
benefits and growth-current income is moderate and safety is high.

Elements of Mutual Fund Marketing

Marketing of services has been considered the most vital area of operation of Mutual Fund
industry in view of keen competition of similar/ alternative products. In a newly developed
market like India where investor awareness is yet to take shape, Mutual Funds have an
important role to educate investors about the manifold advantages of investment in Mutual
Funds. Therefore, a well planned marketing strategy to mobilize savings by educating
investors and creating confidence about safety and return needs to be designed.

In a changing environment of financial services, mutual fund marketing has to maximize

customers satisfaction by optimizing internal and external efficiency in resource use,
competitive product development, cost efficient distribution system etc. It must be
remembered that marketing plan for Mutual Fund services need to be based on a
correlation matrix of firm product-customer relationship because of every nature of
products which are intangible and have the elements of inseparability and perishability.
Keeping in above correlation in view the marketing plan for mutual fund should include
broadly the marketing elements which are given below:

1. Product Planning: Product line to be offered-quality, design, range of services, etc.

2. Branding: Selection of Product name, brand policy like individual family or corporate
brand.
3. Pricing Policy: Price of units, rates of incentives, rates of commission to agents/
brokers.
4. Distribution Policy: Channel to use for selling the products-direct to the customers or
through intermediaries like agents, brokers, etc.
5. Promotion: Promoting sales through advertisement, road shows etc.
6. Servicing: After sales services-direct by the Mutual Funds to the customer or through
intermediaries like Registrars of the issue etc.

These are the important elements of marketing mix to form the marketing strategy to be
directed to achieve corporate goals.

Mutual Funds provide financial services which are intangible like any other financial
services and the quality of services depend not only on product but also on performance.
These services can also be performed like many other financial services.

Mutual Funds Products (i.e. schemes) are basically investment objective oriented and the
savings mobilized by them are invariably need to be invested in the instruments (shares,
debentures, etc.) projected in the schemes. There is little scope of flexibility.

For designing and developing a new product one should take the help of market research to
assess the needs of the customers (market potential), availability of existing product and
future growth in demand. Before formally launching a new product, test marketing can be
conducted. Price of Mutual Fund products are inextricably linked with return. In India face
value of units of most of the Mutual Funds is Rs. 10/-. However, while deciding pricing,
incentives, brokerage agency, commissions are also to be decided in advance because the
expenses towards these items will effect the ultimate returns to the investors.

Success would greatly depend on the appropriate distribution and promotion strategy.
Identification of right market segments of the product, selection of appropriate distribution
channel and promotional aids, will help marketing the products.
Identification of market is crucial to take further action regarding promotion and
distribution of the products. Market segments will be identified on the basis of nature of the
product, direct and indirect benefits of the product on the one hand and behaviour/ attitude
of the customers, product usage rate etc.

Communication is important and communication through advertisement is the most

important promotional aid for any Mutual Fund. Once target group and their
characteristics, value tastes etc., are identified appropriate advisement mix (T.V., Radio,
financial/ general newspaper, leaflets, etc.) is decided in order to reach maximum number
of potential customers, and relative importance and intensity of campaign would depend on
the nature of the product.

Marketing of services is significantly influenced by the quality of service and interpersonal

relationship between customers and service organization.

Service has great significance in Mutual Funds like any other financial service industry.
Market orientation of the product and customer orientation of servicing are the two key
factors in the competitive world of financial services. We have mentioned that expected
rate of return remaining more or less same, it is the service quality which will differentiate
one from other. In India most of the mutual funds provide after sales service through a mix
of external agencies and international service department, through basic reliance is on the
external agencies who are specialized in the job. This is probably due to absence of
sufficient number of such agencies, with trained and qualified staffs. However, it will be
better if the Mutual Funds can develop their in house expertise to render after sales services
in a cost effective manner.

10.11 SUMMARY
Finally, it is concluded that like a manufacturing organization service organization also
needs managerial approach in the marketing of their services. It has become essential for
the marketer to analyze the market, segment the market and frame the marketing mix
according to the background of customers satisfaction. It is pertinent as well as possible
that tangibility has been brought in the services through quantitative improvements in the
services offered. Further the service organization needs product planning and development.
The standardization of services would need proper planning of services and close
supervision and control.

10.12 KEYWORDS
Finance: Funds of monetary resources needed by individuals and industrial houses or the
government for meeting their respective requirements.

Financial services: Various services related to finance which are offered by different
financial institutions.

Mutual fund: A fund operated by an investment company that raises money from
shareholders and invests it in stocks, bonds, options, commodities, or money market
securities. These funds offer investors the advantages of diversification and professional
management.

10.13 SELF ASSESSMENT QUESTIONS

1. What do you understand by marketing of financial services? Briefly explain its
different aspects.
2. Define the product range of different financial services? Are these products common in
different cases?
3. “Product planning and promotion are the core decisions for the success of any service”.
Elaborate this statement in the light of marketing of financial services.
4. Highlight the similarities and dissimilarities between marketing of banking services and
mutual funds.

10.14 REFERENCES / SUGGESTED READINGS

1. Jha, S.M. and Singh, L.P. “Marketing Management in Indian Perspective,” Himalaya
Publication House, Delhi.
2. Chidambaram, P., “Services Marketing: The Indian Experience,” Manas Publications,
Delhi, 1993.
3. Khurana, Rakesh and Kaushik, Madhulika, “Marketing of Services: Concepts and
publications,” School of Management, I.G.N.O.U.
LESSON: 10

INTERACTIVE AND RELATIONSHIP MARKETING

STRUCTURE
i. Objectives
ii. Introduction
iii. Interactive Marketing
iv. Moments of Truth
v. Service Interaction Process
vi. Service Failures and Recovery Strategies
vii. Relationship Marketing
viii. Developing Relationships
ix. Summary
x. Keywords

OBJECTIVES
After going through this lesson, you will be able:
 To learn about the dimensions of interactive marketing
 To fathom out the difference between traditional marketing and modern marketing
practices
 To understand the concept and benefits of relationship marketing.
INTRODUCTION

Interactive marketing takes place between employees of the service organization and
service consumers. Through internal marketing, service providers prepare customer-contact
employees, physically and mentally, to perform the service. Consumers are also educated
and trained to participate in service production and consumption through external
marketing. The actual process of service production, delivery, and consumption takes place
simultaneously during the interactions of contact employees and consumers. The meeting
between contact employee and service consumer is called ‘service encounter’.

Customer Relationship Management is gaining importance in corporate circles in recent

years. It is emerging as the business theme for the 21st century. Companies have realized
the value of long-term relationships with individual customers and other business partners
in the light of rapid change in technology and customer expectations. Enhancing lifetime
value of customers and developing a relationship with profitable customers has become the
central focus of companies’ strategy. The growth of service sector, in fact, promoted the
development of CRM. The role of middlemen is negligible in service sector, as services are
produced and delivered locally in buyer-seller interactions. This feature of services
facilitated a greater emotional bondage between the service provider and the service user.
Building relationships and promoting them has become an integral part of the service
sector.

INTERACTIVE MARKETING
Interactive marketing may be defined as the managerial process through which a series of
interactions between service provider and consumer are organized to facilitate efficient
participation in service production and consumption that satisfies the needs and wants of
the consumers and creates positive customer-perceived quality. The employees and
consumers have their own ways of perceiving the quality of service performance. In most
cases, these two perceptions may not be on similar lines. A customer’s perceived quality
ultimately is the result of the interactive process. Interactive marketing is termed as a
‘process’ in services marketing. Its significance is reflected by its inclusion as one of the
seven components in the services marketing mix.
The Basic Service Package (BSP) involves a series of activities a customer has to pass
through. The customer will interact with a variety of variables. Each variable has the
capacity to influence the quality perception of the customer. The interacting points from
the point of view of a service consumer are:

 Physical setting of the service outlet- Consumers interacts with the location,
exterior of the service outlet, interior service layout and other elements of the
physical environment.
 Tangibles- The tools, equipment, furniture and so on.
 Systems- The queue system, process system, billing and payment system, recording
system, communication system and so on.
 Co-customers- The customers who are also seeking service from the service
provider.
 Contact employees- The employees at the service counters for interaction with
customers.
 Other employees on the line of visibility- The support employees who may not
interact with customers directly but are visible to the customers.
 Signage and other communication material- Sign boards directions, displayed rules
and regulations, cautions and other material.
 Other facilities- Drinking water, toilets, ventilation and so on.

MOMENTS OF TRUTH
The concept of the ‘moments of truth’ was promoted by Jan Carlson, the CEO of
Scandinavia Airlines. After taking charge in 1981 as CEO, he adopted a customer-focused
approach to turn around the company which was suffering a loss of $ 20million. He
identified 50,000 daily ‘moments of truth’ with the customers. By focusing on
improvement of the moments of truth he could make Scandinavia Airlines earn $ 54
million in just twelve months. The concept is simple and easily adaptable. The service
company should first identify those moments between employees and customers,
customers and service environment, and between customers and systems and other
processes that are capable of creating some specific experiences for the customer.
The moments thus identified are to be assigned, by categorizing and classifying them into
groups, to each employee involved in the interaction process. The employee concerned is
responsible for managing the assigned moments. Management of moments of truth
effectively is possible only when employees are adequately empowered. It also requires a
high level of motivation as well as morale of the employees. This concept makes every
employee creative and innovative. The employee will become conscious of what is
happening in the moments assigned to him and become accountable for such moments for
the company.

Management of moments of truth

The moments of truth need to be managed effectively by integrating company policies,
procedures, service environment, employees’ roles and customer roles.

A service encounter occurs when contact employee and customer meet for the purpose of
service production and consumption. Moments of truth will be influenced by physical and
mental state of the employee as well as the consumer. The factors that influence the
condition of the employee include personal needs, self-image, lifestyle, and ability to
perform the service, willingness to perform the service, situational pressures, and mood and
health condition. On the other hand, the condition of the service customer will be
influenced by personal needs, self-image, lifestyle, ability to participate, willingness to
participate, situational pressures, mood, previous experience, word-of-mouth
communication and health condition. The interaction between the two under various
influencing variables should yield good results for the organization. The customers are not
controllable and can only be influenced. As such, only the factors on the employee’s side
can be regulated. The employee can be made fit for interaction. Therefore, an employee
must be motivated and trained to adapt to the customer’s conditions and influence
customers to participate well in service encounter. The employee’s role in making the
moments of truth qualitative is vital. Employees need to be given freedom to participate
and design new ways of interactions that delight consumers.
Let us consider three situations:

 Situation 1: A consumer enters a service outlet and is unable to identify the right
person to contact. The service personnel are basically engaged in their work and
none of them recognizes the customer’s presence. The customer finally contacts a
person and enquires about the right person. The service employee guides him
properly and the customer is able to get the work done and leaves the office with a
feeling of relief.
 Situation 2: A consumer enters the service outlet and is unable to identify the right
person to contact. One employee of the service outlet greets him with a smile and
enquires about the work. The employee guides him to the right person, maintaining
all courtesies. The customer contacts the right person and gets the work done. He
leaves the office happily.
 Situation 3: A consumer enters the service outlet and is unable to identify the right
person to contact. An employee of the service outlet establishes eye contact
immediately, greets him with a smile and offers him a seat. He enquires about the
customer’s problem, tries to show empathy, and reconfirms his understanding of
the problem and starts performing the service by contacting the other personnel
either over the phone or through the internet. He contacts other employees quickly
and completes the service. The employee thanks the customer for availing the
service. The customer leaves the office delighted.

Turning the interactive movements from situation 1 to situation 3 does not require any
extra investment but the improvement of quality is substantial. The opportunities for
improvement in buyer-seller interactions are infinite. Service companies should
continuously explore opportunities and strive for improvement of the moments of truth.

Phil Weaxler classified the moments of truth into two categories:

 Magic moments
 Misery moments
A moment of magic means that the employee performs a moment of truth with quality
service and the customer feels that he has received more than what is expected. The misery
moments are quite opposite to the magic moments. The customer feels ill-treated.
Excellence in the interactive process occurs only when moments of magic become a way of
life for the service organizations. By making every employee familiar with the moments of
truth in their jobs, organizations can motivate them to make every moment a magic
moment. These may include how to answer a phone, how promptly action is taken,
neatness of the visitor’s lounge, appearance of employees, use of signs, company
stationary, that employees say to one another, how employees work together and so on. It
will contribute significantly to customer perceived quality.

Research has shown that nearly 60 per cent of the customers are dissatisfied more by the
discourtesy or lack of proper attention they experience rather than any defect in the goods
or services they buy. A smile, a nice word goes a long way to make a customer happy.

The service organization might have already committed a mistake. When an aggrieved
customer interacts with a contact employee, the contact employee should know what kind
of recovery strategies to be adopted. At times, the employees should be capable of taking
decisions on their own, depending upon the requirement of the situation.

THE SERVICE INTERACTION PROCESS

The service interaction process can be broadly classified into three phases. Lehtinen (1983)
renamed these phases as the joining phase, the intensive consumption phase and the
detachment phase.

(a) The joining phase-The joining phase is the first phase of the service consumption
process. Some studies identified a pre-joining phase also wherein marketing personnel
interact with the customers and persuade or sometimes sell the service. Anyhow, when
services are provided at the service outlet, the customer begins with the joining phase. The
two important activities in this phase are entry and registration.
At the entry phase, the customers look for parking place. They also interact with the
watchman or parking boy and seek assistance. Easy identification of the entry point, the
ease of entry and courteous welcome influence the quality perceptions of the consumer.
During registration, easy identification of the registration counter, the amount of
information to be recorded, the speed of the recording process, the equipment used for
recording, the employee and customer roles during recording, the instruments used, the
courteous interaction and empathy from the side of contact employee, the understanding of
customer problems, the space, furniture and the layout at the registration counter and the
direction to the next contact are the issues that influence the consumer.

At the entry level as well as during registration, consumers may need to wait for some
time. How the wait line is organized and what facilities are provided for managing the
waiting time also matter at this phase. Providing well-furnished waiting rooms, latest
magazines and entertainment facilities reduce waiting pressure.

(b) The intensive consumption Phase-This is a critical phase wherein the service process
aims at solving consumer problems. The first step in the process is the perfect diagnosis of
the problem. Contact employees will discuss with the consumers and try to define the
consumer’s problem accurately by getting confirmation from the service consumer. The
contact employee proposes the service process and also the cost involved in the service
process. The service process will be finalized in consultation with the service consumer
and the agreement on Basic Service Package (BSP) results. The service production process
starts with defined roles being performed by both parties. If the production process is split
into phases, the customers may be directed to move from one phase to another. Precautions
are communicated to customers to make participation effective. There are many factors that
influence the effectiveness of the process at this stage. Documentation, queue system, time
consumed, accuracy, transparency, customer approval, easy flow, equipment used, performance of
the equipment, exclusivity (privacy), flexibility and exceptions are some of the factors that
influence the quality.
(c) Detachment Phase-There are two activities that generally take place during this phase.
They are payment and registration for next visit. The payment system that is designed,
whether cash, credit, installment, office billing, credit card and so on, is the factor that
influences the customers. The registration system for the next visit, exit facilities and
collection of feedback are the other aspects that need to be managed properly.

(d) Integration of the Phases-In the service interaction process, the phases need to be
integrated effectively so that the phase-to-phase delays, communication gaps and flow
errors can be either eliminated or minimized. Continuous research is necessary to identify
service gaps and also to take measures at the right time to eliminate the gaps.

11.4 SERVICE FAILURES AND RECOVERY STRATEGIES

(a) Service failure-If services are performed right at the first time; the question of
deficiency or failure does not arise. But service firms often face problems of poor
performance, delayed performance or part performance. These problems arise due to
several reasons. Human error may be a dominant reason. Sometimes, there is a failure in
support service or efficiency variations in contact personnel. Service deficiencies and
failures affect the interactive process and result in poorly perceived quality by service
consumers.

Consumers have grievances against the service provider when they experience deficiency
in services or service failures. All consumers may not settle their grievances in the same
manner. The possible responses from consumers may be Take it easy, wait for failure the
second time, do not complain but vote with the feet, complain but do not shift loyalty,
complain; seek compensation; promote negative word-of-mouth.

(b) Customer complaints-The aggrieved consumers may choose to lodge complaint to

either of the following:

 The contact employee

 The manager of the service outlet
 The corporate office
 The police
  The consumer court

Service companies need to give special importance to handling complaints. In several

instances, it is proved that when complaints are handled properly, the customer, whose
grievance are settled become strong loyalist of the company. Service companies should
provide accessible complaint-making facilities at every service outlet. Companies should
believe in the philosophy that ‘complaints are opportunities to excel’ and encourage
customers to register even minor grievances. Such steps indicate the positive orientation of
the company. For better results, companies may need to follow the following steps for
complaint handling:

 Registration-A mechanism needs to be designed to register each and every

complaint and to give an identity number to each complaint.
 Acknowledgement-Each complainant should be acknowledged and be
communicated to by the identity number of his complaint.
 Collection and classification-The complaints received at various service outlets
should be pooled and classified. The complaints classified need to be routed to the
responsible personnel in the organization.
 Analysis and Responses-Complaints need to be analyzed and a proper and early
response given to each and every complaint.
(c) Consumer grievance handling Strategies-Sincere efforts by the service provider are
essential to settle the grievances of the consumers, negligence on the spot results in another
service failure and triggers consumer grievance further. No service provider can afford to
have consumer grievance as that may result in severe customer loss. Therefore, attempts
must be made to recover from the damage already done. The following strategies are
capable of yielding good results in recovery:

 Unqualified Apology-Apologizing sincerely to the aggrieved consumer often

contributes to reducing the intensity of grievance. All consumer complaints may not
be correct or rational. Some consumers have the habit of finding fault in everything.
Some may not be capable of interpreting facts properly and some may not have
sufficient information to develop expectations. Business experts suggest that though
the consumer may be wrong, the service provider should not feel that he has a right
to be angry about such complaints. The general rule should be to apologize for the
inconvenience caused, with a promise to take measures for arresting the
 reoccurrence of such failures.

 Rectifying Errors-One of the best alternatives in recovery is doing the service

correctly again. However, this strategy cannot be applicable for all services. A
barber after giving a bad hair-cut cannot correct it immediately.
 Speed-Customers generally do not have the patience to wait for longer periods to
settle their grievances. The longer the time taken for settlement, the greater will be
the intensity of grievance. Delay in settlement of grievance may multiply the
problems of the company and may also provide time to the aggrieved consumer to
spread negative word-of mouth in the market. On the other hand, a fast response
will ensure a happy consumer and the company may find him a positive word-of
-mouth campaigner.
 Better Quality-Researchers suggest that the best recovery strategy is to improve
quality. By offering better quality level service to the customer when there is a
service failure, the service provider can turn the customers’ grievance into delight.
Suppose a customer reserves in advance a two bed accommodation in a hotel.
When he reaches the hotel with his family he finds no accommodation. There is
every reason for his grievance. If the manager of the hotel tenders as apology
immediately and offers a suite for the same price, coupled with a free banquet
dinner, the customer is delighted.
 Compensate value-In some services, the performed service cannot be undone.
There may not be any other way for the service provider except to compensate for
the damage done. In health care services a service failure may lead to the death of a
patient. A service provider may reduce the grievance through the payment of
compensation.
 Institutionalizing correction Process-Service companies should address the
grievances of consumers and also focus upon correction processes. The corrective
measures in the process reduce complaints and improve efficiency. The reasons for
failures or deficiencies need to be identified, analyzed and appropriate measures
have to be initiated for prevention. In the process, the involvement of employees as
well as customers yields good results. The service providers should seek
suggestions from customers as well as employees and incorporate them as per their
suitability. Such steps will strengthen the bond between the service provider, the
employees and the customers. The settlement of a complaint relating to one service
outlet should not be the end of the problem. Service companies should study the
possibility of the occurrence of such failures in other service outlets and take
precautionary measures. Learning from service failures helps in designing BSP or in
modifying the existing service packages.
RELATIONSHIP MARKETING
For several decades marketing theorists have drawn a clear difference between marketing
and selling. Selling conjures up for us the image of a door-to-door peddler who tries to sell
us something we don’t want, and then gets out of town as quickly as possible. The
marketing concept, on the other hand, teaches firms to earn profit by selling what
customers really want for a value that competitors can’t match. The rationale for this
second approach is two-fold: first, it assumes that the marketer represents a going concern
with every intention of remaining in business in the same market. Second, it supposes a
goal of satisfied customers who will be a source of repeat purchases and positive
recommendations. In spite of this underlying concept, the focus of marketing education and
marketing practice has been on the attraction of new customers through the use of the four
P’s (product, price, promotion/ communication, and place/distribution), rather than on the
retention of current customers. Until recently, then, marketing efforts have been focused on
‘creating exchanges’ rather than managing long-term relationships with customers.

Maturing markets, lower population growth, and global competition have forced managers
to examine the costs of winning new customers versus retaining their old ones. We now see
the focus of marketing shifting to managing relationships with customers. The following
definition of marketing captures the new spirit:

Marketing is to establish, maintain, and enhance (usually but not necessarily always long-
term) relationships with customers and other partners, at a profit, so that the objectives of
the parties involved are met. This is achieved by a mutual exchange and fulfillment of
promises.

The concept of promises made and kept by both sides is a key to this definition. The
promises made by the seller include the obvious ones that are part of any selling contract,
such as product quality, delivery and inventory management, attendant services and others,
but for a long-term relationship they must also cover deeper commitments to the buyer’s
success. The promises made by the buyer also must be beyond those of the contractual
terms of payment.
Developing a strong relationship marketing orientation is not without costs in terms of
money, time, and effort. So, before a firm rush out to establish stronger relationships with
customers, it is better to identify the benefits that it is likely to realize. Kotler identified
five different levels of relationship marketing at which a firm may choose to operate.
 Basic- No lasting relationship is really established. The transaction is made and
both parties go their own ways.
 Reactive- The seller offers to respond if the buyer has any problems.
 Accountable- The seller contacts the buyer after the sale to find out how the product
has been received and whether it could have been better.
 Proactive- The seller calls the customer from time to time with updates on
improvements to the product and other services to make the product’s consumption
more satisfying.
 Partnerships- Both parties work together to find solutions to mutual problems and
opportunities for mutual success. This arrangement is generally limited to business-
to-business marketing.

DEVELOPING RELATIONSHIPS
Successful relationship marketing depends on the development of four components:
products that will build loyalty, employees who are adept at relationships, the appropriate
set of customers, and measurement to monitor and improve. We will explore each of these
components in turn.

(a) Products
The basis of the new marketing concept is still delivering products that customers want.
Because winning new customers is harder than keeping familiar ones, the marketer’s best
strategy is to develop products and services for the evolving needs of current customers,
rather than passing them off to other sellers and trying to find new customers for the same
old products. For example, insurance companies provide a range of products that become
relevant at different times in a customer’s life. They may be able to initially sell a young
individual automobile insurance. As the person matures and his or her needs change, the
company should be alert to the opportunities for selling homeowner’s insurance and
investments. As the person reaches maturity, services such as health insurance and
retirement planning assistance become more important.
Relationship marketing requires continued attention to the needs of customers, and
constant development of new products and services to address their evolving needs.

(b) Employees
Relationship marketing obviously involves the efforts and skills of more individuals than
just those in the sales or marketing departments. The need for service and support implies
that employees in design, engineering, and manufacturing and/or service delivery must also
be intimately acquainted with the needs of the customer and be prepared to deal with them.
This observation is true for almost any support function in the company. For example,
information systems may need to be coordinated to enhance ordering, billing, and other
data exchange with customers. Each of the people involved will contribute to the image of
the vendor among the buyer’s employees. Gronroos has spoken of the need to train all
employees of service firms to be ‘part-time marketers’, because their interactions with
customers are important in maintaining corporate relationships. But it is also true for many
employees of manufacturing firms, given that relationships are built upon personal
interactions and serving the customer’s needs.

A study of the role that sales representatives play as relationship managers between firms
found that their training should specifically address several skills. In particular, training in
trust-building activities, and skills in questioning and listening to customers are necessary.
Employees must also be trained to calculate the value of customer relationships, so that
they can allocate their efforts appropriately. Not every customer is worth the cost of
establishing a long-term relationship.

(c) Customers
Not all customers are suitable for long-term relationships. Customers worth pursuing are
those that have the greatest lifetime value, and, in particular, those for whom the lifetime
value exceeds the cost of acquiring them as customers.
Loyalty-based marketing should not be confused with short-term price promotions that
seek to generate momentary bursts in sales. They should be carefully focused to identify
customers who are likely prospects for long-term relationships. Demographic factors and
past purchase histories can be useful in this search. In particular, by identifying segments
of similar customers, the firm improves its prospects of tailor-making services that generate
high loyalty. For example, older people tend to be more loyal banking customers and also
have many similar service needs, whereas younger customers with low balances can be
notorious brand switchers.
Keeping information on Customers- Identifying and keeping in touch with potentially loyal
customers is essential, and computer technology now makes it possible on a scale
unimaginable just a few years ago. In fact, an excellent database and the capability to
organize, analyze and segment it are absolutely essential to make relationship marketing
work. The file must not only contain basic names and addresses but purchase histories and
other relevant information that will allow the firm to anticipate a customer’s future needs.
Determining the value of a Customer- How can one decide which customers are profitable
enough to keep to pursue? Myer recommended a measure of customer value called
Customer Return on Assets (CRA). The basic idea is to measure the profitability of
relationships with individual customers, something often overlooked by accounting
systems that tend to focus more on product performance. Systems that measure revenue
only, combined with a dedication to high service levels at any cost, are likely to lead to
terrible misallocations of effort by the sales force and other customer relations personnel.
Relationship managers should also be tracking the costs of maintaining relationships.
These costs can be traced to individual accounts and include sales costs, service costs, and
other costs related to serving the particular account. Specially teams can be assigned to deal
with customers with similar service needs, a practice that may help reduce the costs of
selling to them and managing their accounts.

(d) Measurement
As with any investment, measures of outcome are necessary to control the process, to
assess its success, and to provide feedback for assessing the relative effectiveness of
various programs. Most relationship-building programs will not produce measurable
bottom-line results for several years.

Currently there are no standardized approaches to measuring the value of a firm’s customer
relationships. The subjectivity of the judgements necessary to quantify this concept makes
it an unlikely prospect for standardized accounting standards in the near future. Therefore,
marketing must press forward in its effort to find useful measures to track and control this
key activity.

SUMMARY
Interactive marketing is nothing but managing the process on stage. An efficient
performance in interactive marketing can save a poorly designed or defective technical
product. But an effective technical product with a poor interactive marketing cannot yield
the desired results. The foundation of interactive marketing is the integrated efforts of
internal marketing and external marketing. The moments of truth that take place at the
service encounter are to be identified, classified and delegated to service employees for
their efficient management. Consumers cannot be controlled, but can be influenced.
Service organizations should focus on employees and provide them the necessary support
for performance. Whenever there is a service failure, service organizations should provide
quick recovery options.

Service organizations need to change from their traditional marketing philosophies that are
transaction-oriented to relationship-oriented marketing philosophy. They should work on
building, maintaining and enhancing customer relationships. Building relationships and
promoting them has become an integral part of the service sector.

11.5 KEYWORDS
Service encounter: The contact between employees and customers. This has also been
referred to as moments of truth.

Interactive marketing: The ability of the customer contact employees to manage interaction
with the customer at different stages of customer – marketer interface.

Relationship marketing: It includes all the tools and practices which help an organization in
establishing and maintaining good relations with key customers.
11.6 SELF ASSESSMENT QUESTIONS
1. What is interactive marketing? Also explain the service encounter.
2. Discuss in detail the moments of truth and its management.
3. Write a detailed note on service interaction process.
4. Explain the concept of relationship marketing with suitable illustrations.
5. Discuss the components on which a strong relationship marketing depends.

11.11. REFERENCES / SUGGESTED READINGS

1. Ravi Shanker, ‘Services Marketing: The Indian Perspective’, Excel Books.
2. Lovelock, ‘Services Marketing: People, Technology, Strategy’, Pearson Education.
3. Zeithaml and Bitner, ‘Services Marketing: Integrating Customer Focus Across the
Firm’, Tata McGraw Hill.
4. Rust, Zahorik, and Keiningham, ‘Service Marketing’, Addison Wesley.
5. Fitzsimmons and Fitzsimmons, ‘Service Marketing: Operations, Strategy, and
Information Technology’, McGraw Hill.
6. K. Rama Mohana Rao, ‘Services marketing’, Pearson Education, New Delhi, 2005.