Introduction to Services Chapter 1 Introduction to Services What are services? Why services marketing? Service and Technology Characteristics of Services Compared to Goods Services Marketing Mix Staying Focused on the Customer McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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

Tangibility Spectrum

Why Services Matter? Services dominate U.S. and worldwide economies and are growing dramatically Service leads to customer retention and loyalty Service leads to profits Services help manufacturing companies differentiate themselves

Where Americans Work Today. As of July, 2008 Industry % of Labor Force Government 16 Wholesale & Retail Trade 16 Education & Health Services 14 Professional & Business Services 13 Leisure & Hospitality 10 Manufacturing 10 Financial Activities 6 Construction 5 Information 2 Transportation & Utilities 4 Natural Resources & Mining 1 Other 4 Source: Business Week, 9/8/08, p. 009 (Based on BLS Statistics)

Why do firms focus on Services? Services can provide higher profit margins and growth potential than products Customer satisfaction and loyalty are driven by service excellence Services can be used as a differentiation strategy in competitive markets Jerome The are 3 main reasons why our program is focusing on services. It provides a higher profit margin than tangible products, Increases satisfaction and retention, Provides a competitive advantage over others. I am going to use two examples to illustrate these points. The automotive industry has typically been perceived as a manufacturing industry. However, after-sale services and parts account for nearly 80% of all revenue opportunities, and more than 50% of the average automobile dealer’s profits It is by far the largest creator of shareholder value on a percentage basis. A GM study revealed that $9 billion in after sale revenue produced $2 billion in profits (22% margin). Profits from $150 billion car sales were much lower. JD Power and Associates published a report showing a strong correlation between customer satisfaction with after-sale services and customer intent to repurchase the same brand (Lexus and Saturn cars) Hyundai’s success is due largely to its differentiation strategy of offering 10 year - 100,000 mile guarantee. The service offering is changing customer’s perception of the brand The same can be said about the personal computer industry. With the advancement of technology, personal computers are now becoming more and more of a commodity. While 25% of revenue opportunities are in the initial sale, most revenue opportunities are from after-sale. Company responsiveness to customer calls is the biggest driver customer satisfaction with its product. Dell revolutionized the industry by being the first to offer mass customization of personal computers. ------------------------- Across manufacturing companies, after-sale services and parts contributes about 25% of total revenue, and 40%-50% of all profits Services related revenue exceeds first-time product sales by 500% - 2000% Retail industry derive largest margins from sale of extended warranties It is a program that is designed in response to a business environment that is increasingly moving away from a product orientation to a service-focus GE, IBM other good examples.

Why study Services Marketing? Most advanced economies are service-based Service as a business imperative in manufacturing and IT As industries deregulate need for professional services increases Services marketing is different than product mktg. Service equals profits

What is Service? The New View Service includes every interaction between any customer and anyone representing the company, including: Dealers Web interaction Salespeople Customer Billing, Accounting Receptionists, Schedulers Service employees Managers/Executives Service can be product by itself, customer service, value added for goods, embedded in a tangible product …

Characteristics of Services Compared to Goods Intangibility Heterogeneity Simultaneous Production and Consumption Perishability

Implications of Intangibility Services cannot be inventoried They cannot be easily patented They cannot be readily displayed or communicated Pricing services is difficult

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

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

Implications of Perishability It is difficult to synchronize supply and demand with services Services cannot be returned or resold Perishability generally results in no residual value

Challenges for Services Defining and improving quality Ensuring the delivery of consistent quality Designing and testing new services Communicating and maintaining a consistent image Accommodating fluctuating demand Motivating and sustaining employee commitment Coordinating marketing, operations, and human resource efforts Setting prices Finding a balance between standardization versus customization

Expanded Mix for Services – The 7 Ps Product Price Place Promotion People 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. Physical Evidence The environment in which the service is delivered and where the firm and customer interact, and any tangible components that facilitate performance or communication of the service. Process The actual procedures, mechanisms, and flow of activities by which the service is delivered—the service delivery and operating systems.

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

Gap Model of Service Quality Chapter 2 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Why Services do not Measure Up?. Customer Gap: Difference between customer expectations and perceptions of service received Expected Service Customer Gap Perceived Service

Gaps Model of Service Quality Customer Gap: is caused by: Provider Gap 1 (Knowledge (Listening) Gap): not knowing what customers expect Provider Gap 2 (Service Design & Standards Gap): not having the right service designs and standards Provider Gap 3 (Service Performance Gap): not delivering to service standards Provider Gap 4 (Communication Gap): not matching performance to promises

Ways to Use Gap Analysis Overall Strategic Assessment: How are we doing overall in meeting or exceeding customer expectations? How are we doing overall in closing the four company gaps? Which gaps represent our strengths and where are our weaknesses?

Ways to Use Gap Analysis Specific Service Implementation Who is the customer? What is the service? Are we consistently meeting/exceeding customer expectations with this service? If not, where are the gaps and what changes are needed?

Customer Behavior in Services Chapter 3 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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

Issues to Consider in Examining the Consumer’s Service Experience Services as processes Service provision as drama Service roles and scripts The compatibility of service customers Customer coproduction Emotion and mood

Customer Expectations of Service Chapter 4 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

The Zone of Tolerance Delights Desirables Musts Desired Service Adequate Service Musts

Zones of Tolerance The range of expectations between desired and adequate… can be wide or narrow can change over time can vary among individuals may vary with the type of product/service

Frequently Asked Questions About Customer Expectations What does a service marketer do if customer expectations are “unrealistic”? Should a company try to delight the customer? How does a company exceed customer service expectations? Do customer service expectations continually escalate? How does a service company stay ahead of competition in meeting customer expectations?

Customer Perceptions of Service Chapter 5 Customer Perceptions of Service Customer Perceptions Customer Satisfaction Service Quality Service Encounters: The Building Blocks for Customer Perceptions McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

The customer is . . . Anyone who receives the company’s services, including: external customers (outside the organization, business customers, suppliers, partners, end consumers) internal customers (inside the organization, e.g., other departments, fellow employees)

Customer Perceptions of Quality and Customer Satisfaction

Factors Influencing Customer Satisfaction Product quality Service quality Price Specific product or service features Consumer emotions Attributions for service success or failure Perceptions of equity or fairness Other consumers, family members, and coworkers Personal factors Situational factors

How Customers Judge the Five Dimensions of Service Quality Car Repair (consumer customers) - Reliability: car fixed first time, on time - Responsiveness: Accessible, no waiting, responds on time - Assurance: knowledgeable mechanics - Empathy: Knows my name, previous problem, my preferences - Tangibles: repair area, uniforms, equipment Airline (consumer customers) - Reliability: leave/arrive on-time - Responsiveness: systems for speedy ticketing, check-in, etc. - Assurance: trusted brand, safety record, competent staff - Empathy: anticipate/deliver on customer needs/special needs - Tangibles: aircraft, ticket counters, baggage area, uniforms Medical Care (consumer customers) - Reliability: on-schedule appointments, accurate diagnosis - Responsiveness: accessible, no waiting, willingness to listen - Assurance: knowledge, skills, credentials, reputation - Empathy: patient is a person, remember previous problems, listen, be patient - Tangibles: waiting room, exam room, equipment, written materials

Top Box Scores – A Higher Standard Overall Satisfaction with XYZ (% of customers) Definitely Will Repurchase from XYZ Definitely Would Recommend XYZ TOP BOX Very Satisfied (64%) = 96% = 91% 44-point drop 55-point drop SECOND BOX Somewhat Satisfied (29%) All Customers = 52% = 36% 32-point drop BOTTOM 3 BOXES Neutral to Very Dissatisfied (7%) 45-point drop = 7% = 4% Source: Technical Assistance Research Bureau (TARP), 2007.

Service Quality The customer’s judgment of overall excellence of the service provided in relation to the quality that was expected. Service quality assessments are formed on judgments of: outcome quality interaction quality Customer Gap physical environment quality

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

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

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

Build Customer Relationships Chapter 7 Build Customer Relationships Relationship Marketing Relationship Value of Customers Customer Profitability Segments Relationship Development Strategies Relationship Challenges McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Relationship Marketing… is a philosophy of doing business, a strategic orientation that focuses on keeping current customers and improving relationships with them does not necessarily emphasize acquiring new customers is usually cheaper for the firm because keeping a current customer costs less than attracting a new one thus, the focus is less on attraction, and more on retention and enhancement of customer relationships

Customer Goals of Relationship Marketing Move customers up the ladder from acquiring to enhancing: Enhancing Retaining Satisfying Acquiring

Benefits of Relationship Marketing Benefits for Customers: Receipt of greater value Confidence benefits: trust confidence in provider reduced anxiety Social benefits: familiarity social support personal relationships Special treatment benefits: special deals price breaks Benefits for Firms: Economic benefits: increased revenues reduced marketing and administrative costs regular revenue stream Customer behavior benefits: strong word-of-mouth endorsements customer voluntary performance social benefits to other customers mentors to other customers Human resource management benefits: easier jobs for employees social benefits for employees employee retention

Profit Impact of 5 Percent Increase in Retention Rate Source: F. F. Reichheld, “Loyalty and the Renaissance of Marketing,” Marketing Management, vol. 2, no. 4 (1994), p. 15.

The Customer Pyramid Platinum Tier Gold Tier Iron Tier Lead Tier Company’s most profitable customers, typically heavy users of the product, not overly price sensitive, willing to invest in and try new offerings, and committed customers of the firm   Gold Tier Profitability levels are not as high, perhaps because customers want price discounts that limit margins or are simply not as loyal. May be heavy users who minimize risk by working with multiple vendors. Iron Tier Essential customers that provide the volume needed to utilize the firm'’ capacity but their spending levels, loyalty, and profitability are not substantial enough for special treatment Lead Tier Customers who are costing the firm money. They demand more attention than they are due given their spending and profitability and are sometimes problem customers—complaining about the firm to others and tying up firm resources.

Segmenting Customers Based on Commitment and Profitability BUTTERFLIES Good fit of company offering and customer needs High profit potential Action: Aim to achieve transactional satisfaction, not attitudinal loyalty Milk the accounts as long as they are active Key challenge: cease investment once inflection point is reached TRUE FRIENDS Good fit of company offering and customer needs Highest profit potential Actions: Consistent intermittently spaced communication Achieve attitudinal and behavioural loyalty Invest to nurture/defend/retain High (Behavioral Loyalty) CLV STRANGERS Little fit of company offering and customer needs Lowest profit potential Action: No relationship investment Profitize every transaction BARNACLES Limited fit of company offering and customer needs Low profit potential Action: Measure size and share-of-wallet If share-of-wallet is low, specific up and cross-selling If size of wallet is small, strict cost control Low Relationship Commitment (Attitudinal Loyalty) Low High W. Reinhartz & V. Kumar, "The Mismanagement of Customer Loyalty," Harvard Business Review 80 (July 2002), pp. 86-94.

Relationship Development Model

Strategies for Building Relationships Core Service Provision: service foundations built upon delivery of excellent service: satisfaction, perceived service quality, perceived value Switching Barriers: customer inertia switching costs: set up costs, search costs, learning costs, contractual costs Relationship Bonds: financial bonds social bonds customization bonds structural bonds

“The Customer Is NOT Always Right” Not all customers are good relationship customers: wrong segment not profitable in the long term difficult customers

Service Recovery 8 Chapter McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Reliability is Critical in Service but… In all service contexts, service failure is inevitable. Service failure occurs when service performance falls below a customer’s expectations and leads to customer dissatisfaction. Service recovery: the actions taken by a firm in response to service failure.

Eight Most Common Remedies Customers Seek with Serious Problems 1.Have the product repaired or service fixed 2. Be reimbursed for the hassle of having experienced a problem 3. Receive a free product or service in the future 4. Explanation by the firm as to what happened 5. Assurance that the problem will not be repeated 6. A thank you for the customer’s business 7. An apology from the firm 8. An opportunity for the customer to vent his or her frustrations to the firm

Service Recovery Paradox The service recovery paradox is more likely to occur when: the failure is not considered by the customer to be severe the customer has not experienced prior failures with the firm the cause of the failure is viewed as unstable by the customer the customer perceives that the company had little control over the cause of the failure Conditions must be just right in order for the recovery paradox to be present!

Service Recovery Strategies

Service Guarantees guarantee is an assurance of the fulfillment of a condition (Webster’s Dictionary) in a business context, a guarantee is a pledge or assurance that a product offered by a firm will perform as promised and, if not, then some form of reparation will be undertaken by the firm for tangible products, a guarantee is often done in the form of a warranty services are often not guaranteed cannot return the service service experience is intangible (so what do you guarantee?)

Characteristics of an Effective Service Guarantee Unconditional the guarantee should make its promise unconditionally – no strings attached Meaningful the firm should guarantee elements of the service that are important to the customer the payout should cover fully the customer’s dissatisfaction Easy to Understand and Communicate customers need to understand what to expect employees need to understand what to do Easy to Invoke and Collect the firm should eliminate hoops or red tape in the way of accessing or collecting on the guarantee

Benefits of Service Guarantees A good guarantee forces the company to focus on its customers. It sets clear standards for the organization. Generates immediate and relevant feedback from customers. When invoked there is an instant opportunity to recover, thus satisfying the customer and helping retain loyalty. Information generated through the guarantee can be tracked and integrated into continuous improvement efforts. Employee morale and loyalty can be enhanced as a result of having a service guarantee in place. A service guarantee reduces customers’ sense of risk and builds confidence in the organization.

Does everyone need a service guarantee? Reasons companies might NOT want to offer a service guarantee: existing service quality is poor guarantee does not fit the company’s image too many uncontrollable external variables fears of cheating or abuse by customers costs of the guarantee outweigh the benefits customers perceive little risk in the service customers perceive little variability in service quality among competitors