ADDIS ABABA UNIVERSITY

SCHOOL OF COMMERCE
MARKETING MANAGEMENT PROGRAM UNIT
SUPPORTED DISTANCE EDUCATION PROGRAM

SERVICES AND RELATIONSHIP MARKETING

Prepared by:

Mulugeta Gebre-Medhin (PhD Candidate)

Geremew Semu

June 2015

Addis Ababa
 SERVICES AND RELATIONSHIP MARKETING

Table of Contents

UNIT 1 UNDERPINNING CONCEPTS OF SERVICES MAREKTING ....................... 1

1.1 Definition of Services .................................................................................................. 1
1.2 Conceptualizing the service ‘offering’ .......................................................................... 2
1.3 Scope of Services Marketing ........................................................................................ 6
1.4 Why Services Marketing? ............................................................................................ 9
1.5 Differences in Goods versus Services Marketing ........................................................ 10
1.6 Classification of Services ........................................................................................... 15
1.6.1 Levels of Classification of Services.......................................................................... 15
1.6.2 The Service Process Matrix .................................................................................... 19
1.7 The Services Marketing Triangle ............................................................................... 20
1.8 The Gaps Model of Service Quality ........................................................................... 23
1.9 Services Marketing Dimensions................................................................................. 25

UNIT 2 CONSUMER BEHAVIOR IN SERVICES ....................................................... 30

Learning Objectives ........................................................................................................ 30
2.1 Introduction ............................................................................................................. 30
2.2 Consumption Value .................................................................................................. 30
2.3 Classification of Properties of Offerings ..................................................................... 32
2.4 Services: Categories in the Decision-Making Process ................................................. 34
2.4.1InformationSearch .................................................................................................. 34
2.4.1.1 Use of Personal Sources ........................................................................................ 34
2.4.1.2 Perceived Risk ........................................................................................................ 35
2.4.2 Evaluation of Service Alternatives .......................................................................... 39
2.4.3 Service Purchase and Consumption ........................................................................ 40
2.4.3.1 Emotion and Mood ................................................................................................ 40
2.4.3.2 Service Provision as Drama .................................................................................. 41
2.4.3.3 The Compatibility of Service Customers ............................................................. 42
2.4.4 Post Purchase Evaluation ....................................................................................... 42

UNIT 3 CUSTOMER SERVICE ................................................................................... 46

3.1 What is Customer Service? ........................................................................................ 46
3.2 Customer Focused Environment ............................................................................... 47
3.2.1 Learning Organization ........................................................................................... 47
3.2.2 The Six Components of a Customer- Focused Environment .................................... 48
3.3 Service Culture ......................................................................................................... 51
3.4 Tools for Service Measurement ................................................................................. 54
3.5 Effective Communication for Effective Customer Service ........................................... 57
3.5.1 The Importance of Effective Communication.......................................................... 57
3.5.2 Avoiding Negative Communication ....................................................................... 58
3.6 The Impact of Nonverbal Cues on Customer Service ................................................. 59
3.6.1 The Scope of Nonverbal Behavior .......................................................................... 59
3.6.1.1 Body Language ........................................................................................................ 60
3.6.1.2 Vocal Cues ............................................................................................................... 61
3.6.1.3 Appearance and Grooming....................................................................................... 62
3.6.1.4 Miscellaneous Cues .................................................................................................. 63
3.6.2 Strategies for improving Nonverbal Communication ............................................... 65
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
II
 SERVICES AND RELATIONSHIP MARKETING

UNIT 4 THE EXPANDED SERVICES MARKETING MIX ........................................ 71

4.1 Expanded Mix for Services........................................................................................ 71
4.2 People ...................................................................................................................... 71
4.2.1 The Critical Importance of Service Employees ........................................................ 72
4.2.2 Employee Satisfaction, Customer Satisfaction, and Profits ...................................... 73
4.2.3 Service Quality Dimensions are Driven by Employee Behaviors .............................. 74
4.2.4 Boundary-Spanning Roles ...................................................................................... 74
4.2.5 Strategies for Closing Gap ...................................................................................... 76
4.3 Physical Evidence and the Servicescape ..................................................................... 81
4.3.1 Meaning of Physical evidence and Servicescape ...................................................... 81
4.3.2 Types of Service Scape ........................................................................................... 82
4.3.3 Roles of the Servicescape ........................................................................................ 83
4.3.4 Marketing Strategies for the Service Environment ................................................... 84
4.3.4.1 Positioning of the Servicescape ............................................................................. 85
4.3.4.2 Designing the Service Environment ..................................................................... 86
4.3.4.2.1 Location ............................................................................................................... 86
4.3.4.2.2 Physical Facility ............................................................................................... 88
4.3.4.3 Employee Appearance and Behavior ....................................................................... 90
4.3.4.4 Impact of Crowding ............................................................................................... 90
4.4 Process ..................................................................................................................... 93

UNIT 5 THE TRADITIONAL SERVICES MARKETING MIX ................................... 95

5.1 Service outcome /product ......................................................................................... 95
5.2 Price ......................................................................................................................... 96
5.2.1 Price Determinants ................................................................................................ 97
5.2.2 Pricing Modifications ............................................................................................ 101
5.2.3 Price Increases ......................................................................................................104
5.2.4 Risk and Price .......................................................................................................105
5.2.5 Price and Level of involvement.............................................................................. 106
5.2.6 Price and Level of Customer Participation ............................................................. 106
5.3 Distribution ............................................................................................................. 106
5.3.1 Access and Availability ......................................................................................... 107
5.3.2 Channel Structures ................................................................................................ 107
5.3.3 Channel options ....................................................................................................108
5.3.4 Multichannel Systems ........................................................................................... 108
5.3.5 Franchising ...........................................................................................................110
5.3.6 Distribution Management ..................................................................................... 111
5.3.7 Customer- Focused Distribution ............................................................................ 114
5.4 Promotion ............................................................................................................... 114
5.4.1 Integrated Marketing Communication ...................................................................114
5.4.2 Services Communication ....................................................................................... 115
5.4.2.1 The role of personal selling.................................................................................. 115
5.4.2.2 The importance of internal marketing communications................................... 116
5.4.2.3 Managing expectations ........................................................................................ 117
5.4.2.4 Tangible clues ....................................................................................................... 117
5.4.2.5 Word-of-mouth communication ......................................................................... 117

UNIT 6 SERVICE QUALITY, CUSTOMER EXPECTATIONS AND PERCEPTION 119

6.1 Service Expectation..................................................................................................119
6.1.1 Service levels and zone of tolerance .......................................................................119
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
III
 SERVICES AND RELATIONSHIP MARKETING

6.1.2 Factors that Influence Customer Expectations of Service ........................................121

6.1.2.1 Sources of Desired Service Expectations ............................................................... 121
6.1.2.2 Sources of Adequate Service Expectations ............................................................ 122
6.1.2.3 Sources of Both the Desired and Predicted Service Expectations.................... 124
6.1.2.4 A Model of Customer Service Expectations ........................................................ 126
6.1.5 Managing Consumer Expectations ........................................................................128
6.2 Service Quality ........................................................................................................130
6.2.1 Definition of Quality ............................................................................................. 130
6.2.2 Hard and Soft Standards ....................................................................................... 132
6.2.3 Process versus Technical Outcome Quality ............................................................ 133
6.2.4 The Gaps Model of Service Quality .......................................................................133
6.2.5 SERVQUAL.........................................................................................................134
6.3 Satisfaction versus Service Quality ...........................................................................139
6.3.1 Customer Satisfaction ........................................................................................... 140
6.4 Service Encounters or “Moments of Truth’: Building Blocks of Satisfaction and Service
Quality .......................................................................................................................... 141
6.4.1 The Importance of Encounters .............................................................................. 142
6.4. 2 Types of Service Encounters ................................................................................. 143
6.4.3 Sources of Pleasure and Displeasure in Service Encounters ....................................144

UNIT 7 SERVICE RECOVERY ................................................................................... 148

7.1 The Impact of Service Failure and Recovery ............................................................. 148
7.2 How Customers Respond to Service Failures? .......................................................... 150
7.3 Types of Complainers .............................................................................................. 151
7.4 Why Do (And Don’t) People Complain? ..................................................................152
7.5 When They Complain, What Do Customers Expect? ............................................... 153
7.6 Service Recovery Strategies ...................................................................................... 155

UNIT 8 SERVICE DEVELOPMENT AND DESIGN .................................................. 159

8.1 New Service Development ....................................................................................... 159
8.1.1 Types of New Services .......................................................................................... 160
8.1.2 Stages in New-Service Development ......................................................................161
8.2 Design of the service ................................................................................................ 166
8.2.1 The concept of design ............................................................................................ 166
8.2.2 Service classification: a design issue .......................................................................167
8.2.3 The 3 logics ..........................................................................................................176
8.3 Service Blueprinting .................................................................................................177
8.3.1 What is a Service Blueprint? .................................................................................. 177
8.3.2 Building a Blueprint .............................................................................................. 182

UNIT 9 MANAGING DEMAND AND CAPACITY .................................................. 185

9.1 The Underlying Issue: Lack of Inventory Capability ................................................ 185
9.2 Understanding capacity constraints ..........................................................................187
9.2.1 Time, Labor, Equipment, Facilities .......................................................................187
9.2.2 Optimal versus Maximal Use of Capacity .............................................................. 187
9.3 Strategies for Matching Capacity and Demand ......................................................... 189
9.3.1 Shifting Demand to Match Capacity ......................................................................189
9.3.2 Flexing Capacity to Meet Demand ........................................................................191
9.4 Yield Management: Balancing Capacity Utilization, Pricing, Market Segmentation, and
Financial Return ...........................................................................................................193
9.5 Waiting Line Strategies: When Demand and Capacity cannot be Aligned ................. 196

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

IV
 SERVICES AND RELATIONSHIP MARKETING

UNIT 10 RELATIONSHIP MARKETING ..................................................................202

10.1 Meaning of Relationship Marketing........................................................................202
10.2 Background of Relationship marketing ...................................................................202
10.3 Relationship Marketing Values ............................................................................... 203
10.3 The Theoretical Origins of Relationship Marketing ................................................. 204
10.3.1 Neo-classical Microeconomic Theory ..................................................................204
10.3.2 Transaction Cost Theory ..................................................................................... 205
10.3.3 Relational Contracting Theory ............................................................................ 207
10.3.4 Social Exchange Theory ...................................................................................... 208
10.3.5 Equity Theory .....................................................................................................208
10.3.6 Political Economy Theory ................................................................................... 210
10.3.7 Resource Dependence Theory ............................................................................. 211
10.3.8 Resource-Advantage Theory................................................................................ 211
10.3.9 Institutional Theory............................................................................................. 212
10.4 The Six Markets model .......................................................................................... 212
10.5 The “Bucket Theory of Marketing” ........................................................................215
10.6 Goals of Relationship Marketing ............................................................................ 215
10.7 Benefits of Customer/Firm Relationships ............................................................... 216
10.8 Lifetime Value of a Customer ................................................................................. 219
10.9 Foundations for Relationship Strategies ..................................................................220
10.10 Retention Strategies.............................................................................................. 223
10.10.1 Financial Bonds ................................................................................................ 224
10.10.2 Social Bonds .....................................................................................................225
10.10.3 Customization Bonds ........................................................................................ 226
10.10.4 Structural Bonds ................................................................................................ 226
10.11 Customer Relationship Management (CRM) Systems……………………………....231

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

V
UNIT 1 UNDERPINNING CONCEPTS OF SERVICES MAREKTING

Learning Objectives
Upon completion of this unit a student will be able to:
 Describe what services are and define services marketing.
 Explain the need for special services marketing concepts and practices
 Outline the basic differences between goods and services and the resulting challenges
for service businesses.
 Describe the six levels of the service classification scheme.
 Introduce the services marketing triangle and the gaps model of service quality as
powerful frameworks that can aid in addressing the challenges of managing and
marketing services.

1.1 Definition of Services

Services are all around us – as consumers we use services every day. The growth in the
service economy is widely recognized and increasingly contributes to the economic
development of many regions. Although the service sector accounts for most of the new job
growth in developed countries, the dominance of the service sector is not limited to highly
developed nations. Many services such as those in the tourism sector contribute very heavily
to developing economies as well. By their very nature, services are diverse and therefore
have often been difficult to define. However there have been many attempts to describe
services and there is an overall recognition of what they are and how they contribute to
marketing offerings and the economy.

Put in the simplest terms, services are deeds, processes, and performances. Relying on the
simple, broad definition of services, it quickly becomes apparent that services are produced
not only by service businesses but are also integral to the offerings of many manufactured-
goods producers.

Activity 1.1
Give examples of services in the form of deeds, processes and performances offered
by both manufacturing and service giving organizations

Commentary
For example, car manufacturers offer warranties and repair services for their cars;
computer manufacturers offer warranties, maintenance contracts, and training;
industrial equipment producers offer delivery, inventory management, and
maintenance services. All of these services are examples of deeds, processes, and
performances.
 SERVICES AND RELATIONSHIP MARKETING

While we will rely on the simple, broad definition of services, you should be aware that over
time services and the service sector of the economy have been defined in subtly different
ways. The most quoted definitions of service are given below:
(1) Christopher Lovelock defined service as an act or performance offered by one party
to another. Although the process may be tied to a physical product, the performance
is essentially intangible and does not normally result in ownership of any of the
factors of production. Services are economic activities that create value and provide
benefits for customers at specific times and places as a result of bringing about a
desired change in the recipient of the service.

(2) Zeithaml and Bitner defined service as deeds, processes, and performances. Services
are not tangible things that can be touched, seen, and felt, but rather are intangible
deeds and performances.

(3) Christian Gronroos defined services as an activity or series of activities of more or

less intangible nature that normally, but not necessarily, take place in interactions
between customer and service employees and/or physical resources or goods and/or
systems of the service provider, which are provided as solutions to customer
problems.

(4) According to Quinn, Baruch, and Paquette services include all economic activities
whose output is not a physical product, is generally consumed at the time it is
produced, and provides added value in forms that are essentially intangible concerns
of its first purchaser.

(5) Sasser, Olsen, and Wyckoff stress that a precise definition of goods and services
should distinguish them on the basis of their attributes. A good is a tangible physical
product that can be created and transferred; it has an existence over time and thus
can be created and used later. A service is intangible and perishable. It is an
occurrence or process that is created and used simultaneously. While the consumer
cannot retain the actual service after is produced, the effect of the service can be
retained.

(6) According to James Fitzsimmons a service is a time-perishable, intangible experience

performed for a customer acting in the role of co-producer.

1.2 Conceptualizing the service ‘offering’

In traditional marketing texts where most discussion relates to goods marketing, the concept
of the augmented product is often used to illustrate the idea of a product package or bundle
of benefits included when a customer buys a physical good. Adaptation of this concept for
services takes account of the entire service product, process and experience. Given that the
basic product concept of a service is its intangibility, it can be difficult for a customer to
grasp its meaning and context unless the whole interaction between customer and producer
is managed carefully and an integrated service is delivered. The service interaction may

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

2
 SERVICES AND RELATIONSHIP MARKETING

involve a distribution system and a form of personal marketing communication. Such

aspects are often referred to as the consumer–producer relationship. In services, people are
important in both producing and consuming the service product package or bundle of
benefits.

A service cannot be easily specified or presented before purchase so a physical product or

tangible cue is often used to illustrate exactly what is on offer or what is going to be
achieved as a result of receiving the service. Consideration of the service offer in this way
will allow customers to arrive at a description or understanding of the ‘service package’.

Activity 1.2
Do customers value every aspect of the service offering or service package
equally?

Commentary
Often one of the aspects or dimensions of the service package will be clearly
predominant while others are more peripheral or ancillary to the service. For
example, in an airline service, the actual transport of a customer from Addis -
London is probably more important than efficient checking-in procedures and
the cleanliness of the plane, even though these also contribute to the overall
service. Thus in services, we can often distinguish between a core service and
other ancillary, supplemental, augmented or secondary services, although they
are all part of the service package.

The concept of core and augmented products is well established in marketing. ‘What are
consumers really buying?’ expresses the core element. It was the late Charles Revson of
Revlon who captured the essence of the core: ‘In the factory we make cosmetics; in the drug
store we sell hope.’ As the core becomes perfected in the eyes of the customer, competitive
pressures force organizations to offer additional benefits. This is the augmented product.
The ‘augmented product’ for services is usually in the form of further services and these are
also referred to as supplementary, peripheral and facilitating. It is ironic that much of these
additional benefits are in the form of customer services: credit and financing, fast and
reliable delivery, free-phone, supportiveness, and repair and maintenance.

Activity 1.3
Site service giving organizations of different forms and identify the
core service they offer to their customers.
Commentary
Like tangible goods, services are also in the business of providing
a core benefit. The core benefits of services offered by various
service giving organizations are presented hereunder.
 Rail travel: safe and reliable transportation
 Tax consultant – peace of mind
 Education course: career enhancement, self-actualization
 Hotel: hospitality, rest and recuperation
 Hairdresser: feel more attractive, confidence-booster.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

3
 SERVICES AND RELATIONSHIP MARKETING

Cleanliness of
plane and airport
lounges

Airport
Regular & guidance
fast check- and
in facilities Transport directions
Addis
Ababa -
London Helpfulness
Refreshment
on request of check-in &
and catering airline staff
services

Entertainment/in-
flight movies/
games for children

Figure 1.1 Core and secondary/supplemental/ aspects of an airline service

In some contexts, the distinction between core and secondary services is not always so clear.
Services operating in competitive markets may offer a very similar core service but add
different secondary aspects in order to be seen to be doing something different from their
competitors. For example, airlines may offer a wider range or different business class
facilities to attract customers away from their competitors. This focus on secondary aspects
of the service package only works if the service package in question includes all the
elements, both core and ancillary or secondary, that their customers expect; and the extent
to which each of these elements meets the needs of their customers. If it does work, the
additional secondary aspects may become integral to the customer’s perception of the core
service.

Figure 1.1 illustrates the different aspects of the whole service offering for passengers flying
from Addis Ababa to London. The core aspect of the service is being transported from
Addis to London in this example. The secondary aspect of the service package encompasses
a number of services such as regular and fast check-in facilities, cleanliness of plane and
departure lounge, airport guidance for customers, helpfulness of airport and airline staff,
entertainment/in-flight movies, catering service, drinks on request and games for children.

Concepts of tangible and intangible dimensions

Some of the earlier attempts at conceptualizing the dimensions of services focused on the
positioning of tangible and intangible elements within the product/service offering (Bateson,
1979; Shostack, 1977). Indeed many researchers in service marketing have used the
tangible/intangible dimensions as a basis for conceptualizing different types of services,
simple to complex. For example Shostack (1977) used it to differentiate simple
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
4
 SERVICES AND RELATIONSHIP MARKETING

product/service packages from more complex product/service packages. Often these

tangible and intangible dimensions will have an impact on how customers perceive a
service/product offering and how it will be experienced and measured.

Consideration of both tangible and intangible dimensions of services underpins how

customers perceive and evaluate services and how service delivery and customer satisfaction
can be conceptualized and measured. Much of this work is based on measuring two aspects
of customers’ requirements. Swan and Combs (1976) argue that customer expectations have
two dimensions, as having both instrumental and psychological aspects. Both Gronroos
(1984) and Parasuraman et al. (1985) built upon the notion of instrumental and
psychological customer requirements as a basis for their studies. The ‘instrumental’
dimensions can be compared to the ‘technical’ aspects that Gronroos describes as the ‘what’
of service delivery. The psychological dimensions of expectations relate to the ‘functional’
aspects or ‘how’ of service delivery and include the more intangible aspects such as
customer feelings and perceptions about the service performance.

A further development based on the argument that customer expectations have both
‘technical’ and ‘functional’ components was that both could be influenced by and contribute
to the company image (Gronroos, 1984). This idea recognizes how important it is for
service managers to create good ‘functional’ quality as well as ‘technical’ quality and so
contribute to the overall image of the service package and service company.

Table 1.1 Tangible and intangible dimensions of service delivery

Tangible elements: relatively easy to Intangible elements: relatively difficult to
measure measure
Physical facilities Image
Credit facilities Congenial atmosphere
Speed of delivery Security/confidentiality
Technical expertise/support Advice/guidance
Appearance of staff Competence of staff
Responsiveness
Accessibility/courtesy
Individual customer service

One outcome of Parasuraman et al.’s study in 1985 recommended that service dimensions
should include: access, communication, competence, courtesy, credibility, reliability,
responsiveness, security, tangibles and understanding the customer. However their further
studies reduced these to five dimensions (Parasuraman et al., 1988): tangibles, reliability,
responsiveness, assurance and empathy. Both these frameworks are inextricably based upon
the concept of tangible and intangible dimensions of services. Sometimes in service
industries there is a tendency to concentrate more on the tangible aspects of the service
delivery because they are easier to measure. In doing so, the intangible dimensions may be
neglected. The interrelationships between the tangible and intangible elements of service
quality are illustrated in Table 1-1. The range of dimensions from tangible to intangible
highlights the large task that service managers may have in trying to integrate all aspects of
the service delivery in order to achieve a more balanced delivery of service quality.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
5
 SERVICES AND RELATIONSHIP MARKETING

1.3 Scope of Services Marketing

Most frequently, a service has been described as an act, a process and a performance. For
example, activities such as accountancy, banking and hairdressing can be recognized as
being predominantly service based. Also services can be more widely described as economic
activities that create ‘added value’ and provide benefits for customers (consumers or
organizations). Today most products include some element of service. However, a service
‘product’ or a service company can be differentiated from customer service that is provided
by all types of companies such as manufacturers and IT companies as well as service
companies.

It is important to draw the distinction between services and customer service. Services, as
broadly defined above, encompass a wide range of industries. However, manufacturers and
technology companies can offer services to the marketplace as well. Services are offered for
sale by companies. Customer service is also provided by all types of companies -
manufacturers, IT companies, service companies. Customer service is the service provided in
support of a company's core products. Customer service most often includes answering
questions, taking orders, dealing with billing issues, handling complaints, and perhaps
scheduling maintenance or repairs. Typically, there is no charge for customer service. Although
customer service is inherent in services marketing it is carried out as an additional function
by many industries. Quality customer service is essential to building customer relationships. It
should not, however, be confused with the services provided for sale by a company.

There are many products that depend upon service-based activities to give them a
competitive advantage. For example, someone buying a new computer may be attracted to
the store where he will also receive useful information and guidance from a helpful staff
member at the store, a hotline service for installing programs, and other services, in addition
to their preferred computer. Recognizing the value of this to potential customers, computer
store service managers will aim to offer many additional useful services for customers. This
illustrates the value and relevance of understanding and recognizing the importance that
service issues have on today’s society. A service business is one where the perceived value of
the offering to the buyer is determined more by the service rendered than the product
offered. In this way the nature and scope of services pose different challenges for managers
in service businesses. Such businesses include those that provide an almost entirely
intangible offering, such as legal services, healthcare, and cleaning services and businesses
that offer both services and products such as restaurants and retail outlets. The definition
and scope of the service concept is wide and can mean any or all of the following:

Table 1-2 Scope of services

Service activities Service as a concept
Customer service A service organization
Service based activities As a core product
Value added activities As an augmented product
As product support
As an act

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

6
 SERVICES AND RELATIONSHIP MARKETING

 Service as an organization: The entire business or not-for-profit structure that resides

within the service sector. For example, a restaurant, an insurance company, or a
charity.
• Service as core product: The commercial outputs of a service organization such as a
bank account, an insurance policy or a holiday.
• Service as product augmentation: Any peripheral activity designed to enhance the
delivery of a core product. For example, provision of a courtesy car, complimentary
coffee at the hairdressers.
• Service as product support: Any product- or customer-oriented activity that takes
place after the point of delivery. For example monitoring activities, a repair service,
and up-dating facilities.
• Service as an act: Service as a mode of behaviour such as helping out or giving
advice.

Activity 1.4
The relative importance of various dimensions of the service package may vary
from customer to customer. Give an example of a service which would be
valued by different customers from different angles.

Commentary
From a market or consumer point of view the relative importance of different
components of the service offering can range vastly from one customer to
another. So a service must be considered from the point of view of many types
of customers. For example, two people may pay the same amount for a service
but may be paying for different aspects of the service. A business person may
dine regularly in an expensive, up-market restaurant because of the convenience
to their place of work and the perceived ‘status’ of entertaining guests there.
Other customers of the same restaurant may eat there regularly because of the
excellent food, the modern décor and menu choice.

Dependency of Manufacturing on Services

The following figure illustrates the interdependency of the services and manufacturing
sectors of the economy.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

7
 SERVICES AND RELATIONSHIP MARKETING

Figure 1.2 Role of services in an economy

Value-Added Services Infrastructures Services

 Financing  Communication
 Leasing  Transportation
 Insurance  Utilities
 Banking

Personal Services
 Health care
Manufacturing Distribution Services  Restaurants
Service inside  Wholesaling  Hotels
Company:  Retailing
 Finance  Repairing
 Accounting Consumer
 Legal (Self-service)
 R&D and
design

Business Services
Supporting Government Services
Manufacturing:  Military
 Consulting  Education
 Auditing  Judicial
 Advertising  Police and fire protection
 Waste disposal

Many service industries provide transportation, banking, advertising, repair, or

communication in support of the distribution of manufactured goods. Even as
manufacturing moves offshore, many of these services will continue to be needed.
Furthermore, the success of manufacturing requires rapid feedback from the marketplace,
ability to customize products, and fast delivery – all of which are dependent on integration
of downstream services.

The service sector includes a wide range of industries as shown in the following table

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

8
 SERVICES AND RELATIONSHIP MARKETING

Table 1-3 Scope of the service industry

Service types Other services
Transportation and public utilities Hotels and other lodging places
Railroad transportation Personal services
Local and warehousing Business services
Trucking and warehousing Auto repair, services, and parking
Water transportation Miscellaneous repair services
Air transportation Motion pictures
Pipelines, except natural gas Amusement and recreation services
Transportation service Health services
Legal services
Communication
Telephone and telegraph Educational services
Radio and television broadcasting Social services
Electric, gas, and sanitary services Membership organizations
Wholesale trade Miscellaneous services
Retail trade Private household services
Finance, insurance, and real estate Federal government
Depository institutions State and local government
Security and commodity brokers, and services
Insurance agents, brokers and services
Real estate
Holding and other investment companies

1.4 Why Services Marketing?

Many forces led to the growth of services marketing with the most notable ones include the
following.

A service based economy

The economic importance of services cannot be overstated. The service sector represents a
major share of GDP and it has become a major employer. The economic importance of
service is also evident with the fact that trade in services is growing worldwide.

Services as a business imperative in Manufacturing and IT

Manufacturing and technology industries revenues and profit are coming from services.
Customers not only expect excellent, high-quality goods; they also expect high levels of
services all with them. As manufacturers and IT companies become more and more service-
focused, the need for special concepts and approaches for managing and marketing services
becomes even more apparent.

Services marketing is different

More variables exist in the marketing mix of services than for consumer goods. In a service
business, marketing and operations are more closely linked than in a manufacturing
business. The service production process is part of the marketing process.
Customer/employee interface is a major difference between goods marketing and services
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
9
 SERVICES AND RELATIONSHIP MARKETING

marketing. Pricing of services is difficult because determining the costs associated with
service production and delivery is very difficult. The benefits of using price as a promotional
weapon are not apparent in services. Promotional price cuts tended to erode hard fought
positioning and image.

1.5 Differences in Goods versus Services Marketing

To put the services/product distinction into perspective it is helpful to consider the goods–
services continuum. In 1966 Rathmell observed that most marketers have some idea of the
meaning of the term ‘goods’; they are tangible economic products that are capable of being
seen and touched and may or may not be tasted, heard or smelled. As for services, Rathmell
asserted that there was no clear understanding. He sought to change this by defining a good
as a thing and service as an act, the former being an object, an article, a device or a material and
the latter a deed, a performance, or an effort. Economic products were to be regarded as lying
along a goods–services continuum with pure goods at one extreme and pure services at the
other, but with most of them falling between these two extremes.

Shostack developed a refined version of the goods–services continuum and it remains a

valuable perspective for understanding the nature of services (Figure 1.2). The essence of the
continuum is that tangibility (ability to see, touch, smell, hear prior to purchase) decreases
as one moves from left to right. An organization on the continuum delivers some degree of
service as part of its total offer. However, it is the organizations to the right which deliver
most in the way of service and can therefore truly bear the hallmark ‘service organizations’.
It is important to make a distinction between those for whom service is part of the overall
offer (e.g. computer manufacturer, car dealer, fashion retailer) and those for whom service is
the offer (e.g. bank, hotel, airline, accountant), as the latter exhibit particular characteristics
that merit attention.

Tangibility Spectrum
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 intangible or totally tangible. Instead, services tend to be more intangible than
manufactured products, and manufactured products tend to be more tangible than services. For
example, the fast-food industry, while classified as a service, also has many tangible
components such as the food, the packaging, and so on. Automobiles, while classified
within the manufacturing sector, also supply many intangibles, for example, transportation.
The tangibility spectrum captures this idea.

When we refer to services, we will be assuming the broad definition of services and
acknowledging that there are very few "pure services" or "pure goods." The issues and
approaches we discuss are directed toward those offerings that lie on the right side, the
intangible side, of the spectrum shown in figure 1-2.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

10
 SERVICES AND RELATIONSHIP MARKETING

Salt
 Soft drinks
 Detergents
Automobiles
 Cosmetics
 Fast food Outlets

Intangible
Dominant
Tangible
Dominant  
Fast-food Ad. 
Outlets Airlines 
Investment 
Consulting 
Teaching

Figure 1-3 The tangibility spectrum

Unique Service Features and Marketing Implications

The services marketing mix is the set of tools and activities available to an organization to
shape the nature of its offer to customers. Goods marketers are familiar with the product,
price, promotion, and place aspects of the marketing mix. An analysis and description of the
marketing mix elements was carried out by Neil Borden (1964) based on a study of
manufacturing industry at a time when the importance of services to the economy was
considered to be relatively insignificant. For services marketing, the distinguishing features
or characteristics of services are important in the design of an appropriate marketing mix.
The identification of these characteristics was the concern of much of the earlier research
and conceptual development of services marketing.

The core characteristics are now widely recognized as intangibility, heterogeneity,

inseparability, and perishability. These are defined below.

Intangibility
Even though many services include tangible aspects such as an airline seat, a classroom, a
restaurant table and food the service performance leading to a customer’s experience is
intangible. The benefits of buying a product are based on its physical characteristics whereas
the benefits of buying a service are from the nature of the performance. In comparison to
physical goods, services cannot be stored or readily displayed. They are difficult to
communicate, cannot be protected through patents and prices are difficult to set. The
intangible nature of services often means that customers have difficulty in evaluating and
comparing services. As a result they may use price as a basis for assessing quality and they
may place greater emphasis on personal information sources. This all leads to consumers
having higher levels of perceived risk. The intangibility of services makes them very different
from the traditional product mix that is frequently analyzed in terms of tangible design

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

11
 SERVICES AND RELATIONSHIP MARKETING

properties. Similarly, physical distribution management may not be an important element of

the ‘place’ mix decisions because there is no tangible product.

The most basic, and universally cited, difference between goods and 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,
health care services are actions (e.g., surgery, diagnosis, examination, and treatment)
performed by providers and directed toward patients and their families. These services
cannot actually be seen or touched even if they involve certain tangible components of the
service (e.g. equipment, hospital room). In fact many services such as health care are
difficult for the consumer to grasp even mentally. Even after a diagnosis or surgery has been
completed the patient may not fully comprehend the service performed.

Marketing Implications
Intangibility presents several marketing challenges:
 Services cannot be inventoried, and therefore fluctuations in demand are often
difficult to manage. For example, there is tremendous demand for hotel
accommodation in recreation places like Sodore and Langano during the weekend,
but little demand in weekdays.
 Services cannot be readily displayed, demonstrated, or easily communicated to
customers, so quality may be difficult for consumers to assess. Decisions about what
to include in advertising and other promotional materials are challenging, as is
pricing.
 The actual costs of a "unit of service” are hard to determine and the price/quality
relationship is complex.

Heterogeneity/Variability
Because services are performance, frequently produced by humans, no two services will be
precisely alike. The employees delivering the service frequently are the service in the
customer's eyes, and people may differ in their performance from day to day or even hour to
hour. 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).

Marketing Implications:
 Because services are heterogeneous across time, organizations, and people, ensuring
consistent service quality is challenging.
 Quality actually depends on many factor that cannot be fully controlled by the
service supplier, such as:
o the ability of the consumer to articulate his or her needs,
o the ability and willingness of personnel to satisfy those needs,
o the presence (or absence) of other customers, and
o 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
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
12
 SERVICES AND RELATIONSHIP MARKETING

promoted. Sometimes services may be provided by a third party, further increasing the
potential heterogeneity of the offering. For example, a consulting organization may choose
to subcontract certain elements of its total offering. From the customer's perspective, these
subcontractors still represent the consulting organization, even though their actions cannot
be totally predicted or controlled by the contractor.

Inseparability/Simultaneous Production and Consumption

Because services are processes, deeds or acts, customers are involved in the production of a
service. Also other consumers may be involved in the production environment and
centralized mass production is difficult, particularly if the service is more complex or
customized. For most services both the buyer and the seller need to be at the same place at
the same time for the service to occur. Because centralized mass production is difficult,
consumers often have to travel to the point of service production. For example, it is hard to
imagine a haircut without both customer and hairdresser or barber present. Also promotion
by the service personnel may take place. For a bank clerk or hairdresser the manner in
which the service is produced is an essential element of the total promotion of the service.

Often consumers are co-consumers of a service with a small or large number of others. Thus
the behaviour and attitude of other consumers may impact upon the nature and experience
of a service. For example, a loud or over-demanding customer can deflect service staff’s
attention and impact on the quality of service delivery to other consumers. In this
circumstance it may be difficult for the service providers to control the quality and
consistency of the service, unless staff have been trained to deal with such situations in a
precise and effective manner.

Whereas most goods are produced first, then sold and consumed; most services are sold first
and then produced and consumed simultaneously. For example, a foam mattress can be
manufactured in Addis, shipped to Diredawa, sold two months later and used over a period
of years. But restaurant services cannot be provided until they have been sold, and the
dining experience is essentially produced and consumed at the same time. Frequently this
means that the customer is present while the service is being produced and thus views and
may even take part in the production process. This also means that frequently customers
will interact with each other during the service production process and thus may affect each
other's experiences. 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 ingredients in the service experience for the consumer.

Marketing Implications:
 Because 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 what
happens in "real time," including actions of employees and the interactions between
employees and customers.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

13
 SERVICES AND RELATIONSHIP MARKETING

 Similarly, 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 in convenient locations.
 Because of simultaneous production and consumption, the customer is involved in
and observes the production process and thus may affects (positively or negatively)
the outcome of the service transaction. In a related vain, "problem customers” (those
who disrupt the service process) can cause for themselves or others in the service
setting, resulting in lowered customer satisfaction. For example, in a restaurant
setting, an over demanding and intoxicated patron will command extra attention
from the service provider and negatively impact the experiences of other customers.

Perishability
It refers to the fact that services cannot be saved, stored, resold, or returned. A seat on an
airplane, an hour of a lawyer's time, or telephone line capacity not used cannot be
reclaimed and used or resold at a later time. This is in contrast to goods that can be stored in
inventory or resold another day, or even returned if the consumer is unhappy. Wouldn't it
be nice if a bad haircut could be returned or resold to another consumer? Perishability
makes this an unlikely possibility for most services.

Marketing Implications:
 A primary issue that marketers face in relation to service perishability is the inability
to 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
storing recovery strategies when things do go wrong. For example, while a bad
haircut cannot be returned, the hairdresser can and should have strategies for
recovering the customer's goodwill if and when such a problem occurs.

Table 1.4: Summary of the distinguishing features of services

Goods Services Resulting Implications

Tangible Intangible Services cannot be inventoried

Services cannot be patented
Services cannot be readily displayed
or communicated.
Pricing is difficult

Service delivery and customer

satisfaction depend on employee
Standardized Heterogeneous actions.
(variable) Service quality depends on many
uncontrollable factors.
There is no sure knowledge that the
service delivered matches what was
planned and promoted.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

14
 SERVICES AND RELATIONSHIP MARKETING

Production separate Simultaneous Customers participate in and affect

from consumption production and the transaction.
consumption Customers affect each other.
(inseparable) Employees affect the service
outcome.
Decentralization may be essential.
Mass production is difficult

Nonperishable Perishable It is difficult to synchronize supply

and demand with services.
Services cannot be returned or resold

1.6 Classification of Services

Classifying a service provides several benefits, such as providing a better understating of the
particular service under consideration, highlighting the similarities as well as the differences
between the service being classified and other services, and assisting in the development of
marketing strategies and tactics. Services in the same categories will face the same types of
challenges and the same marketing strategy will normally work for all services in a given
category. However application of the strategy may have some variation within each
category. The same is true for marketing activities such as promotion, pricing, and
distribution; the same tactics tend to work for all services within a single category.

The classification scheme offers several advantages including:

1. It is comprehensive, incorporating the major classification schemes already
introduced.
2. It follows a systematic order, allowing marketers to classify services based on
common characteristics.
3. It allows the development of marketing strategies for groups of services with
common characteristics.

1.6.1 Levels of Classification of Services

1. Nature of the organization

The first level of classification system deals with the nature of the organization. At this level
the purposes, structure, and type of their service is identified. Who is the target customer- a
household consumer or business organizations? Is it a profit or a non-profit venture? For
instance Addis Ababa University School of Commerce (AAUSC) is a public institution
without a profit motive. The School offers a formal education for individuals in its regular
and extension programs. Besides it offers an external training and consultancy service to
external business, government offices, and NGOs.

2. Nature of the service

The second level of the service addresses the nature of the service in terms of the degree of
tradability and merchantability.

Tradability refers to the trade-off between goods and services offered by a service firm. It is
the relative involvement between goods and services in the production of the service.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
15
 SERVICES AND RELATIONSHIP MARKETING

Merchantability refers to distance from which a customer can make a transaction with a
service firm. It is the relative distance between the customer and the service provider in the
acquisition or performance of the service.

In terms of tradability, AAUSC is purely a service directed entirely toward people. In its
regular programs, it is low in terms of merchantability, which means the customer and the
service provider both must be present when the service is performed and in its supported
distance learning program, the school is medium in terms of merchantability. In service
providers like DSTV, the service can be performed at arm’s length. AAUSC is a pure service
provider and as such it has to address the issues of intangibility and perishability. To market
services low in merchantability, management must provide physical space for both
customers and service providers. The number of customers that can be served
simultaneously is limited by the physical space available. For instance, travel agents are
high in merchantability, so they have more flexibility in terms of how many customers they
can serve at one time and when the service can be performed. Since few customers actually
come to the service, the amount of physical space needed for a travel agent is quite small.

3. Customer Relationship
At the third level, relationship can be either formal or informal. Formal relationships are
used by facilities such as DSTV that charge individuals an annual fee or Ethiopian
Telecommunication Corporation (ETC) that charges a monthly fee. Informal relationships
are pay-as-use systems. Where there is an informal relationship, demand is more difficult to
forecast.

In terms of degree of participation, customers must be present during the service

performance. In these situations, décor and environment of the business are important to
make the customer feel comfortable, whereas in services where the customer does not have
to be present, such as in the credit card companies, the décor can be designed to meet the
needs of the staff. Also, since customers are present, facility size is an important factor since
the number of customers served will depend on the size of the facility. Since the service
must be performed when customers are present, efficiency of the operation will be reduced.
For example, customers are not normally present for auto repair service. Because the car is
left at the facility, the manager can schedule employees and work to be done, which
increases efficiency of the system.

4. Nature of Demand
In terms of the fourth level demand can be greater, equal, or less than supply capacity of the
firm. To reduce the negative impact of perishability, service providers must develop
strategies to cope with fluctuating demand. This goal can be accomplished by making
simultaneous adjustments in demand, supply, and capacity. The goal of these strategies is to
achieve parity and balance among the three.

5. Service package
Service package is the type of services and goods offered by a service firm. AAUSC offers
multiple of services like formal education in various undergraduate and graduate programs,
consultancy, and an external training services.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
16
 SERVICES AND RELATIONSHIP MARKETING

(a) Customization – Customization refers to services designed to meet the needs and wants
of individual customers. AAUSC, for instance, designs a customized and tailor made
training programs for various organizations based on their unique requirements. By
customizing part of the service, costs are increased.

b) Degree of Durability – it refers to the life span of the service after purchase. For instance
once a student has graduated in Accounting, he has the basic skills necessary to be an
accountant for a long time with some refreshment training programs.

6. Delivery Method
The sixth level of the classification scheme deals with the delivery of the service. Delivery
method involves issues like whether the service is provided only at one site or in multiple
sites, whether the type of consumption is independent or collective, and whether capacity is
allocated based on reservation, order of arrival, or on preferential terms.

Table 1-5 Summary of the Service Classification Scheme

Level 1: Nature of Organization
Category Option AAU School of Commerce
Purpose (satisfy needs of) Individuals Purpose is to satisfy the needs of both
Business individuals, government agencies,
Both NGOs and business firms.
Structure Profit structure is a government
Nonprofit organization
Type Public Type is a public institution
Private
Level 2: Nature of service
Degree of tradability Embodied service Degree of tradability is pure service
Pure service
Service directed toward Individuals Service is directed toward individuals
Things
Degree of merchantability High Degree of merchantability is low
Medium
Low

Level 3: Customer Relationship

Type of relationship Formal Type of relationship is formal
Informal
Both
Degree of participation Customer must be present The customer must be present
Customer must start and finish
the service
Customer has to start the
service
Customer has to finish the
service
Level 4: Nature of Demand
Level of demand Demand exceeds capacity Demand exceeds capacity
Demand equals capacity
Capacity exceeds demand

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

17
 SERVICES AND RELATIONSHIP MARKETING

Degree of fluctuation Wide Degree of fluctuation is variable

Narrow
Variable
No fluctuation
Level 5: Service Package
Number of services and One service Multiple service
goods One service, one good
One service, multiple goods
Multiple services
Multiple services, one good
Multiple services, multiple
goods
Degree of equipment base High Degree of equipment base is medium
Medium
Low
Degree of customization High Degree of customization is medium
Medium
Low
Degree of durability High Degree of durability is high
Medium
Low
Cannot be defined
Level 6: Delivery Method
Availability of service One site Availability of service is at multiple
Multiple sites sites
Nature of delivery Continuous Nature of delivery is discrete
Discrete
Both
Type of consumption Independent Type of consumption is collective
Collective
Both
Allocation of capacity Reservation Allocation of capacity is preferential
Order-of-arrival
Preferential

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

18
 SERVICES AND RELATIONSHIP MARKETING

Activity 1.5
Try to identify the various issues that service firms shall address at each of the six
levels of classification of services.

Commentary
The following are major issues that service firms must address at each level of the
classification scheme.
 Level 1 will impact a service firm’s promotional strategies and its strategic
approach to business.
 Level 2 will affect the operations, efficiency, productivity, distribution, and
personnel.
 Level 3 will impact operation, efficiency, supply and demand strategies,
pricing, and personnel.
 Level 4 will affect supply and demand strategies, distribution, and
efficiency.
 Level 5 will impact distribution, capital investment, differentiation
strategies, efficiency, productivity, staffing, and pricing.
 Level 5 affects facility design and distribution.

1.6.2 The Service Process Matrix

Another service classification scheme developed by Roger Schmenner is known as the
service process matrix. To demonstrate that management problems are common across
service industries, Roger Schmenner proposed the service process matrix shown in Figure
1.4. In this matrix, services are classified across two dimensions that significantly affect the
character of the service delivery process. The vertical dimension measures the degree of
labour intensity, which is defined as the ratio of labor cost to capital cost. Thus, capital-
intensive services such as airlines and hospitals are found in the upper row because of their
considerable investment in plant and equipment relative to labor costs. Labor-intensive
services such as schools and legal assistance are found in the bottom row because their labor
costs are high relative to their capital requirements.

The horizontal dimension measures the degree of customer interaction and customization,
which is a marketing variable that describes the ability of the customer to affect personally
the nature of the service being delivered. Little interaction between customer and service
provider is needed when the service is standardized rather than customized. For example, a
meal at McDonald’s, which is assembled from prepared items, is low in customization and
served with little interaction occurring between the customer and the service providers. In
contrast, a doctor and patient must interact fully in the diagnostic and treatment phases to
achieve satisfactory results. Patients also expect to be treated as individuals and wish to
receive medical care that is customized to their particular needs. It is important to note,
however, that the interaction resulting from high customization creates potential problems
for management of the service delivery process.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

19
 SERVICES AND RELATIONSHIP MARKETING

Degree of interaction and customization

Low High
Service factory: Service shop:
 Airlines  Hospitals
Degree of labor intensity

Low
 Trucking  Auto repair
 Hotels  Other repair services
 Resorts & recreation
Mass service: Professional services:
 Retailing  Physicians
High  Wholesaling  Lawyers
 Schools  Accountants
 Retail aspects of  Architects
commercial banking

Figure 1.4 The Service Process Matrix

The four quadrants of the service process matrix have been given names, as defined by the
two dimensions, to describe the nature of the services illustrated. Service factories provide a
standardized service with high capital investment, much like a line-flow in a high-capital
environment. Customers of a mass service will receive an undifferentiated service in a
labor-intensive environment, but those seeking a professional service will be given
individual attention by highly trained specialists.

Activity 1.6
Try to identify major challenges faced by managers of services in service
factory, mass service, service shop, or professional services.

Commentary
Managers of service in any category, whether service factory, service shop,
mass service, or professional service, share similar challenges. Services with
high capital requirements (i.e., low labor intensity), such as airlines and
hospitals, require close monitoring of technological advances to remain
competitive. This high capital investment also requires managers to schedule
demand to maintain utilization of the equipment. Alternatively, managers of
highly labor-intensive services, such as medical or legal professionals, must
concentrate on personnel matters. The degree of customization affects the
ability to control the quality of the service being delivered and the perception
of the service by the customer. Approaches to addressing each of these
challenges are topics that will be discussed in later units.

1.7 The Services Marketing Triangle

The services marketing triangle shows the three interlinked groups that work together to
develop, promote and deliver services. These key players are labeled on the points of the
triangle: the company, the customers, and the providers. Between these three points on the
triangle, there are three types of marketing that must be successfully carried out for a service
to succeed:
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
20
 SERVICES AND RELATIONSHIP MARKETING

1. External marketing,
2. Internal marketing, and
3. Interactive marketing.

All these activities revolve around making and keeping promises to customers. For services,
all three types of marketing activities are essential for building and maintaining relationships
with customers.

Company

Internal Marketing: External Marketing:

Enabling Making
Promises Promises

Providers Customers

Interactive Marketing:
Keeping promises
Figure 1-5 The services marketing triangle

External Marketing: Making Promises

Through its external marketing efforts, a company makes promises to its customers
regarding what they can expect and how it will be delivered. Traditional marketing
activities such as advertising, sales, special promotions, and pricing facilitate this type of
marketing. But for services, other factors also communicate the promise to customers.

The service employees, the design and decor of the facility, and the service process itself also
communicate and help to set customer expectations. Service guarantees and two-way
communication (especially in situations where promises can be negotiated and expectations
can be managed on an individual basis) are additional ways of communicating service
promises. Unless consistent and realistic promises are set via all of these external
communication vehicles, a customer relationship will be off to a poor beginning. Further, if
there is a tendency to over promise, the relationship may also be off to a weak beginning.

Interactive Marketing: Keeping Promises

External marketing is just the beginning for services marketers: Promises made must be
kept. Keeping promises, or interactive marketing, is the second type of marketing activity
captured by the triangle and is the most critical from the customer's point of view. Service
promises are most often kept or broken by the employees of the firm or by third-party
providers, most often in real time. Sometimes service promises are even delivered through
technology. Interactive marketing occurs in the moment of truth when the customer
interacts with the organization and the service is produced and consumed. Interestingly,
Promises are kept or broken and the reliability of service is tested every time the customer
interacts with the organization.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

21
 SERVICES AND RELATIONSHIP MARKETING

Internal Marketing: Enabling Promises

A third form of marketing, internal marketing, takes place through the enabling of promises.
In order for providers and service systems to deliver on the promises made, they must have
the skills, abilities, tools, and motivation to deliver. In other words, they must be enabled.
This essential service marketing activity has become known as internal marketing. Promises
are easy to make, but unless providers are recruited, trained, provided with tools and
appropriate internal systems, and rewarded for good service, the promises may not be kept.
Internal marketing also hinges on the assumption that employee satisfaction and customer
satisfactions are inextricable linked.

Aligning the Sides of the Triangle

In a triangle, all three sides are essential to complete the whole. For services all three
marketing activities, represented by the sides of the triangle, are critical to success; without
one of the sides in place, the triangle, or the total marketing effort, cannot be optimally
supported. Each side represents significant challenges, and as we proceed through the test
we will find approaches and strategies for dealing with all three.

Technology and the Services Marketing Triangle

With the impact of technology on all dimensions of service and service delivery, it has been
suggested that the services triangle be expanded to explicitly include technology - turning
the triangle into a pyramid.
Company

Internal Marketing External Marketing

Enabling Making
Promises Promises
Technology

Providers Customers
Interactive Marketing
Keeping promises

Figure 1-6 The services triangle and technology

The pyramid suggests that:

 Interactive marketing can be the result of customers, providers, and technology (or
some subset of the three) interacting in real time to produce the service.
 Management has the responsibility to facilitate not only the delivery of service
through human providers, but also the delivery through technology.
 Customers will, at times, interact only with technology and therefore will need skills,
abilities, and motivation to receive services in that manner.
 Issues of customer satisfaction with technology delivered services are also implied.

Many services are faced with increasing demand and customer contact. To help address the
problems services are turning to technology. The advance of technology not only enables
services to transfer some of the work to customers but also allows organizations to vary
according to customer type, the service received. With the advent of information
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
22
 SERVICES AND RELATIONSHIP MARKETING

technology, organizations can now amass a substantial amount of data on customers. The
benefits of technology, for service organizations, are apparent in terms of productivity and
cost savings. But what of the customer? After all, ‘much of this technology delivered service
is initiated and carried out by the consumer and involves no direct or indirect contact with
representatives of the service provider’. This is given further meaning by the view that
‘across industries, technology is dramatically altering interpersonal encounter relationships,
and in some instances, eliminating them altogether’.

So in this age of increasing technology-based service, what are the views of the customers?
Dabholkar studied a situation in a fast-food restaurant where customers could use a
computerized touch screen to order a meal (technology-based self-service). The study found
that feeling in control and the potential enjoyment from using this type of delivery, were
important determinants of service quality. Reliability (error free), speed of delivery and ease
of use were also found to be important. In an extensive study of consumers, Howard and
Worboys found that time-saving was seen as the biggest advantage of self-service. However,
the findings also suggest that consumers still prefer the concept of human interaction rather
than technological interfaces. Similar findings by Curry and Penman from the banking
sector indicate that the human element in the banker/customer relationship is more
influential than the technology element. Equally they draw attention to differences between
banks and their employees in the use of technology. Technology not only appears in service
provider/customer contacts. It is also present within the service organization’s work
environment. The aims are largely twofold: management control and efficiency.

1.8 The Gaps Model of Service Quality

A third model for addressing services challenges is the gaps model of services quality. The
model focuses on strategies and processes that firms can employ to drive service excellence.
The gaps model will be used to frame this entire course, and is the organizational structure
for the rest of the units. It is a model that can be used to drive strategy as well as
implementation decisions.

The Provider Gaps

(1) Gap 1 shows the difference between expected service and companies understanding of
customers expectations.
(2) Gap 2 shows the gap between companies perception of customers expectations and the
service designs developed based on the companies understanding of customers expectations.
(3) Gap 3 shows the gap between the service design and the delivery of the service by the service
providing employees.
(4) Gap 4 shows the gap between the service delivery and the promises made to customers
through external communication channels.
(5) Gap 5 represents the customer gap which is the gap between expected service and perceived
service actually experienced by the customer. Gap 5 is the central focus of the gap model.
Expectations are the reference points customers have before coming in to a service
experience; perceptions reflect the service as actually received. Gap 5 is affected by the first
four gaps which are within the bound of the management of the organization to deal with
and make necessary corrections. Companies which would like to improve their service
quality must close the first four gaps (Parasuraman 1998).
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
23
 SERVICES AND RELATIONSHIP MARKETING

A primary cause in many firms for meeting customers' expectations is that the firm lacks
accurate understanding of exactly what those expectations are. A gap exists (gap 1) between
company perceptions of customer expectations and what customers actually expect. In the first
major section of this course we explore why this gap occurs and develop strategies for closing it.

Even if a firm does have a clear understanding of its customers’ expectations, there still may be
problems if that understanding is not translated into customer-driven service designs and
standards (gap 2). The second major section of this course focuses on reasons for gap 2 and
strategies for designing services and developing standards to meet customer expectations.

Once service designs and standards are in place, it would seem that the firm is well on its way to
delivering high-quality services. This is true, but still not enough. There must be systems,
processes, and people in place to ensure that service delivery actually matches (or is even better
than) the designs and standards in place (gap 3). The third major section of the course focuses
on how and why gap 3 can occur and specific process, people, and infrastructure strategies for
closing this gap.

Figure 1-7 Gaps model of service quality

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

24
 SERVICES AND RELATIONSHIP MARKETING

Finally, with everything in place to effectively meet or exceed customer expectations, the
firm must ensure that what is promised to customers matches what is delivered (gap 4).
Service marketers should focus on strategies for communicating effectively with customers
and for ensuring that the promises, once made, can and will be kept.

Closing the Customers Gap

In a broad sense, the gaps model says that a service marketer must first close the customer
gap, shown in the accompanying figure, between customer perceptions and expectation. To
do so, the provider must close the four provider gaps, or discrepancies within the
organization that inhibit delivery of quality service. The gaps model focuses on strategies
and processes that firms can employ to drive service excellence.

Expected
Service

Customer
Gap

Perceived
Service

Figure 1-8 The customer gap

The figure shows a pair of boxes that correspond to two concepts: customer expectations
and customer perceptions that play a major role in services marketing. Customer
perceptions are subjective assessments of actual service experiences. Customer
expectations are the standards of or reference points for performance against which service
experiences are compared and are often formulated in terms of what a customer believes
should or will happen. For example, when you visit an expensive restaurant, you expect a
certain level of service, one that is considerably different from the level you would expect in
a fast-food restaurant.

The sources of customer expectations consist of marketer-controlled factors (such as pricing,

advertising, sales promises) as well as factors that the marketer has limited ability to affect
(innate personal needs, word-of-mouth communications, and competitive offerings). In a perfect
world, expectations and perceptions would be identical: customers would perceive that they
receive what they thought they would and should. In practice these concepts are often, even
usually, separated by some distance. Broadly, it is the goal of services marketing to bridge
this distance, and close this customer gap.

1.9 Services Marketing Dimensions

The multi-dimensional nature of services is a feature of the service literature and the focus of
many studies of services. Over the previous decades, many works have aimed to identify
and describe some dimensions of service quality for specific and general service contexts (for
example, Gilmore and Carson, 1993; Gronroos, 1984; LeBlanc and Nguyen, 1988;
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
25
 SERVICES AND RELATIONSHIP MARKETING

Parasuraman et al., 1985, 1988). All of these relate to dimensions inherent in many of the
conceptual models that are used to help grasp and understand services better. For example,
some frequently used models explicitly recognize and illustrate different aspects of services
marketing. These are discussed later in this unit.

First, some of the most widely recognized dimensions of services marketing inherent in
service management, delivery and evaluation are discussed. These dimensions include:
 technical
 functional
 tangible
 intangible
 physical facilities and service-scapes
 accessibility
 reliability
 responsiveness
 communication
 competence
 courtesy
 credibility
 security
 empathy/understanding the customer and
 image.

Many of these dimensions originate from the work focusing on managing service quality
and were chosen to reflect that consistent conformance to customer expectations and
delivering ‘fitness for purpose’ is important in addition to satisfying the customer.

Technical dimensions are the ‘what’ or the instrumental dimensions of service delivery.
These relate to the more tangible aspects involved in the service package. For example, the
hotel customer will expect a comfortable room to sleep in, the restaurant customer will
expect a meal and so on. The technical outcome of a service experience is what the
customer receives as a result of his or her interactions with a service firm. This is only one
aspect of the overall service delivery. Because services are produced through interaction
with consumers the quality of technical dimensions alone will not complete the total service
experience. Other dimensions such as how the service is delivered will also be important.

Functional dimensions are the ‘how’ dimensions of service delivery. The accessibility of a
service (the availability of a hairdresser or a consultant at a convenient time), the
appearance of the service delivery staff, how they behave and what they say will feature very
strongly in how the service is delivered. Other consumers experiencing the service at the
same time can influence these dimensions. So the service process or the ‘how’ of service
delivery can be different from one experience to the next but is very important in a
consumer’s overall assessment of a service.

Tangible dimensions relate to the more concrete evidence of a service actually taking place.
Tangible dimensions include the physical evidence of the service. For example, the service
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
26
 SERVICES AND RELATIONSHIP MARKETING

environment, the appearance of the service personnel, the equipment and facilities used to
carry out the service and any other physical representations of the service, such as an airline
ticket or a plastic credit card.

Intangible dimensions are usually the core aspects of the service, the actual process, deed,
act, performance central to the service delivery. The intangible dimension is the haircut, the
advice received from a consultant and other aspects of the service activity. For example, any
aspect that contributes to how the customer is treated and processed through the service
delivery.

Physical facilities and ‘service-scapes’ refer to the immediate environment where a service
activity takes place. For example, the layout, furniture, facilities and overall quality of the
surroundings evident in a doctor’s waiting room or the equipment and facilities available in
a bank will have an impact on a consumer’s overall perception of the service encounter.
Accessibility refers to the approachability, availability and ease of contact with the service
company. It will include the ease with which the service company may be reached by
telephone or e-mail, the waiting time to receive or experience the service, the opening hours
or hours of operation and the location of the service.

Reliability entails the consistency of service performance and dependability. It includes the
requirement of a firm to perform the service right first time (often referred to as having ‘zero
defects’) and to live up to its promises to customers. For example, it will include providing
accurate bills and performing the service at the designated time.

Responsiveness concerns the willingness and readiness of staff to deliver the service and
respond to customers’ requirements. It may involve mailing information or transaction
details immediately, calling customers back promptly when promised, and giving prompt
service. Communication involves communicating with customers in a language they
understand, listening to their requests and responding appropriately. Common areas of
customer communication include ‘educating’ the customer about a service, providing some
interpretation of a particular issue or providing guidance with a specific service problem.
For example, explaining the service outcome and process and how much it will cost,
assuring the customer that their problem will be resolved, explaining different levels of
service and different costs.

Competence refers to the ability of the service company to actually deliver the service. It
entails ensuring that staff possess the appropriate skills and knowledge to perform the
service including the knowledge and skill of the contract personnel, operational support
personnel and the overall capability of the service firm. Courtesy encompasses the
politeness, respect, consideration and friendliness of contact personnel and service delivery
staff. It includes staff and management having consideration for consumers’ property and
being properly prepared for customers.

Credibility concerns the trustworthiness, believability and honesty experienced during the
service encounter. Wider issues will also have an impact on the overall perception of
organizational credibility; these include reputation of the company and its staff, and other

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

27
 SERVICES AND RELATIONSHIP MARKETING

businesses or stakeholders associated with the company, in addition to the personal

characteristics of the contact personnel. Security relates to how secure, free from danger,
risk or doubt consumers feel during interaction with the service. In a service situation this
will impact upon both physical safety and financial confidentiality.

Empathy and understanding the customer is one of the most intangible dimensions in
practice. It involves understanding and having empathy with individual customer needs and
requirements and responding to these in an appropriate manner.

Image is an important dimension in services marketing. The concept of image is as a mental

representation of reality sustained by an individual or group. This dimension entails the
combined experience and assessment of many other factors and is inextricably linked with
both the whole service experience and previous knowledge of the company. Image is
something that signifies customers’, managers’ and service deliverers’ beliefs and
understanding of a phenomenon or situation. This mental perception or image held by
specific people or groups can be either a good or bad representation of reality but it is always
important because it guides behaviour. People act or react because of their own perception
of reality whether that perception is fair or not (Normann, 1984). Image can be a very
powerful weapon with which to exert influence, but it is a double-edged sword. It has a
tendency to reinforce itself and once established, becomes self-fulfilling. In this way it has an
enormous impact upon communication and how communication is received. Thus it is easy
to see why ‘image management’ is so important to service organizations.

As services are less tangible than physical products and difficult to examine before purchase,
customers’ perceptions or image of the service and the company are vital. The image that a
company creates will be determined by the nature of the service, how the company is
organized, its culture, employees and the users. This means that the management and
delivery of the entire service package needs to be carefully coordinated and integrated. It is
therefore important for a service company to be organized in such a way as to allow efficient
and effective service delivery and that all the people involved are competent and willing to
carry out their service roles. This emphasizes the importance of excellent services
management, the effective use of internal marketing and communication and the
development of managerial and staff competence.

All of the service dimensions outlined above contribute to a variety of conceptual models for
services. They have been used as fundamental and underpinning frameworks to be included
and adapted to facilitate the clearer understanding of services in different contexts. The
purpose in being able to define and describe service quality dimensions is to help
researchers, managers, and anyone working in service delivery to recognize the complexity
of the service and to be able to deliver it and evaluate it in terms of its overall
appropriateness, consistency and quality.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

28
 SERVICES AND RELATIONSHIP MARKETING

Summary
This unit sets the stage for further learning about services marketing by presenting
information about changes in the world economy and business practice that have driven
the focus on service: the fact that services dominate the modern economies of the world: the
focus on service as a competitive business imperative, specific needs of the professional
service industries: the role of new services marketing is different. A broad definition of
services as deeds, processes, and performances was presented, and distinctions of services as
deeds, processes, and performances was presented, and distinctions between service and
customer services and customer service were drawn.

Building on this fundamental understanding of the service marketing, the unit went on to
present the key differences between goods and service that underlie the need for distinct
strategies and concepts for managing services businesses. These basic differences are that
services are intangible, heterogeneous, produced and consumed simultaneously, and
perishable. Because of these basic differences, service managers face a number of challenges
in marketing, including the complex problem of how to deliver quality services consistently.

The six classification levels of the classification scheme for services are: (1) the nature of the
organization, (2) the nature of the service, (3) the customer relationship, (4) the nature of
demand, (5) the service package, and (6) the delivery method. The two powerful models of
the services marketing triangle and the gaps model of service quality were introduced as
conceptual frameworks for beginning to address the unique challenges of services
marketing. The remainder of the course focuses on exploring the unique challenges further
and on developing solutions for dealing with these challenges that will help you to become
an effective service manager.

Unit 1 Self Assessment Questions (SAQ)

1. List the basic characteristics that underlie the difference between services marketing
and marketing of tangible goods
2. What distinguishes service offerings from customer service?
3. What are the implications of the services marketing triangle for a service
organization.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

29
 SERVICES AND RELATIONSHIP MARKETING

UNIT 2 CONSUMER BEHAVIOR IN SERVICES

Learning Objectives
At the end of this unit, a student will be able to:
1. Overview the generic differences in consumer behavior between services and goods.
2. Introduce the aspects of consumer behavior that a marketer must understand in four
categories of consumer behavior:
 Information search
 Evaluation of service alternatives
 Service purchase and consumption
 Post purchase evaluation

2.1 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.

This unit shows that services' unique characteristics necessitate different consumer
evaluation processes 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. Because the premise of this course is that the
customer is the heart of effective services marketing, we begin with the customer and
maintain this focus throughout the course.

Consumers have a more difficult time evaluating and choosing services than goods, because
services are intangible and non-standardized and consumption is so closely intertwined with
production. These characteristics lead to differences in consumer evaluation processes for
goods and services in all of the following four stages of the buying process.
(1) information search
(2) evaluation of alternatives
(3) purchase and consumption and
(4) post purchase evaluation.

Lack of understanding of the way customers evaluate and choose services in these four
fundamental stages leads to a customer gap that must be closed by service marketers.

2.2 Consumption Value

Consumers purchase goods and services because they satisfy certain needs or wants in their
lives. Firms purchase goods and services for the same basic reasons: to satisfy the needs and
wants of themselves or their clients. Due to time and financial restraints, consumers must
make choices in their purchase decisions.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
30
 SERVICES AND RELATIONSHIP MARKETING

In addition to choosing a good or service category, consumers and businesses are faced with
choosing a particular vendor from which to purchase that good or service. Buyers are
constantly forced to make choices in their purchase decisions. These types of choices are
influenced by consumption values. Consumption value is the perceived value or utility that an
individual believes a specific choice will provide.

Consumption value includes the following elements.

1. functional value
2. social value
3. emotional value
4. epistemic value
5. conditional value

It must be kept in mind that these values are not mutually exclusive; a particular choice may
provide multiple consumption values.

Functional value is the perceived utility acquired when a particular choice provides
utilitarian or functional benefits for the consumer. These benefits are based on the attributes
a particular choice possesses and the benefits those attributes provide the consumer.

Social value is the perceived utility acquired from making a purchase decision that is
associated with a particular referent group. This group could be friends or it could be based
on demographics such as age, sex, ethnic origin, or religion.

Emotional value is the feeling derived from a choice, within a consumer. For many
services, especially entertainment services, perceived emotional utility is an important
motivating factor in the purchase decision.

Epistemic value is the value acquired when a purchase decision is perceived to satisfy a
desire for knowledge, provide novelty, or arouse curiosity.

Conditional value is the perceived utility provided when an alternative is chosen because of
temporary situational factors that will enhance one of the consumption values. Finance may
be a temporary situational factor that would alter a purchase decision.

Activity 2.1
Give appropriate examples that illustrate each of the five consumption
values.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

31
 SERVICES AND RELATIONSHIP MARKETING

Commentary
The functional value of any automobile is to provide a transportation service or the
functional benefits of cosmetics is to increase ones personal attractiveness. For many
people, for instance, Mercedes Benz is perceived as a symbol of status which enhances
ones social value. Related to emotional value, common reasons given for getting tattoos
are as a means of self-expression or rebellion, both of which are products of the
consumers’ emotions. Most museums, historical sites, zoos, and botanical gardens are
visited because of the epistemic value provided. Finally, Related to conditional value,
assume it is one day before payday and you want to eat at a restaurant. You would like
to go to an expensive restaurant but since you don’t have much money and it is
moderately expensive, you will instead go to a cheaper food outlet.

2.3 Classification of Properties of Offerings

One framework for isolating differences in the evaluation processes between goods and
services is a classification of properties of offerings proposed by economists. Economists
distinguish between three categories of properties of offerings.
1. Search qualities are attributes that a consumer can determine before purchasing a
product. Search qualities include color, style, price, fit, feel, hardness, and smell.
2. Experience qualities are attributes that can only be discerned after purchase or
during consumption. Experience qualities include taste and wearability.
3. Credence qualities are characteristics that the consumer may find impossible to
evaluate even after purchase and consumption.

Most Most
goods Services

Difficult to evaluate
Easy to evaluate
Automobile

Auto repair
Child Care

Root canal
Restaurant

Television
Furniture

diagnosis
Vacation
Clothing

Haircuts

Medical
services
Jewelry

Houses

repair
meals

Legal

High in search High in experience High in credence

qualities qualities qualities

Figure 2-1 Continuum of evaluation for different types of products.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

32
 SERVICES AND RELATIONSHIP MARKETING

Activity 2.2
Give example of goods and services which are high in search qualities, experience
qualities, and credence qualities.

Commentary
 Goods such as automobiles, clothing, furniture, and jewelry are high in
search qualities as their attributes can be almost completely determined and
evaluated before purchase.
 Goods and services such as vacations and restaurant meals are high in
experience qualities, for their attributes cannot be known or assessed until
they have been purchased and are being consumed.
 Examples of offerings high in credence qualities include appendix operations
and brake relining on automobiles. Few consumers possess medical and
mechanical skills sufficient to evaluate whether these services are necessary
or are performed properly, even after they have been prescribed and
produced by the seller.

Figure 2-1 arrays goods and services high in search, experience, or credence qualities along
a continuum of evaluation ranging from easy to evaluate to difficult to evaluate.
 Goods high in search qualities are the easiest to evaluate (left end of the continuum).
 Goods and service high in experience qualities are more difficult to evaluate because
they must be purchased and consumed before assessment is possible (center of
continuum).
 Goods and services high in credence qualities are the most difficult to evaluate
because the consumer may be unaware of or may lack sufficient knowledge to
appraise whether the offerings satisfy given wants or needs even after consumption
(right end of the continuum).

The major premise of this unit is that most goods fall to the left of the continuum, while
most services fall to the right due to three of the distinguishing characteristics described in
unit 1-intangibility, heterogeneity, and inseparability of production and consumption. These
characteristics make services more difficult to evaluate than goods. Difficulty in evaluation, in
turn, forces consumers to rely on different cues and processes when evaluating services.

Because experience and credence qualities dominate in services, consumers employ different
evaluation processes than those they use with goods, where search qualities dominate. They
are also likely to experience the steps in the decision-making process in different orders and
at different times from the steps in the classic goods driven decision-making process.
Specific characteristics of services may lead to divergent evaluation processes and altered
consumer behavior. The major differential factors of consumer behavior in services are
related to:
 information search,
 evaluative criteria,
 size and composition of the evoked set of alternatives,
 perceived risk,

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

33
 SERVICES AND RELATIONSHIP MARKETING

 adoption of innovations,
 brand loyalty,
 assessment of value, and
 attribution of dissatisfaction.

2.4 Services: Categories in the Decision-Making Process

Using the basic consumer decision-making process, we have organized this unit into four
main categories:
(1) information search,
(2) evaluation of alternatives,
(3) purchase and consumption, and
(4) post purchase evaluation

Information Search Evaluation of Alternatives

Use of personal sources Evoked set
Perceived risk Emotion and mood

Purchase and Consumption Post purchase Evaluation

Service provision as drama Attribution of dissatisfaction
Compatibility of customers Innovation diffusion
Perceived risk Brand loyalty

Figure 2.2 Categories in consumer decision making and evaluation of services

In purchase of services, these categories do not occur in a linear sequence the way they most
often do in the purchase of goods. As you will see in this unit, one of the major differences
between goods and services is that a greater portion of the evaluation of services succeeds
purchase and consumption than is the case with goods. Therefore, while our categorization
here follows the sequence consumers use with goods, we will show how these stages in
services depart from evaluation of goods.

2.4.1 Information Search

2.4.1.1 Use of Personal Sources

Consumers obtain information about products and services from personal sources (e.g.,
friends or experts) and from non-personal sources (e.g., mass or selective media). When
purchasing goods consumers make 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 for several
reasons.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

34
 SERVICES AND RELATIONSHIP MARKETING

 First, mass and selective media convey information about search qualities that can
communicate little about experience qualities. By asking friends or experts about
services, however, the consumer can obtain information vicariously about experience
qualities.
 Second, non-personal sources of information may not be available because many
service providers are local, independent merchants with neither the experience nor
the funds for advertising and “cooperative" advertising, or advertising funded jointly
by the retailer and the manufacture, is used infrequently with services because most
local providers are both producer and retailer of the service.
 Third, because consumers can discover few attributes before purchase of a service,
they may feel greater risk in selecting a little-known alternative.

Personal influence becomes pivotal where experience qualities are high, as product
complexity increases, and when objective standards by which to evaluate a product
decreases. Most managers in service industries recognize the strong influence of word of
mouth in services.

Next, consumers may find post purchase information seeking more essential with services
than with goods because services possess experience qualities that cannot be adequately
assessed before purchase. One model of audience response to communication (conative –
affective – cognitive) describes the situation that occurs frequently when consumers select
services:
1. The consumer selects from among virtually indistinguishable alternatives.
2. Through experience the consumer develops an attitude toward the service.
3. After the development of an attitude, the consumer learns more about the service by
paying attention to messages supporting his or her choice. In contrast to the conventional
view of audience response to communication (cognitive -affective-conative) where
consumers seek information and evaluate products before purchase, with services most
evaluation follows purchase.

2.4.1.2 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. Related to information search for purchase of services, the following conclusions
can be drawn.
 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 accompanied by warranties or guarantees.
The dissatisfied service purchaser can rarely "return" a service; he has already
consumed it by the time he realizes his dissatisfaction.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

35
 SERVICES AND RELATIONSHIP MARKETING

 Finally, many services (e.g., medical diagnosis, pest control etc) are so technical or
specialized that consumers possess neither the knowledge nor the experience to
evaluate whether they are satisfied, even after they have consumed the service.

The increase in perceived risk involved in purchasing services suggests the use of strategies
to reduce risk. Where appropriate, guarantees of satisfaction may be offered. To the extent
possible, service providers should emphasize on employees training and other procedures to
standardize their offerings, so that consumers learn to expect a given level of quality and
satisfaction.

When purchasing a service, the following seven types of risk are potentially involved in the
consumer’s decision-making process.
1. performance risk
2. financial risk
3. time loss risk
4. opportunity risk
5. psychological risk
6. social risk
7. physical risk

Performance risk is the chance that the service will not perform or provide the benefit for
which it was purchased. For example, in the selection of a firm to clean carpets for a retail
business, buyers face the risk that the carpets will not be cleaned properly. Even for
professional services, there is a certain degree of performance risk. A bad hair cut which
cannot be recovered can be cited as a performance risk.

Financial risk is the amount of monetary loss incurred by the consumer if the service fails.
Purchasing services involves a higher degree of financial risk than purchasing goods because
fewer service firms have money-back guarantees or warranties of any kind. For example,
money invested in personal tutoring that does not help a student is lost and cannot be
recovered.

Time loss risk refers to the amount of time lost by the consumer as a result of the failure of
the service. A consumer who takes his or her automobile into a repair shop for servicing
because it is running poorly will experience time loss if the vehicle is left there for six hours
and the service performed does not correct the problem. Not only was the consumer
without the use of the vehicle for six hours but the time invested in taking the car to the
repair shop and picking it up was also wasted.

Opportunity risk refers to the risk involved when consumers must choose one service over
another and deal with the lost opportunity a consumer experiences when he or she makes a
decision between the two opportunities. Suppose an individual is faced with a decision to
go to a business trip during a time when his final examination is scheduled. Both are
occurring at the same time so attendance at both is not possible. Selecting one will
automatically eliminate the other. If the one selected turns out to be unenjoyable, then the
individual has lost the opportunity he or she had to purchase the other.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

36
 SERVICES AND RELATIONSHIP MARKETING

Psychological risk is the chance that the purchase of a service will not fit the individual’s
self-concept. Services that have a high degree of impact on individuals’ self-concept or are
high in epistemic and emotional value tend to have a high degree of psychological risk.
Services with a high psychological risk include education, entertainment, fitness facilities,
and religious organizations.

Social risk refers to the probability that a service will not meet the approval of others who
are significant to the consumer making the purchase. Services with high visibility, such as
restaurants and hair and beauty salons, tend to be high in social risk.

Physical risk is the chance that a service will actually cause physical harm to the customer.
Many services contain some degree of physical risk. When going to a physician for a
medical procedure, there is the risk that the procedure will create undesirable side effects.

Activity 2.3
Give example of services that may expose the customer to each of the seven types of risk
discussed above.
Commentary
 Performance risk: With dentists there are risks that services provided may not turn
out as patients expect.
 Financial service: A trucking firm that fails to arrive on time with a critical raw
material may force an assembly line at a factory to shut down, costing the
manufacturer thousands of dollars an hour.
 Time loss risk: A customer waiting for a banking service for an hour might be
finally informed that the service cannot be offered due to system failure is an
example of time loss risk.
 Opportunity risk: Opting for clinic ‘A’ over clinic ‘B’ or choosing consulting firm
‘X’ over ‘Y’ can be taken as an example of opportunity risk.
 Psychological risk: A psychological dilemma whether to invest or not to invest in a
bank with lucrative profit record but labeled as corrupt.
 Social risk: Your association with a service providing firm or a particular brand
may not be approved by your referent others.
 Physical risk: In purchasing public transportation, there is always a small chance
that there might be an accident causing physical harm.

Risk Reduction Strategies Used by Consumers

During the pre-purchase phase, consumers evaluate the type and extent of risk involved in
the purchase decision. They often compare services and service firms to see how much risk
is involved with each option. When comparing several vendors within a service industry,
consumers normally look at the uncertainty component of risk since the consequence
component is the same.

How do consumers and businesses reduce the risk of a purchase?

First, they examine their own personal experiences. Consumers tend to continue to patronize
the same firm if they have not received bad service from that firm in the past. This is
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
37
 SERVICES AND RELATIONSHIP MARKETING

especially true if one has patronized a particular firm regularly. Going to a new service firm
has a much higher element of the unknown, thus is a higher risk. As a result, there tends to
be higher loyalty toward service firms than toward sellers of tangible goods.

A second strategy used by consumers to reduce risk is to seek the opinion of others such as
friends, relatives, business associates, local opinion leaders, or experts in the field. Because of the
experiential nature of the services and the fact that a service usually cannot be evaluated
until after it is performed, consumers tend to rely more on personal sources of information
than company-produced sources.

The third source of information would be service-produced sources of information. The

primary source of information is advertising, promotions, and the questions or concerns.
Information may also be obtained through direct inquiry to either sales personnel or service
providers within the service firm.

Risk Reduction Strategies Used by Service Firms

Service firms should be aware of the risk involved in the purchase of their services and use
appropriate strategies to reduce the perceived risk of consumers. Furthermore, there are
different strategies to reduce the uncertainty component of risk than would be used to
reduce the consequence component of risk.

To reduce the uncertainty component of risk, service firms must reduce the perceived probability of
a service failure. The word “perceived” must be emphasized because the actual chances of
service failure are immaterial. What is important to consumers is the perceived chances of
something going wrong. Service firms must, therefore, reduce what consumers perceive is
the chance or probability of a service failure. The lower the perceived probability of a service
failure, the more likely the consumer will purchase the service. If a consumer is comparing
several service firms, the one chosen will usually be the one with the lowest perceived risk.

To reduce the uncertainty of performance risk, service firms must increase the perceived
probability the service will perform as consumers desire. This can be done through
communication, branding, and certification. Many fields in the service industry require
employees to become certified in the service they provide. Certification indicates to the
consumer that the service providers are qualified to perform the service thereby reducing the
chances of receiving poor service.

Financial risks can be reduced by offering trial purchases, sampling, and promotional incentives.
An attorney may offer a free initial consultation visit for bankruptcy and auto accident
cases. This offer is an example of sampling and allows the customer to evaluate the service
provider with no financial risk. Instead of a free first visit, fitness centers may offer a special
one-month trial membership for a minimal fee to encourage people to try the facility. This is
a trial purchase, which allows the consumer to evaluate the service without the full financial
risk of a membership fee. Incentives such as coupons, premiums, and price-off deals can
also be used to stimulate consumers to try a service.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

38
 SERVICES AND RELATIONSHIP MARKETING

To reduce the consequences of financial risk, service firms can offer money back guarantees.
Although prominent in retailing and manufacturing, full money back guarantees are rare in
the service sector. An exception is attorneys who accept cases on a contingency basis; that
is, they get a percentage of any recovery received by a client, but nothing if they lose the
case.

The uncertainty of time loss risk and opportunity risk can be reduced by branding. The presence
of a brand name such as Microsoft will reduce the perceived chances of poor service
performance, which, in turn, will reduce the perceived chances of time loss on the part of
the consumer. The same is true for opportunity risk.

To reduce the consequences of time loss risk, service firms can offer some type of compensation in
the case of service failure, such as financial reimbursement for time lost or coupons for future
purchases. For opportunity risk, the firm must ensure that there are quality control standards
and procedures in place and that these are followed by service personnel. If consumers
receive the service expected they will not feel they lost an opportunity.

The uncertainty of psychological and social risk can be reduced by branding and communication.
Again, recognized brand names carry the assurance to the consumer that the service will
coincide with the consumer’s self-image and will be well received by his or her relevant
social group. Both sales and service personnel can reassure customers of the service and its
relevance and its acceptability with the individual’s self-concept and the perception within a
relevant social group. In addition, communication aimed at the consumer through
advertising and interaction with service personnel can reduce the uncertainty of
psychological and social risk. Testimonials are especially effective because they tend to be
more believable. The consequences of psychological and social risk can be reduced by
following strict quality control standards and procedures, and thus reducing variability of
service. If consumers receive the service expected, the chances of the service outcome being
unacceptable to themselves or to others within their social circle are greatly reduced.

Physical risk is reduced by service providers adhering to strict safety standards instruction,
and communication. The consequences of the physical risk are reduced by establishing and
following safety standards. The uncertainty of physical risk is reduced by giving consumers
instructions to reduce the chances of physical injury occurring. For example, gyms can give
customers instruction on the proper use of weight equipment to prevent injury.

2.4.2 Evaluation of Service Alternatives

Evoked Set
The evoked set of alternatives refer to a group of products a consumer considers acceptable
options in a given product category. Evoked set is likely to be smaller with services than
with goods for the following reasons.

 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

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

39
 SERVICES AND RELATIONSHIP MARKETING

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 geographical
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.

Faced with the task of collecting and evaluating experience qualities, consumers may simply
select the first acceptable alternative rather than searching many alternatives. In consumer
behavior terms, the consumer's evoked set of alternatives is smaller with services than with goods.

2.4.3 Service Purchase and Consumption

2.4.3.1 Emotion and Mood

Emotion and mood are feeling states that influence people's (and therefore customer')
perceptions and evaluations of their experiences. Moods are distinguished from emotions in
that moods refer to transient feeling sates 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 his/her interaction
with customers will likely be adversely affected by that mood. Furthermore, when another
customer in a service establishment is frustrated, whether from problems with the service or
from existing emotions unrelated to the service his or her mood affects the provision 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.

In what specific ways can mood affect the behavior of service customers?

First, positive moods can make customers more obliging and willing to participate in behaviors
that help service encounters succeed. A customer in a good emotional state is probably more
willing to follow an exercise regimen prescribed by a physical therapist or completing
homework assigned in a class.

A second way that moods and emotions influence service customers is to bias the way they judge
service encounters and providers. Mood and emotions enhance and amplify experiences,
making them either more positive or more negative than they might seem in the absence of
the moods and emotions. After losing a big account, a sales woman catching an airline
flight will be more incensed with delays and crowding than she might be on a day when
business went well. Conversely, the positive mood of a services customer at a dance or
restaurant will heighten the experience, leading to positive evaluations of the service
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
40
 SERVICES AND RELATIONSHIP MARKETING

establishment. The direction of the bias in evaluation is consistent with the polarity (that is,
positive or negative) of the mood or emotion.

Finally, moods and emotions affect the way information about service is absorbed and retrieved.
As memories about a service are encoded by a consumer, the feelings associated with the
encounter become an inseparable part of the memory. If travelers fall in love during a
vacation in warm places, they may hold favorable assessments of the destination due more
to their emotional state than to the destination itself.

Service marketers need to be aware of the moods and emotions of customers and of service
employees and should attempt to influence those moods and emotions in positive ways.
They need to cultivate positive moods and emotions such as joy, delight, and contentment
and discourage negative emotions such as distress, frustrations, anger, and disgust.

2.4.3.2 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 that the
performances of the actors are pleasing to the audience.

The skill of the service "actor" 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 increase (such as in a hospital, resort, or restaurant), when the service
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).

The physical setting of the service can be likened to the staging of a theatrical production
including scenery, props, and other physical cues to create desired impressions. Among a
setting's features that may influence that character of a service are the colors or brightness of
the service's features that may influence that character of a service are the colors or
brightness of the service's surroundings; the volume and pitch of sounds in the setting; the
smells, movement, freshness, and temperature of the air; the use of space; the style and
comfort of the furnishings; and the setting's design and cleanliness. The setting increases in
importance when the nature of a service is distinguished by its environment. In essence,
the delivery of service can be conceived as drama, where service personnel are the "actors,"
service customers are the "audience," physical evidence of the service is the "setting" and the
process of service assembly is the "performance."

The drama metaphor offers a useful way to conceive of service performances. Among the
aspects of a service that can be considered in this way are selection of personnel (auditioning
the actors), creation of the service environment (setting the stage), and deciding which

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

41
 SERVICES AND RELATIONSHIP MARKETING

aspects of the service should be performed in the presence of the customer (onstage) and
which should be performed in the back room (backstage).

2.4.3.3 The Compatibility of Service Customers

We have just discussed the roles of employees and customers receiving service. We now
want to focus on the role of other customers receiving service at the same time. Consider
how central the mere presence of other customers is in churches, restaurants, dances, bars,
lounges, and spectator sports: If no one else shows up, customers will not get to socialize
with others, one of the primary expectations in these types of services. However, if the
number of customers becomes so dense that crowding occurs, customers may also be
dissatisfied. The way other customers behave with many services such as airlines,
education, clubs, and social organizations also exerts a major influence on a customer's
experience. In general, the presence, behavior, and similarity of other customers receiving
services has a strong impact on the satisfaction and dissatisfaction of any given customer?

Customers can be incompatible for many reasons-differences in beliefs, values, experiences,

abilities to pay, appearance, age, and deal with heterogeneous consumers who have the
potential to be incompatible. The service marketer can also bring homogeneous customers
together and solidify relationships between them, which increase the cost to the customer of
switching service providers. Customer compatibility is a factor that influences customer
satisfaction, particularly in high-contact services.

2.4.4 Post Purchase Evaluation

2.4.4.1 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 she 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).

The quality of many services depends on the information the customer brings to the service
encounter: A doctor's accurate diagnosis requires a conscientious case history and a clear
articulation of symptoms. Failure to obtain satisfaction with any of these services may not
be blamed completely on the service provider because the consumer must adequately
perform his or her part in the production process also.

With products, on the other hand, a consumer's main form of participation is the act of
purchase. The consumer may attribute failure to receive satisfaction to her own decision-
making error, but she holds the producer responsible for product performance. Goods
usually carry warranties or guarantees with purchase, emphasizing that the producer
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
42
 SERVICES AND RELATIONSHIP MARKETING

believes that if something goes wrong, it is not the fault of the customer. With services,
consumers attribute some of their dissatisfaction to their own inability to specify or perform
their part of the service. They also may complain less frequently about services than about
goods because of their belief that they themselves are partly responsible for their
dissatisfaction.

2.4.4.2 Innovation Diffusion

The rate of diffusion of an innovation depends on consumers' perceptions of the innovation
with regard to five characteristics:
1. relative advantage
2. compatibility
3. communicability
4. divisibility
5. 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/sample basis) diffuses more quickly
than others. An offering that is complex, that is, difficult to understand or use, diffuses more
slowly than others.

Considered as a group, services are less communicable, less divisible, more complex, and
probably less compatible than goods. They are less communicable because they are
intangible (e.g., their features cannot be displayed, illustrated, or compared) and because
they are often unique to each buyer (as in a medical diagnosis or dental care). Services are
less divisible because they are usually impossible to sample or test on a limited basis (e.g.,
how does one "sample" a medical diagnosis? a lawyer's services in settling a divorce? even a
haircut?). Services are frequently more complex than goods because they are composed of a
bundle of different attributes, not all of which will be offered to every buyer on each
purchase.

Finally, services may be incompatible with existing values and behaviors, especially if
consumers are accustomed to providing the service for themselves. As an illustration,
consider a novel day care center that cooks breakfast for children so that parents can arrive
at work early. Mothers accustomed to performing this service for their children may resist
adopting the innovation because it requires a change in habit, in behavior, even in values.
Consumers adopt innovations in services more slowly than they adopt innovations in goods.

Marketers may need to concentrate on incentives to trial when introducing new services.
The awareness-interest-evaluation stages of the adoption process may best be bypassed
because of the difficulty and inefficiency of communicating information about intangibles.
Offering free visits, dollars-off coupons, and samples may be appropriate strategies to speed
diffusion of innovations in services.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

43
 SERVICES AND RELATIONSHIP MARKETING

2.4.4.3 Brand Loyalty

The degree to which consumers are committed to particular brands of goods or services
depends on the following factors:
1. the cost of changing brands (switching cost)
2. the availability of substitutes
3. the perceived risk associated with the purchase and
4. the degree to which they have obtained satisfaction in the past.

Because it may be more costly 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
service, 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.

If consumers perceive greater risks with services, as is hypothesized here, they probably
depend on brand loyalty to a greater extent than when they purchase products. Brand
loyalty, described as a "means of economizing decision effort by substituting habit for
repeated, deliberate decision," function as a device for reducing the risks of consumer
decisions.

A final reason consumers may be more brand loyal with services is the recognition of the
need for repeated patronage in order to obtain optimum satisfaction from the seller.
Becoming a "regular customer" allows the seller to gain knowledge of the customer's tastes
and preferences, ensures better treatment, and encourages more interest in the consumer's
satisfaction. Thus, a consumer may exhibit brand loyalty to cultivate a satisfying
relationship with the seller.

Brand loyalty has two sides. The fact that a service provider's own customers are brand loyal
is not a problem. The fact that the customers of the provider's competition are difficult to
capture, however, creates special challenges. The marketer may need to direct
communications and strategy to the customers of competitors, emphasizing attributes and
strengths that he or she possesses and the competitor lacks. Marketers can also facilitate
switching from competitors' services by reducing switching costs.

Intangibility, heterogeneity, and inseparability of production/consumption lead services to

possess high levels of experience and credence properties, which in turn, make them more
difficult to evaluate than tangible goods. We isolated and discussed four categories of
consumer behavior that reflect the differences between goods and services: (1) information
search, (2) evaluation of service alternatives, (3) service purchase and consumption, (4) post-
purchase evaluation. Consumer behavior in services was discussed, accompanied by

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

44
 SERVICES AND RELATIONSHIP MARKETING

strategic implications for marketers. To be effective, service providers may need to alter their
marketing mixes to recognize these different consumer behaviors and evaluation processes.

Summary
Intangibility, heterogeneity, and inseparability of production/consumption lead services to
possess high levels of experience and credence properties, which, in turn, make them more
difficult to evaluate than tangible goods. The four categories of consumer behavior that
reflect the differences between goods and services are discussed: (1) information search, (2)
evaluation of service alternatives, (3) service purchase and consumption, (4) post purchase
evaluation. Consumer behavior in services was discussed, accompanied by strategic
implications for marketers. To be effective, service providers may need to alter their
marketing mixes to recognize these different consumer behaviors and evaluation processes.

Self Assessment Questions

1. List the major differential factors of consumer behavior in services.
2. What are examples of services that are high in credence properties?
3. List the five characteristics that influence the rate of diffusion of an innovation.
4. List the seven types of risk which are potentially involved in the consumer’s decision-
making process of services.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

45
 SERVICES AND RELATIONSHIP MARKETING

UNIT 3 CUSTOMER SERVICE

Learning Objectives
Upon completion of this unit a student will be able to:
 Explain the concept of customer-focused organization and the characteristics of
customer focused organization.
 Provide reasons for becoming a learning organization in order to gain competitive
advantage.
 Explain the six components of a customer-focused environment.
 Describe the concept of service culture and discuss the elements that contribute to a
service culture.
 Identify and explain about the seven intangibles that customers want.
 Identify and explain the key elements that make the relationship between service
personnel and customers successful.
 Discuss how the service personnel can avoid negative communication and use
positive communication to serve the customers in an excellent manner.
 Explain how assertive service can help in solving problems while aggressive service
may escalate them.
 Discuss the effect of nonverbal communication in enhancing or detracting the
effectiveness of customer encounters is discussed.
 Identify and discuss the strategies that can be used to improve nonverbal cues are
discusses.

3.1 What is Customer Service?

Customer service is defined as the ability of knowledgeable, capable, and enthusiastic

employees to deliver products and services to their internal and external customers in a
manner that satisfies identified and unidentified needs and ultimately results in positive
word-of-mouth publicity and return business. (Robert W. Lucas) According to Jamier
L.Scott. (2002), customer service is a series of activities designed to enhance the level of
customer satisfaction – that is, the feeling that a product or service has met the customer
expectation. Its importance varies by product, industry and customer. Although the goal of
providing customer service may vary depending on the focus of the organization, such as
retailing, industry, or service- all organizations provide some degree of customer service.

Many companies specialize in providing only services. Examples of these types of

companies are banks and credit unions, consulting firms, internet service providers, utility
companies, call centers, brokerage firms, laundries, plumbing and electrical companies,
transportation companies, and medical facilities. Some organizations provide both products
and services. Examples are businesses such as car dealerships, retail stores, and
manufactures that have support services for their products, supermarkets, theaters, and
restaurants.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

46
 SERVICES AND RELATIONSHIP MARKETING

Activity 3.1
The effectiveness of an organization in delivering a satisfactory customer service by
and large depends on the extent to which the organization is customer focused.
Drawing from your exposure in other marketing modules, develop the characteristics
of a customer focused organization.

Commentary
Characteristics of an organization that is customer- focused.
1. Customer- focused organizations have internal customers (for example, peers,
coworkers, bosses, subordinates, and people from other areas of their
organization.
2. They have external customers (for example, vendors, suppliers, various
telephone callers, walk in customers, and other organizations, others not
within the organization).
3. The customer- focused organization determines and meets the needs of its
internal and external customers. Its focus is to treat everyone with respect and
as if they were special.
4. Information, products, and services are easily accessible by customers in a
customer- focused organization.
5. In a customer- focused company the policies are in place to allow employees
to make decisions in order to better serve customers.
6. In a customer- focused company the management and systems support and
appropriately reward employee’s effort to serve customers.
7. Reevaluation of the way business is conducted is ongoing and results in
necessary changes and upgrades to deliver timely, quality service to the
customer.
8. Build relationship through customer relationship management (CRM)
programs.

3.2 Customer Focused Environment

3.2.1 Learning Organization
The focus of many companies is to capture and hold loyal customers by providing premium
service. A customer- focused company emphasizes providing service excellence and an
environment in which customer needs are identified and satisfied. To achieve this, a
customer- focused company has to become a learning organization. A learning organization
is an organization that uses knowledge as a basis for competitive advantage. The term
learning organization was made popular by the author peter Senge in his book the fifth
discipline.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

47
 SERVICES AND RELATIONSHIP MARKETING

Activity 3.2
Try to identify the most important characteristics of a learning organization that would
enhance the customer service effort of the organization.

Commentary
In a learning organization
1. Employees are provided with ongoing training development opportunities so
that they gain and maintain cutting- edge skills and knowledge while projecting
a positive can- do customer focused attitude.
2. Systems that can adequately compensate and reward employees based on their
performance are present.
3. Systems and processes are continuously examined and up dated.
4. Organizations must train all employees to spot problems and deal with them
before the customer becomes aware that they exist. If a service breakdown does
occur, managers in truly customer- focused organizations should empower
employees at all levels to do whatever is necessary to satisfy the customer. For
this to happen management must educate and train staff members on the
techniques of policies available to help serve the customer. They must then give
employees the authority to act without asking first for management intervention
in order to resolve customer issues.

3.2.2 The Six Components of a Customer- Focused Environment

Organizational
culture
Service

Human resources Customer

Delivery systems

Product / deliverables

Figure 3-1 components of a customer- focused environment

The six components that make up the customer service environment:

1. the customer
2. organization culture
3. human resources
4. product/ deliverables
5. delivery systems
6. service
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
48
 SERVICES AND RELATIONSHIP MARKETING

All the six components contribute to customer service delivery. These factors can be used in
order to ensure that a viable service environment is the responsibility of every employee of
the organization not just the customer service representatives.

The customer
The figure shown previously indicates that the key component of a customer focused
environment is the customer, without the customer there is no reason for any organization
to exist. And since all employees have customers, either internal or external, there must be a
continuing consciousness of the need to provide exceptional, enthusiastic customer service.

Internal customers
Many people in the workplace will tell you that they do not have customers. They
are wrong. Anyone in the organization has customers. They may not be traditional
customers who come to buy or use products or services. Instead they are internal
customers who are workers, employees of other departments or branches, and other
people who work within the same organization. They also rely on others in their
organization to provide services, information and/or products that will enable them
do their jobs. Recognizing this formidable group of customers is important and
crucial for on the – job success. That is because, in the internal customer chain, an
employee is sometimes a customer and at other times a supplier. At times, you may
call a coworker in another department for information. Later that same day, this
coworker may call you for a similar reason. For example, suppose you work in the
service center of a company that sells automobile parts. The people in the accounting
department might provide services to you in the form of a biweekly pay check or
information on customer accounts (supplier). At other times, they may call to request
customer information related to an order so that they can assure accuracy of an
invoice (customer). Only when both parties are acutely aware of their role in this
customer – supplier relationship can the organization effectively prosper and grow to
full potential.

External customers
External customers may be current or potential customers or clients. They are the
ones who actively seek out, research, and buy, rent, or lease products or services
offered by your organization. This group can involve business customers who
purchase your product to include with its own for resale. It can involve an
organization that can act as a franchise or distributor. Such an organization buys
your products to resell or uses them to represent your company in their geographic
area.

Organizational culture
Without the mechanism and atmosphere to support front line service, the other components
of the business environment cannot succeed. Put simply, organizational culture is what the
customer experiences. This culture is made up of a collection of sub components, each of
which contributes to the overall service environment. The service meaning, importance, and
determinants of service culture are discussed in section 3.3.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

49
 SERVICES AND RELATIONSHIP MARKETING

Human resources
To make the culture work, an organization must take great care in recruiting, selecting, and
training qualified people- its human resources. That is why, when one applies for a job as a
customer service professional, a thorough screening process will be used to identify ones
skills, knowledge, and aptitudes. Without motivated, competent workers, planning, policy,
and procedures change or systems adaptation will not make a difference in customer
service. Many organizations go to great lengths to obtain and retain the “right” employees
who possess the knowledge, skills, and competencies to professionally serve customers.
Employees who are skilled, motivated, and enthusiastic about providing service excellence
are hard to find and are appreciated by employers and customers. As noted earlier,
organizations now rely on all employees to provide service excellence to customers;
however, they also maintain specially trained “elite” groups of employees who perform
specific customer- related functions.

Products/ Deliverables
The fourth component of a service environment is the product or deliverable offered by an
organization. The product or deliverable may be a tangible item manufactured or distributed
by the company, such as a piece of furniture or a service available to the customer, such as a
pest extermination service. In either case there are two potential areas of customer
satisfaction or dissatisfaction- quality and quantity. If your customers receive what they
perceive as a quality product or service to the level that they expected, and in the time frame
promised or viewed as acceptable, they will likely be happy. On the other hand, if customers
believe that they were sold an inferior product or given an inferior service or one that does
not match their expectations, they will likely be dissatisfied and could take their business
elsewhere. They may also provide negative word-of- month advertising for the organization.

Delivery systems
The fifth component of an effective service environment is the method (s) by which the
product or service is delivered. In deciding on delivery systems, organizations examine the
following factors.
Industry standards: How is the competition currently delivering? Are current
organizational delivery standards in line with those of competitors?
Customer expectations: Do customers expect delivery to occur in certain manner within a
specified time frame? Are alternatives acceptable?
Capabilities: Do existing or available systems within the organization and industry allow
for a variety of delivery methods?
Costs: Will providing a variety of techniques add real or perceived value at an acceptable
cost? If there are additional costs, will consumers be willing to absorb them?
Current and projected requirements: Are existing methods of delivery, such as mail,
phone, and face-to-face service meeting the needs of the customer and will they continue to
do so in the future? Without high level of customer service companies will lose business.
The remaining part of the discussion related to customer service will show you exactly what
to do, and what skills to develop and sharpen, to stop this from happening. We will look at
why customers leave, and what can be done to prevent them from leaving.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

50
 SERVICES AND RELATIONSHIP MARKETING

3.3 Service Culture

What is a service culture in an organization? The answer is that it is different for each
organization. No two organizations operate in the same manner, have the same focus, or
provide management that accomplishes the same results. Among other things, a culture
includes the values, beliefs, norms, rituals, and practices of a group or organization. Any
policy, procedure, action, or inaction on the part of your organization contributes to the
service culture; the figure below provides an overview of the typical elements of a service
culture. Other elements may be specific to your organization or industry. You play a key
role in communicating the culture to your customers. You may communicate through your
appearance or your interaction.

It is apparent that the behavior of employees in an organization will be heavily influenced by the
culture of the organization, or the pervasive norms and values that shape individual and group
behavior. Corporate culture has been defined as “the pattern of shared values and beliefs
that give the members of an organization meaning, and provide them with the rules for
behavior in the organization. Culture has been defined more informally as “What we do
around here,” or “organizational glue,” or “central themes.”

Experts have suggested that a customer-oriented, service-oriented organization will have at

its heart a “service culture” defined as “a culture where an appreciation for good service exists,
and where giving good service to internal as well as ultimate, external customers is considered a
natural way of life and one of the most important norms by everyone”. This is a very rich
definition with many implications for employee behaviors.
 First, a service culture exists if there is an “appreciation for good service.” This
doesn’t mean that the company has an advertising campaign that stresses the
importance of service, but that “in that underneath sort of way” people know that
good service is appreciated and valued.
 A second important point in this definition is that good service is given to internal as
well as external customers. It is not enough to promise excellent service to final
customers; all people within the organization deserve the same kind of service.
Finally, in a service culture good service is “a way of life” and it comes naturally
because it is an important norm of the organization.

Culture also encompasses your products and services, and the physical appearance of the
organization’s facility, equipment, or any other aspect of the organization with which the
customer comes into contact. Unfortunately, many companies are product centered and
view customers from the stand point of what company products or services they use.
Successful organizations are customer- centered and focus on individual needs. An
organization’s service culture is made up of many facets, each of which affects the customer
and helps to determine the success or failure of customer service initiatives. Too often,
organizations over promise and under deliver because their cultural and internal systems
(infrastructure) do not have the ability to support customer service initiatives.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

51
 SERVICES AND RELATIONSHIP MARKETING

Delivery systems Service philosophy Employee roles and

or mission expectations

Service
Policies and
Training culture
procedures

Management support
Services philosophy
Motivators and or mission Products and
rewards services
Generally, an organization’s approach to business, mission or its service philos

Figure 3-2 Elements of a service culture which defined a successful organization

Service philosophy or mission: The direction or vision of an organization that supports

day-to-day interactions with the customer. Leadership, real and perceived, is crucial to
service success. In successful organizations, members of upper management make
themselves clearly visible to frontline employees and are in tune with customer needs and
expectations. Although it is wonderful when organizations go to the trouble of developing
and hanging a nicely framed formal mission or philosophy statement on the wall, if it is not
a functional way of life for employees, it serves little purpose.

Employee roles and expectations: The specific communications or measures that indicate
what is expected of employees in customer interactions define the service culture of an
organization. Depending on the job, the size and type of your organization, and the industry
involved, the employee roles and expectations may be similar from one organization to
another, and yet they may be performed in a variety of different ways. Such roles and
expectations are normally included in a job description and translated into performance
goals.

Policies and procedures: Although there are a lot of regulations with which employees
must comply, many policies are flexible. Many customers negatively meet organizational
culture directly when a service provider hides behind “company policy” to handle a
problem. The goal should be to process customer requests and satisfy needs as quickly,
efficiently, and cheerfully as possible anything less is an invitation for criticism,
dissatisfaction, potential customer loss, and employee frustration.

Products and services: The type and quality of products and services also contribute to your
organizational culture. If customers perceive that you offer reputable products and services

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

52
 SERVICES AND RELATIONSHIP MARKETING

in a professional manner and at a competitive price, your organization will likely reap the
rewards of loyalty and positive “press.” On the other hand, if products and services do not
live up to expectations or promises, or if your ability to correct problems in products and
services is deficient, you and the organization could suffer adversely.

Service delivery systems: An organization must determine the best way to deliver quality
products and service and to provide effective follow-up support. Many ways are available
for delivering service to customers. Two key factors involved in delivery are transportation
modes (how products and services are physically delivered- by truck, train, plane, postal
service, courier, and electronically) and location (facilities located centrally and easily
accessible by customers).

Direct versus indirect delivery systems

The type of delivery system used (direct or indirect contact) is important because it affects
staffing numbers, costs, technology, scheduling, and many other factors. The major
difference between the two types of systems is that in a direct contact environment,
customers interact directly with people, whereas in an indirect system their needs are met
primarily with self- service through technology (possibly integrated with the human factor).
There is a delicate balance in selecting a service delivery system. This is because each
customer is unique and has personal preferences. While many prefer a hands- off self-
service approach, others resent it and often view it as a loss of caring. Many banks
discovered this fact in recent years. They saw technology as a cost-saving strategy to deliver
service. The result is that companies are now increasing their branch locations and
retrofitting their branches and ATMs.

Table 3-1 Differences between direct and indirect systems

Many industries are using technology to provide service that has traditionally
been obtained by a customer going to a supplier and meeting face-to-face with
an organization’s representative. The following lists compare the traditional
(direct) and technological (indirect) approaches.
Direct contact Indirect contact
Face-to-face Online ordering and delivery
Bank tellers Automated teller machines or online
banking
Reservationists (airlines, hotels) Online computer reservations
Front desk staff (hotels) Ticket scanners
Customer service representatives
Lawyers
Photo developers
Supermarket clerks

Management support: The availability of management to answer questions and assist

frontline employees in customer interactions when necessary enhances the service culture of
the organization. Also, the level of management involvement and enthusiasm in coaching
and mentoring professional development influences the attitude and behavior of employees.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

53
 SERVICES AND RELATIONSHIP MARKETING

Motivators and rewards: monetary rewards, material items, or feedback that prompts
employees to continue to deliver service and perform at a high level of effectiveness and
efficiency. In any environment, people work more effectively and productively when their
performance is recognized and adequately rewarded. Whether the rewards are in the form
of monetary or material items, or a simple verbal pat on the back by the manager, most
employees expect and thrive on some form of recognition.

Training: The importance of effective training cannot be overstated. To perform your job
successfully and create a positive impression in the minds of customers, you and other
frontline employees must be given the necessary tools. Depending on your position and
your organization’s focus, this training might address interpersonal skills, technical skills,
organizational awareness, or job skills, again depending on your position. Most important,
your training should help you know what is expected of you and how to fulfill those
expectations. Training is a vehicle for accomplishing this and is an essential component of
any organizational culture that supports customer service.

Employee empowerment: Employee empowerment is one way for a supervisor to help

ensure that service providers can respond quickly to customer needs or requests. The intent
of empowerment is a delegation of authority where a frontline service provider can take
action without having to call a supervisor or ask permission. Such authority allows on-the-
spot responsiveness to the customer while making service representatives feel trusted,
respected, and like an important part of the organization. Empowerment is also an
intangible way that successful service organizations reward employees. Often someone who
has decision-making authority feels better about himself or herself and their organization.

3.4 Tools for Service Measurement

In a customer- oriented environment, it is important to constantly gauge service
effectiveness. Organizations can use many ways to find out how well service providers are
doing in servicing customers. Once the results of organizational self assessments are
obtained, they will likely be shared with employees in an effort to determine ways to reduce
shortcomings and enhance strengths. Here are some of the typical techniques or tools
available for measuring service effectiveness.

Employee focus groups: In such groups, service providers might be asked to comment or
develop ideas on various topics related to customer service or employee and organizational
issues.

Customer focus groups: Similar to the employee groups, these forums provide an
opportunity to gather a group of customers (selected geographically, demographically by
factors such as age, sex, race, income, or interests, or randomly from lists). Customer focus
groups are brought together to answer specific questions related to some aspect of product
or service.

Mystery shoppers: These people may be internal employees or external consultants who
pose as customers in on-site visits, over the telephone or online, to determine how well
customers are being served.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
54
 SERVICES AND RELATIONSHIP MARKETING

Customer satisfaction surveys: Customers are asked to complete a brief questionnaire at

the end of their service transaction. Some organizations do follow-up telephone satisfaction
surveys; others put their surveys on their website and encourage feedback. Customers are
often enticed to participate in a survey through the use of gifts, prizes, and discounts.

Customer comment cards: Many service businesses can use these simple cards to get
immediate reactions and comments from customers following a visit.

Employee exit interviews: These interviews are typically administered by the human
resources or personnel department, or in smaller organizations, an officer or owner might
informally ask questions of a departing employee. Such information can identify trends or
concerns. Departing employees often feel that they have nothing to lose and will candidly
provide valuable feedback about management practices, policies and procedures, and a
multitude of other organizational issues.

Walk-through audits: Create a checklist of service factors (for example, responsiveness,

friendliness, and so on) for supervisors or managers to use as they walk through a store or
service facility to view the operations from a customer’s perspective.

On-site management visits: These visits provide first hand observation of service practice
and allow interaction between managers, employees, and customers. They are especially
helpful when there are off-site workers (at construction sites or branch offices, or operations
consulting projects). A side benefit of these types of visits is that they show that the
organization is committed to fulfilling the customers’ needs.

Activity 3.3
Customers expect effective, efficient service and value for their money. Customers
also expect certain common things that service providers can furnish. Try to list
out the various expectations of customers for a satisfactory service experience.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

55
 SERVICES AND RELATIONSHIP MARKETING

Commentary
What customers want is value for their money and effective, efficient service. They also expect certain
intangible things during a service encounter. Here are seven common things that customers want and
expect if they are to keep doing business with you and your organization:

1) Personal Recognition. This can be demonstrated in a number of ways (sending thank you cards
or notes, or birthday cards, returning calls in a timely fashion, taking the time to look up
information that might be helpful even if the customer did not ask for it). A simple way to show
recognition to a customer who enters your work area, even if you cannot immediately stop what
you are doing to serve him or her, is to simile and acknowledge the person’s presence. If
possible, you might also offer the customer the option of waiting, having a seat, and so on.
2) Courtesy. Basic courtesy involves pleasantries such as “please” and “thank you” as there is no
place or excuse for rude behavior in a customer service environment. Even though customers
may not always be right; you must treat them with respect. If a situation becomes too intense
and you find yourself “losing it,” call upon someone else to serve that customer.
3) Timely Service. Most people don’t mind waiting briefly for service if there is a legitimate reason
(as when you are waiting on another customer or obviously serving another customer on the
phone), but they do not like to spend what they believe is undue amounts of time waiting to be
served. Your challenge as a customer service professional is to provide prompt yet effective
service.
4) Professionalism. Customers expect and should receive knowledgeable answers to their
questions, service that satisfies their needs and lessens effort on their part, and service personnel
who take pride in their work.
5) Enthusiastic Service. Customers come to your organization for one purpose- to satisfy a need.
This need may be nothing more than to “look around.” Even so, they should find a dedicated
team of service professionals standing by to assist them in whatever way possible. By delivering
service with a smile, offering additional services and information, and taking the time to give
extra effort in every service encounter, you can help guarantee a positive service experience for
your customer.
6) Empathy. Customers also want to be understood. Your job as a service provider is to make
every effort to be understanding, and to provide appropriate service. To succeed, you must be
able to put yourself in the customer’s position or look at the need from the customer’s
perspective as much as possible. This is especially true when customers do not speak your native
tongue well or have some type of disability that reduces their communication effectiveness.
When a customer has a complaint or believes that he or she did not receive appropriate service,
it is your job to calm or appease in a no threatening, helpful manner and show understanding.
A common strategy for showing empathy is the feel, felt, found technique. When used, a
service provider is demonstrating a compassionate understanding of the customer’s issue or
situation. For example, a customer is upset because the product desired is not in stock. A service
provider might respond by saying: I know how you feel. I’ve felt the same way when I had my
heart set on a specific item. I’ve actually found that the alternative product I described to you
has the same features and performs several other functions as well.”
7) Patience. Customers should not have to deal with your frustrations or pressures. Your efficiency
and effectiveness should seem effortless. If you are angry because of a policy, procedure,
management, or the customer; you must strive to mask that feeling. This may be difficult to do
when you believe that the customer is being unfair or unrealistic, however.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

56
 SERVICES AND RELATIONSHIP MARKETING

3.5 Effective Communication for Effective Customer Service

3.5.1 The Importance of Effective Communication

A service provider has the power to make or break the organization. A front line employee’s
appearance, actions or inactions, and ability to communicate say volumes about the
organization and its focus on customer satisfaction. A key element in making interactions
with customers successful is to recognize how a service provider tends to communicate. A
service provider shall exercise two-way communication for effective service delivery.

Two-way communication involves the sender and the receiver who each contribute to the
communication process. Part of the process is deciding which is the best channel to ensure
clear message delivery. A customer service professional is responsible for ensuring that a
meaningful exchange of information takes place. By accepting this responsibility, a service
provider can perform his job more efficiently, generate goodwill and customer loyalty for
the organization, and provide service excellence. To facilitate this, a service provider should
be aware of all the elements of two-way communication and the importance of each.

Activity 3.4
Discuss the elements that constitute a two-way communication.

Commentary
Sender. As a sender a service provider initiates a message with a customer.
Receiver. Initially, a service provider may be the receiver of a customer’s
message.
Message. The message is the idea or concept that a service provider or customers
wish to convey.
Channel. The method a service provider chooses to transmit a message (over the
phone, in person, by fax, by modem, or by other means).
Encoding. Encoding occurs as a service provider evaluates what must be done to
effectively put a message into a format that a customer will understand
(language, symbols, and gestures are a few options).
Decoding. Decoding occurs as a service provider or a customer converts
messages received into familiar ideas by interpreting or assigning meaning.
Depending on how well the message was encoded or whether filters interfere,
the received message may not be the one originally sent.

Feedback. Unless a response is given to messages received, there is no way to

determine whether the intended message was received. Feedback is one of the
most crucial elements of the two-way communication process. Without it, you
have a monologue.
Filters. Filters are factors that distort or affect the messages receives. They
include, among other things, your attitude, interests, biases, expectations,
education, beliefs, and values.
Noise. Noise consists of physiological or psychological factors (your physical
characteristics, level of attention, message clarity, loudness of message, or
environmental factors) that interfere with the accurate reception of information.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

57
 SERVICES AND RELATIONSHIP MARKETING

3.5.2 Avoiding Negative Communication

A service provider has to use positive words or phrases, rather than emphasizing the
negative. A service provider choice of words or phrasing can often lead to either satisfaction
or confrontation or it can destroy a customer- provider relationship. Customers do not want
to hear what you can’t do; they want to hear how you’re going to help satisfy their needs or
expectations.

Here are some words and phrases that can lead to trouble with your customers. Avoid or
limit their use.

Table 3-2 Words and phrases that damage customer relationships

You don’t understand. You’re wrong or mistaken.
You’ll have to… You aren’t listening to me.
You don’t see my point. Listen to me.
Hold on (or hang on) a second. I never said…
I (we, you) can’t … In my opinion…
Our policy says (or prohibits)… What’s your problem?
That’s not my job (or responsibility). The word problem.
You’re not being reasonable. Do you understand?
You must… Are you aware…
You should… The word but.
What you need to do is… Global terms (always, never, nobody).
You’ll have to… The word no.
Why don’t you…? Endearment terms (honey, sweetie,
sugar, baby).
I don’t know. Profanity or vulgarity.

Some phrases can assist you in strengthening relationships with your customers. Such
language reinforces your integrity and encourages customers to trust you. How do you or
could you use these words? Which ones do you use the most? Table 3-3 Words and phrases
that build customer relationships
Please. You’re right.
Thank you. May I…?
I can or will… Have you considered…
How may I help? I’m sorry ( I apologize) for…
I was wrong. However, and or yet (instead of but).
I understand (appreciate) how you feel It’s my (our) fault.
Situation, issue, concern (instead of problem) Would you mind…?
Often, many times, some (instead of global terms) What do you think?
I appreciate…
Use of customer’s name.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

58
 SERVICES AND RELATIONSHIP MARKETING

3.6 The Impact of Nonverbal Cues on Customer Service

Nonverbal messages can contradict or override verbal messages. When in doubt, people
tend to believe nonverbal messages. By being aware that you constantly send nonverbal
messages to others and that it is impossible for you to not communicate, a service provider
can increase his effectiveness in customer encounters. A significant fact to remember is that,
according to a classic research study on how feelings are transmitted between two people
during communication, nonverbal signals can contradict or override verbal message. This is
especially true when emotions are high. In Mehrabian's study, it was found that in
communication between two people, 55 percent of message meaning (feelings) is extracted
from facial and other body cues, 38 percent is taken from vocal cues, and 7 percent is
received from the actual words used. This should not be construed to mean that words are
not important; they are just typically overridden by facial and vocal cues. When in doubt
about the messages meaning, people tend to believe the nonverbal (facial and vocal) parts.
Figure 3.2 below illustrates the importance of the different types of cues.

Words (verbal)

Vocal
7%
Facial

38%

55%

Figure 3-2 The importance of different communication methods

3.6.1 The Scope of Nonverbal Behavior

Background, culture, physical conditions, communication ability, and many other factors
influence whether and how well people use body cues. In addition to verbal and written
messages; nonverbal cues tell a lot about a service provider’s personality, attitude,
willingness and ability to assist customers. Customers receive and interpret the messages
you send, just as you receive and interpret their messages. The following categories of
nonverbal cues are discussed in this section.

 Body language  Spatial cues (proxemics)

 Vocal cues  Appearance or grooming
 Miscellaneous cues  (habits, time usage, and follow-
through)

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

59
 SERVICES AND RELATIONSHIP MARKETING

3.6.1.1 Body Language

Recognizing, understanding and reacting appropriately to the body language of others, as
well as using positive body language yourself, allow you to communicate with your
customers more effectively. The key to "reading" body language is to realize that your
interpretations should be used only as an indicator of the customer's true message meaning.
Placing too much importance on nonverbal cues could lead to miscommunication and
possibly a service breakdown.

Activity 3.5
Identify and discuss some of the typical forms of body language along with the norms accepted by society
that elicit positive response in communication.

Commentary: Some typical forms of body language:

Eye Contact
Looking away more often can send a message of disinterest or dishonesty. If either the length or the
frequency of eye contact differs from the "norm", many people might think that you are being rude or
offensive. They might also interpret your behavior as an attempt to exert power or as flirting. In any case,
your customer might become uncomfortable and may react in an undesirable manner (for example,
become upset or end the contact). Besides, looking down before answering questions, glancing away
continually as a customer talks, and blinking excessively can create a negative impression. Finally,
customer's lack of direct eye contact with you could send a variety of message, such as lack of interest,
confidence or trust, or honesty.
Posture
Basically, posture (or stance) involves the way you position your body. Various terms describe posture
(for example, formal, rigid, relaxed, slouched, awkward, sensual, defensive). By sitting or standing in an
erect manner, or leaning forward or away as you speak with customers, you can send a variety of
messages. By standing or sitting with an erect posture, walking confidently, or assuming a relaxed, open
posture, you might appear to be attentive, confident, assertive, and ready to assist your customer. On the
other hand, slouching in your seat, standing with slumped shoulders, keeping your arms crossed while
speaking to someone, shuffling or not picking up your feet when walking, or averting eye contact can say
that you are unsure or yourself, are being deceitful, or just have a poor customer service attitude. In
addition, your behavior when listening to a customer speak can affect his or her feedback and reaction to
you. For example, if you lean forward and smile as the customer speaks, you signal that you are interested
in what is being said and that you are listening intently. Leaning away could send the opposite message.
Facial Expressions
The face is capable of making many expressions. Your face can signal excitement, happiness, sadness,
boredom, concern, dismay, and dozens of other emotions. By being aware of the power of your
expressions and using positive ones, such as smiling, you can initiate and sustain relationships with
others. In fact, smiling seems to be one of the few nonverbal cues that has a universal meaning of
friendship or acceptance. Smiling typically expresses a mood of friendship, cheerfulness, pleasure,
relaxation, and comfort with a situation. On the other hand, some people smile to mask nervousness,
embarrassment, or deceit. In some situations, smiling (yours and a customer's) may even lead to
problems.

Nodding of the Head

Nodding of the head is often used (and overused) by many people to signal agreement or to indicate that
they are listening to a speaker during a conversation.
Gestures
The use of the head,
ADDIS hands,
ABABA arms, and
UNIVERSITY shoulders
SCHOOL to accentuate
OF COMMERCE GRADUATE verbal messages adds color, excitement,
PROGRAM
60
and enthusiasm to your communication. Using physical movements naturally during a conversation with
a customer may help make a point or result in added credibility.
 SERVICES AND RELATIONSHIP MARKETING

3.6.1.2 Vocal Cues

Vocal cues, that is, pitch volume (loudness), rate, quality, and articulation and other
attributes of verbal communication, can send nonverbal messages to customers.

Pitch
Changes in voice tone (either higher or lower) add vocal variety to messages and can
dramatically affect interpretation of meaning. These changes are referred to as inflection or
pitch of the voice or tone. Inflection is the "vocal punctuation" in oral message delivery. For
example, a raised inflection occurs at the end of a question and indicates a vocal "question
mark" be sure that your inflection normally falls at the end of sentence statements. Another
technique is to use a vocal "comma" in the form of a brief pause as you speak.

Volume
The range in which vocal messages are delivered is referred to as the degree of loudness or
Volume. Depending on surrounding noise or your customers' ability to hear properly, you
may have to raise or lower your volume as you speak. Be careful to listen to customer
comments, especially on the telephone. If the customer keeps asking you to speak up, check
the position of the mouthpiece in relation to your mouth, adjust outgoing volume (if your
equipment allows this), and try to eliminate background noise, or simply speak up. On the
other hand, if he or she is saying, "You don't have to shout," adjust your voice volume or
the positioning of the mouthpiece accordingly.

Articulation
Also known as enunciation or pronunciation of words, articulation refers to the clarity of
your word usage. If you have a problem articulating well, practice by gripping a pencil
horizontally between your teeth, reading sentences aloud, and forcing yourself to enunciate
each word clearly. Over time, you will find that you slow down and form words more
precisely.

Pauses
Pauses in communication can be either positive or negative depending on how you use
them. From a positive standpoint, they can be used to allow a customer to reflect on what
you just said, to verbally punctuate a point made or sentence (through intonation and
inflection in the voice), or to indicate that you are waiting for a response. On the negative
side, you can irritate someone through the use of too many vocal pauses or interferences.
The latter can be audible sounds (" uh," “er”, "um," "uh-huh") and are often used when you
have doubts or are unsure of what you are saying, not being truthful, or nervous. They are
sometimes called verbal filters.

Semantics
Semantics has to do with choice of words. Although not nonverbal in nature, semantics is a
crucial element of message delivery and interpretation. You can aid or detract from effective
communication depending on the words you use and how you use them. Keep in mind
what you read earlier about the Mehrabian study and the fact that 7 percent of messages
meaning comes from the words you choose to use.If you use a lot of jargon (technical or
industry-related terms) or complex words that customers may not understand because of

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

61
 SERVICES AND RELATIONSHIP MARKETING

their background, education, culture, or experience, you run the risk of irritating, frustrating,
or dissatisfying them and thus damaging the customer-provider relationship.

3.6.1.3 Appearance and Grooming

Through your appearance and grooming habits, you project an image of yourself and the
organization. Good personal hygiene and attention to your appearance are crucial in a
customer environment.

Hygiene
Effective hygiene (regular washing and combing of hair, bathing, brushing teeth, use of
mouthwash and deodorant, washing hands and cleaning fingernails) is basic to successful
customer service. Although good hygiene and grooming are important, going to an extreme
through excessive use makeup, cologne, or perfume can create a negative impression and
may even cause people to avoid further communication. This is especially true of people
who have allergies or respiratory problems, or people with whom you work in confined
spaces.

Spatial Cues (Proxemics)

Each culture has its own proxemics (zones in which interpersonal interactions take place) or
spatial cues for various situations. When a service provider violates this distance, the
comfort level of other people is likely to decrease, and they may become visibly anxious,
move away, and/ or become defensive or offended. Space considerations are important to
service providers because violations of territorial space without customer consent may set
off the customer's defense mechanisms and create a barrier to communications. There are
four main types of distance to consider:
 intimate space (up to 2 feet);
 personal space (2 to 4 feet);
 social space (4 to 12 feet); and
 public space (greater than 12 feet).

Intimate space of up to two feet or about arm's length, is the most sensitive zone, since
it is reserved for close friends and loved ones. To enter intimate space in the service
provider - customer relationship, for some prospects, could be socially unacceptable-
possibly offensive.

Personal space is the closest zone a stranger or business acquaintance is normally

allowed to enter. Even in this zone, a prospect may be uncomfortable. Barriers, such as
a desk, often reduce the threat implied when someone enters this zone.

Social space is the area normally used for formal interaction. Again, the customer often
uses a desk to maintain a distance of four feet or more between buyer and seller.
Standing while facing a seated customer may communicate to the customer that the
service provider seems too dominating. Thus, the service provider should normally stay
seated to convey a relaxed manner. A service provider should consider beginning a
presentation in the middle of the social distance zone, six to eight feet, to avoid the
customer's erecting negative mental barriers.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
62
 SERVICES AND RELATIONSHIP MARKETING

Public space can be used by the service provider making a presentation to a group of
people. It is similar to the distance between teacher and student in a classroom. People
are at ease and thus easy to communicate with at this distance, since they do not feel
threatened by the service provider.

3.6.1.4 Miscellaneous Cues

Other factors, such as the miscellaneous cues discussed in the following sections, can affect
customer perception of feelings about you or your organization.

Personal Habits
If a service provider has annoying or distracting habits, he could send negative messages to
customers. For example, eating, smoking, drinking, or chewing gum while servicing
customers can lead to negative impressions about you and your organization.

Follow- Through
Follow-through, or lack of it, sends a very powerful nonverbal message to customers. If you
tell a customer you will do something, it is critical to your relationship that you do so. If you
can't meet agreed upon terms or time frames, get back to the customer and renegotiate.
Otherwise, you may lose the customer's trust. For example, suppose you assure a customer
that an item that is out of stock will arrive by Wednesday. On Tuesday, you find out that
the shipment is delayed. If you fail to inform the customer, you may lose that sale and the
customer.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

63
 SERVICES AND RELATIONSHIP MARKETING

Activity 3.6
From your own personal experience, try to identify personal habits or mannerisms you observe on
service providers that may irritate or annoy a customer.

Commentary
A service provider should be aware of habits or mannerisms that can send annoying or negative
messages to customers. Many people develop unproductive nonverbal behaviors without even
realizing it. These may be nervous habits or some mannerism carried to excess (scratching, pulling
an ear, or playing with hair). In a customer environment, a service provider should try to
minimize such actions because they might send a negative or annoying message to your
customers. An easy way to discover whether you have such behaviors is to ask people who know
you well to observe you for a period of time and tell you about anything they observe that could
be a problem. Here are some more common behaviors that can annoy people and cause
relationship breakdowns or comments about you and your organizations.

Unprofessional Handshake
Hundreds of years ago, a handshake was used to determine whether a person was holding a
weapon. Later, a firm handshake became a show of commitment, of one's word, or of
"manhood." Today, in Western cultures and many others in which the Western way of doing
business has been adopted, both men and women in the workplace are expected to convey
greeting and/ or commitment with a firm handshake. Failure to shake hands appropriately (palm
to palm), with a couple of firm pumps up and down, can lead to an impression that you are weak
or lack confidence. The grip should not be overly loose or overly firm.

Fidgeting
Using nervous mannerisms can indicate to a customer that you are anxious, annoyed, or
distracted, and should therefore be avoided, if possible. Such signals can also indicate that you are
nervous or lack confidence. Cues such as playing with or putting hair in your mouth, tugging at
clothing, hand-wringing, throat-clearing, playing with items as you speak (pencil, pen, or other
object), biting or licking your lips, or drumming your fingers or tapping on a surface with a pencil
or other object can all send a potentially annoying and/ or negative message.

Holding Hands near mouth

By holding your hands near your mouth, you will muffle your voice or distort your message. Also,
placing your hands over or in front of your mouth can send messages of doubt or uncertainty, or
can suggest that you are hiding something.

Nonverbal and verbal habits can lead to relationship breakdowns:

 Touching the customer.
 Scratching or touching parts of your body.
 Using pet phrases or speech patterns excessively.
 Talking endlessly without letting the customer speak.
 Talking about personal problems.
 Complaining about your job, employer, coworkers, or other customers.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

64
 SERVICES AND RELATIONSHIP MARKETING

3.6.2 Strategies for improving Nonverbal Communication

Nonverbal cues are all around us. Vocal and visual cues related to customers' feelings or
needs are important and may mean the difference between a successful or unsuccessful
customer service experiences. The strategy discussed in this section will help to improve
nonverbal communication skills.

Seek Out Nonverbal Cues

Too often, service providers miss important vocal clues related to customer feelings or needs
because they are distracted doing other things or not being attentive. These missed
opportunities can often mean the difference between a successful and unsuccessful customer
experience. Train yourself to look for nonverbal cues by becoming a "student of human
nature." Nonverbal cues are all around you, if you simply open your eyes and mind to them.
Start spending time watching people in public places (at supermarkets, malls, airports, bus
stops, school, or wherever you have the chance). Watch the behavior of others you see, and
the behavior of the people with whom they are interacting. Try to interpret the results of
each behavior. However, keep in mind that human nature is not exact and that many factors
affect the nonverbal cues used by yourself and others (culture, gender, environment and
many more). Be aware that you may be viewing through your own filters or biases, so
evaluate carefully. Also, look at clusters, or groups of nonverbal behaviors, and the
language accompany them instead of interpreting individual signals. These clusters might be
positive (smiling, open body posture, friendly touching) or negative (crossed arms, looking
away as someone talks, or angry facial expressions or gestures). Evaluating clusters can help
you gain an accurate view of what is going on in a communication exchange.

Activity 3.7
Based on the discussion made in the previous sections, discuss the benefits of a
customer focused behavior?

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

65
 SERVICES AND RELATIONSHIP MARKETING

Commentary
As you have learned in this unit, many different factors affect behavior and influence how
a customer perceives a service providers ability to provide good customer service. Because
of the competitive nature of business, organizations and customer service professionals
should strive to pull a head of the competition in any positive way possible. Simple
courteous nonverbal behavior can be one way to beat the service quality levels of other
companies. Here are some of the advantages garnered from a customer focused behavior.

Image Is Enhanced. First impressions are often lasting impressions. A more professional
impression is created when you and the organizational culture are customer-focused.
When your customers feel comfortable about you and the image projected, they are more
likely to develop a higher level of trust and willingness to be more tolerant when things do
go wrong occasionally.
Customer Loyalty Increases. People often return to organizations where they feel welcome,
serviced properly, and respected.

Word-of-Mouth Advertising Increases. Sending regular positive nonverbal messages can help
create a feeling of satisfaction and rapport. When customers are satisfied, and feel
comfortable with you and your organization, they typically tell three to five other people.
This increases your customer base while holding down formal advertising costs
(newspapers and other publications, television, and radio).

Complaints Are Reduced. When people are treated fairly and courteously, they are less likely
to complain. If they do complain, their complaints are generally directed to a lower level
(below supervisory level) and are generally expressed with low levels of anger. Simple
things like smiling or attentive actions can help customers relax and feel appreciated.

Employee morale and esteem increase. If employees feel that they are doing a good job
and get positive customer and management feedback, they will probably feel better about
themselves. This increased level of self-esteem affects the quality of service delivered. Keep
in mind your role in helping peers feel appreciated. They are often your internal customers
and expect the same consideration and treatment as your external customers expect.

Financial Losses Decrease. When customers are satisfied, they are less likely to file lawsuits,
steal be abusive toward employees (who might ultimately resign), and spread negative
stories about employees and the organization. Building good rapport through
communication can help in this area.

Employee- Customer Communication Improves. By treating customers in a professional,

courteous manner, you encourage them to freely approach and talk to you. Needs,
expectations, and satisfaction levels can then be more easily determined.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

66
 SERVICES AND RELATIONSHIP MARKETING

Summary
As many organizations move toward a more quality- oriented, customer- focused
environment, developing a fine- tuning policies, procedures, and systems to better identify
customer needs and meet their expectations will be crucial. Through a concerted effort to
perfect service delivery, organizations will be able to survive and compete in a global
economy. More emphasis must be placed on finding out what the consumer expects and
going beyond those expectations. Total customer satisfaction is not just a buzz phrase; it is a
way of life that companies are adopting in order to gain and maintain market share. As a
customer service professional it will be your job to help foster a customer- oriented service
environment.

Professional customer service helps highlight and define service culture. Everything
customers experience from the time they contact an organization and its employees. To
positively influence their opinion, you must constantly be alert for opportunities to provide
excellent service. Taking the time to provide a little extra effort can often mean the
difference between total customer satisfaction and service breakdown.

Providing service that makes a customer feel special can lead to customer satisfaction and
loyalty to you and your organization. By responding appropriately and in a positive manner
(verbally and nonverbally), you will increase your likelihood of success. When additional
information is needed, it is up to you to ask questions that will elicit useful customer
feedback. That lets the customer know you received the intended message. You must also
let your customers know that you’ll take action on their needs or requests.

Once you become aware of the potential and scope of nonverbal communication, it can be
one of the most important ways you have of sharing information and messages with
customers. Limitless messages can be conveyed through a look, a gesture, a posture, or a
vocal intonation. To be sure that the messages received are the ones you intended to send,
be vigilant about what you say and do and how you communicate. Also, watch carefully the
responses of your customers. Keep in mind that gender, culture, and a host of other factors
affect the way you and your customers interpret received nonverbal cues.

To avoid distorting customer messages, or sending inappropriate messages yourself, keep

these two points in mind: (1) Use a nonverbal cue receive from others as an indicator and
not as an absolute message. Analyze the cue in conjunction with the verbal message to more
accurately assess the meaning of the message. (2) Continually seek to improve your
understanding of nonverbal signals.

One final point: Remember that you are constantly sending nonverbal messages. Be certain
that they complement your verbal communication and say to the customer, "I'm here to
serve you."

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

67
 SERVICES AND RELATIONSHIP MARKETING

Self Assessment Questions

1. What are the six components of a customer service environment?
2. What are the key elements that make up a service culture?
3. What are some typical things that customers want and expect for developing a
mutually benefiting and continuing business relationship?
4. Recognizing, understanding and reacting appropriately to the body language of
others, as well as using positive body language yourself, allow you to communicate
with your customers more effectively. What are the 5 categories of nonverbal cues?

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

68
 SERVICES AND RELATIONSHIP MARKETING

THE SERVICE MARKTING MIX

Conceptualizing the service marketing mix

Given the differentiating characteristics of services, the concept of the marketing mix or
overall offering is more complex for services marketing. Some consideration of what might
be entailed in the service offering and how it can be designed or conceptualized is outlined
here.

The ‘product’ dimension of a service is predominantly intangible, therefore for marketers

and managers to identify, define and illustrate what the service entails it may need tangible
surrogates. These surrogates may include different tools to help customers and managers to
get to know the product, to distinguish between product features and product benefits and to
identify when variations are significant enough to be regarded as having created a different
or distinct service. Also the product dimension will be heavily dependent upon the human
influence, on how it is delivered and perceived.

The ‘pricing’ element is very closely associated with perceptions of value. Customers’
perceptions of value may be different and the intangible nature of the service product will
make it difficult to evaluate. Therefore for managers, costing is difficult and imprecise.
Furthermore many services are public services or charities and in such cases there may be
no direct price.

The ‘promotion’ dimension of the marketing mix is very closely related to the product
features. Given that there is no physical product to promote, marketers and managers rely
heavily on promoting an ‘image’. And because service products cannot be stored the
promotion message needs to focus on spreading as well as creating demand.

The ‘place or distribution’ aspect of the marketing mix is, in some ways, a ‘virtual’
concept. There is no physical distribution system. However because services are performed
they need to have a suitable environment for that performance. Therefore the location of
premises is vital. If the service has multiple outlets or is delivered in more than one
geographical region then the effective management of agents is important. This is always
difficult and even more so when the product is intangible.

Closely related to the place and distribution of the marketing mix is the ‘physical evidence’
aspect of the service experience. This is important in services marketing and management
because services have a physical environment or site which may encompass a building,
shape, lighting, means of orienting the customer, queues, crowding and methods of
stimulating interest and participation. These aspects of physical evidence also provide
tangible clues for customers to evaluate the service, and will contribute to the overall ‘image’
and ‘ambience’.

The service ‘process’ takes account of how the service is delivered, for example, the policies
and procedures that ensure an efficient and expert service. Management of the process
entails overseeing the pre-, during and post-service delivery experience of the customer, and
ensuring managerial and operational ‘attention to detail’ in all aspects of service delivery.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

69
 SERVICES AND RELATIONSHIP MARKETING

Inherent in the service marketing mix is ‘managing people’. There are many different
players or people involved in service delivery. Often people are ‘the service’. Customers are
also people and other customers and their interactions can have a large impact on the
overall service delivery. The different levels of staff and their interactions with customers are
important and need to be managed. In order to manage this aspect of the marketing mix
some consideration needs to be given to the appropriate selection and training of staff and
how to manage and communicate with the different levels of staff and management. Over
time people may need up-to-date training, specialized training programs and other
encouragement for developing job-related skills and competencies.

The next two units will address the expanded services marketing mix (people, process, and
physical evidence) and the traditional marketing mix (product, price, distribution, and
promotion) in detail.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

70
 SERVICES AND RELATIONSHIP MARKETING

UNIT 4 THE EXPANDED SERVICES MARKETING MIX

Learning Objectives
Upon completion of this unit, a student will be able to:
 Explain the traditional marketing mix in relation to service
 Describe the forms of physical evidence
 Explain the components of a physical evidence
 Discuss the servicescape usage
 Explain the major roles of a servicescape
 Illustrate the critical importance of service employees in creating customer
satisfaction and service quality.
 Demonstrate the challenges inherent in boundary-spanning roles.
 Provide examples of strategies for creating customer-oriented service delivery
through hiring the right people, developing employees to deliver service quality,
providing needed support systems, and retaining the best service employees
 Show how the strategies can support a service culture where providing excellent
service to both internal and external customers is a way of life.

4.1 Expanded Mix for Services

Because services are usually produced and consumed simultaneously, customers are often
present in the firm’s facility, interact directly with the firm’s personnel, and are actually part
of the service production process. Also, because services are intangible customers will often
be looking for any tangible cue to help them understand the nature of the service experience.
These facts have led services marketers to conclude that they can use additional variables to
communicate with and satisfy their customers. For example, in the hotel industry the design
and décor of the hotel as well as the appearance and attitudes of its employees will influence
customer perceptions and experiences.

Acknowledgment of the importance of these additional communication variables has led

services marketers to adopt the concept of an expanded marketing mix. In addition to the
traditional four p’s, the services marketing mix includes:
1. people
2. physical evidence and
3. process

4.2 People
It 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 the 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

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

71
 SERVICES AND RELATIONSHIP MARKETING

customer’s perceptions of the service. The service provider or contact person can be very
important.

In many service situations, customers themselves can also influence service delivery, thus
affecting service quality and their own satisfaction. For example, heath care patients greatly
affect the quality of service they receive when they either comply or don’t comply with
health regimens prescribed by the provider.

Customers not only influence their own service outcomes, but they can influence other
customers as well. In a theater, at a soccer game, or in a classroom, customers can influence
the quality of service received by others – either enhancing or detracting from other
customers’ experiences.

4.2.1 The Critical Importance of Service Employees

People, front line employees and those supporting them from behind the scenes, are critical
to the success of any service organization. People in the services marketing mix involves all
the 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.

Activity 4.1
What makes service employees so important in services marketing?

Commentary
Service employees play a critical role in services marketing because:
 Service employees are the service.
 Service employees are the organization in the customer’s eyes.
 Service employees are marketers.

In many cases, the contact employee is the service. For example, in most
personal services (e.g., haircutting, physical trainers, child care, cleaning,
maintenance, counseling, legal services) the contact employee provides the
entire service single handedly. The offering is the employee. Thus, investing
in the employee to improve the service parallels making a direct investment in
the improvement of a manufactured product.

Even if the contact employee doesn’t perform the service entirely, he or she
may still personify the firm in the customer’s eyes. All of the employees of a
law firm or health clinic-from the professionals who provide the service to the
receptionists and office staff-represent the firm to the client, and everything
these individuals do or say can influence customer’s perceptions of the
organization.

 Because contact employees represent the organization and can
directly influence customer satisfaction, they perform the role
of marketers. They physically embody the product and are
walking billboards from a promotional standpoint. Whether
acknowledged or not, actively selling or not, service employees
perform marketing functions. They can perform these
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
functions well, to the organization’s advantage, or poorly to the 72
organization’s detriment. In this unit we will examine
strategies for ensuring that service employees perform their
marketing functions well.
 SERVICES AND RELATIONSHIP MARKETING

4.2.2 Employee Satisfaction, Customer Satisfaction, and Profits

There is concrete evidence that satisfied employees make for satisfied customers and
satisfied customers can, in turn, reinforce employees’ sense of satisfaction in their jobs.
Some have even gone so far as to suggest that unless service employees are happy in their
jobs, customer satisfaction will be difficult to achieve.

Through their research with customers and employees Benjamin Schneider and David
Bowen have shown that both a climate for service and a climate for employee well-being are
highly correlated with overall customer’s perception of service quality. It is also found that
customer satisfaction to be strongly related to employee turnover. Ultimately there is
connection between employee retention levels, poorer quality service, and negative
customer reactions.

The service profit chain suggests that there are critical linkages among internal service quality;
employee satisfaction/productivity; the value of services provided to the customer; and ultimately
customer satisfaction, retention, and profits.

Revenue
Employee Growth
Retention
Internal Employee
Service Satisfaction External Customer Customer
Quality Service Satisfaction Loyalty
Value
Employee Profitability
Productivity

Figure 4.1 The service profit chain

Activity 4.2
Does the service profit chain model represent a causal relationship between
employee satisfaction and customer satisfaction?

Commentary
Service profit chain researchers are careful to point out that the model does not
suggest causality. That is, employee satisfaction does not cause customer
satisfaction; rather the two are interrelated and feed off each other. The
model does imply that companies exhibiting high levels of success on the
elements of the model will be more successful and profitable than those that
do not.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

73
 SERVICES AND RELATIONSHIP MARKETING

4.2.3 Service Quality Dimensions are Driven by Employee Behaviors

All of the five dimensions of service quality (reliability, responsiveness, assurance, empathy,
and tangibles) can be influenced directly by service employees.

Reliability: Delivering the service as promised is often totally within the control of front-line
employees. Even in the case of automated services (such as ATMs or automated ticketing
machines), behind-the-scenes employees are critical for making sure all of the systems are
working properly. When services fail or errors are made, employees are essential for setting
things right and using their judgment to determine the best course of action for service
recovery.

Responsiveness: Front-line employees directly influence customer perceptions of

responsiveness through their personal willingness to help and their promptness in serving
customers. Consider the range of responses you receive from different retail store clerks
when you need help finding a particular item of clothing. One employee may ignore your
presence, while another offers to help you search and calls other stores to locate the item.
One may help you immediately and efficiently, while another may move slowly in
accommodating even the simplest request.

Assurance: The assurance dimension of service quality is highly dependent on employees’

ability to communicate their credibility and to inspire trust and confidence. The reputation
of the organization will help, but in the end, individual employees with whom the customer
interacts confirm and build trust in the organization or detract from its reputation and
ultimately destroy trust. For startup or relatively unknown organizations, credibility, trust,
and confidence will be tied totally to employee actions.

Empathy: It is difficult to imagine how an organization would deliver “caring,

individualized attention” to customers independent of its employees. Empathy implies that
employees will pay attention, listen, adapt, and be flexible in delivering what individual
customers need. Organizations that leave this quality dimension to chance are likely to find
extreme variation in this dimension across employees and customer experiences.

Tangibles: Employee appearance and dress are important aspects of the tangibles dimension
of quality, along with many other factors that are independent of service employees (e.g.,
the service facility, décor, brochures, and signage.)

4.2.4 Boundary-Spanning Roles

Our focus in this unit is on front-line service employees who interact directly with
customers, although much of what is described and recommended can be applied to internal
service employees as well. The front-line service employees are referred to as boundary
spanners because they operate at the organization’s boundary. Boundary spanners provide a
link between the external customer and environment and the internal operations of the
organizations. They serve a critical function in understanding, filtering, and interpreting
information and resources to and from the organization and its external constituencies.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

74
 SERVICES AND RELATIONSHIP MARKETING

Who are these boundary spanners? What types of people and positions comprise critical
boundary-spanning roles? Their skills and experience cover the full spectrum of jobs and
careers. In industries such as fast food, hotels, telecommunication, and retail, the boundary
spanners are the least skilled, lowest-paid employees in the organization. They are order
takers, front-desk employees, telephone operators, store clerks, truck drivers, and delivery
people. In other industries, boundary spanners are well paid, highly educated professionals,
for example, doctors, lawyers, accountants, consultants, architects, and teachers.

No matter what the level of skill or pay, boundary-spanning positions are often high-stress
jobs. In addition to mental and physical skills, these positions require extraordinary levels
of emotional labor, frequently demand an ability to handle interpersonal and inter-
organizational conflict, and call on the employee to make real-time trade-offs between
quality and productivity on the job. Sometimes these stresses and trade-offs result in a
failure to deliver services as specified, which widens gap.

For successful accomplishment of their roles, boundary spanners need to possess the
following skills:
a) Mental and physical labor
b) Emotional labor
c) Ability to handle interpersonal and inter-organizational conflicts
d) Ability to maintain a quality/ productivity tradeoff

The term emotional labor was coined by Arlie Hochschild to refer to the labor that goes
beyond the physical or mental skills needed to deliver quality service. It means delivering
smiles, making eye contact, showing sincere interest, and engaging in friendly conversation
with people. Friendliness, courtesy, empathy, and responsiveness directed toward customers
all require huge amounts of emotional labor from the front-line employees who shoulder
this responsibility for the organization. Emotional labor draws on people’s feelings (often
requiring them to suppress their true feelings) to be effective in their jobs. A front-line
service employee who is having a bad day or isn’t feeling just right is still expected to put on
the face of the organization when dealing with customers. One of the clearest examples of
emotional labor is the story (probably apocryphal) of the flight attendant who was
approached by a businessman who said, “Let’s have a smile.” “Okay,” she replied, “I will
tell you what, first I’ll smile and then you’ll smile, okay?” He smiled first and she followed
him. “Good,” he said. “Now hold that for 15 hours,” and he walked away.

Many of the strategies we’ll discuss later in the unit can help organizations and employees
deal with the realities of emotional labor on the job. For the organization such strategies
include carefully selecting people who can handle emotional stress, training them in needed
skills (e.g., listening skills, problem solving), and teaching or giving them coping abilities
and strategies (e.g., job rotation, scheduled breaks, team-work).

Other companies train employees in how not to absorb a customer’s bad mood, by having
them spend hours role playing to suppress the natural reaction to return an insult with an
insult. Providing good physical working conditions and allowing employees to take
scheduled breaks, to rely on each other for support, and to rotate positions among the most
demanding front-line jobs also help to reduce the stress of excessive emotional labor.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
75
 SERVICES AND RELATIONSHIP MARKETING

Front line employees often face interpersonal and inter-organizational conflicts on the job.
Their frustration and confusion can, if left unattended, lead to stress, job dissatisfaction, a
dimensioned ability to service customers, and burnout. Because they represent the customer
to the organizations and often need to manage a number of customers simultaneously, front
liners inevitably have to deal with conflicts, including person/role conflicts,
organization/client conflicts, and inter client conflicts.

4.2.5 Strategies for Closing Gap

A complex combination of strategies is needed to ensure that service employees are willing
and able to deliver quality services and that they stay motivated to perform in customer
oriented, service-minded ways. As described in unit 1, we are focusing on strategies for
ensuring that service promises can be kept. These strategies for enabling service promises are
often referred to as internal marketing. By approaching human resource decisions and
strategies from the point of view that the primary goal is to motivate and enable employees
to deliver customer-oriented promises successfully, and organization will move toward
closing gap.

The strategies presented here are organized around four basic themes. To build a customer-
oriented, service minded workforce, an organization must:
I. Hire the right people
1. Compete for the best people
2. Hire for service competencies & service inclination
3. Be the preferred employer

II. Develop people to deliver service quality

1. Train for technical & interactive skills
2. Empower employees
3. Promote team work

III. Provide the needed support systems

1. Develop service oriented internal processes
2. Provide supportive technology and equipment
3. Measure internal service quality

IV. Retain the best people

1. Measure and reward strong service performers
2. Treat employees as customers
3. Include employees in the company vision

Within each of these basic strategies are a number of specific sub strategies for
accomplishing the goal.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

76
 SERVICES AND RELATIONSHIP MARKETING

I. Hire the Right People

One of the best ways to close gap 3 is to start with the right service delivery people from the
beginning. This implies that considerable attention should be focused on hiring and
recruiting service personnel. To that end service providing companies should:

1. Compete for the Best people To get the best people, an organization needs to
identify who the best people are and compete with other organizations to hire them.
Leonard Berry and A. Parasuraman refers to this as “Competing for talent market
share”. Given the multidimensional nature of service quality service is reliable,
responsive, empathetic-service employees should be screened for more than their
service competencies. They must also be screened for service inclination.

2. Hire for service competencies and Service inclination Once potential employees
have been identified, organizations need to be conscientious in interviewing and
screening to truly identify the best people from the pool of candidates. It has been
suggested that service employees need two complementary capacities:
a) competencies and
b) service inclination.

Service competencies are the skills and knowledge necessary to do the job. In many
cases, competencies are validated by achieving particular degrees and certifications.
In other cases, service competencies may not be degree related, but may instead
relate to basic intelligence or physical requirements. A retail clerk, for example, must
possess basic math skills and the potential to operate a cash register. An airport
shuttle driver must be able to drive a large van and be physically capable of loading
and unloading heavy luggage. In a typical applicant pool for a service job, service
competencies vary widely.

Employees must also be screened for service inclination - their interest in doing
service related work - which is reflected in their attitudes toward service and
orientation toward serving customers and others on the job. Self-selection suggests
that most service jobs will draw applicants with some level of service inclination, and
that most employees in service organizations are inclined toward service. However,
some employees clearly have a greater service inclination than others. Research has
shown that service effectiveness is correlated with having service-oriented personality
characteristics such as helpfulness, thoughtfulness, and sociability. This same research
defines service orientation as a syndrome containing elements of good adjustment,
likeability, social skill, and willingness to follow rules.

An ideal selection process for service employees assesses both service competencies
and service inclination.

3. Be the preferred Employer One way to attract the best people is to be known as the
preferred employer in a particular industry or in particular location. To be a
preferred employer, firms should have an equitable and attractive benefit packages
with a conducive working environment. Other strategies that support a goal of being

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

77
 SERVICES AND RELATIONSHIP MARKETING

the preferred employer include providing extensive training, career and advancement
opportunities, excellent internal support, and attractive incentives, and offering
quality goods and services that employees are proud to be associated with.

II. Develop People to Deliver Service Quality

To grow and maintain a workforce that is customer oriented and focused on delivering
quality, an organization must develop its employees to deliver service quality. That is, once
it has hired the right employees, the organization must train and work with these individuals
to ensure service performance.
1. Train for Technical and Interactive Skills To provide quality service, employees
need ongoing training in the necessary technical skills and knowledge and in process
or interactive skills. Examples of technical skills and knowledge are working with
accounting systems in hotels, cash machine procedures in retail store, underwriting
procedures in an insurance company, and any operational rules the company has for
running its business.

In addition to the type of technical skills and knowledge training just described,
service employees need training in interactive skills that allow them to provide
courteous, caring, responsive, and empathetic service. Successful companies invest
heavily in training and make sure that the training fits their business goals and
strategies.

It isn’t just front-line service personnel who need this combination of service skills
and interactive training. Support staff, supervisors, and mangers need service
training as well. Unless contact employees experience the same values and behaviors
from their supervisors, they are unlikely to deliver high-quality service to customers.

2. Empower Employees Many organizations have discovered that to be truly

responsive to customer needs, front-line providers need to be empowered to
accommodate customer requests and to recover on the spot when things go wrong.
Empowerment means giving employees the desire, skill, tools, and authority to serve the
customer. While the key to empowerment is giving employees authority to make
decisions on the customer’s behalf, authority alone is not enough. Employees need
the knowledge and tools to be able to make these decisions, and they need incentives
that will encourage them to make the right decisions.

Potential Costs and Benefits of Empowerment

Benefits
o Quicker online response to customer needs during service delivery.
o Quicker online responses to dissatisfied customers during service recovery.
o Employees feel better about their jobs and themselves
o Employees will interact with customers with more warmth and enthusiasm.
o Empowered employees are a great source of service ideas
o Great word-of-mouth advertising from customers
Costs

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

78
 SERVICES AND RELATIONSHIP MARKETING

o A potential greater dollar investment in selection and training

o Higher labor costs
o Potentially slower or inconsistent service delivery

3. Promote Teamwork The nature of many service jobs suggests that customer
satisfaction will be enhanced when employees work as teams. Because service jobs
are frequently frustrating, demanding, and challenging, a teamwork environment will
hip to alleviate some of the stresses and strains. Employees who feel supported and
that they have a team backing them up will be better able to maintain their
enthusiasm and provide quality service.

III. Provide Needed Support Systems

To be efficient and effective in their jobs, service workers require internal support systems
that are aligned with their need to be customer focused. This point cannot be
overemphasized. In fact, without customer-focused internal support and customer-oriented
systems, it is nearly impossible for employees to deliver quality service no matter how much
they want to. For example, to be effective a patient-focused doctor requires that the hospital
have internal systems that allow him/her to get access to patient information, modern
surgical and testing equipment, and staff who share her commitment to patient satisfaction.
The following sections suggest strategies for ensuring customer-oriented internal support.

1. Develop Service Oriented Internal Processes

To best support service personnel in their delivery of quality service on the front line,
an organization’s internal processes should be designed with customer value and
customer satisfaction in mind. In other words, internal procedures must support
quality service performance. In many companies internal processes are driven by
bureaucratic rules, tradition, cost efficiencies, or the need of internal employees.
Providing service-and customer-oriented internal processes can therefore imply a
need for total redesign of systems which has become known as “process
reengineering.” While developing service-oriented internal processes through
reengineering sounds sensible, it is probably one of the most difficult strategies to
implement, especially in organizations that are steeped in tradition.

2. Measure Internal Service Quality

One way to encourage supportive internal service relationships is to measure and
reward internal service. By first acknowledging that everyone in the organization
has a customer and then measuring customer perceptions of internal service quality,
an organization can begin to develop an internal quality culture. Internal customer
service audits and internal service guarantees are two strategies used to implement a
culture of internal service quality.
 Through the audit, internal organizations identify their customers, determine
their needs, measure how well they are doing, and make improvements. The
process parallels market research practices used for external customers.

 Internal service guarantees can augment the measurement of internal service

quality. The information gained from customers who invoked the guarantee was
invaluable in making improvements and enhancing internal service quality.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
79
 SERVICES AND RELATIONSHIP MARKETING

A cautionary note: One risk of measuring and focusing on internal service quality
and internal customers is that the people can sometimes get so wrapped up in
meeting the needs of internal customers that they forget they are in business to serve
the ultimate, external customers. In measuring internal service quality, therefore, it
is important to constantly draw the linkages between what is being delivered
internally and how it supports the delivery of the final service to customers.

3. Provide Supportive Technology and Equipment

When employees don’t have the right equipment, or their equipment fails them, they
can be easily frustrated in their desire to deliver quality service. To do their jobs
effectively and efficiently, service employees need the right equipment and
technology. Having the right technology and equipment can extend into strategies
regarding workplace and work station design.

IV. Retain the Best People

An organization that hires the right people, trains and develops them to deliver service
quality, and provides the needed support must also work to retain the best ones. Employee
turnover, especially when the best service employees are the ones leaving, can be very
detrimental to customer satisfaction, employee morale, and overall service quality. And,
just as they do with customers, some firms spend a lot of time attracting employees but then
tend to take them for granted (or even worse), causing these good employees to search for
job alternatives.

1. Treat Employees as Customers

If employees feel valued and their needs are taken care of, they are more likely to
stay with the organization. Many companies have adapted the idea that employees
are also customers of the organization, and that basic marketing strategies can be
directed at them. Most successful companies have a goal of “Becoming the Best
place to Work” by doing the following:
 Treating employees as customers.
 Using employee input and a fact-based approach for decision making in the
design and implementation of human resources policies, programs, and
processes.
 Measuring employee satisfaction and trying to continuously improve the
work place environment.
 Benchmarking and incorporating best practices.

2. Measure and Reward Strong Service performers

If a company wants the strongest service performers to stay with the organization, it
must reward and promote them. This may seem obvious, but often the reward
systems in organizations are not set up to reward service excellence. Reward systems
may value productivity, quantity, sales, or some other dimension that can potentially
work against a good service. Even those service workers who are intrinsically
motivated to deliver high service quality will become discouraged at some point and
start looking elsewhere if their efforts are not recognized and rewarded.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

80
 SERVICES AND RELATIONSHIP MARKETING

Alternatively, they may stop providing high levels of service and simply sink to meet
the service performance of the lost common denominator. Reward systems need to
be linked to the organization’s vision and to outcomes that are truly important. For
instance, if customer retention is viewed as a critical outcome, service behaviors that
increase retention need to be recognized and rewarded.

3. Include employees in the Company’s Vision

For employees to remain motivated and interested in sticking with the organization
and supporting its goals, they need to share an understanding of the organization’s
vision. People who deliver service day in and day out need to understand how their
work fits in to the big picture of the organization and its goals. When the vision and
direction are clear and motivating, employees are more likely to remain with the
company through the inevitable rough spots along the path to the vision.

4.3 Physical Evidence and the Servicescape

4.3.1 Meaning of Physical evidence and Servicescape
Physical evidence is the environment in which the service is delivered and where the firm
and the customer interact, and any tangible commodities that facilitate performance or
communication of the service. The first part of this definition encompasses the actual
physical facility where the service is performed, delivered, and consumed; throughout this
unit the physical facility is referred to as the servicescape.

Because services are intangible, customers often rely on tangible cues, or physical evidence,
to evaluate the service before its purchase and to assess their satisfaction with the service
during and after consumption. General elements of physical evidence are shown in the
following table. They include all aspects of the organization’s physical facility (the
servicescape) as well as other forms of tangible communication. Elements of the
servicescape that affect customers include both exterior attributes (such as signage, parking,
landscape) and interior attributes (such as design, layout, equipment, décor).

Table 4-1 Elements of physical evidence

Servicescape Other tangibles
Facility Exterior Business cards
Exterior design Stationery
Signage Billing statements
Parking Reports
Landscape Employee dress
Surrounding Uniforms
environment
Facility Interior Brochures
Interior design Internet/web pages
Equipment
Signage
Layout

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

81
 SERVICES AND RELATIONSHIP MARKETING

Activity 4.3
Try to identify the servicescape and other tangibles needed for effective service delivery in
the insurance, health care, air lines, and express mail industry.

Commentary
Service Servicescape Other tangibles
Insurance Not applicable Policy itself
Billing statements
Company brochure
Letters/cards

Hospital Building exterior Uniforms

Parking Reports
Waiting areas Billing statements
Admission office
Patient care room
Medical equipment
Recovery room
Airline Airline gate area Tickets
Airplane exterior Food
Airplane interior (décor, uniforms
seats, air quality)
Express mail Not applicable Packaging
Trucks
Uniforms
computers

4.3.2 Types of Service Scape

Organizations differ in terms of who the servicescape will actually have an effect on. That is,
who actually comes into the service facility and thus is potentially influenced by its design –
customers, employees, or both groups. The three types of service organizations based on
variations in form arnd use are:
1. Self service
2. Remote service and
3. Interpersonal service

In a self service environment the customer performs most of the activities and few if any
employees are involved. Examples include ATM’s, movie theaters etc. In these primarily
self-service environments the organization can plan the servicescape focusing exclusively on
marketing goals such as attracting the right market segment and making the facility pleasing and
easy to use.

In a remote service there is little or no customer involvement with the servicescape.

Telecommunication, utilities, financial consultants, editorial, and mail-order services are

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

82
 SERVICES AND RELATIONSHIP MARKETING

examples of services that can be provided without the customer ever seeing the service
facility. In these remote services, decision about how the facility should be designed can focus on
the employees’ needs and preferences almost exclusively. The place can be set up to keep employees
motivated and to facilitate productivity, teamwork, operational efficiency, or whatever
organizational behavior goal is desired without any consideration of customers, since they
will never need to see the servicescape.

Interpersonal services are placed between the two extremes and represents situations where
both the customer the employee must be present in the servicescape. Examples include
hotels, banks, and educational settings. In these cases the servicescape must be planned to
attract, satisfy, and facilitate the activities of both customers and employees simultaneously.
Special attention must also be given to how the servicescape affects the nature and quality
the social interactions between and among customers and employees.

Activity 4.4
Give examples of service organizations that best represent the three types of organizations by
servicescape usage

Commentary
Servicescape usage Examples
Self service ATM
(customer only) Movie theaters
Express mail drop-off facilities
Self service entertainment like golf
Interpersonal service Hotel
(both customer and employee) Restaurant
Hospital
Bank
Airline
School

Remote service Telephone company

(employee only) Insurance company
Utility

4.3.3 Roles of the Servicescape

In service giving organizations servicescape serves the package of the core benefit,
facilitator, socialize and differentiator. Each of these servicescape roles are discussed below.

1. Package
Similar to a tangible product’s package, the servicescape and other elements of physical
evidence essentially “wrap” the service and convey an external image of what is “inside”
to consumers. Product packages are designed to portray a particular image as well as to
evoke a particular sensory or emotional reaction. The physical setting of a service does
the same thing through the interaction of many complex stimuli. The servicescape is the
outward appearance of the organization and thus can be critical in forming initial
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
83
 SERVICES AND RELATIONSHIP MARKETING

impressions or setting up customer expectations - it is a visual metaphor for the

intangible service. This packaging role is particularly important in creating expectations
for new customers and for newly established service organizations that are trying to
build a particular image. The packaging role extends to the appearance of contact
personnel through their uniforms or dress and other elements of their outward
appearance.

2. Facilitator
The servicescape can also serve as a facilitator in aiding the performances of persons in
the environment. How the setting is designed can enhance or inhibit the efficient flow of
activities in the service setting, making it easier or harder for customers and employees
to accomplish their goals. A well-designed, functional facility can make the service a
pleasure to experience from the customer’s point of view and a pleasure to perform from
the employee’s. On the other hand, poor and inefficient design may frustrate both
customers and employees.

3. Socializer
The design of the servicescape aids in the socialization of both employees and customers
in the sense that it helps to convey expected roles, behaviors, and relationships. For
example, a new employee in a professional services firm would come to understand
his/her position in the hierarchy partially through noting his/her office assignment, the
quality of his/her office furnishings, and his/her location relative to others in the
organization. The design of the facility can also suggest to customers what their role is
relative to employees, what parts of the servicescape they are welcome in and which are
for employees only, how they should behave while in the environment, and what types
of interactions are encouraged.

4. Differentiator
The design of the physical facility can differentiate a firm from its competitors and signal
the market segment the service is intended for. Given its power as differentiator,
changes in the physical environment can be used to reposition a firm and/or to attract
new market segments. The design of a physical setting can also differentiate one area of
a service organization from another. This is commonly the case in the hotel industry
where one large hotel may have several levels of dining possibilities, each signaled by
differences in design. Price differentiation is also often partially achieved through
variations in physical setting.

4.3.4 Marketing Strategies for the Service Environment

Service firms should take four steps to maximize the impact of their environment.
1. Service firms should identify their operational strategy.
2. Service firms must identify the appropriate servicescape position that corresponds
with its operational position.
3. Service firms should identify the desired behaviors they wish to elicit from the
servicescape.
4. Service firms need to identify the servicescape factors that will enhance the desired
behaviors.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

84
 SERVICES AND RELATIONSHIP MARKETING

The four steps are illustrated in figure 4.5 about the steps to maximize impact of
service environment.

Table 4.2: Steps to maximize impact of service environment

Maximizing the service environment

1. Identify the firm’s operational position.
2. Identify the appropriate servicescape position.
3. Identify desired behaviors to be elicited by the
servicescape.
4. Identify servicescape factors that will enhance
desired behaviors.

4.3.4.1 Positioning of the Servicescape

Companies face a difficult question when it comes to designing a service facility. The
primary questions that need to be answered are: whose needs are paramount in terms
of facility design? Should the facility be designed to focus on the needs of customers?
Should the facility be designed to focus primarily on the needs of employees?
Perhaps it should be designed to meet the needs of both. Then, the question of the
firm itself arises. Should the facility be designed to meet the needs of the firm? If so,
does this mean that neither the customer’s nor the employee’s needs will be fully
met? The answer lies in the operational position chosen by the firm.

The servicescape of the firm should match the firm’s operational position and service
firms have three possible operational positions.

1. Customization Operational Approach: For firms using the customization

operational approach, the servicescape should be designed to focus on the needs of
customers. For a four-star restaurant in Addis Ababa, this would mean
comfortable chairs for the guests to sit in while dining. It may mean subdued
lighting and colorful décor. The distance between tables may be greater to allow
guests more privacy and greater comfort.

2. Cost Efficiency Approach: For firms choosing the cost efficiency approach, the
needs of the firm should be paramount. The physical setting should increase the
staff’s efficiency and productivity. The physical setting should allow the firm to
maximize the number of customers it can serve. Seats at a fast food restaurant are
usually hard. Lighting is bright. Décor is simple. All of these factors encourage
customers to eat more quickly. Some fast food units even pipe in fast paced music
to speed customers up.

3. Service Quality Approach: Firms choosing the service quality approach will use
different designs depending on whether technical quality or functional quality is
emphasized. Firms using functional quality will want to design the facility to focus on
the needs of customers, firms using technical quality will want to design the service to

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

85
 SERVICES AND RELATIONSHIP MARKETING

focus on the needs of employees. The figure below summarizes whose need should
be paramount for each of the three operational positions.

Cost efficiency

Firm
(Technical)
Employees
Service
Customers Customization
Quality
(Functional)
Figure 4.2 whose needs should be emphasized by the environment?

4.3.4.2 Designing the Service Environment

Each of the four dimensions of the service environment will impact customer behavior
through cognitive, effective, or physiological reactions to the environment. Employees,
likewise, are affected by each of the four dimensions. Managing the servicescape requires:
1. Selecting the correct location for the facility
2. Creating the right physical facility appearance
3. Monitoring the ambient conditions and
4. Managing the interpersonal conditions.

4.3.4.2.1 Location
In choosing a site location, services must examine five criteria:
 Operational position
 Merchantability
 Traffic interception
 Cumulative competitive attraction
 Competitive compatibility

Recall that, merchantability refers to the distance from which a customer can make a
transaction. Traffic interception refers to the type and volume of both vehicular and
pedestrian traffic that passes by a business. Cumulative competitive attraction refers to the
drawing power of a cluster of similar and complementary businesses. Competitive
Compatibility is the degree that businesses inter-change customers.

Operational Position
Choosing a location for the service is the first critical decision management must make in
the process of designing an appropriate servicescape. The location depends on the firm’s
operating position. Firms using a cost efficiency approach must locate the business where
they can generate a high volume of customer traffic. Firms choosing a customization
approach will want to locate the business where they can obtain the prestige and image that
will impress their customers. Firms with service quality approach will want to make their

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

86
 SERVICES AND RELATIONSHIP MARKETING

customer contact component convenient for their customers. The support component
should be in a low-cost area. If the customer contact and support functions cannot be
separated, then priority would be given to the customer contact component.

Merchantability
Services high in merchantability can be conducted without the customer being physically
present. Services low in merchantability either require the customer to come to the service
or the service to go to the customer. If the customer is required to go to the service, the site
location becomes more critical. Cost efficient operational services must be sure their facility
is convenient for customers. If the firm has chosen a service quality approach, the physical
site is not as critical but it is still important. For customization approaches, the site criterion
changes from one that is convenient for customers to one that is impressive and coveys a
specific image to the customer.

Activity 4.5
How do you describe the relationship between merchantability and location?
Give examples of service organizations with high and low merchantability and
the importance of location for their success.

Commentary
As the merchantability of the service increases, the importance of the actual site
location decreases. A travel agency that conducts 80% of its business over the
telephone is not concerned about site location as a beauty salon that requires
customers to come to the facility.

Traffic Interception
Service businesses that rely on volume must be located where a large number of vehicles or
pedestrians pass by their facility. In addition to volume, service firms still want to examine
the type of traffic. Being located on a limited-access highway would be less attractive than
being located on a city street with the same volume of traffic since city traffic is more likely
to stop. In terms of pedestrian traffic, service providers must identify both the quantity and
type of pedestrians. To be viable, the pedestrian traffic must be consistent with the customer
base for that service. For example, tourist type services will want the pedestrians to be
tourists.

Cumulative Competitive Attraction

Some services benefit by being located in a cluster of similar business or complementary
businesses. Restaurants and hotels appear to attract more business when they are located in
clusters than when they are isolated. Medical offices are often located in clusters. However,
with medical offices, the cluster is usually created by offering complementary services rather
than the same types of services. This allows patients the opportunity to see a specialist
without having to leave the medical complex.

If the cluster offers complementary choices, each service will benefit. For example, if a fast-
food restaurant is located in a cluster of fast-food restaurants there would be limited positive
impact of cumulative attraction. However if the cluster offers services that are having
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
87
 SERVICES AND RELATIONSHIP MARKETING

complementary characteristics allowing consumers some choices, then the cluster would
benefit.

Activity 4.6
Give example of a cluster of organizations in a retail and hotel businesses which
complement each other and mutually benefit from being located in similar sites.

Commentary
In the retail sector having clothing stores, shoe stores, and jewelry stores within one
location allows customers to shop for complementary goods. Within the service sector,
complementary clusters are less common.

Services which could locate near a hotel and complement their services would be dry
cleaners, amusement parks, car rental agencies, restaurants, and beauty salon. Many of
these services would be used by guests of a hotel.

The concept of cumulative attraction is most important for services focusing on the cost
efficiency operational approach and least important for services using the customization
approach. For services using the service quality approach, the importance of competitive
attraction depends on the volume of customers desired. Hotels often benefits from being in a
cluster because most guests stay only one or two nights. The hotel needs a constant flow of
customers. For physicians, the opposite is true. They tend to develop long term relationships
with patients, so being in a cluster of other medical specialists is not as critical.

Competitive Compatibility
The more businesses can interchange customers, the greater the benefit of being in cluster
with other businesses. Competitive compatibility is important to services such as automobile
rental agencies. Locating at or near hotels and airports allows an interchange of customers.
Tourist attractions and hotels both benefit from competitive compatibility. There is a mutual
interchange of customers. The same is true for restaurant and hotels and for airports and
hotels.

However, competitive compatibility is not important to some services such as Attorneys.

Rarely would there be an interchange of clients with another business. The same would be
true for dental services and financial services.

4.3.4.2.2 Physical Facility

Components of the physical facility which impact both customers and employees include
the exterior appearance and the interior décor, layout, furniture, and equipment. For new
potential customers, the exterior of the facility is an important determinant in the purchase
decision. Once an individual has patronized a service, the exterior appearance becomes less
critical. The table below highlights the different approaches of physical facility design that
would be used by firms based on their operational position.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

88
 SERVICES AND RELATIONSHIP MARKETING

Table 4.3 Focus of Facility Design Based on the Firm’s Operational Position
Operational Position Exterior of facility Interior of facility
Cost efficiency Designed to attract customers Maximize efficiency and
productivity.
Customization Must match image of firm Should focus on meeting
customer needs.
Technical Service Should convey technical Should maximize quality
Quality expertise of firm. output.
Functional Service Should convey functional Should be oriented toward
Quality image to customers customers.

Exterior Appearance
For services using the cost efficiency operations approach, the exterior appearance is
especially important. Most services in this sector need significant volume to survive, which
means the firm must continually attract new customers. Current buyers tend to display
repeat purchase behavior rather than firm loyalty so they are more cognizant of tangible
cues such as appearance.

Services using the customization operational approach must ensure the exterior appearance
of the facility matches the image they wish to convey to the customer. In most cases, these
types of services want customers to believe they will be treated in a special way. Having an
exterior that looks prestigious will aid in establishing this image.
Firms employing a service quality operational approach will want to design the exterior of
the facility to convey an image of either high technical service or high functional service.
For example security is important to travelers in the selection of lodging, so hotels will want
to design their facility in such a way that it appears to be safe. Business travelers, especially
businesswomen, often avoid hotels where the room door opens to the outside. If travelers do
not perceive a hotel to be safe, they will likely look for another option.

Interior appearance
Interior items that affect the service atmosphere include the color of the walls and the
material they are made of, the signs that are posted, and the decorations, furniture
equipment, and personal artifacts found on desks and walls. Employees who are allowed to
personalize their work area with family photos and other personal memorials develop
stronger positive beliefs about the company. It also coveys to customers that employees are
part of the company and as a result should take pride in their work.

A very important component of the interior décor is color. It aids in creating a first
impression in the minds of consumers. Color is perhaps the strongest interior décor
component in terms of getting a consumer’s attentions and stimulating approach behaviors.
Colors such as red, yellow, and orange are classified as warm colors while blue, green, and
violet are cool colors. Warm colors give customers of a service the impression of a warm,
comfortable service environment. Cool colors tend to create a formal type of service
environment. By properly using colors, a service firm can create almost any type of
environment it desires. By combining colors appropriately, service environments can
stimulate the moods of both customers and employees. To create a formal and pleasant
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
89
 SERVICES AND RELATIONSHIP MARKETING

atmosphere for the professional service, combinations of blues and greens are the best. To
create an exciting environment for young buyers, using some combinations of the warm,
bright colors would be the best. However, to create the same exciting environment for adults
would require the warm colors to be of softer tones.

Ambient Conditions
Ambient conditions affect customers and employees physiologically. These factors include
such things as the temperature of the facility, noise, music, other sounds, air quality, and
odors. Ambient conditions impact one of the five senses. If the temperature is too cold or
too hot, customers will feel uncomfortable. They will display avoidance behaviors. They
will likely choose another firm for the next purchase and may even leave the current firm
early. Employees working under these conditions will become irritable and not provide the
level of customer service they should. Dysfunctional behaviors such as absenteeism,
tardiness, and poor work habits will often results.

Interpersonal Factors
Service atmospheres are also affected by interpersonal factors such as the appearance,
behavior, and mood of both employees and customers. Crowding and its impact on
individuals is another factor. All of these interpersonal elements create either cognitive of
affective responses which in turn lead to specific behaviors.

4.3.4.3 Employee Appearance and Behavior

The appearance of service personnel will often affect customers’ cognitive belief about the
quality of service they will receive. To control the image its employees convey to customers,
many services require uniforms. Airlines, plumbing repair, and automobile repair are some
of the services that require uniforms. Firms that do not require uniforms will often have a
minimum dress code for their employees. The purpose of dress codes is to ensure employee
appearances will convey the cognitive and affective moods desired by management.

The behaviors and moods of service personnel will have an effect on customer. The reverse
can also occur. Behaviors and moods of customer can affect employees. For example, a
customer who is in a bad mood is often harder to deal with than a customer in a good
mood. Employees, in turn, will normally try harder to please a customer in a good mood
than one who is in an irritable or depressed mood. An employee who is normally cheerful
and happy may refrain from any expressions of happiness while dealing with a customer in
an irritable mood. Employee moods and behaviors impact customers. An employee who is
in a depressed mood will often respond to customers through actions alone, with little or no
emotion. The customer will feel that the employee doesn’t care and isn’t trying to do a good
job. Even if the technical part of the service is adequate, the customer will often be
dissatisfied with the functional part of the service.

4.3.4.4 Impact of Crowding

Although crowding is in the eye of the beholder, it normally produces a negative reaction
and avoidance behaviors. Customers tend to avoid service providers that are perceived to be
too crowded. For example, an individual who sees a video rental store that is crowded may
decide to go to another store. If another store is not convenient, they may postpone their

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

90
 SERVICES AND RELATIONSHIP MARKETING

planned purchase until another time. If waiting is not feasible, they may go into the video
rental store, but the amount of time spent browsing will be reduced. A reduction in
browsing normally translates into fewer video rentals.

Customer perceptions of crowding are affected by four factors:

 Environmental cues: Environmental cues include such items as the number of people
in a facility, the loudness of the music or noise, and a cluttered layout.
 Shopping motives: Shopping motives are either task-oriented or non-task oriented.
Constraints are risk and time pressure. Given the same density of customers in a service
business, a task-oriented individual will perceive it to be more crowded than a non-task
oriented customer. A task-oriented customer is one who stops at a service such as video
rental store to rent a movie to watch that evening. A non-task oriented customer would
be one who goes to the video rental store just to browse through the new movies to see
what’s available. This individual may or may not rent a movie. Task-oriented
individuals will notice density cues more frequently that non-task oriented individuals.
 They will notice how many other customers are in the place. They will notice all the
movies customers have taken and are holding to check out. They will perceive that the
density of customers appears to be greatest where they want to look.
 Constraints: Time or risk pressures increase the feeling of crowding by task-oriented
individuals. If a customer has only 10 minutes to select a movie, he or she will feel the
crowding is greater than someone who is not facing a time limitation. The line to check
out will seem longer. Getting help from store personnel will seem more difficult. Other
customers will appear to have all of the good movies.
 Expectations of crowding: If customers expect a service facility to be crowded, their
expectations are reduced and they tend to be less dissatisfied with the crowded
environment. For example, if a customer expects the video rental store to be crowded
because it is the day before a holiday, she will be mentally prepared for it. She will not
be as likely to notice the density cues. She will expect to shuffle around other customers
to see movies. She will expect many of the good movies to be checked out. She will
even expect to wait a long time to check out, and if she needs help, she will expect the
employees to take longer than usual or not to be available to help her at all.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

91
 SERVICES AND RELATIONSHIP MARKETING

Activity 4.7
Try to identify the short term and long term effects of crowding.

Commentary
Crowding has both short-term and long-term effects on the behavior of customers. Short-term
effects include negative feelings and in-service adaptive behaviors. Long-term effects include
both cognitive and behavioral responses.

The most common short-term effect of crowding is in terms of affective responses. Customers
often will feel they are being confined or constrained. They will become tense and nervous.
They may even show signs of being confused. In addition to the affective feelings, customers
will normally adjust their purchase strategy. Several in-service adjustments will be made.
Most will make an attempt to reduce the amount of time they planned to spend in the
facility. A customer planning to bowl three games in a crowded bowling center may bowl
only one or two games. A customer will limit his conversation with already-busy employees,
because talking to them will require the customer to be in the facility longer.

Customers will often limit their requests or wait to make a purchase when it is not as
crowded. A customer who planned to purchase a desert at a crowded restaurant may decide
not to make the purchase. A customer intending to buy popcorn in a crowded movie theater
lobby may decide to do without it or get it later during the show.

The long-term effects of crowding are more serious. Customers have less confidence that they
have made the best overall selection. For example, at a crowded video rental store, customers
might feel that the movie they selected was not the best choice or the one they would have
made in an uncrowded environment. They sometimes feel they selected the wrong store to
patronize. In general, they are dissatisfied with the service experience. In addition, crowding
tends to damage the image consumers have of the business establishment itself.

In addition to these cognitive responses, customers often modify their future purchase
intentions. They will make a mental note of the time, place, and conditions that created the
crowded situation. In the future they will avoid going at a time they believe it will be
crowded. If they cannot avoid the crowd, they may search for another business to go to that
will not be as crowded. To a service firm, these long-term effects are the most serious since it
often involves a loss of customers to a competitor.

Strategies to Reduce the Impact of Crowding

Two categories of strategies used to reduce the impact crowding on customers are
operations management and perceptions management.

Operations management involves making changes in the servicescape and

operations of the firm to reduce the number of individuals in the facility. In
operations management, the first step management should take is to study the layout
of their physical facility. Sometimes changing the layout can reduce crowding. A
video rental store may be able to reduce crowding by rearranging displays, furniture,
and video arrangements. The same number of people may be in the facility, but if
they are spread throughout the facility, density is reduced. Occasionally, a facility
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
92
 SERVICES AND RELATIONSHIP MARKETING

may need to reduce its capacity. A restaurant may need to reduce the number of
tables in the facility so they are not as close together. Although fewer customers can
be served at peak times, this may be wiser than having customers who will not come
back because they didn’t like the crowded eating conditions.

Another operations management strategy is to physically control the number of

customers inside a facility at any one time so crowding does not occur. A
recreational theme park or a tourist site will often make customers wait outside the
facility until some of the current customers have left. This method prevents an
overcrowding situation that causes customer dissatisfaction. If a firm controls the
number of people who enter to its facility at any one time, then when the facility
reaches a certain number inside, employees stop letting visitors in until others have
left. This prevents overcrowding that would diminish the enjoyment at the facility.

A further operations management strategy is to hire more customer contact people to

wait on customers. Fast-food restaurants use this strategy during peak meal times.

Perceptions management involves reducing only customer perceptions of crowding.

Perceptions management strives to modify customer perceptions of crowding
without actually reducing the density of people. One method of doing this is to use
signs to help customers. For instance, a video rental store could use signs to identify
the location of popular videos. Customers will be able to locate videos quicker. This
strategy is especially beneficial to task-oriented shoppers. They will not perceive the
facility to be as crowded since the crowd did not interfere with the fulfillment of their
task.

Ambient factors such as temperature, music, and lighting can be used to reduce the
perception of crowding. A facility that is hot will be perceived to be more crowded
than one that is cool. Fast, loud music tends to make individuals more aware of
crowded conditions while soft, quiet music tends to reduce the perceptions of
crowding. Subdued, soft lighting can be used to reduce perceptions of crowding.

4.4 Process
Process covers the actual procedures, mechanisms, and flow of activities by which the
service is delivered, i.e., the service delivery and operating systems. The actual delivery
enhances the customer’s experiences, or the operational flow of the service. It also provides
customers with evidence on which to judge the service. Some services are very complex,
requiring the customer to follow a complicated and extensive series of actions to complete
the process. Highly bureaucratized services frequently follow this pattern, and the logic of
the steps involved often escapes the customer. Another distinguishing characteristic of the
process that can provide evidence to the customer is whether the service follows a
production-line/standardized approach/ or whether the process is an
empowered/customized/ one. None of these characteristics of the service is inherently
better or worse than another. Rather, the point is that these process characteristics are
another form of evidence used by the consumer to judge service.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

93
 SERVICES AND RELATIONSHIP MARKETING

Summary
Because many services are delivered by people in real time, closing the service performance
gap is heavily dependent on human resource strategies. Often service employees are the
service, and in all cases they represent the organization in customer’s eyes. They affect
service quality perceptions to a large degree through their influence on the five dimensions
of service quality: reliability, responsiveness, assurance, empathy, and tangibles.

Because services are intangible and because they are often produced and consumed at the
same time, they can be difficult to comprehend or evaluate before their purchase. The
physical evidence of the service thus serves as a primary cue for setting customer
expectations before purchase. These tangible cues, particularly the servicescape, can also
influence customers’ responses as they experience the service. Because customers and
employees often interact in the servicescape, the physical surroundings also influence
employees and the nature of employee/customer interactions. The actual delivery steps the
customers experiences, or the operational flow of the service, also provides customers with
evidence on which to judge the service.

Self Assessment Questions

1. Why are service employees critical to the success of any service organization?
2. Describe the basic tenet of the service profit chain model.
3. What is emotional labor? How can it be differentiated form physical or mental labor?
4. Briefly describe the three operational positions that can be adopted and implemented
by a service provider.
5. Describe the four basic human resource strategy themes and why each plays an
important role in building a customer-oriented organization.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

94
 SERVICES AND RELATIONSHIP MARKETING

UNIT 5 THE TRADITIONAL SERVICES MARKETING MIX

Learning Objectives
Upon completion of this unit a student will be able to:
 Explain the two components of a service outcome
 Explain price determinants in services
 Discuss price modifications
 Describe the various types of price bundling strategies
 Discuss the challenge of service availability and accessibility
 Describe the various types of channel structures
 Discuss the various types of distribution growth options
 Explain the importance of franchising and branding of services

The traditional marketing mix involves the four P’s.

1. Service outcome/product
2. price
3. distribution
4. promotion

5.1 Service outcome /product

The product component of the marketing mix is the outcome of the service. It consists of
two components: the technical and the functional outcomes. The technical outcome is the
end result of the service or the “what” of the service. For dental services, it would be the
completed crown. The functional outcome is the process of receiving the service or “how”
the service was provided. Functional service is the way the customer or client was treated by
the firm’s staff. For dental service, it is the way the dentist, the dental assistant, and the
receptionist interacted with the patient.

After classifying a service outcome into technical and functional outcomes, in this section
we will see branding in the service sector. Many services have become commodities to
consumers. A commodity is an undifferentiated good or service. Consumers view little or
no salient differences between the vendors. In these situations, price and convenience
become the primary factors in the purchase decisions.

To many consumers, air travel has become a commodity. The only major differences are the
two groups of air carriers: long- distance carriers and short- haul carriers. Within each
category, most travelers feel there are limited significant differences among the airlines.
Therefore, decisions are often made on the basis of price and schedule. The airline that fits
the traveler’s flying plans best and has the most reasonable price is normally chosen.

To avoid the consequences of a commodity classification, service firms will use branding.
Branding assures the consumer they will receive uniform service. For service firms, branding
provides value by enhancing the efficiency and effectiveness of the marketing programs.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

95
 SERVICES AND RELATIONSHIP MARKETING

Brand loyalty and repeat purchase behavior are increased. Once a brand name is
established, it allows a firm to leverage their position through brand extension, higher
prices, and higher margins. A highly established brand name can provide a firm with a
strong competitive advantage.
To maximize the benefit of a brand, service providers should meet the following four
characteristics:
1. The brand is distinctive
2. the brand is relevant
3. the brand has a tangible quality
4. the company’s most important services are branded and linked

In branding, a company must decide if they want to use a single brand or multiple brands.
The primary reason for using a single brand name is to capitalize on the brand name’s
reputation. Extensive image building is required to create a strong brand name that will
demonstrate consumer preference.

Activity 5.1
Explain the benefit of branding to a service operation.

Commentary
From consumers’ viewpoint, branding assures them they will receive
uniform quality. From a service firm’s stand point, branding provides
value that enhances the efficiency and effectiveness of the marketing
programs, increases repeat purchase behavior, enhances brand loyalty of
consumers, and allows a firm to charge a higher price for the service.

5.2 Price
The second component is the price of the service. Because services are intangible and
experiential in nature, the price becomes more important to consumers as a cue of what to
expect. Higher prices tend to convey higher quality. However, an extremely high price may
be viewed by consumers as rip-off. The converse is also true; lower prices tend to convey
lower quality but for some services and for some consumers, this is acceptable.

Consumers often use price as one of the inputs into forming expectations of a service and in
making purchase decisions. If consumers are not familiar with a particular service vendor,
price becomes even more important because of the lack of search qualities. For services high
in credence and experience properties, price serves as one of the tangible cues that will
indicate to the consumer what to expect.

Price is used by consumers in their service quality evaluations. Consumers normally feel
that service quality is positively related to price. The more consumers pay for a service, the
more they expect. Comments such as “I thought the service was good, but not good enough
for the price I paid,” suggests consumers compare the service to the price charged. Another
statement often heard is “The service isn’t the best, but for the price, it’s a real bargain.”

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

96
 SERVICES AND RELATIONSHIP MARKETING

Price is an important element in controlling demand. Increasing the price at peak demand
times will normally reduce the demand. Restaurants, movie theaters, and airlines often use
this strategy when demand exceeds supply. The higher price will cause some demand to
shift from high-to lower- usage periods. In addition, services may lower the price at low-
usage times. This lower price will not only cause a shift of demand, but it will also stimulate
new demand. When movie theaters offer an afternoon show for 50% of the evening price,
some demand is shifted but most of the customers are people who probably would not have
attended at all.

Activity 5.2
Explain the concept of customer-focused pricing. Try to identify some of the factors
that are of concerns to customers in their buying decision of services.

Commentary
Customer-focused pricing looks at pricing decisions from the view point of the
customer. Concerns customers have include the value of the purchase, personal
needs and wants, firm-switching costs, risk, availability of alternatives, level of
involvement, and personal participation level.

5.2.1 Price Determinants

Several factors go into the pricing decision. These factors are organizational pricing
objectives, cost, demand curve, elasticity of price, competition, operational position, and
marketing mix composition.

1. Organizational pricing objectives

Firms use one of four pricing objectives: profit maximization, sales maximization, market
share maximization, or competitive parity. The price charged by a service will be based on
which pricing objective is being used by the firm. For profit maximization, the price is set at
the level that will yield the highest total revenue for the firm within a pre-specified profit
constraint. For market share maximization, the price is set at the level that will provide the
firm with the largest market share or total unit sales. Normally, the market share
maximization price is set within the parameters of a pre-specified profit constraint. For
competitive parity, prices are set that are approximately equal with the competition.

2. Cost Analysis
Costs normally serve as a pricing floor. To remain a viable business, firms must obtain a
certain level of gross profit to cover overhead expenses. How much profit will depend on the
firm’s objectives and the competition. Calculating the cost of a service is more difficult than
for a good. A manufacturer of a bottle can easily calculate the cost of producing a bottle and
arrive at a per unit cost. Calculating costs per meal at a restaurant is not too difficult since a
tangible good is used in the service. The only question which must be decided is how to
figure labor costs since cooks and wait staff will work on several meals simultaneously. The
most difficult costs to calculate are pure services. How much does it cost to fly from Addis
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
97
 SERVICES AND RELATIONSHIP MARKETING

Ababa to Diredawa? The unit cost will depend on how many passengers were on the flight.
Unit costs to fly 120 passengers to Diredawa will be more if 205 passengers were flown on
the same plane.

The first step in analyzing costs is to separate costs into variable and fixed components.
Variable costs are those that change with demand. For example, food costs at a catering
service are variable costs. Food and fuel costs for an airplane are variable costs. Chemicals
for a pest control service are variable costs. Fixed costs do not change with the quantity
demanded although demand may have some impact on them. The cost of an airplane is a
fixed cost for an airline. Demand does not directly affect this cost; however, demand will
determine how many airplanes are needed. The most difficult cost to calculate is labor.
Should labor be a fixed or a variable cost?

3. Demand/ price curve

To determine the correct price, a demand/ price schedule must be generated. A demand/
price schedule shows the demand for a service at various prices. The demand/ price
schedule can be generated from historical data or sales forecasts. The figure on the next page
illustrates the demand for an auto detailing service at six different prices. Demand increases
as the price declines until the price reaches $35. At that pricing point, demand starts
declining. It would appear that customers feel the quality of the service will be unacceptable
at lower price.

250

200 195 190

160 175 150
150 145
130
100
Quantity

50

0
60 55 50 45 40 35 30

Price

Figure 5.1: Demand/price schedule

If the firm’s pricing objective is market share maximization, the $40 price will yield the
highest demand. To determine sales and profit maximization prices, it will be necessary to
calculate total revenue, total variable costs, and gross margins. The figure below provides
this information based on a variable cost of $25 per service unit. The $50 price would be the
sales maximization price because it would yield the highest total revenue at $8,000. The
profit maximization price would be $60 because it yields the highest gross margin, $4,550.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
98
 SERVICES AND RELATIONSHIP MARKETING

10000
8000
8000 7,800 7,975 7875 7800
6650
6000 4500

4000

2000

0
60 55 50 45 40 35 30

Gross Margins $4550 $4350 $4000 $3500 $2925 $1900 $750

Variable costs $3250 $3625 $4000 $4375 $4875 $4750 $3750

Figure 5.2 total revenue and profit

4. Price Elasticity
An important ingredient in pricing decisions is a concept called price elasticity of demand.
Price elasticity of demand is the percentage change in demand divided by the percentage
change in price. If the percentage change in demand is greater than the percentage change in
price, the price is said to be elastic at that price point. If the percentage change in demand is
less than the percentage change in price, the price is said to be inelastic at that price point.

5. Competition
Firms must examine the pricing structure of competition. Prices that are drastically different
than competitors’ will be more elastic than prices that are close to the competition. In
addition to primary competitors, firms must be aware of secondary and third level
competitors.

6. Operational position
The operational position chosen by the service will have a major impact on the price. Firms
using the cost efficiency operational approach will have a lower price than firms using the
other approaches. Firms using the customization approach will tend to have the highest
prices. Firms using either service quality approach will tend to be in the middle price range.
However, firms which have developed a high level of expertise in the technical service
quality area will be able to charge more for their services.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

99
 SERVICES AND RELATIONSHIP MARKETING

Activity 5.3
Identify and discuss the various factors that influence the elasticity of demand for services. Give
examples to elucidate how a particular factor affects elasticity of demand.

Commentary
Whether a service is elastic or inelastic at a specific price point is determined by at least six
factors. These factors are the availability of substitutes and complements, the relation to
competitors’ prices, whether the service is a necessity or a luxury, personal characteristics of the
consumer, and the time perspective.

Demand tends to be elastic if a substitute is readily available. Instead of paying the higher price,
consumers can purchase a substitute service. This type of relationship is often seen in
entertainment-type of services. The more substitutes that are available to a consumer, the greater
the elasticity of demand. Because substitutes for professional and business-to-business services are
not available they tend to be less elastic than consumer services.

Demand tends to be inelastic for services that are complements. If the price of a complementary
service is increased, buyers normally will not modify their consumption very much. For example,
air travel, car rentals, and hotels tend to be complementary services.

The type of scenario that would exist if car rental agencies raised their prices is that it would have
less impact on air travel and hotels. However, if airlines raised their prices, it could have an
impact on hotels and car rental agencies. The impact could be elastic rather than inelastic. The
type of elasticity is dependent on the type and strength of the relationship between the
complementary goods and services.

If the change in the price of a service produces a wide disparity among competition, the elasticity
of demand will tend to be more elastic. If a service increases their price substantially above
competitors, customers will normally switch to the competition. If a service decreases their price
substantially below competition, customers would be attracted and would switch firms. Price
changes that remain close to the competition will have little impact on demand, and thus will
tend to be inelastic.

Another factor that affects elasticity of demand is whether the service is a necessity or a luxury
item. Haircuts and automobile repairs tend to be necessity-type consumer services. In the
business-to-business sector, company health insurance and accounting services tend to be
necessity-type services. Because they are viewed as necessities, they tend to have an inelastic
demand curve. Price increases will result in little change in demand. Buyers may not like the
price increase and they may complain about the high prices, but they will usually continue to
patronize the service.

Luxury services tend to have elastic demand curves. Price increases or decreases normally result
in a greater
7. Marketing Mix change in demand. Examples of consumer luxury services are movie theaters,
Theamusement
marketing parks, sporting events,
mix composition willairline
have travel, and dining
an impact on theout. When
price. Theairlines
other slash their prices,
marketing mix
demand immediately rises.
elements are promotions, service outcome, distribution, and corporate image.
Another personal characteristic which impacts the elasticity of demand is personal income. The
last factor that impacts elasticity is the time perspective. In the short run, most services tend to be
inelastic while in the long run they tend to be elastic. The explanation is that in the short run,
substitute services may not be readily available, but in the long run, adjustments can be made.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
100
 SERVICES AND RELATIONSHIP MARKETING

Activity 5.4
Show how each element of the marketing mix influences price.

Commentary
If the firm is planning an extensive advertising campaign to stimulate
demand, the price is normally higher to cover the campaign costs. If the
service is going to use salespeople, the price for the service will normally be
higher because of the cost of the sales staff. If a service is going to use a multi-
distribution strategy with multiple outlets, normally the service will be priced
lower. The image consumers have of a service firm will impact on how much
that firm can charge. In most situations, firms with better images can obtain
higher prices for their service than firms with poorer consumer images.

5.2.2 Pricing Modifications

Service firms have four variations of pricing which they can use to boost sales and profits.
These methods include:
 Differential Pricing
 Yield Management
 Price Bundling
 Multiple-Use Discounts.
Each of these methods will be discussed in this section. The section will conclude with a
discussion of how service firms can handle price increases.

1. Differential Pricing
The purpose of differential pricing is to either shift demand from high-demand periods to
low- demand periods or to stimulate demand during low-demand periods. For differential
pricing to be effective, it must meet the following five criteria. If all of these conditions are
satisfied, differential pricing can be used successfully to increase revenues and contribute to
fixed overhead costs.
i. Segments must value the service differently.
ii. Segments must be large enough to be identifiable and profitable.
iii. A mechanism must prohibit customers in the lower-paying segment from selling to
higher-paying segments.
iv. The cost of implementing the differential pricing system must not exceed the
incremental revenue generated.
v. The differential pricing system must not be confusing to current and future
customers.

Differential pricing can be used in one of the following four ways.

 First is by time of service usage. If a theater charges less for an afternoon show than
it does for evening shows, it is using differential pricing based on time of usage. A
restaurant that charges less for a meal at lunch hour than for dinner in the evening is
using differential pricing based on usage. A telecommunication company is using
differential pricing when it charges different fees for daytime and weekend calls.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
101
 SERVICES AND RELATIONSHIP MARKETING

 Differential pricing can be based on the time of reservation. Airlines use this system.
The price charged is based on when the airline seat is reserved. Passengers who
reserve their seat 30 days in advance will pay less than passengers who reserve their
seat four days in advance.
 Differential pricing can be based on different target markets. For example, a cinema
charges less for children under say 12 than it does for adults.
 A final method of differential pricing implementation is by location of consumption.
Football fans at a stadium will pay different prices based on the area of their seats.

Activity 5.5
Specify how differential pricing can be used by service marketers.

Commentary
Differential pricing is used by firms to either shift demand or stimulate
demand. Prices can be differentiated by time of usage, by time of reservation,
by time of ticket purchase, and by location of consumption.

2. Yield Management
A pricing tool which has recently emerged to manage differential pricing is a system called
yield management. Yield management is a differential pricing methodology designed to
produce the highest revenues based on a detailed analysis of the past purchase behavior of
each market segment served by a company. Yield management is primarily used in the
airline industry but has also been used in other service industries such as hotels, trucking,
restaurants, and banking. Yield management will be discussed further in unit 9 related to
managing demand and supply.

3. Price Bundling
A common pricing tactic used today by many services is price bundling. Price bundling is
offering consumers two or more goods or services in a single package for a special price.
When a petrol station offers vehicle lubrication, oil change, and other fluid checks in one
package, it is using price bundling.

Pure vs. Mixed Bundling

Services have two basic forms of bundling they can use: pure bundling and mixed
bundling. Pure bundling is combining two or more goods or services not sold
individually into a single package for the consumer. Mixed bundling is combining
two or more goods or services sold individually into a single package for a special
price. The auto lubrication facility’s and oil change bundle is a pure bundle. Neither
service can be purchased independently. Pure bundling is used when the
combination of goods or services is more valuable to the consumer than any of them
would be independently. The typical fast lube service facility not only lubes a vehicle
and changes the oil but they also check tires, batteries, brake fluid, power steering
fluid, transmission fluid, and tire air pressure. By combining all of these services into
one package, greater revenue is generated than if each were sold individually. Also,
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
102
 SERVICES AND RELATIONSHIP MARKETING

by combining all of the services into one package, economies of scale and operating
efficiencies can be obtained. It is less confusing to consumers since they do not have
to decide which services they need.

Mixed joint bundling

Mixed bundling consists of two types: mixed leader and mixed joint. Mixed leader
pricing offers service B for a discount if you purchase service A. Mixed joint is when
two or more services or products are offered together at a fixed price. The purpose of
the mixed joint bundle is to increase total revenues. Items are packaged together that
are complements and that are often purchased together. By pricing the package
cheaper than the combination of items individually, consumers feel they are getting a
bargain.

Activity 5.6
Outline how service firms can use the concept of price bundling.

Commentary
Price bundling is offering two or more services in a single package. The purpose
of price bundling is to increase revenues. Pure bundling is the combination of
two or more services that cannot be purchased separately by the consumer
while mixed bundling is the combination of two or more services that can be
purchased independently.

4. Multiple-use pricing Discounts

To encourage repeat purchasing or multiple uses of a service, many services use multiple-
use pricing discounts. Multiple-use pricing discounts are price reductions given to customers
for repeat usage of a service. The multiple-use discount can be for a fixed number of uses or
be unlimited. It can be for a fixed duration of time or it can be for an unlimited amount of
time. The four possible multiple-use discount combinations are outlined on the Table 5.1
with some illustrations of each type of discount.

Table 5.1 Multiple-Use Discounts

Duration Usage Example

Limited Limited “10 sessions during January for $50.00”
Limited Unlimited “$30.00 for April, no limit to number of
sessions”
Unlimited Limited “10 sessions for $50.00”
Unlimited Unlimited “10% discount to children”

An example of a multiple- use discount of fixed usage and fixed duration would be a movie
theatre offering “10 sessions during January for $50.00.” The primary purpose of using this
type of multiple- use discount is to encourage usage of the movie theater during slow-
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
103
 SERVICES AND RELATIONSHIP MARKETING

demand times and shift some demand from high-usage to low-usage periods. By advertising
the special discount the movie theater hopes stimulate demand during the time that it is
expected to be low.

Another example of multiple- use discount of fixed usage and fixed duration would be a
video rental store advertising a discount card that offers customers the rental of 20 movies
during January and February for a special $ 2.00 price each. The multiple- use discount is of
fixed duration and fixed usage. The purpose of this multiple-use discount may be to reward
current customers, to increase repeat purchase behavior among current customers, or to
attract new customers to the video rental store.

The second type of multiple- use price discounts is fixed usage and unlimited duration. If the
movie theater sells a ticket for 10 movie sessions for $50.00.00 with no time restrictions, it is
using this type of multiple-use price discount. The customer can use the ticket at anytime.
The primary purpose of this type of multiple- use discount is to encourage repeat purchase
behavior of current customers. It can also be used to attract new customers if the special
price is a significant savings over the cost of individual sessions and what the competition
charges.

The third type of multiple-use price discounts is unlimited usage and fixed duration. Resort
centers, can use this type of multiple-use discount. Individuals can buy season passes that
entitle them to get into the facility as many times as they wish during the season or for the
duration of the pass.

The last type of multiple-use price discount is unlimited usage and unlimited duration.
Under this arrangement, individuals under the age of 12 can obtain discounts to a movie
theater. There are no restrictions as to the number of times the discount can be used.

Activity 5.7
Identify the different types of multiple-use pricing discounts.

Commentary
Four types of multiple-use pricing discounts can be used based on usage and
duration. The four types of multiple-use discounts are fixed usage and fixed
duration, fixed usage and unlimited duration, unlimited usage and fixed
duration, and unlimited usage and unlimited duration.

5.2.3 Price Increases

Increasing the price of a service offers a unique challenge for firms, especially for services
that have an elastic demand curve. Even for services that have an inelastic demand curve,
price increases often result in lower levels of customer satisfaction and a reduction of
purchase frequency. Consumers react positively to price wars and price reductions, but
negatively to price increases.

The airline industry has suffered from numerous price wars and price cuts. Industry profits
decline when carriers engage in a price battle for market share. Although price wars
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
104
 SERVICES AND RELATIONSHIP MARKETING

continued in selected markets, airlines have gradually increased their prices. To raise
industry price someone has to function as a leader.

Activity 5.8
Discuss a situation in which price increase per se may not affect market share. Try to
indentify situations or strategies that a firm should consider before increasing the price of
a service.

Commentary
Price increases will not normally affect market share of a single vendor if all of the firms
in an industry increase their prices. However, if all firms do not raise their prices, price
increases are more difficult to achieve without a negative impact on sales revenue. For
this reason, most companies will adopt one of the following strategies when it is believed
that prices should be increased.
 A common strategy is to simply wait until someone else increases their prices, and
then quickly follow.
 A second strategy is to use a communications program to explain to customers why
the price increase is necessary. If it is a business-to- business service, the
information usually is conveyed through salespeople to purchasing agents. If it is
for consumer services, the information may be relayed through advertising,
point- of – purchase displays, or sales staff.
 A third strategy to adopt is to make no acknowledgement of a price increase, and
then hope that customers will not notice it. If customers do notice the price
increase, the standard answer of increased costs is given. Another approach for
instituting price increases is to do it in small increments over a period of time.
For example, a 10% increase in price may be done in three installments over four
or five months. It is believed such small price increases will be less noticed by
consumers.
 A final strategy a firm can use to increase prices is to modify the service offering
or add a service feature that would justify the price increase to the consumer.
This method is successful if the service modification costs less than the price
increase and if service modification is wanted by customers.

5.2.4 Risk and Price

Consumers see price as a means of modifying risk. Suppose a hotel manager wants to install
a swimming pool in his hotel. She has no past experience with any of the four firms that
provided bids, so price becomes an important factor in her decision. Because the cost of
installing the pool is significant compared to the annual income of the hotel, the risk
associated with the decision is quite high for her.

The four bids for installing the pool complete with landscaping were Birr 2,000,000 Birr
1,900,500, Birr 1,800,700 and Birr 1,600,600. The low bid will be eliminated. The manager
views the low bid as too risky. In her mind, there is a good chance they will not do as good
of a job as the other three firms because their price was substantially lower. Often consumers
will shy away from purchasing from low- priced vendors because of perceived risk. The
manager will probably not perceive any difference among the three remaining bids in terms
of risk since they are almost equal.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
105
 SERVICES AND RELATIONSHIP MARKETING

High bids are not always viewed as being less risky. If they are close to competitors’,
consumers may feel all vendors are about the same risk or they may feel that risk is slightly
lower for the highest bidder. If a high bidder is substantially higher than the competition,
consumers normally feel that it is not a good value because the higher price is not justified.
They feel that the quality and service will not be substantially better and they do not see the
higher price as substantially less risky.

5.2.5 Price and Level of involvement

Personal level of involvement in the purchase affects how consumers view the price of a
service. For high-involvement services, pricing tends to be more inelastic than for low-
involvement service. If Bekele’s dentist increases the fee for dental exams and treatments,
Bekele will probably not look for another dentist. Because dental service is a high-
involvement decision, firm switching costs and risk are perceived to be higher.

However, if a garden care service firm increases their prices, a business customer will be
inclined to hire another service. Since garden care services are a low-involvement decision
for most businesses, firm-switching cost and risk are low. For low-involvement services,
prices tend to be elastic and firm switching cost is quite common.

5.2.6 Price and Level of Customer Participation

A final factor that buyers consider when evaluating price is their level of participation in the
service. In general, the more customers are involved in the production of the service, the less
they expect to pay. Customers expect to pay less at a self- service car wash facility than at an
automatic car wash.

Occasionally conflicts will occur in the business-to-business sector over buyer participation
and pricing. A carpet cleaning service may expect the customer to pick up boxes, trash cans,
and other small items before they arrive. If this is done, the customer will expect to pay less
than if the service does it. Accounting services may expect the client to prepare certain
information for them while the customer may feel it is the responsibility of the accounting
firm. Central to this conflict will be the price. If the price is perceived to be high by the
customer, they will expect the accounting firm to do the work. If it is perceived to be low,
they may feel it is their responsibility.

When deciding on the price of a service, firms must take time to look at all of these factors
from a customer’s view point. If the price is compatible with the level of service being
offered, consumers will see the price as being fair. If the price is fair and the service provided
is perceived to be better than the competition, they will see the service as good value.
Customers will continue to patronize the service they perceive to be of good value.

5.3 Distribution
Because of the inherent characteristics of services, distribution becomes challenging.
Distribution is the availability and accessibility of a service to consumers which is the first
topic of this section. The second part of the section addresses the issue of channels from the
perspective of services. Since the channel tends to be shorter and often direct for services,

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

106
 SERVICES AND RELATIONSHIP MARKETING

distribution of service is not as easy as it is for goods. Distribution growth options are
presented and discussed in the third section of the section.

In terms of expansion and distribution, firms must consider several key issues, such as
franchising and branding. Franchising and branding of services has been a current trend
and has proven successful for many firms. It provides a quicker method for growth while
reducing some of the risk of expansion. The last section of the unit discusses distribution
from the customer’s perspective.

5.3.1 Access and Availability

As noted above, distribution involves the availability and accessibility of a service to
consumers. From a consumer’s viewpoint, availability means the service is available to the
consumer when he or she wants it. Accessibility means it is relatively easy for the consumer to
conduct a transaction with the service vendor.

Operating hours is a critical distribution decision. To be successful, service operations need

to have operating hours that are compatible with their target markets. A recent study on
shopping behavior of consumers indicates that the traditional pattern of 8:00 A.M. to 5:00
P.M., Monday through Friday, is no longer the case when most consumers shop. In fact,
only 17% of all shopping is done during those hours. Over 50% of consumers’ shopping is
done on weekends while another 23% is done from 5 P.M., Monday through Friday. Based
on this information, a printing service that has operating hours from 8 to 5, Monday
through Friday, is available only when 17% of all consumers shopping is done. By adding
Saturday operating hours, the store would be available to consumers when an additional
33% of their shopping is done. If the 5 to 9 evening hours were added, the availability would
jump to a total of 73%. Each service operation needs to analyze their target markets and
establish operating hours that are compatible.

Activity 5.9
What do banks in Ethiopia do to improve their service accessibility?

Commentary
To increase the accessibility of banking services, banks have added ATMs as well as
lengthening their branch hours. Many banks are now open later in the day and some are
open on Saturdays. Staying open until 5 or 6 p.m. allows customers to conduct business
after they get off work. ATMs allow customers to bank any time, 24 hours a day. Banks
and other services have increased their availability through on-line computer services.
Consumers can now conduct numerous financial transactions at home or at work using
their computers.

5.3.2 Channel Structures

The channel length tends to be shorter for services than for goods. Many services are
performed by a service provider for the consumer with no intermediaries. This type of a
distribution system is called a direct channel. Other services use agents or intermediaries to

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

107
 SERVICES AND RELATIONSHIP MARKETING

perform one or more functions. Using some type of intermediary or intermediaries in the
channel structure is referred to as an indirect channel.

Generally, the service process can be divided into four components:

1. information
2. reservation
3. payment and
4. consumption

Service providers can use agents or third parties to perform any of the 4 functions. Using
agents to carry out one or more of the functions allows a service firm to grow with minimal
investment. Among the services that use agents extensively are airlines.

Activity 5.10
Show how travel agents and airlines perform the four functions which have to be
undertaken by any service provider for effective service delivery.

Commentary
Airlines use travel agents to perform the first three functions. Travel agents provide
information, make reservations, and collect payment. The consumption phase is
performed by the airlines.

5.3.3 Channel options

In deciding what type of channel structure to use, service firms have three options: exclusive
distribution, selective distribution, and intensive distribution.

Exclusive distribution involves the use of a limited number of agents or outlets who sell
only the one brand. This type of distribution system is used when the service provider wants
to maintain a high level of control over the functions of the agent or third party.

A second option is the selective distribution strategy. Selective distribution involves the use
of a few intermediaries but not all who would like to carry the brand.

The third option is an intensive distribution strategy. Intensive distribution involves placing
the service with as many different agents or third parties as possible.

5.3.4 Multichannel Systems

To increase market coverage, many service firms are using a multichannel approach.
Multichannel distribution involves the use of two or more channels to reach one or more
market segments. In addition to increasing market coverage, this strategy often lowers costs
of distribution. Most airlines use a multichannel distribution strategy. Tickets can be
purchased directly through an airline such as the airline or they can be purchased through a
local travel agent.

Distribution Growth Options

Service firms have seven distribution growth strategies available to them.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
108
 SERVICES AND RELATIONSHIP MARKETING

1) multisite
2) multiservice
3) multisegement
4) Multisite, multiservice
5) Multisite, multisegement
6) Multiservice, multisegement
7) Multisite, multiservice, multisegement

A multisite distribution strategy is expansion of a service to another location. A

multiservice distribution strategy is the addition of a new service to a firm’s existing
portfolio. For example, a fast- food restaurant that has only drive- up facilities may add
delivery service. A multisegement distribution strategy is the expansion of the current
service to a new market segment. A health club that expands its swimming lessons from
children to include adults who do not know how to swim would be using a multisegement
strategy. The remaining four strategies are combinations of the three options just discussed
and expand services at the same time.

A multisite, multisegement strategy involves serving different market segments with

different site locations. A multiservice, multisegement strategy is an option allowing firms
to expand their operation by offering new services to new market segments. The final
strategy is a combination of all three of the primary options: multisite, multiservice, and
multisegement. The table below presents the relative merits and concerns of each
distribution strategy.

Table 5.2 summary of benefits and concerns of each distribution strategy

Growth strategy Benefits Concerns
Multisite 1. rapid expansion 1. good locations
2. sales growth 2. financial resources
3. easiest to manage 3. managing multiple outlets
4. quality control
5. too rapid growth
Multiservice 1. serve current customers 1. decline in efficiency
better 2. financial resources
2. can gain new customers 3. managing multiple service
3. sales growth 4. quality control
Multisegement 1. better utilization of 1. locating a complementary segment
facility 2. customer confusion
2. sales growth 3. quality of service
Multisite, 1. sales growth 1. overhead costs
multiservice 2. one-stop shopping for 2. managing service structure
customers 3. quality of services
3. serve current customers
better
Multisite, 1. sales growth 1. overhead costs
multisegement 2. each site can specialize 2. managing service structure
in a segment 3. quality service
Multiservice, 1. sales growth 1. quality of service
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
109
 SERVICES AND RELATIONSHIP MARKETING

multisegement 2. serve current customers 2. managing service structure

better 3. customer confusion
3. gain new customers
Multisite, 1. sales growth 1. Overhead costs.
multiservice, 2. one-stop shopping 2. managing service structure
multisegement 3. prevent competition 3. quality of service
from eroding market 4. financial resources
share 5. customer confusion

5.3.5 Franchising
Franchising is a method of expanding rapidly with low capital investments. Franchising is a
multisite distribution growth strategy involving the selling of a service concept to a third
party who agrees to establish and operate a service facility according to a franchisor’s
specifications. Most franchise contracts maintain tight controls over the franchise guidelines
or may even be owned by the franchisor.

Benefits of franchising
Franchising provides outside capital for growth. This additional capital allows a firm to
grow faster than if it was dependent on internally raised capital. Franchising provides
additional management to run the new outlets. Many franchise owners have prior
experience managing businesses.

Franchising provides lower risk for a franchisee than building his own business. The
franchise offers an established brand name and a business plan that has proven to be
successful. Most franchisors assist with advertising, promotions, and operations
management. Expert help is available for franchise operators when problems arise. These
services, provided by the franchisor, reduce the risk of a franchise failing. In exchange, the
franchisor will receive a percentage of the franchisee’s income. Franchise fees normally run
2% to 3% of the franchisee’s net income.

Advantage Disadvantages

Franchisor

1. capital for growth 1. lower potential profits

2. faster growth 2. controlling service quality
3. additional management 3. controlling firm image
4. additional income

Franchisee

1. lower risk 1. franchise fees

2. established brand name 2. lack of freedom
3. successful business plan
3. controlled by the franchisor
4. expert assistance

Figure 5.3 advantages and disadvantages of franchising

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

110
 SERVICES AND RELATIONSHIP MARKETING

Disadvantages of franchising
A disadvantage of franchising is lower potential profits. Because profits are being shared
between the franchisor and the franchisee, both earn less than if they operated
independently owned outlets. However, the franchise brand name will often bring in greater
income than a business with an unknown name.

Quality control is another disadvantage of franchising. Because each outlet is owned by a

franchise holder, it is more difficult for the parent firm to control the service operation.
Quality control standards can be written in the franchise agreement, but are more difficult to
enforce than if the outlet was company owned.

Occasionally, franchises have difficulty with image control. To continue growth, franchisors
want each franchise outlet to follow the franchise blueprint so that a consistent image is
projected. Problems occur when franchise outlets drift from the blueprint and project an
image that inconsistent with the franchise operation.

Franchising and Operational Position

Franchising works especially well for firms operating in the cost efficiency operational
position for the same reason that was indicated for the multisite distribution growth
strategy. The franchisor’s operation can be easily duplicated by the franchisees. Franchising
also works well for firms operating in the technical service quality position. The methods
used to produce superior service can be specified by the franchisor and passed on to the
franchisee. Franchising does not work as well for the customization and functional service
quality approaches because of the human element. It is more difficult to develop a corporate
culture that can be passed from a franchisor to a franchisee. Employees and franchisee
managers can be trained in how to deal with customers, but ensuring consistent functional
quality exists throughout the franchises is more difficult.

Activity 5.11
Cite the advantages and disadvantages of franchising as a distribution growth
strategy.

Commentary
The advantages of franchising include use of outside capital for growth, additional
management personnel, and lower risk. The disadvantages of franchising are lower
potential profits, and difficulty controlling service quality and maintaining a unified
corporate image

5.3.6 Distribution Management

Distribution management involves two components: an organizational management
structure and economies-of-scale plan. When services expand beyond a one- service, one-
site business, a decision concerning the organizational management structure must be made.
The primary decision is whether the organization will use a centralized or decentralized
management structure. The second decision is how to arrange the support functions to
obtain economies- of- scale.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

111
 SERVICES AND RELATIONSHIP MARKETING

Organizational structure
Centralization and decentralization refer to the relative level of delegation of authority,
decision- making, and power in the organization. In a centralized organization, key
decisions and power are located with the top managers of the firm. In a decentralized
organization, key decisions and power are shared among both top and middle management.

For firms using a centralized organizational structure, decision making power is in the
hands of the central office. Branch sites have very little authority to make decisions or to
alter the operations. The service offerings tend to be highly standardized with very little
customization to meet different customer needs. This type of structure normally results in a
high level of economies- of- scale. Franchising is an excellent means of growth since the
service offering is highly standardized and branded.

Using a centralized organizational structure is common with a multisite growth strategy

because of the highly standardized, branded service offering. This approach is also the best
for services using the cost efficiency or technical service quality approach. It is more difficult
to achieve when using a multiservice or a multisegement growth strategy. A decentralized
organizational structure seems to work better when using a multiservice or a multisegement
growth strategy. A decentralized organizational structure seems to work better when
multisite strategies are coupled with a multiservice or a multisegement strategy. The
decentralized organizational structure works the best for firms using a functional service
quality or a customization operational approach.

Using a decentralized organizational structure puts more power into the hands of lower-
level employees. Authority of individual branch sites is high. Service offerings can be
customized to meet the needs of each site’s customers. However, some of the economies- of-
scale will be reduced. Franchising becomes more difficult because of problems controlling
the operations and quality of service at each branch. Branding is helpful, but is not essential
since each branch site has considerable flexibility in their service operation.

Activity 5.12
Describe the difference between a centralized management system and a
decentralized management system.
Commentary
In centralized management structures, key decisions and power are located
in top management personnel. In decentralized management structure, key
decisions and power are shared among both top managers and middle
managers.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

112
 SERVICES AND RELATIONSHIP MARKETING

Economies- of-scale
Economies-of-scale can be developed in finances when profits earned by the different outlets
are used to finance the operations of another outlet. As companies grow, their ability to
finance their own growth increases. Internal financing reduces the reliance on financial
institutions and reduces interest costs. Economies-of scale can be developed in marketing
when brand names become well established. The image and quality attached to a brand
name will carry over from one facility to another. When a new facility is built, money does
not have to be spent to establish a reputation. It is already established via the brand name.
In operations, firms can gain economies-of – scales in three different categories: service-
specific economies, site-specific economies, and firm-specific economies. Service- specific
economies are economies related to the output of one service. Site-specific economies are
economies related to the output of one service site. Firm-specific economies are economies
related to the output of a firm’s operation.

Service-specific economies can be gained when a service operation specialized in one

service. Division of labor can be used to separate the service operation into components.
Having employees specialize in components will increase the efficiency of the operation.
Standardizing the service operation will further increase service- specific economies.

Site- specific economies occur when a service firm offers more than one service at a single
site. Capital resources are shared in terms of buildings, land, and equipment. Sharing these
costs among multiple service offerings is cheaper than offering each service at a different
site. Operating costs are reduced as the firm utilizes its resources to support all of the
services being offered. Personnel often can be used to provide multiple services, which will
reduce the cost of providing separate personnel for each service.

Firm- specific economies are gained when a single firm operates multiple service operations.
Management personnel can be used to oversee multiple sites and services rather than having
managers for each unit. Recruiting and hiring can often be done in central locations for
multiple facilities. Payroll and bookkeeping can be done in one location, reducing the need
for each site to perform these tasks. Equipment and people can be shared among facilities
and services. All of these techniques can be used to improve the economies-of-scale of an
operation.

An alternate method of producing economies-of-scale is through outsourcing. Outsourcing

is done for one of two reasons. First, outsourcing allows a firm to increase capacity without
expanding its operation. Second, outsourcing reduces overall costs if purchasing the
outsourced service component is cheaper than trying to do it in-house.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

113
 SERVICES AND RELATIONSHIP MARKETING

5.3.7 Customer- Focused Distribution

A customer-focused distribution strategy involves managing five components of distribution
from the viewpoint of the customer. These components are:
1. Identification of market segments being served
2. Identification of benefits sought by customers
3. Matching customer needs to corporate channel and distribution growth strategies
4. Managing quality control
5. Managing corporate growth

Customer- focused distribution begins by identifying the market segments being served and
the benefits they seek from the service. Different market segments may be seeking different
benefits. If this is the case, the best growth strategy may involve developing alternate sites
from each market segment or using different agents for each market segment. The
distribution growth and channel strategy chosen should match the needs and desires of each
market segment served.

The most difficult aspect of growth to manage is service quality. In the zeal for growth and
expansion, the quality of service being provided to customers is often overlooked. As long as
sales are increasing, headquarters may feel that all is going well. What they may not realize
is that the defection rate may be alarmingly high and when growth flattens, sales will
decline. A reputation of providing bad service is very difficult to overcome.

Systematic, planned growth that keeps customer service the number one priority is essential
for long- term success. Growth may not be as fast, but the results will be longer lasting. A
company that adds each year only the number of new sites that they can realistically
manage based on their infrastructure will experience greater success in the long run than a
company that expands too rapidly.

5.4 Promotion
Today’s environment is fiercely competitive. It is therefore not enough to develop a service
for which there is known demand. It is not enough to say that a good service will sell itself.
The service must be communicated to the target market in order to generate and develop a
loyal customer base. While communications can be planned before the service is ready for
consumption, they should certainly not be implemented. With the ever-increasing variety of
media channels, and the proliferation of brands, marketing communications must be
planned and implemented in an integrated fashion.

5.4.1 Integrated Marketing Communication

In previous times, there were more limited opportunities for ways in which a company
could communicate with its audiences. There were also generally fewer brands in any
market sector, meaning that it was relatively easier for the brand to be seen and heard (and
remembered). It is estimated that today the average person is exposed to 1300 advertising
messages every day. However, today’s multi-brand markets are diverse and numerous ways

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

114
 SERVICES AND RELATIONSHIP MARKETING

of talking to consumers means that it becomes increasingly important that every piece of
communication works optimally.

One key way in which the marketer can optimize communications is to integrate them. This
is often referred to as integrated marketing communications (IMC). IMC presupposes that
all communications whether internal to the organization or external to its various
stakeholder groups, share the same ‘tone of voice’. Whether the consumer is viewing an
advertisement or talking to a call centre that is handling the company’s customer helpline,
or whether it is the manner in which complaints are handled and service is recovered, there
should be little doubt that the communications come from the same company.

5.4.2 Services Communication

The key differences between products and services should be taken into account in
considering service communication.
 Simultaneous production and consumption: The layout and the appearance and
manner of the staff are critical communication variables. So too is communicating
the role that the consumer is expected to play in the production of the service they
want to consume.
 Intangibility: Service providers should attempt to reduce the risk to the consumer of
buying an intangible product by providing tangible clues about the service offering.
These clues come from all aspects of corporate communication.
 Heterogeneity: This, too, leads to greater perceived risk. Again communications can
help to reduce this factor. It may be appropriate to communicate a service guarantee
or promise, or to demonstrate how well trained your staff are.
 Perishability: Many promotional tools, e.g. advertising, sales promotion and direct
marketing, have a role to play in shaping demand. This is one of the most
challenging aspects of service management and arises from the fact that services
cannot be inventoried.

Flowing from this there are five key aspects of communication for the service marketer:
(1) The role of personal selling
(2) The importance of internal marketing communications
(3) The management of expectations
(4) The provision of tangible clues
(5) Word-of-mouth communications.

These Key communication variables are discussed below in detail.

5.4.2.1 The role of personal selling

Service delivery often involves human encounter, whether face-to-face, or more remotely
via the telephone. The way in which that encounter develops can determine whether the
customer walks away feeling pleased, satisfied, annoyed, or victimized. Although the
customer’s expectations help determine levels of satisfaction, the encounter itself will
invariably play a significant part in determining satisfaction. The person who delivers the
service is often actually part of the service itself. He or she is not merely facilitating the

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

115
 SERVICES AND RELATIONSHIP MARKETING

exchange of a product that is already fully developed and is waiting to be picked from a
shelf. Waiting staff in a restaurant deliver not just food but customer satisfaction. Research
conducted by John Bateson for his book Managing Services Marketing. concluded that
personal selling and image-creating strategies were the communications tools most often
used by service organizations. He notes that organizations must choose their contact
personnel carefully and train them to interact effectively with customers. The role of
personal selling is not the same for every service organization. The partner in a large
accountancy firm will be performing quite a different personal selling role from that of a
checkout operator in a supermarket.
In attempting to mould the interpersonal skills of contact personnel, service managers
should ask themselves the following questions:
 Which staff are customer-facing? It’s not just traditional sales staff that ‘sell’ the
service.
 What other functions do they fulfill?
 What ought they to be communicating about the service?
 On what dimensions do consumers judge the standard of service delivery?
 What factors shape expectations of each service encounter? Are they related to
service complexity? To frequency of use of the service?
 Is it more appropriate for customers to be offered a customized or a standardized
response?

Personal selling is often the most important variable in the development of expectations. No
matter what the advertising communicates, or what the consumers’ friends say, their
expectations will be shaped by any personalized communication that they receive from the
company. Frontline employees have to be trained to understand that it is important to
develop realistic expectations in consumers however tempting it may be to over-promise.

5.4.2.2 The importance of internal marketing communications

The importance of the employee in the delivery of a quality service means that they should
not be ignored when it comes to considering who the relevant communication targets are
The most prolific writer in this field, Leonard Berry makes this point. There are certainly
internal pieces of communication that can help improve employees’ job performance.
Traditionally the mission statement was regarded as a critical tool in this respect. However,
nowadays more dynamic tools such as internal newsletters – often transmitted via email –
staff forums and awaydays are vital.
Companies need to listen as well as to inform. The employee can also benefit from external
corporate communications which appear to be aimed at the consumer. There are several
reasons for this. First, many services are delivered through a geographically dispersed
network of branches and outlets. Employees have little contact with head office. In this case
external communications can help to maintain their commitment to the organization. It can
also help remind them of the corporate culture that was imbued during their induction.

It may serve as a reminder or a reassurance of what the organization expects of them, or, as
Zeithaml states, ‘if [the communication] features employees doing their jobs, it
communicates to them that they are important’. Finally these communications can help to

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

116
 SERVICES AND RELATIONSHIP MARKETING

manage customers’ expectations and in so doing they can communicate with employees
about what to expect from their customers.

5.4.2.3 Managing expectations

Communicating with the customer about what to expect of the service is important. If
expectations can be managed so that customers have more realistic expectations of the
service delivery then their expectations are more likely to be met. Raising expectations
through communications can increase the risk of customer dissatisfaction. It may be
tempting to over-promise in order to get business through the door. However, the
repercussions often outweigh any initial benefit.

Most literature on this subject actually suggests that the role of communication is to revise
consumers’ expectations downwards. This arises from the view that consumers set
themselves unrealistically high expectations in the first place. However, a more challenging
task for the service marketer is to develop and maintain a quality service that meets or
exceeds most consumers’ expectations. Future developments will certainly see more
companies aiming to reduce the gap between expectations and delivery by tackling the issue
internally as well as externally.

5.4.2.4 Tangible clues

The less tangible the generic service, the more powerfully and persistently the judgment of it
gets shaped by the packaging. As Levitt states, ‘Metaphors and symbols become surrogates
for the tangibility that cannot be provided or experienced in advance.’ The consumption of
services is often associated with high levels of risk. Much of this risk stems from the
intangible nature of services. It is not just the fact that the service cannot be touched in the
same way that a product can. It is also that consumers often find it difficult to comprehend
what they are being offered. This risk can be reduced by the provision of tangible clues that
relate to the service offering.

5.4.2.5 Word-of-mouth communication

Personal recommendation is a powerful communication vehicle in the service sector. The
importance that consumers attach to word-of-mouth endorsement by their peer group arises
from their need to reduce risk from the intangible and variable nature of services. It has been
demonstrated to be many times more effective a tool of persuasion than traditional
advertising. Service marketers must learn to capitalize on this tool. So how should they do
this? The following list presents some of the options:
 Introduce a friend scheme: Encourage current users to inform others of the good
service. (American Express offers current card holders a case of wine if they
introduce a friend.)
 Testimonials: Use satisfied customers’ experiences in advertising.
 Persuasion of opinion formers: Use PR to target opinion leaders or early adopters.
 Promotional items: Promotional items can provide tangible clues implying ‘club’
membership. The Open Golf Championship umbrella, or the Wimbledon sweatshirt
are examples of this.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

117
 SERVICES AND RELATIONSHIP MARKETING

 Appointment of brand ambassadors: These are people employed by the company

whose remit it is to build personal relationships with customers and other
stakeholders.
 Feedback: Incorporate it into the communication of a comprehensive complaints
procedure. ‘If you’re happy with what we do tell them [friends etc.], if you’re not tell
us.’

Summary
This unit covers the traditional marketing mix application in the service concept. The
traditional marketing mix represents service outcome, price, distribution, and promotion.
The product component of the marketing mix is the outcome of the service. It consists of
two components: the technical and the functional outcomes. The technical outcome is the
end result of the service or the “what” of the service. The price of a service is used by
consumers as an input into their expectations, their purchase decisions, and their evaluation
of service quality. Price is used by firms to control demand of the service. The factors that
impact the pricing decision are demand for the service, elasticity of demand, pricing
structure of the competition, costs, operational position of the firm, the marketing mix
elements, the firm’s target market, the firm’s image, organizational pricing objective, and
legal restraints.

Service firms have three different channel structures that can be used: exclusive distribution,
selective distribution, and intensive distribution. Seven distribution growth strategies can be
used by service firms. These strategies are multisite; multiservice; multisegement; multisite,
multiservice; multisite, multisegement; multiservice, multisegement; and multisite,
multiservice, multisegement. Service firms should gain economies-of-scale in their
marketing programs. In operations, firms should develop service-specific economies, site-
specific economies, and firm-specific economies.

Service firms shall integrate their promotion mix. IMC presupposes that all communications
whether internal to the organization or external to its various stakeholder groups, share the
same ‘tone of voice’. The five key aspects of communication that service marketers should
look into are the role of personal selling, the importance of internal marketing
communications, the management of expectations, the provision of tangible clues, and
word-of-mouth communications.

Discussion Questions

1. Explain the benefit of branding to a service operation.

2. Describe the difference between a centralized management system and a
decentralized management system.
3. Identify the factors that affect pricing decisions in a service setting.
4. What is price bundling?
5. Describe the notion of a multichannel distribution and list each of the distribution
growth strategies.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
118
 SERVICES AND RELATIONSHIP MARKETING

UNIT 6 SERVICE QUALITY, CUSTOMER EXPECTATIONS AND

PERCEPTION
Learning Objectives

Upon completion of this unit a student will be able to:

 Define the meaning of customer expectation
 Recognize that customers hold different types of expectations for service
performance.
 List the various types of customer expectations
 Discuss the sources of customer expectations of service including those that are
controllable and uncontrollable by marketers.
 Describe the various factors that influence customers’ expectations of services
 Explain the model of service expectations
 Define customer satisfaction and service quality
 Show that service encounters or the "Moments of truth" are the building blocks of
customer perceptions.
 Highlight strategies for managing customer perceptions of service.

6.1 Service Expectation

Before, during and after consumption of a service two feelings are prominent, namely
expectations and perceptions. Expectations are usually formed prior to usage of a service
but may also occur where a customer is actively involved in the delivery of a service.
Expectations reflect inclinations or beliefs as to what will or should happen. Perceptions can
also develop during a service, but invariably materialize after usage. They represent the
customer’s evaluation of the service, particularly in relation to expectations. Measuring the
customer’s perception and expectations is vitally important. However, the following
question must be asked of the service organization: ‘What does it think of customer
expectations and perceptions? To arrive at an answer, two variants of the original
perceptions/expectations formula might be used. The objective is to determine whether or
not any gaps exist between the customers’ view and the service organization’s perception of
the customers’ view.

6.1.1 Service levels and zone of tolerance

Customer expectations are pretrial beliefs a consumer has about the performance of a
service that are used as the standard or reference against which service performance is
judged. Customers hold several different types of expectations about services.
 The first can be termed desired service and defined as the level of service the customer
hopes to receive - the "wished for" level of performance. Desired service is a blend of
what the customer believes "can be" and "should be". For example, you will engage
the services of your college’s placement office when you are ready to graduate. What
are your expectations of the service? In all likelihood, you want the office to find you
a job – the right job in the right geography for the right salary – because that is what
you hope and wish for.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

119
 SERVICES AND RELATIONSHIP MARKETING

 Customers hope to achieve their service desires but recognize that this is not always
possible. For this reason they hold another, lower-level expectation for the threshold
of acceptable services. This lower expectation has been termed adequate service- the
level of service the customer will accept. Adequate service represents the "minimum
tolerable expectation." the bottom level of performance acceptable to the customer,
and reflects the level of service customers believe they will get on the basis of their
experience with services. For example, under circumstances where unemployment
rate is the highest, some graduates may accept any job for which they could earn a
salary, and others agreed to nonpaying, short-term positions as interns to gain
experience.

Figure 6-1 shows these two expectation standards as the upper and lower boundaries for the
expectations. This figure portrays the idea that customers evaluate service performance on
the basis of two standards: what they desire and what they deem acceptable.

Desired Service

Adequate Service

Figure 6-1 Dual customer expectation levels

As we discussed in earlier units of this module, services are heterogeneous in that

performance may vary across providers, across employees from the same provider, and even
within the same service employee. The extent to which customers recognize and are willing to
accept this variation is called the Zone of tolerance and is shown in Figure 6-2.

Desired Service

Zone of
Tolerance

Adequate Service

Figure 6-2 the zone of tolerance

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

120
 SERVICES AND RELATIONSHIP MARKETING

Activity 6.1
What is the implication of a service performance which falls outside the zone
of tolerance and within the zone of tolerance?

Commentary
If service drops below adequate service (the minimum level considered
acceptable) customers will be frustrated and their satisfaction with the company
undermined. If a service performance is outside the zone of tolerance at the
top end where performance exceeds desired service customers will be very
pleased and probably quite surprised as well. You might consider the zone of
tolerance as the range or window in which customers do not particularly notice
service performance. When it falls outside the range (either very low or very
high), the service gets the customer's attention in either a positive or negative
way.

6.1.2 Factors that Influence Customer Expectations of Service

Because expectations play a critical role in customer evaluation of services, marketers need
and want to understand the factors that shape them. Marketers would also like to have
control over these factors as well, but many of the forces that influence customer
expectations are uncontrollable. Service expectations are formed by many uncontrollable
factors, from the experience of customers with other companies and their advertising to a
customer's psychological state at the time of service delivery. Strictly speaking, what
customers expect is as diverse as their education, values and experience. In this section we
try to separate out the various factors that influence customer expectations.

6.1.2.1 Sources of Desired Service Expectations

As shown in Figure 6-3 two of the largest influences on desired service level are personal
needs and philosophies about service.
Expected
Enduring service Service
intensifiers
Desired Service

Personal needs
Zone
of
Tolerance

Adequate Service

6.3 Factors that influence desired service

Personal needs are those states or conditions essential to the physical or psychological well-
being of the customer. Personal needs are pivotal factors that shape the level of desired
service. Personal needs can fall into many categories, including physical, social,
psychological, and functional. A fan who regularly goes to a football game right from work,

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

121
 SERVICES AND RELATIONSHIP MARKETING

and is therefore thirsty and hungry, hopes and desires that the food and drink vendors will
pass by his section frequently, whereas a fan who regularly has dinner elsewhere has a low
or zero level of desired service from the vendors. A customer with high social and
dependency needs may have relatively high expectations of a hotel's ancillary services,
hoping, for example, that the hotel has a bar with live music and dancing.

Some customers are more demanding than others, having greater sensitivity to, and higher
expectations of, service. Enduring service intensifiers are individual, stable factors that lead
the customers to a heightened sensitivity to service. One of the most important of these
factors can be called derived service expectations, which occur when customer
expectations are driven by another person or group of people. For a large computer vendor,
when the computer equipment is down, his customers complain. Hence his need to keep the
system up and running is not just his own expectation but is derived from the pressure of his
customers.

6.1.2.2 Sources of Adequate Service Expectations

A different set of determinants affect adequate service, the level of service the customer finds
acceptable. In general, these influences are short term in a nature and tend to fluctuate
more than the somewhat stable factors that influence desired service.

In this section we explain the five factors shown in Figure 6-4 that influence adequate
service.
(1) Transitory service intensifiers
(2) Perceived service alternatives
(3) Customer self-perceived service role
(4) Situational factors
(5) Predicted service

Transitory service
intensifiers
Desired
Service
Perceived service
alternatives Zone
of
Tolerance
Self-perceived
service role
Adequate Predicted
Service Service
Situational
factors

Figure 6-4 Factors that influence adequate service

The first set of elements, transitory service intensifiers, are temporary, usually short-term,
individual factors that make a customer more aware of the need for service. Personal
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
122
 SERVICES AND RELATIONSHIP MARKETING

emergency situations in which service is urgently needed (such as an accident and the need
for automobile insurance or a breakdown in office equipment during a busy period) raise the
level of adequate service expectation, particularly the level of responsiveness required and
considered acceptable.

Perceived service alternatives are other providers from whom the customer can obtain
service. If customers have multiple service providers to choose from, or if they can provide
the service for themselves, their levels of adequate services are higher than those of
customers who believe it is not possible to get better service elsewhere. The customer's
perception that service alternative exist raises the level of adequate service and narrows the
zone of tolerance.

A third factor affecting the level of adequate service is the customer's self perceived service
role. We define this as customer perceptions of the degree to which customers exert an
influence on the level of service they receive. In other words, customers' expectations are
partly shaped by how well they believe they are performing their own roles in service
delivery. One role of the customer is specifying the level or service expected. The customer's
active participation in the service also affects this factor. A final way the customer defines his
or her role is in assuming the responsibility for complaining when service is poor. A
dissatisfied customer who complains will be less tolerant than one who does not voice his or
her concerns.

Levels of adequate service are also influenced by situational factors defined as service
performance conditions that customers view as beyond the control of the service provider.
For example, where personal emergencies such as serious automobile accidents would likely
intensify customer service expectations of insurance companies (because they are transitory
service intensifiers), catastrophes that affect a large number of people at one time (tornadoes
or earthquakes) may lower service expectations because customers recognize that insurers
are inundated with demands for their service. Customers who recognize that these
contingencies are not the fault of the service company may accept lower levels of adequate
service given the context. In general, situational factors temporarily lower the level of
adequate service, widening the zone of tolerance.

The final factor that influences adequate service is predicted service, the level of service
customers believe they are likely to get. This type of service expectation can be viewed as
predictions made by customers about what is likely to happen during an impending
transaction or exchange. Predicted service performance implies some objective calculation
of the probability of performance or estimate of anticipated service performance level.

Predicted service is typically an estimate or calculation of the service a customer will receive
in an individual transaction rather than in the overall relationship with a service provider.
Where desired and adequate service expectations are overall assessments comprising many

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

123
 SERVICES AND RELATIONSHIP MARKETING

individual service transactions, predicted service is almost always an estimate of what will
happen in the next service encounter or transaction the customer experiences. This is one of
the reasons predicted service is viewed in this model as an influencer of adequate service.

Because predictions are about individual service encounters, they are likely to be more
concrete and specific than the types of expectation levels customers hold for adequate
service or desired service. For example, your predicted service expectations about the
length of time you will spend in the waiting room the next time you visit your doctor will
likely be expressed in terms of the number of minutes or hours you have set in the waiting
room this time.

6.1.2.3 Sources of Both the Desired and Predicted Service Expectations

When consumers are interested in purchasing services, they are likely to seek or take in
information from several different sources. For example, they may call a store, ask a friend,
or deliberately track newspaper advertisements to find the needed service at the lowest price.
They may also receive service information by watching television or hearing an unsolicited
comment from a colleague about a service that was performed well. In addition to these
active and passive types of external search for information, consumers may conduct an
internal search by reviewing the information held in memory about the service.

This section discusses one internal and three external factors that influence both desired and
predicted service expectations:
(1) Explicit service promises
(2) Implicit service promises
(3) Word-or-mouth communications and
(4) Past experience

Explicit service promises

EXPECTED
SERVICE
Implicit service promises
Desired Service

Word of mouth
Zone
of Past experience
Tolerance

Adequate Service Predicted

Service

Figure 6.5 Factors that influence desired and predicted service

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

124
 SERVICES AND RELATIONSHIP MARKETING

Explicit service promises are personal and non-personal statements about the service made
by the organization to customers. The statements are personal when they are communicated
by a salespeople or service or repair personnel; they are non-personal when they come from
advertising, brochures, and other written publications. Explicit service promises are one of
the few influences on expectations that are completely in the control of the service provider.
Explicit service promises influence both the levels of desired service and predicted service.
They shape what customers desire in general as well as what they predict will happen in the
next service encounter from a particular service provider or in a certain service encounter.

Activity 6.2
Companies are tempted to overpromise in making explicit service promises. What is
the downside of such practice?

Commentary
Promising exactly what will ultimately be delivered would seem a logical and
appropriate way to manage customer expectations and ensure that reality fits the
promises. Companies and personnel who represent them often deliberately
overpromise to obtain business or inadvertently over promise by stating their best
estimates about delivery of a service in the future. A particularly dangerous promise
that many companies today make to their business customers is to provide a “total
solution" to their business needs. This promise is very difficult to deliver. Making
overpromises influence customers to form expectations beyond what the service
provider can deliver which ultimately leads to customers’ dissatisfaction.

Implicit service promises are service- related cues other than explicit promises that lead to
inferences about what the service should and will be like. These quality cues are dominated
by price and the tangibles associated with the service. In general the higher the price and the
more impressive the tangibles, the more a customer will expect from the service.

Activity 6.3
Give examples to elucidate how do internal service promises such as price other
tangible cues influence customers expectations.

Commentary
Consider a customer who shops for insurance, finding two firms charging
radically different prices. The customer can make inferences that the firm
with the higher price should and will provide higher-quality service and better
coverage. Similarly, a customer who stays at a high class hotel is likely to
desire and predict a higher standard of service than from a hotel with less
impressive facilities.

The importance of word-of mouth communication in shaping expectations of service is

well documented. These personal and sometimes non-personal statements made by parties
other than the organization convey to customers what the service will be like and influence
both predicted and desired service. Word-of-mouth communication carries particular weight
as the source of the information in that it is perceived as unbiased. Word of mouth tends to

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

125
 SERVICES AND RELATIONSHIP MARKETING

be very important in services that are difficult to evaluate before purchase and direct
experience of them. Experts (including consumer reports, friends, and family) are also word-
of-mouth sources that can affect the levels of desired and predicted service.

Past experience, the customer's previous exposure to service that is relevant to the focal
service, is another force in shaping predictions and desires. The service relevant for
prediction can be previous exposure to the service. For example, you probably compare
each stay in a particular hotel with all previous stays in that hotel. You may also compare
each stay with your experiences in other hotels and hotel chains. Customers also compare
across industries: Hospital patients, for example, compare hospital stays against the
standard of hotel visits. In a general sense, past experience may incorporate previous
experience with the focal brand typical performance of a favorite brand, experience with the
brand last purchased or the top-selling brand, as well as the average performance a customer
believes represents a group of similar brands.

6.1.2.4 A Model of Customer Service Expectations

The full model of customer expectations and the forces that influence them is shown in
Figure 6-6. At the center of the model is the detailed view of expectations showing the two
levels, desired and adequate, and the zone of tolerance that separates them. The source or
antecedents of each type of expectation are shown along the sides of the model.

ENDURING SERVICE EXPLICIT SERVICE

INTENSIFIERS PROMISES
 Derived expectations  Advertising
 Personal service philosophies  Personal selling
 Contracts
 Other communications
IMPLICT SERVICE
PERSONAL NEEDS PROMISES
 Tangibles
EXPECTED  Price

TRANSITORY SERVICE SERVICE

WORD OF MOUTH
INTENSIFIERS
Desired  Personal
 Emergencies
Service  Expert ( Consumer Reports,
 Service Problems
publicity, consultants,
surrogates)
Zone of
PERCEIVED SERVICE Tolerance
ALERNATIVES PAST EXPERIENCE
Adequate
SELF-PERCEIVED Service
SERVICE ROLE PREDICTED SERVICE

SITUATIONAL Gap 5
FACTORS
 Bad weather
 Catastrophe PERCEIVED
 Random over demand SERVICE

Figure 6-6 Nature and determinants of customer expectations of service

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

126
 SERVICES AND RELATIONSHIP MARKETING

How might a manager of a service organization use this model to create, improve, or market
services? First, managers need to know the pertinent expectation sources and their relative
importance for a customer population, a customer segment, and perhaps even a particular
customer. They need to know, for instance, the relative weight of word of mouth, explicit
service promises, and implicit service promises in shaping desired service and predicted
service. Some of these sources are more stable and permanent in their influence (e.g.,
enduring service intensifiers and personal needs) than the others, which fluctuate
considerably over time (e.g., perceived service alternatives and situational factors).

The different sources vary in terms of their credibility as well as their potential to be
influenced by the marketer. Exhibit 6-1 shows the breakdown of typically controllable and
uncontrollable factors and offers suggestions about the ways services marketers can
influence the factors.

Exhibit 6-1ways Services Marketers Can Influence Customer Expectations

Controllable factors Possible influence strategies

Explicit service promises Make realistic and accurate promises that reflect the service actually
delivered rather than an idealized version of the service.
Ask contact people for feedback on the accuracy of promises made in
advertising and personal selling.
Avoid engaging in price or advertising wars with competitors because
they take the focus off customers and escalate promises beyond the
level at which they can be met.
Formalize service promises through a service guarantee that focuses
company employees on the promise and that provides feedback on the
number of times promises are not fulfilled.
Implicit service promises Ensure that service tangibles accurately reflect the type and level of
service provided.
Ensure that price premiums can be justified by higher levels of
performance by the company on important customer attributes.

Less controllable factors Possible influence strategies

Enduring-service intensifiers Use market research to determine sources of derived service

expectations and their requirements. Focus advertising and marketing
strategy on ways the service allows the focal customer to satisfy the
requirements of the influencing customer.
Use market research to profile personal service philosophies of
customers and use this information in designing and delivering
services.
Personal needs Educate customers on ways the service addresses their needs.
Transitory-service Increases service delivery during peak periods or in emergencies.
intensifiers
Perceived-service Be fully aware of competitive offerings and, where possible and
alternatives appropriate, match them.
Self-perceived service role Educate customers to understand their roles and perform them better.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

127
 SERVICES AND RELATIONSHIP MARKETING

Word-of-mouth Stimulate word of mouth in advertising by using testimonials and

communications opinion leaders.
Identify influences and opinion leaders for the service and concentrate
marketing efforts on them.
Use incentives with existing customers to encourage them to say
positive things about the service.
Past experience Use marketing research to profile customer previous experience with
similar services.
Situational factors Use service guarantees to assure customer about service recovery
regardless of the situational factors that occur.
Predicted service Tell customers when service provision is higher than what can
normally be expected so that predictions of future service encounters
will not be inflated.

6.1.5 Managing Consumer Expectations

Consumer buying decisions and patronage are based on consumer expectations. The higher
the level of expectations, the greater the probability of purchase will be. The lower the level
of expectations, the lower the probability of purchase will be. Also, remember that the
higher the expectations, the greater the chances that the service firm will not be able to meet
consumer expectations and that the customer will be dissatisfied. The reverse is true for
lower expectations.

Marketers Dilemma
Service firms face a strange dilemma in marketing. Promoting high expectations
will increase patronage but also increase the chances of producing dissatisfied
customers. Promoting lower expectations will ensure satisfied customers, but the
chances of getting customers to buy the service are greatly reduced. Therefore,
the ideal goal is to promote the exact service customers will receive and to
provide the exact service customers expect. If firms can match expectations and
service, customers are satisfied.

Managing customer expectations is a critical component in the marketing plan of a service

business. Consumer expectations must be managed during the pre-purchase phase, the
service encounter, and the post-purchase phase. The following sections will discuss how
customer expectations can be managed during each phase of the purchase process.

During the Pre-Purchase Phase

Managing customer expectations during the pre-purchase phase consists of three steps.
 First, learn what customers expect.
 Second, tell customers what they can expect.
 Third, consistently provide the service that customers expect.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

128
 SERVICES AND RELATIONSHIP MARKETING

The first strategy, learning customer expectations, during the pre-purchase phase requires
communication. Service personnel and sales personnel must ask questions and be willing to
listen.

The second strategy for managing customer expectations during the pre-purchase phase is to
tell customers what they can expect. Advertising, sales personnel, service personnel, tangible
cues, point-of-purchase displays, and sales promotions are some of the methods that can be
used. Service firms must be careful, however, to communicate accurate information.
Businesses must resist the temptation to over promise and should promise only what can
and will be provided.

The third strategy consists of providing consistent service. Past experience and word-of-
mouth are two critical variables used by consumers in making purchase decisions. By
providing consistent service, customers form concrete expectation and tend to continue
patronizing the same firm. Buyers will also convey positive word-of-mouth communication
to other potential customers.

During the Service Encounter

Three strategies can be used during the service encounter to manage customer expectations.
 First, service personnel must communicate with the customer during the service
encounter.
 Second, if possible, service providers should modify the service to meet the
customer’s expectations.
 Third, if the service cannot be modified, the service personnel should explain why
the customer’s expectations cannot be met. The goal during this phase is to ensure
the service being provided matches the consumer’s expectations.

During the Post-Purchase Phase

Managing consumer expectations does not stop after the service is performed. Service firms
have three strategies they can use after the service has been completed.
 First, companies should communicate with customers immediately after the service is
completed to see if expectations were met.
 Second, forms can be used for a follow-up program, such as an evaluation survey sent to
the customer through the mail or a phone call.
 Third, companies should have a procedure for dealing with dissatisfied customers that
will assist in managing future expectations. The goal during this phase is twofold.
o The primary goal is to communicate with customer to see if expectations were
met.
o The secondary goal is to modify future expectations to increase the chances of
repeat purchase.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

129
 SERVICES AND RELATIONSHIP MARKETING

6.2 Service Quality

It is widely acknowledged that efforts to define and measure the quality of products have
proved more successful than the definition and measurement of service quality. Even the
word itself has evoked a variety of views as to its meaning. For services the setting of
standards represents one way of communicating quality. However, the workings of the
service organization itself must come under scrutiny in the quest for delivering quality. The
Gaps Model is a useful framework for understanding the impact of the organization on
quality. A technique for determining what to measure, and how, has been developed for
service quality. It is called SERVQUAL. Additional approaches for managing service
quality are discussed in the unit.

6.2.1 Definition of Quality

Quality has been the subject of many and varied definitions leading to ‘no one definition (of
quality) is “best” in every situation. Each definition has both strengths and weaknesses in
relation to criteria such as measurement and generalizability, managerial usefulness and
consumer relevance. David Garvin is noteworthy for analyzing the range of quality
definitions, classifying them into five groups.

The Transcendent Approach

According to this view, quality is synonymous with innate excellence, absolute and
universally recognizable: ‘You will know it when you see it’. It emphasizes quality as a
mark of uncompromising standards. The origin of quality as excellence dates back to the
Greek philosophers who referred to it as ‘the best’, ‘the highest form’, ‘the highest idea’. If,
so we are to grant the title ‘quality’ only to those products and services that achieve the
highest standards. Unlike the Greeks in ancient times philosophizing over the concept of
quality, practitioners in the world of business seek something much more practical. For
them quality should be capable of implementation, delivery and measurement.

The Product-Based Approach

The emphasis here is on quality as a precise and measurable variable. Any differences (in
quality) that do occur reflect differences in the quantity of some ingredient or attribute
possessed by a product. This approach leads to a vertical or hierarchical ordering of quality.
Products are raised according to the amount of ingredients/attributes that each possesses.
However, an unambiguous ranking is possible only if the ingredients/attributes in question
are considered preferable by all buyers. For services, on the other hand, precision and
measurability represent an ongoing challenge.

The User-Based Approach

This approach starts from the premise that quality ‘lies in the eyes of the beholder’.
Consumers are said to have specific wants or needs and those products that best meet their
preferences are those that they view as having the highest quality. There are two problems
with this approach. First, with so many different preferences in the marketplace it is going to
be difficult arriving at an agreed definition of quality. Second, it tends to equate quality with
satisfaction. As Garvin perceptually notes, ‘a product that maximizes satisfaction is
certainly preferable to one that meets fewer needs, but is it necessarily better as well’.
Garvin’s user-based approach focuses exclusively on the customer in the determination of
quality. His other four approaches are rooted in manufacturing/operations and engineering
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
130
 SERVICES AND RELATIONSHIP MARKETING

and consequently have difficulty confronting the unique characteristics of services. Meeting
and/or exceeding customer expectations grew out of the services marketing literature in the
mid-1980s. It still commands a vast amount of interest within services but it is not without
criticism The undeniable strength of this approach is that it allows the customer the
overriding say in defining quality. Unfortunately that strength may also be construed as a
weakness. As with the issue of preference variety mentioned earlier, expectations can also
be highly varied, and personal. Securing agreement over expectations is therefore
problematic. Furthermore, customers may not be in a position to articulate their
expectations due to a lack of knowledge and understanding. Where customers are
encouraged to state their expectations, service organizations may find them to be
impractical, unreasonable and unprofitable.

The Manufacturing-Based Approach

Whilst the user-based approach to quality is rooted in the subjectivity of consumer
preferences, the manufacturing-based approach, as the name suggests, focuses on internal
matters. It has come to be known as conformance specifications. Products are designed and
manufactured according to predetermined specifications. Quality control techniques are
used for detecting deviations from the specification. For service organizations the back
office operations (the technical core) are amenable to specifications. On the other hand the
front office is often not so responsive to the imposition of specifications. However, even here
under a process of standardization or routinization services are subject to a form of standard
operating procedures or models. Specifications can be written for aspects of service that
would appear, on the surface, to present difficulties. Take courtesy as an example: A
courteous employee (1) reflects a ‘welcome’ attitude; (2) shows consideration and respect for
the customer; (3) listens to the customer, takes a friendly helpful attitude; (4) talks to the
customer; (5) tries to understand the feelings, needs and requests of a customer; (6) explains
the situation to the customer; (7) sees the customer is satisfied; (8) offers to help the
customer at any time; (9) thanks the customer.

Quality is value
In contrast to quality as absolute (the excellence level of thought), the value approach
regards quality as relative to price. Monroe, a leading authority on pricing, suggests that a
buyer’s perception of value represents a mental trade-off between the quality or benefits
perceived relative to the sacrifice perceived by paying the price. Thus,

Perceived value = Perceived benefits (gain)

Perceived cost (give)

Buyers, in effect, use price as an index of quality as well as an index of the sacrifice that is
made in purchasing it. According to Feigenbaum, the notion of value has to be included in
any quality definition: Quality does not have the popular meaning of ‘best’ in any absolute
sense. It means ‘best for certain customer conditions’. These conditions are (a) the actual
use and (b) the selling price of the product. Product quality cannot be thought of apart from
product cost. The last sentence in the quotation above is noteworthy as it suggests that ‘you
get what you pay for’. Value, therefore, should be viewed as higher price/higher quality,
lower price/lower quality. However the price set is, in addition, a reflection of market
conditions, internal costs (material, labour, equipment) and operating efficiencies.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

131
 SERVICES AND RELATIONSHIP MARKETING

Depending on the impact of these factors price may not reflect quality. Customers unable to
comprehend market conditions and cost behaviour are thereby exempted from making an
informed judgement of value. A‘high price’ for whatever service is not necessarily an
indicator or reassurance of excellent quality.

Reference was made above (under a manufacturing-based approach) to what is required of a

courteous employee. What that signified is a service setting some form of standard for
employee behaviour. Service employee conduct, knowledge and appearance is one, albeit
important, element in debates over the standard of service. In general terms the word
standard (often used interchangeably with quality) implies a level of performance that
customers will find at the very least acceptable. However much that level is of importance to
customers, how and why a particular level is arrived at should additionally warrant scrutiny.
Unfortunately, judgements (by the customer) over the level of service are not informed by
knowledge of why it is at that level. Whilst the formation of customer expectations has
aroused interest, the process by which standards are determined has not attracted much
attention in the services literature. Not surprisingly, we must resort to the view that
standards should be set in accordance with customer requirements or expectations.

6.2.2 Hard and Soft Standards

The standards experienced by customers of a service fall into two categories: hard and soft.

Hard standards often involve counts or timed actions of how many, how accurately, how
quickly. Two of the five quality dimensions (see SERVQUAL later in unit) are particularly
receptive to hard measures. For reliability the ultimate standard is either ‘right first time’
(e.g. the correct order delivered to the customer), or ‘right on time’ (e.g. trains run when
they are meant to run, the doctor keeps to the patient’s scheduled appointment time and the
dry cleaner cleans the customer’s clothing by the promised date). For the second dimension,
responsiveness, time or speed of response, is what’s looked for in a standard. Basically it
refers to the amount of time a customer has to wait between calling a service and receiving a
response, e.g. waiting to get through to a service by telephone, waiting for a plumber to
arrive.

Soft standards are areas that are more difficult to measure objectively and agree a standard.
Soft standards are developed in response to customers, who invariably ask themselves:
 How was I made to feel?
 Was I involved, informed and consulted?
 Did I like how I was treated?
Service customers want to experience courtesy, trust, care and understanding. These
attributes are encapsulated in a further two dimensions of service quality, namely empathy
and assurance. To determine the extent to which they are present during a service encounter
we need to contact the customers for their opinions and guarantees. This can be done
through group discussions and/or customer surveys. Establishing standards requires a
detailed assessment of the entire service process, as in blueprinting or service mapping.
Questions can then be raised as to how far each step in the process requires and is amenable
to specific behaviour or action to complete. The greater the degree of specificity the easier it
will be to set a standard.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

132
 SERVICES AND RELATIONSHIP MARKETING

6.2.3 Process versus Technical Outcome Quality

The two bases to judge the quality of service are:
1. Process of the service/ functional quality
2. Outcome of the service/ technical quality

Consumers judge the quality of services on their perceptions of the technical outcome
provided and on how that outcome was delivered. For example, a legal services client will
judge the quality of the outcome, or how the court case was resolved, and also the quality of
the process. Process quality would include such things as the lawyer's timeliness, his
responsiveness in returning phone calls, his empathy for the client, his courtesy and listening
skills. Similarly, restaurant customers will judge the service on his/her perceptions of the
meal (technical outcome quality) and on how the meal was served and how the employees
interacted (process quality).

If the service has a specific outcome, as in the winning or losing of a lawsuit, the customers
can judge the effectiveness of the service on the basis of that outcome. However, many
services offered by doctors, engineers, college professors, accountants, and architects among
others as well as many routine services such as automobile repair are highly complex, and a
clear outcome is not always evident. In these situations, the technical quality of the service
or 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.

Activity 6.4
How do customers judge the quality of the service when they cannot accurately
evaluate the technical quality of the service?

Commentary
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. In a study investigating the cues influential in assessing legal services,
researchers found that courtesy was an extremely powerful signal. Thus, courtesy
of the provider was used as a signal of quality for a service whose technical
quality could not be accurately evaluated.

6.2.4 The Gaps Model of Service Quality

To enhance knowledge of service quality and encourage investigation of the key issues, a
model has been developed which has made a substantial contribution to our understanding
of service quality. The authors regard a gap as representing a significant hurdle in achieving
a satisfactory level of quality. The overriding attractiveness of this model is that it should
encourage us to consider service quality in more than definitional terms. Rather, it looks to
the workings of a service organization for explanation of the ‘how’ and ‘why’ of service
quality delivery.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
133
 SERVICES AND RELATIONSHIP MARKETING

Word-of-mouth Personal needs Past experience

Communications

Expected
Service

Gap 5

Perceived service

Consumer

Marketer
Service delivery Gap4 External
communications to
consumers
Gap 3

Translations of
perceptions into
service quality specs

Gap 1
Gap 2

Management
perceptions of
consumer
expectations

Figure 6.7 The gaps model

(1) Gap 1 represents the difference between customer expectations and management
perceptions of customer expectations.
(2) Gap 2 is the difference between management perceptions of consumer expectations
and the translation of these perceptions into service-quality specifications.
(3) Gap 3 is the difference between the service actually delivered by frontline service
personnel on a day-to-day basis and the specifications set by management.
(4) Gap 4 represents the difference between service delivery and what is promised in
external communications to consumers.
(1) Finally, Gap 5 is the difference between customer expectations and perceptions (that
is, perceived service quality, as described above). Gap 5 is influenced by Gaps 1-4,
which are all within the control of an organization and therefore need to be analyzed
to identify any changes that should implemented to reduce or eliminate Gap 5.

6.2.5 SERVQUAL
Service quality is viewed as a multi-dimensional concept. Consumers assess and evaluate a
number of factors or dimensions. The fifth gap in the Gaps Model of Service Quality gave
rise to SERVQUAL, a self-administered questionnaire purported to be a generic measure of
service quality. The SERVQUAL instrument is based on Gap 5 or the customer gap. On the
basis of information from 12 focus-group interviews with consumers, Parasuraman et al.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
134
 SERVICES AND RELATIONSHIP MARKETING

(1985) concluded that consumers evaluated service quality by comparing expectations with
perceptions on ten dimensions:

(1) tangibles;
(2) reliability;
(3) responsiveness;
(4) communication;
(5) credibility;
(6) security;
(7) competence;
(8) courtesy;
(9) understanding/knowing customers; and
(10) access.

These ten dimensions were subsequently collapsed into five generic service-quality
dimensions, as follows:
1. Reliability - Ability to perform the promised service dependably and accurately.
2. Responsiveness - Willingness to help customers and provide prompt service.
3. Assurance - Employees' knowledge and courtesy and their ability to inspire trust and
confidence.
4. Empathy - Caring, individualized attention given to customers.
5. Tangibles - Appearance of physical facilities, equipment, personnel, and written
materials.

We will expand on each of the five dimensions of service quality and provide illustration of
how customers judge each dimension. Table 6-1 gives examples of each for customer
services (car repair, airline, medical care).

Reliability: Delivering on Promises

Of the five dimensions, reliability has been consistently shown to be the most important
determinant of perceptions of service quality. Reliability is defined as the ability to perform
the promised service dependably and accurately. In its broadest sense, reliability means that
the company delivers on its promises-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. Think of the service
companies you are most loyal to. Unless you have no choice about which you do business
with, those service companies you are most loyal to shall be reliable to deliver the core
service.

Responsiveness: Being Willing to Help

Responsiveness is the willingness to help customers and to provide prompt service. This
dimension emphasizes attentiveness and promptness in dealing with customer request,
questions, complaints, and problems. 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. To excel on the dimension of responsiveness, a company must be

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

135
 SERVICES AND RELATIONSHIP MARKETING

certain to view the process of service delivery and the handling of requests from the
customer's point of view rather than from the company's 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.

Assurance: Inspiring Trust and Confidence

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 in a sense that customers are assigned to a banker who
will get to know them individually and who will coordinate all of their banking services.
(An inherent risk for the company when these types of personal relationships are built up is
that the customer will follow the service provider if and when the provider leaves the
company.) In other situations, trust and confidence are embodied in the organization itself.
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.

Empathy: Treating Customers as Individual

Empathy is defined as the caring, individualized attention the firm provides its customers.
The essence of empathy is conveying, through personalized or customized service, that
customers are unique and special. Personnel at small service firms 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. Even though larger
firms have superior resources, the small firms are perceived as more knowledgeable about
customer's issues and needs and are able to offer more customized services.

Tangibles: Representing the Service Physically

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. 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. While tangibles are often used by service companies
to enhance their image, provide continuity, and signal quality to customers, most companies
combine tangibles with another dimension to create a service quality strategy for the firm. In
contrast, firms that don't pay attention to the tangibles dimension of the service strategy can
confuse and even destroy an otherwise good strategy.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

136
 SERVICES AND RELATIONSHIP MARKETING

Activity 6.5
Give examples how a car repair firm, an airline, and a medical care facility address and how
customers judge each of the following service quality dimensions.
 Reliability
 Responsiveness
 Assurance
 Empathy
 Tangible

Commentary
Reliability Responsiveness Assurance Empathy Tangibles
Car Problem fixed Accessible; no Knowledgeable Acknowledges Repair
repair the first time waiting, mechanics customer by name, facility,
and ready responds to remember waiting
when requests. preference area,
promised uniforms,
equipment

Airline Flights to Prompts and Trusted name, Understanding Aircraft,

promised speedy system good safety special individual ticketing
destinations for ticketing, record, needs counters,
baggage competent baggage
handling employees area,
uniforms

Medical Appointments Accessible, no Knowledge, Acknowledges Waiting

Care are kept on waiting, skills, patient as a person, room, exam
schedule, willingness to credentials, remembers room,
diagnoses listen reputation previous problems, equipment,
prove to be patience written
accurate materials.

For measurement purpose, the five service quality dimensions are assessed by a total of 22
items (Parasuraman, 1988).

Reliability
(1) Providing services as promised.
(2) Dependability in handling customers’ service performed.
(3) Performing the services right the first time.
(4) Providing services at the promised time.
(5) Maintaining error-free records.

Responsiveness
(1) Keeping customers informed about when services will be performed.
(2) Prompt service to customers.
(3) Willing to help customers.
(4) Readiness to respond to customers’ requests.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
137
 SERVICES AND RELATIONSHIP MARKETING

Assurance
(1) Employees who instill confidence in customers.
(2) Making customers feel safe in their transaction.
(3) Employees who are consistently courteous.
(4) Knowledgeable employee to answer customer questions.

Empathy
(1) Giving customers individual attention.
(2) Employees who deal with customers in a caring fashion.
(3) Having the customer’s best interest at heart.
(4) Employees who understand the needs of their customers.
(5) Convenient business hour.

Tangibles
(1) Modern equipment.
(2) Visually appealing facilities.
(3) Employees who have a neat, professional appearance.
(4) Visually appealing materials associated with the service.

Each item is measured on the basis of responses to two statements that measure:
(1) the general expectations of customers concerning a service; and
(2) the perceptions of customers regarding the levels of service actually provided by the
company within that service category.

For each statement of the SERVQUAL dimensions, the respondent indicates his or her
opinion on a seven-point Likert-type scale ranging from “strongly disagree” (1) to “strongly
agree” (7). The data are converted into “perception-minus-expectation” scores for each
statement. The gap score (G) is calculated on an item-by-item basis as the difference
between the raw perception-of-performance score (P) and the raw expectation score (E) for
matching items; therefore, G = P–E. Following this calculation, the greater the perception-
minus-expectation score, the greater is the perceived service quality.

The SERVQUAL model has been the most popular instrument for measurement of
customer perceived service quality. It has got a strong endorsement and provides the starting
point for further rigorous studies on the subject by researchers and practitioners. However,
its popularity and influence doesn’t salvage it from severe criticisms on a number of fronts.
Buttle (1996) and Sureshchandar et al. (2002) identified the following major limitations of
the original SERVQUAL model developed by Prasuraman et al (1988).
 Conceptualization – conceptualization of service quality as a disconfirmation model of
the gap between the actual service experience and the expected service level does not
have a strong empirical grounds. Cronin and Taylor (1992) showed that service quality
can be measured based on the perception of the service quality without subtraction of the
expected service quality.
 Focus – the emphasis of SERVQUAL is on the process dimensions involving the human
interaction, the soft side of service delivery, and the functional service quality aspects
with no adequate emphasis on the technical outcome or the hard core service. The model
also doesn’t capture all facets of the marketing mix as it doesn’t address price and
promotion in its measurement items.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
138
 SERVICES AND RELATIONSHIP MARKETING

 Dimensionality – the five service quality dimensions cannot have a universal application
as they can’t be used uniformly across all countries and sectors as the organizational,
technological, economic, social, and cultural factors may vary.

SERVQUAL vs SERVPERF
In Parasuraman et al.’s “disconfirmation” perspective, the service quality construct is seen as
an attitude resulting from customers’ comparison of their expectations about the service
encounter with their perceptions of the service encounter. The SERVQUAL instrument
operationalizes this construct as the difference between expected and actual (perceived)
performance. Alternatively, SERVPERF is based on the “performance only” perspective and
operationalizes service quality as customers’ evaluations of the service encounter. As a
result, SERVPERF uses only the performance items of the SERVQUAL scale.

6.3 Satisfaction versus Service Quality

Satisfaction and service quality are fundamentally different in terms of their underlying
causes and outcomes. While they have certain things in common, satisfaction is generally
viewed as a broader concept while service quality assessment focuses specifically on
dimensions of service. Based on this view, perceived service quality is a component of
customer satisfaction. Figure 7-1 graphically illustrates the distinctions between the two
concepts.

As shown in Figure 7-1 service quality is a focused evaluation that reflects the customer's
perception of specific dimensions of service: reliability, responsiveness, assurance, empathy,
tangibles. Satisfaction, on the other hand, is more inclusive: It is influenced by perceptions
of service quality, product quality, and price as well as situational factors and personal
factors.

Reliability

Responsivenes Situational
s Service Factors
Quality
Assurance

Empathy Customer
Product Satisfaction
Quality
Tangibles

Price Personal
Factors

Figure 7.1- Customer perceptions of quality and customer satisfaction

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

139
 SERVICES AND RELATIONSHIP MARKETING

When we refer to customer perceptions, we assume that the dimensions of service and the
ways in which customers evaluate service are similar whether the customer is internal or
external to the organization. By external customers we mean those individuals and
businesses that buy goods and services from the organization. When we refer to customer
perceptions and how customers evaluate services, you can assume that both internal and
external customers are included and that the definitions, strategies, and apply to either
group.

6.3.1 Customer Satisfaction

What is customer Satisfaction? Satisfaction is the consumer's fulfillment response. It is a
judgment that a product or service feature, or the product or service itself, provides a
pleasurable level of consumption-related fulfillment. In less technical terms, satisfaction is
the customers' evaluation of a product or service in terms of whether that product or service
has met their needs and expectations. Failure to meet needs and expectations is assumed to
result in dissatisfaction with the product or service.

The confirmation/disconfirmation model is the foundation for measurement of customer

satisfaction (Davis and Heineke, 1998). According to the disconfirmation model customer’s
satisfaction is a function of the discrepancy between the customer’s expectation and
perception of the service. Locke (1976) and Davis and Heineke (1998) improvised the
disconfirmation model with an addition of a third factor in the model. They suggested that
importance weight shall be attached to each measurement item as all measurement items
cannot have equal impact to the customer’s satisfaction. Thus customer satisfaction is a
function of customer expectation (E), customer perception (P), and importance (I).
Algebraically this can be expressed as:
S = (E – P) x I

However, the Locke’s model was not found to provide a better measure of the degree of
satisfaction or dissatisfaction of customers than does the confirmation/disconfirmation
model (Kanning et al., 2009).

Customer satisfaction will be influenced by the following factors.

1. Product and service features
2. Consumer emotions
3. Perceptions of equity or fairness
4. Attributions for service success or failure

Product and Service Features: Customer satisfaction with a product or service is influenced
significantly by the customer's evaluation of product or service features. In conducting
satisfaction studies, most firms will determine what the important features and attributes are
for their service and then measure perceptions of those features as well as overall service
satisfaction. Research has shown that customers of services will make trade-offs among
different service features (e.g., price level versus quality versus friendliness of personnel

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

140
 SERVICES AND RELATIONSHIP MARKETING

versus level of customization), depending on the type of service being evaluated and the
criticality of the service.

Consumer Emotions: Customers' emotions can also affect their perceptions of satisfaction
with products and services. These emotions can be stable, pre-existing emotions-for
example, mood state or life satisfaction. Think of times when you are at a very happy stage
in your life (such as when you are on vacation), and your good happy mood and positive
frame of mind has influenced how you feel about the services you experience.

Attributions for Service Success or Failure: Attributions - the perceived causes of events -
influence perceptions of satisfaction as well. When they have been surprised by an outcome
(the service is either much better or much worse than expected), consumers tend to look for
the reasons, and their assessments of the reasons can influence their satisfaction.

Perceptions of Equity or Fairness: Customer satisfaction is also influenced by perceptions

of equity and fairness. Customers ask themselves: Have I been treated fairly compared with
other customers? Did other customers get better treatment, better prices, or better quality
service? Did I pay a fair price for the service? Was I treated well in exchange for what I
paid and the effort I expended? Notions of fairness are central to customers' perceptions of
satisfaction with products and services.

Activity 6.6
Give examples that illustrate how a product feature, customer’s emotions, and attribution
account to customers’ satisfaction in a service setting.

Commentary
For a service such as a resort hotel, important features might include the pool area,
restaurants, room comfort and privacy, helpfulness and courtesy of staff, room price, and so
forth. When a customer is in a bad mood, your negative feelings may carry over into how you
respond to services, causing you to overreact or respond negatively to any little problem.
Regarding attribution effect, if a customer of a weight-loss organization fails to lose weight as
hoped for, he will likely search for the causes; was it something he did, was the diet plan
ineffective, or did circumstances simply not allow her to follow the diet regimen - before
determining her level of satisfaction or dissatisfaction with the weight-loss center. For many
services, customers at least take partial responsibility for how things turnout.

6.4 Service Encounters or “Moments of Truth”: Building Blocks of

Satisfaction and Service Quality
We have just finished a discussion of customer satisfaction and service quality. Here we
turn to what have been termed the "building blocks of satisfaction and service quality-
namely, service encounters or the "moment of truth." Remember back in unit 1 when we
introduced the services marketing triangle. The service encounter or the moment of truth is
what we termed interactive marketing in the triangle. It is where promises are kept or
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
141
 SERVICES AND RELATIONSHIP MARKETING

broken and where the proverbial rubber meets the road sometimes called "real-time
marketing." It is from these service encounters the customers build their perceptions.

Service Encounters or "Moments or Truth"

From the customer's point of view, the most vivid impression of service occurs in the service
encounter, or the "moment of truth," when the customer interacts with the service firm. For
example, among the service encounters a hotel customer experiences are checking in to the
hotel, being taken to a room by a bell person, eating a restaurant meal, requesting a wake-up
call, and checking out. Among the service encounters that a business-to-business customer
experience in purchase and use of a piece of equipment are sales contact, delivery,
installation, billing, and servicing. From the organization's point of view, each encounter
thus presents an opportunity to prove its potential as a quality service provider and to
increase customer loyalty.

6.4.1 The Importance of Encounters

While early events in the encounter cascade are likely to be especially important, any
encounter can potentially be critical in determining customer satisfaction and loyalty.

Sales Call

Delivery and
Installation

Servicing

Ordering of Supplies

Billing
Figure 6-8 A service encounter cascade for an industrial purchase

If a customer is interacting with a firm for the first time, that initial encounter will create a
first impression of the organization. In these first encounter situations, the customer
frequently has no other basis for judging the organization, and the initial phone contact or
face-to-face experience with a representative of the firm can take on excessive importance in
the customer's perceptions of quality.

Even when the customer has had multiple interactions with a firm, each individual
encounter is important in creating a composite image of the firm in the customer's memory.
Many positive experiences add up to a composite image of high quality, while much
negative interaction will have the opposite effect. On the other hand, a combination of
positive and negative interactions will leave the customer feeling unsure of the firm’s
quality, doubtful of its consistency in service delivery, and vulnerable to the appeals of
competitors. Each encounter adds to or detects from the potential for a continuing
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
142
 SERVICES AND RELATIONSHIP MARKETING

relationship.Logic suggests that not all encounters are equally important in building
relationships. For every organization, certain encounters are probably key to customer
satisfaction. Aside from common key encounters, there is some momentous encounter that,
like the proverbial “one bad apple,” simply ruins the rest and drives the customer away no
matter how many or what type of encounters has occurred in the past.

Activity 6.7
Develop a service encounter cascade that portrays the key activities undertaken by a
service provider to the satisfaction of a customer during a hotel visit.

A service encounter cascade for a hotel visit.

Check-in

Bell person takes to Room

Restaurant Meal

Wake-Up Call

Checkout

6.4. 2 Types of Service Encounters

A service encounter occurs every time a customer interacts with the service organization.
There are three general types of service encounters;
1. Remote encounters
2. Phone encounters and
3. Face-to-face encounters.

A customer may experience any of these types of encounters or a combination of all three,
in his or her relations with a service firm.

Remote Encounters
First, encounters can occur without any direct human contact (remote encounters), such as
when a customer interacts with a bank through the ATM system, or with a mail-order
service through automated dial-in ordering. Remote encounters also occur when the firm
sends its billing statements or communicates other types of information to customers by
mail. Although there is no direct human contact in these remote encounters, each represents
an opportunity for the firm to reinforce or establish quality perceptions in the customer. In
remote encounters the tangible evidence of the service and the quality of the technical
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
143
 SERVICES AND RELATIONSHIP MARKETING

processes and systems become the primary bases for judging quality. More and more
services are being delivered through technology, particularly with the advent of Internet
applications. Retail purchases, airline ticketing, repair and maintenance troubleshooting,
and package and shipment tracking can be considered few examples of remote encounters.

Phone Encounters
In many organizations (e.g., insurance companies, utilities, telecommunications), the most
frequent type of encounter between an end customer and the firm occurs over the telephone
(phone encounters). Almost all firms (whether goods manufacturers or service businesses)
rely on phone encounters in the form of customer-service, general inquiry, or order-taking
functions. The judgment of the quality in phone encounters is different from remote
encounters because there is greater potential variability in the interaction. Tone of voice,
employee knowledge, and effectiveness/efficiency in handling customer issues become
important criteria for judging quality in these encounters.

Face- to- face Encounter

A third type of encounter is the one that occurs between an employee and a customer in
direct contact (face-to-face encounters). Determining and understanding service quality
issues in face-to-face context is the most complex of all. Both verbal and nonverbal
behaviors are important determinants of quality, as are tangible cues such as employee dress
and other symbols of service (e.g. equipment, informational brochure, physical setting). In
face-to-face encounters the customer also plays a role in creating quality service through the
behavior displayed during the interaction.

6.4.3 Sources of Pleasure and Displeasure in Service Encounters

Because of the importance of service encounters in building quality perceptions and
ultimately influencing customer satisfaction, researchers have extensively analyzed service
encounters in many contexts to determine the sources of customers' favorable and
unfavorable perceptions.

Sometimes contact employees are asked to put themselves in the shoes of a customer and
answer the same questions: Put yourself in the shoes of customers of your firm. In other
words, try to see your firm through your customers' eyes. Now think of a recent time when a
customer of your firm had a particularly satisfying/ unsatisfying interaction with you or a
fellow employee." The stories are then analyzed to determine common themes of
satisfaction/dissatisfaction underlying the events.

Four common themes have been identified as the sources of customer

satisfaction/dissatisfaction in service encounters.
1. Recovery (after failure)
2. Adaptability
3. Spontaneity and
4. Coping

Recovery - Employee Response to Service Delivery System Failures

The first theme includes all incidents in which there has been a failure of the service delivery
system and an employee is required to respond in some way to consumer complaints and
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
144
 SERVICES AND RELATIONSHIP MARKETING

disappointments. The failure may be, for example, a hotel room that isn't available, an
airplane flight that is delayed six hours, an incorrect item sent from a mail order company,
or a critical error on an internal document. The content or form of the employee's response
is what causes the customer to remember the event either favorably or unfavorably.

Examples of recovery incidents, both good and bad

Satisfactory Dissatisfactory
I had made an advance reservation at the hotel. They We had made an advance reservation at the hotel.
lost my room reservation but the manager gave me the When we arrived we found we had no room-no
suite room for the same price. (external customer) explanation, no apologies, and no assistance in finding
another hotel. (external customer)
A gentleman left his shoes outside his room door to be One of my suitcases was all dented up and looked like
shined. When he went to retrieve them, they were it had been dropped from 30,000 feet. When I tried to
gone, and could not be found. The hotel staff took make a claim for my damaged luggage, the employee
responsibility and within an hour a representative had insinuated that I was lying and trying to rip them off.
arrived with six pairs of shoes for the gentleman to (external customer)
choose from. (employee)

Adaptability-Employee Response to Customer Needs and Requests

A second theme underling satisfaction/dissatisfaction in service encounter is how adaptable
the service delivery system is when the customer has special needs or requests that place
demands on the process. In these cases, customers judge service encounter quality in terms
of the flexibility of the employees and the system. Incidents categorized within this theme
all contain an implicit or explicit request for customization of the service to meet a need.
Much of what customers see as special needs or requests may actually be rather routine
from the employee's point of view; what is important is that the customer perceives that
something special is being done for his/her based on his/her own individual needs. External
customers and internal customers alike are pleased when the service provider puts forth the
effort to accommodate and adjust the system to meet their requirements. On the flip side,
they are angered and frustrated by an un-willingness to try to accommodate and by promises
that are never followed through. Contact employees also see their abilities to adapt the
system as being a prominent source of customer satisfaction, and often they are equally
frustrated by constraints that keep them from being flexible.

Examples of adaptability incidents, both good and bad

Satisfactory Dissatisfactory
Although it was not our regular order time, I My young son, flying alone, was to be assisted by
needed some suppliers that we did not have in the stewardess from start to finish. At the airport
stock. I called the supply office and the she left him alone in the airport with no one to
gentleman on the phone said, “No problem. I escort him to his connecting flight. (external
received the supplies the next day. His word was customer)
as good as gold. (internal customer)

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

145
 SERVICES AND RELATIONSHIP MARKETING

Spontaneity-Unprompted and Unsolicited Employee Actions:

Even when there is no system failure and no special request or need, customers can still
remember service encounters as being very satisfying or very dissatisfying. Employee
spontaneity in delivering memorably good or poor service is the third theme. Satisfying
incidents in this group represent very pleasant surprises for the customer (special attention,
being treated like royalty, receiving something nice but not requested), whereas dissatisfying
incidents in this group represent negative and unacceptable employee behaviors (rudeness,
stealing, discrimination, ignoring the customers).

Examples of spontaneity incidents:

Satisfaction Dissatisfaction
The anesthesiologist took extra time to explain exactly what I needed a few minutes to decide on a
I would be aware of and promised to take special care in dinner. The waitress said, “If you would
making sure I did not wake up. It impressed me that the read the menu and not the road map,
anesthesiologist came to settle my nerves and explain the you would know what you want to
difference in the medicine I was getting because of my cold. order.” (external customer)
It was a nice bit of extra attention that he did not have to
give. (external customer)

Coping-Employee Response to Problem Customers:

The incidents categorized in this group came to light when employees were asked to
describe service encounter incidents in which customers were either very satisfied or
dissatisfied. In addition to describing incidents of the types outlined under the first three
themes, employees described many incidents in which customers were the cause of their
own dissatisfaction. Such customers were basically uncooperative; that is unwilling to
cooperate with the service provider, other customers, industry regulations, and/or laws. In
these cases nothing the employee could do would result in the customer feeling pleased
about the encounter. The term "Coping" is used to describe these incidents because this is
the behavior generally required of employees to handle problem customer encounters. Also
of interest is the customers themselves didn't relate any "Problem customer" incidents. That
is, customers either do not see, or choose not to remember or retell, stories of the times
when they themselves were unreasonable to the point of causing their own dissatisfactory
service encounter.

Examples of coping incidents, both good and bad

Satisfactory Dissatisfactory
A person who became An intoxicated man began pinching the female flight attendants. One attendant told
intoxicated on a flight started him to stop but he continued and then hit another passenger. The co-pilot was called
speaking loudly, annoying the and asked the man to sit down and leave the others alone, but the passenger refused.
other passengers. The flight The co-pilot then “decked" the man knocking him into his seat. (Employee)
attendant asked the passenger if
he would be driving when the While a family of three was waiting to order dinner, the father began hitting his child.
plane landed and offered him Another customer complained about this to the manager who then, in a friendly and
coffee. He accepted the coffee sympathetic way, asked the family to leave. The father knocked all of the plates and
and became quieter and glasses off the table before leaving. (Employee)
friendlier (employee)

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

146
 SERVICES AND RELATIONSHIP MARKETING

Summary
Using a conceptual model of the nature and determinants of customer expectations of
service, we showed in this unit that customers hold different types of service expectations:
(1) desired service, which reflects what customers want; (2) adequate service, what
customers are willing to accept; and (3) predicted service, what customers believe they are
likely to get.

Customer expectations are influenced by a variety of factors, some controllable and others
uncontrollable by service marketers. The types and sources of expectations are the same for
end consumers and business customers, for pure service and product related service, and for
experienced customers and inexperienced customers.

This unit also described customer perceptions of service by first introducing you to two
critical concepts: customer satisfaction and service quality. These critical customer
perceptions were defined and discussed in terms of the factors that influence each of them.
You learned that customer satisfaction is a broad perception influenced by features and
attributes of the product as well as by customers' emotional responses, their attributions, and
their perceptions of fairness. Service quality, the customer's perception of the service
component of a product, is also a critical determinant of customer satisfaction. Sometimes,
as in the case of a pure service, service quality may be the most critical determinant of
satisfaction. You learned that perceptions of service quality are based on five dimensions:
reliability, assurance, empathy, responsiveness, and tangibles.

The other major purpose of the unit was to introduce the notion of service encounters, or
"moments of truth," as the building blocks for both satisfaction and quality. You learned
that every service encounter (whether remote, over the phone, or in person) is an
opportunity to build perceptions of quality and satisfaction. The underlying themes of
pleasure and displeasure in service encounters were also described. The importance of
managing the evidence of service in each and every encounter was discussed. The evidence
of service includes people, processes, and physical evidence.

Finally, we described strategies firms use to enhance customer perceptions of service quality
and increase customer satisfaction. Broadly these strategies include measuring and
managing customer satisfaction and service quality and aiming for quality and satisfaction
in every service encounter.

Self Assessment Questions

1. Describe the notion of zone of tolerance.

2. List the major factors that influence adequate service and desired service levels.
3. Discuss the difference between Parasuman’s SERVQUAL model and Cronin and
Taylor’s SERVPERF model.
4. Briefly describe the notion of a remote encounter, a phone encounter, and a face-to-
face encounter that you have had recently.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

147
 SERVICES AND RELATIONSHIP MARKETING

UNIT 7 SERVICE RECOVERY

Learning Objectives
Upon completion of this unit a student will be able to:
 Illustrate the importance of recovery from service failures in keeping customers and
building loyalty.
 Discuss the nature of consumer complaints and why people do and do not
complain.
 Provide evidence of what customers expect and the kind of responses they want
when they do complain.
 Provide strategies for effective service recovery, together with examples of what
does and does not work.

7.1 The Impact of Service Failure and Recovery

Service recovery refers to the actions taken by an organization in response to a service
failure. Failures occur for all kinds of reasons:
 The service may be unavailable when promised
 The service may be delivered late or too slowly
 The outcome may be incorrect or poorly executed or
 Employees may be rude or uncaring.

All of these types of failures bring about negative feelings and responses from customers.
Left unfixed they can result in customers leaving, telling other customers about their
negative experiences, and even challenging the organization through organizations of
consumer rights or legal channels. Research has shown that resolving customer problems
effectively has a strong impact on customer satisfaction, loyalty, and bottom-line
performance. That is, customers who experience service failures, but are ultimately satisfied
based on recovery efforts by the firm, will be more loyal than those whose problems are not
resolved. That loyalty translates into profitability. Those who complain and have their
problems resolved quickly are much more likely to repurchase than are those whose
complaints are not resolved. Those who never complain are least likely to repurchase.

An effective service recovery strategy has multiple potential impacts. It can increase
customer satisfaction and loyalty and generate positive word of mouth as noted earlier. A
well-designed, well-documented service recovery strategy also provides information that can
be used to improve service as part of a continuous improvement effort. By making
adjustments to service processes, systems, and outcomes based on learning from service
recovery experiences, companies increase the likelihood of “doing it right the first time.” In
turn, this reduces costs of failures and increases initial customer satisfaction.

There are tremendous downsides to having no service recovery or ineffective service

recovery strategies. Poor recovery following a bad service experience can lead to customers
who are so dissatisfied and become “terrorists,” actively pursuing opportunities to openly
criticize the company. Further, repeated service failures without an effective recovery

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

148
 SERVICES AND RELATIONSHIP MARKETING

strategy in place can aggravate even the best employees. Some have suggested that
customers who are dissatisfied, but experience a high level of excellent service recovery,
may ultimately be even more satisfied and more likely to repurchase than are those who
were satisfied in the first place. For example, think of a hotel customer who arrives to check
in and finds there is no room available for him. In an effort to recover, the hotel front-desk
person immediately upgrades this guest to a better room at the same original price. The
customer is so thrilled with this compensation that he is extremely satisfied with this
experience, even more impressed with the hotel than he was before, and vows to be loyal
into the future. The logical, but not very rational, conclusion is that companies should plan
to disappoint customers so that they can recover and gain even greater loyalty from them as
a result! This idea has become known as the recovery paradox.

Certainly, the recovery paradox is more complex than it may seem on the surface. First of
all, it is expensive to fix mistakes, and it would appear somewhat ludicrous to encourage
service failures – after all we know that reliability (“doing it right the first time”) is the most
critical determinant of service quality across industries. Second, empirical research suggests
that only under the very highest levels of customers’ service recovery ratings will we observe
increased satisfaction and loyalty. This research suggests that customers weigh their most
recent experiences heavily in their determination of whether to buy again. If the experience
is negative, overall feelings about the company will decrease and repurchase intentions will
also diminish significantly. Unless the recovery effort is absolutely superlative, it cannot
overcome the negative impression of the initial experience enough to build repurchase
intentions beyond where they would be if the service had been provided right in the first
place. The adage “Do it right the first time” is still the best bet. However, when a failure
does occur, then every effort at a superior recovery should be made.

Activity 7.1
What is recovery paradox, and you think it is an easy task?

Commentary
Recovery paradox is a plan designed to disappoint customers and recover
service failures in order to gain more loyalty. This practice considers the
nature of the customer, the degree of the service failure, the procedure used
to handle complaint, and the superiority of the recovery, etc. Besides, it
incurs cost and it is complex.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

149
 SERVICES AND RELATIONSHIP MARKETING

7.2 How Customers Respond to Service Failures?

When there is a service failure, customers can respond in a variety of ways as illustrated in
figure 7.1.
Service Failure

Take Actions Do Nothing

Switch Providers Stay with Provider

Complain to Complain to Complain to

Provider Family and Third Party
Friends

Switch Providers Stay with Provider

Figure 7.1 Customer response following service failure

First, customers can choose to take action or they can do nothing. Many customers are very
passive about their dissatisfaction, simply saying or doing nothing. Whether they take
action or not, at some point the customer will decide whether to stay with that provider or
switch to a competitor. As we already have seen, those who do not complain are least likely
to return. For companies, customer passivity in the face of dissatisfaction is a threat to
future success.

Types of customer actions

Customers can take various actions following service failure. A dissatisfied customer can
choose to complain on the spot to the service provider, giving the company the opportunity
to respond immediately. This is often the best-case scenario for the company because it
gives a second chance to satisfy the customer, keep business in the future, and potentially
avoid any negative word of mouth. If they don’t complain immediately, customers may
choose to complain later to the provider by phone or in writing, or even to write or call the
corporate offices of the company. Again, the company has a chance to recover.

Some customers choose not to complain directly to the provider but rather spread negative
word of mouth about the company to friends, relatives, and co-workers. This negative word
of mouth can be extremely detrimental because it can reinforce the customer’s feelings of
negativism and spread that negative impression to others as well. Further, the company has
no chance to recover unless the negative word of mouth is accompanied by a complaint
directly to the company.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

150
 SERVICES AND RELATIONSHIP MARKETING

Finally, customers may choose to complain to third parties such as the Better Business
Bureau, to consumer affairs arms of the government, to a licensing authority, a professional
association, or potentially to a private attorney.

Activity 7.1
What is the advantage to the business when dissatisfied customers express their
complaints to the service provider at the time of the service failure?

Commentary
It gives the company the chance to react without delay, and make appropriate
recovery to satisfy the customer, maintain the business in the future, and prevent
any negative word of mouth.

7.3 Types of Complainers

1. Passive
2. Voicers
3. Irates
4. Activists

Research suggests that people can be grouped into categories based on how they respond to
failures. Four categories of response types were identified in a study that focused on grocery
stores, automotive repair services, medical care, and banking and financial services:
Passives, voicers, irates, and activists. While the proportion of the types of complainers is
likely to vary across industries and contexts, it is likely that these four categories of
complainer types will be relatively consistent and that each type can be found in all
companies and industries.

Passives: This group of customers is least likely to take any action. They are unlikely to say
anything to the provider, less likely than others to spread negative word of mouth, and
unlikely to complain to a third party. They often doubt the effectiveness of complaining,
thinking the consequences will not merit the time and effort they will expend. Sometimes
their personal values or norms argue against complaining. These folks tend to feel less
alienated from the marketplace than irates and activists.

Voicers: These customers actively complain to the service provider, but they are less likely
to spread negative word of mouth, to switch patronage, or to go to third parties with their
complaints. These customers should be viewed as the service provider’s best friends! They
actively complain and thus give the company a second chance. As with the passives, these
customers are less alienated from the marketplace than those in the other two groups. They
tend to believe complaining has social benefits and therefore don’t hesitate to voice their
opinions. They believe the consequences of complaining to the provider can be very
positive, and they believe less in other types of complaining such as spreading word of
mouth or talking to third parties. Their personal norms are consistent with complaining.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

151
 SERVICES AND RELATIONSHIP MARKETING

Irates: These consumers are more likely to engage in negative word of mouth to friends and
relatives and to switch providers than are others. They are about average in their propensity
to complain to the provider. They are unlikely to complain to third parties. These folks
tend to feel somewhat alienated from the marketplace. As their label suggests, they are
more angry with the provider, although they do believe that complaining to the provider can
have social benefits. They are less likely to give the service provider a second chance and
instead will switch to a competitor, spreading the word to friends and relatives along the
way.

Activists: These consumers are characterized by above average propensity to complain on

all dimensions: They will complain to the provider, they will tell others, and they are more
likely than any other group to complain to third parties. Complaining fits with their
personal norms. As with the irates, these consumers are more alienated from the
marketplace than the other groups. They have a very optimistic sense of the potential
positive consequences of all types of complaining. In extreme cases, these consumers can
become “terrorists”.

Activity 7.2
Assuming that you are a front line customer address the following questions.
1. What does good customer service mean to you?
2. How would you deal with an extremely irate customer?
3. What kind of customer would you like to approach? A satisfied customer, a
doubtful customer, or an irate customer?

Commentary
1. There cannot be one ideal answer to this question because each individual has his
own understanding about customer service. A Good customer service to me means
ensuring that my customer gets satisfied with my service.
2. I understand that the customer is irate because I didn't live up to my promise, so I
would be very polite and ensure that he/she understands that I empathize with
him/her, along with finding a quick solution to the problem.
3. Attending to a satisfied customer will not give me the chance to understand how
good (or bad), I am at my job. Therefore I would like to approach the irate
customer, because of the challenge the situation presents.

7.4 Why Do (And Don’t) People Complain?

The categories just described suggest that there are some customers who are more likely to
complain than others. As individuals, these consumers believe that positive consequences
may occur and that there are social benefits of complaining, and their personal norms
support their complaining behavior. They believe they will and should be provided
compensation for the service failure in some from. They believe that fair treatment and
good service is their due, and that in cases of service failure, someone should make good. In
some cases they feel a social obligation to complain-to help others avoid similar situations
or to punish the service provider. A very small number of consumers have “complaining”
personalities- they just like to complain or cause trouble.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

152
 SERVICES AND RELATIONSHIP MARKETING

Those who are unlikely to take any action hold the opposite beliefs. They often see
complaining as a waste of their time and effort. They don’t believe anything positive will
occur for them or others based on their actions. Sometimes they don’t know how to
complain- they don’t understand the process or may not realize there are avenues open to
them to voice their complaints. In some cases, non-complainers may engage in “emotion-
focused coping” to deal with their negative experiences. This type of coping involves self-
blame, denial, and possibly seeking social support. They may feel that the failure was
somehow their fault and that they don’t deserve redress.

Personal relevance of the failure can also influence whether people complain. If the service
failure is not really important, if the failure had no critical consequences for the consumer,
or if the consumer has little ego involvement in the service experience, then he or she is less
likely to complain. For example, consumers are more likely to complain about services that
are expensive, high risk, and ego involving (e.g., vacation packages, airline travel, and
medical services) than they are about less expensive, frequently purchased services. These
latter services are simply not important enough to warrant the time to complain.
Unfortunately, even though the experience may not be important to the consumer at the
moment, a dissatisfying encounter can still drive him or her to a competitor next time the
service is needed.

Activity 7.3
Have you ever experienced a service failure that you didn’t complain
about? What were the reasons you didn’t complain?

Commentary
Refer to the above two paragraphs; you can include points that are not
mentioned.

7.5 When They Complain, What Do Customers Expect?

When they do take the time and effort to complain, customers generally have high
expectations. They expect to be helped quickly. They expect to be compensated for their
grief and for the hassle of being inconvenienced. And, they expect to be treated nicely in the
process.

Customers Expect Fair Treatment

Specifically, customers want justice and fairness in handling their complaints. Service
recovery experts, Steve Brown and Steve Tax, have documented three specific types of
justice that customers are looking for following their complaints: outcome fairness,
procedural fairness, and interaction fairness.

Outcome Fairness
Customers expect outcomes, or compensation, that matches the level of their dissatisfaction.
This compensation can take the form of actual monetary compensation, an apology, future
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
153
 SERVICES AND RELATIONSHIP MARKETING

free services, reduced charges, repairs, and/or replacements. They expect equity in the
exchange- that is, they want to feel that the company had “paid” for its mistakes in a
manner at least equal to what the customer has suffered. The company’s “punishment
should fit the crime.” They expect equality- that is, they want to be compensated no more
or less than other customers who have experienced the same type of service failure. They
also appreciate it when a company gives them choices in terms of compensation. For
example, a hotel guest could be offered the choice of a refund or a free upgrade to a better
room in compensation for his room not being available on arrival.

Procedural Fairness
In addition to fair compensation, customers expect fairness in terms of policies, rules, and
timeliness of the complaint process. They want easy access to the complaint process, and
they want things handled quickly, preferably by the first person they contact. They
appreciate companies that can be adaptable in their procedures so that the recovery effort
can match their individual circumstances. In some cases, particularly in business – to-
business services, companies actually ask the customer, “What can we do to compensate
you for our failure?” Many times, what the customer asks for is actually less than the
company might have expected.

Fair procedures are characterized by clarity, speed, and absence of hassles. Unfair
procedures are those that customers perceive as slow, prolonged, and inconvenient.
Customers also feel it is unfair if they have to prove their case – when the assumption seems
to be they are wrong or lying until they can prove otherwise.

Interaction Fairness
Above and beyond their expectations of fair compensation and hassle-free, quick
procedures, customers expect to be treated politely, with care and honesty. This form of
fairness can dominate the others if customers feel the company and its employees have
uncaring attitudes and have done little to try to resolve the problem. This type of behavior
on the part of employees may seem strange- why would they treat customers rudely or in an
uncaring manner under these circumstances? Often it is due to lack of training and
empowerment a frustrated, front-line employee who has no authority to compensate the
customer may easily respond in an aloof or uncaring manner, especially if the customer is
angry and/or rude himself.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

154
 SERVICES AND RELATIONSHIP MARKETING

Self-Assessment Question 1:
Read the following scenario and answer the questions

Alemu purchased a relatively expensive table from a mail-order division of a well- known
retailer. Previously he had purchased other furniture and goods from the same retailer. After
waiting for a number of weeks the table failed to be delivered, so Alemu contracted the mail-
order division, who referred him to their outsourced delivery company. This company’s
representative was bemused and concerned, because records showed that the delivery had been
made. She said that the matter would be looked into and the customer contacted. After three
days and no telephone call, Alemu again rang the delivery company, to find that the relevant
staff member was not in the office and therefore the whole matter had to be explained again. At
the end of this telephone call no progress had been made, so Alemu called the original mail-
order division again to explain the situation. He was told that the matter would be looked into
and that he would be contacted. The next day there was a message on Alemu’s answer machine
to say that the table had indeed been delivered about a week ago, but to a block of flats two
doors away with the same postcode and to someone of the same surname. The message then
suggested that the company would go to that address, retrieve the table and deliver it to Alemu.

Alemu’s reaction was to telephone the retailer’s mail –order division again, this time asking to
speak to the customer-service manager. The telephone was answered by a call-center employee
and the consumer was required to explain the nature of the enquiry. He was then told that the
customer-service manager was on a tea break, and was asked to phone back. It was not possible
to give out direct-line number, and so other calls to the call center was required later. (It has not
already been mentioned that each telephone call to the retailer required a considerable waiting
time.) A future phone call was made; this time Alemu was transferred to the manger’s secretary
who, after asking about the nature of the enquiry, said that she would ask this manger to call
back as soon as possible. Two hours later the customer- service manager called.

Questions
 With reference to the scenario above, what do you think that the consumer’s reaction
would be to that situation?
 In your option, was the correct action taken by the retailer?
 If not, what should have been done differently?

7.6 Service Recovery Strategies

Thankfully not all companies are doing poorly at service recovery. There are many that
have learned the importance of providing excellent recovery for disappointed customers. In
this section we examine their strategies and share examples of benchmark companies and
what they are doing. It will become clear that excellent service recovery is really a
combination of a variety of strategies that need to work. The major service recovery
Strategies are:
1. Do it right the first time
2. Welcome and encourage complaints
3. Act quickly
4. Treat customers fairly
5. Learn from recovery experiences
6. Learn from Lost customers

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

155
 SERVICES AND RELATIONSHIP MARKETING

Do it Right the First Time!

The first rule of service quality is to do it right the first time. In this way, recovery is
unnecessary, customers get what they expect, and the costs of redoing the service and
compensating for errors can be avoided. As you have already learned, reliability or doing it
right the first time is the most important dimension of service quality across industry
contexts.

What specific strategies do firms employ to achieve reliability? The adoption of total quality
management (TQM) practices aimed at “zero defects” is commonly used. However, given
the inherent differences between services and manufactured products, these tools typically
require considerable adaptation to work well in service contexts. Firms that blindly adopt
TQM practices without considering services implications, often fail in their efforts.

Dick Chase, noted service operations expert, suggests that services adopt the TQM notion of
poka-yokes to improve service reliability. Poka yokes are automatic warnings or controls in
place to ensure mistakes are not made – essentially they are quality control mechanisms,
typically used on assembly lines. Chase suggests that poka yokes can be devised in service
settings to “mistake proof” the service, to ensure that essential procedures are followed, to
avoid potentially life-threatening mistakes. For example, trays for surgical instruments have
indentations for specific instruments, and each instrument is nested in its appropriate spot.
In this way, surgeons and their staff know that all instruments are in their places prior to
closing the patient’s incision.

Similarly, poka yokes can be devised to ensure that the tangibles associated with the service are
clean and well maintained, and that documents are accurate and up-to-date. Poka yokes can
also be implemented for employee behaviors (e.g. checklists, role-playing and practice,
reminder signs) and even for ensuring that customers perform effectively.

Even more fundamentally, it is important to create a culture of zero defections to ensure

doing it right the first time. Within a zero defections culture, everyone understands the
importance of reliability. Employees and managers aim to satisfy every customer and look
for ways to improve service. Employees in a zero defects culture fully understand and
appreciate the “lifetime value of a customer” concept.

Welcome and Encourage Complaints

Even in a zero defects organization that aims for 100 percent service quality, failures occur.
A critical component of a service recovery strategy is thus to welcome and encourage
complaints. Complaints should be anticipated, encouraged, and tracked. The complaining
customer should truly be viewed as a friend. There are a number of ways to encourage and
track complaints. Customer research can be designed specifically to do this through
satisfaction surveys, critical incident studies, and lost-customer research. In a less formal
manner, employees can be important listening posts discovering sources of customer
dissatisfaction and service failure on the front line. They should be encouraged to report
this type of information. Part of encouraging complaints also involves teaching customers
how to complain. Sometimes they have no idea who to speak to, what the process is, or
what will be involved. It is best to make this process as simple as possible – the last thing
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
156
 SERVICES AND RELATIONSHIP MARKETING

customers want when they are dissatisfied is to face a complex, difficult – to- access process
for complaining. One way that the complaining process has been simplified for customers is
though technology. New technologies have resulted in easier access for customers to sales
and service representatives.

Act Quickly
Complaining customers want quick responses. Thus, if the company welcomes, even
encourages, complaints, it must be prepared to act on them quickly. This requires systems
and procedures that allow for quick action, as well as empowered employees.

Take Care of Problems on the Front Line

Customers want the first person who hears their complaints to solve their problems whether
a complaint is registered in person, over the phone, or via the internet. Another obvious
way to speed complaint handling is to call (or in some cases electronically respond) to
customers, rather than send responses in the mail.

Empower Employees
Employees must be trained and empowered to solve problems as they occur. A problem
not solved can quickly escalate. For service employees, there is a specific and real need for
recovery training. Because customers demand that service recovery take place on the spot
and quickly, front-line employees need the skills, authority, and incentives to engage in
effective recovery. Effective recovery skills, authority, and incentives are needed to engage
in effective recovery. Effective recovery skills include hearing the customer’s problems,
taking initiative, identifying solutions, improvising, and perhaps bending the rules from time
to time. Employees not only need the authority to act (usually within certain defined
limits), but they should not be punished for taking action. In fact, incentives should exist
that encourage employees to exercise their recovery authority.

Allow Customers to Solve Their Own Problems

Another way that problems or complaints can be handled quickly is by building systems that
allow customers to actually solve their own service needs and fix their own problems.
Typically this is done through technology. Customers directly interface with the company’s
technology to perform their own customer service, providing them with instant answers.

Treat Customers Fairly

In responding quickly, it is also critical to treat each customer fairly. As discussed in an
earlier section, customers expect to be treated fairly in terms of the outcome they receive,
the process by which the service recovery takes place, and in terms of the interpersonal
treatment they receive. Examples, strategies, and results of research focused on fairness in
service recovery were discussed earlier. Here, you are reminded that this fair treatment is an
essential component of an effective service recovery strategy.

Learn from Recovery Experiences

“Problem- resolution situations are more than just opportunities to fix flawed services and
strengthen ties with customers. They are also a valuable- but frequently ignored or
underutilized- source of diagnostic, prescriptive information for improving customer

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

157
 SERVICES AND RELATIONSHIP MARKETING

service”. By tracking service recovery efforts and solutions, mangers can often learn about
systematic problems in the delivery system that need fixing. By conducting root-cause
analysis, the sources of the problems can be identified and processes modified, sometimes
eliminating almost completely the need for recovery.

Learn from Lost Customers

Another key component of an effective service recovery strategy is to learn from the
customers who defected or decided to leave. Formal market research to discover the
reasons customers have left can assist in preventing failures in the future. The following
figure shows causes behind service switching.

Summary
In this unit you learned about the importance of an effective service recovery strategy for
retaining customers and increasing positive word of mouth. Another major benefit of an
effective service recovery strategy is the information it provides that can be useful for service
improvement. The potential down sides of poor service recovery are tremendous- negative
word of mouth, lost customers, and declining business when quality issues are not
addressed.

This unit addressed how customers respond to service failures and why some people
complain while others don not. You learned that customers expect to be treated fairly when
they complain-not just in terms of actual outcome or compensation they receive, but also in
terms of the procedures that are used and how they are treated interpersonally. It is also
clear from the unit that there are tremendous rooms for improvement in service recovery
effectiveness across firms and industries.

The second half of the unit focused on specific strategies that firms are using for service
recovery: (1). Do it right the first time, (2). Welcome and Encourage Complaints, (3). Act
Quickly, (4).Treat Customers Fairly, (5) Learn from recovery Experiences, and (6). Learn
from Lost Customers.

Self Assessment Questions

1. List out some of the plausible reasons for service failure in the service industry.
2. Describe the characteristics of the four types of complainers in terms of their
behavior, propensity to take their complaints to the service provider and to third
parties.
3. What do customers expect when they lodge their complaint to the service provider
after experiencing service failure?
4. Excellent service recovery is a combination of a variety of strategies that need to
work. List the major service recovery strategies that have to be sought after by a
service marketer.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

158
 SERVICES AND RELATIONSHIP MARKETING

UNIT 8 SERVICE DEVELOPMENT AND DESIGN

Learning Objectives

Upon completion of this unit a student will be able to:

 Describe the challenges inherent in service design.
 Present steps in the new -service development process.
 Show the value of service blueprinting.
 Present lessons learned in choosing and implementing high-performance service
innovations.

8.1 New Service Development

Overview
Research suggests that products that are designed and introduced by following the steps in a
structured planning framework have a greater likelihood of ultimate success than those not
developed within a framework. The fact that services are intangible makes it even more
imperative for a new-service development system to have four basic characteristics:
(1) It must be objective, not subjective.
(2) It must be precise, not vague.
(3) It must be fact driven, not opinion driven
(4) It must be methodological not philosophical.

Often, new services are introduced on the basis of managers' and employees' subjective
opinions about what the services should be and whether they will succeed, rather than on
objective designs incorporating a data about customer perceptions, market needs, and
feasibility. A new-service design process may be imprecise in defining the nature of the
service concept because the people involved believe either that intangible processes cannot
be defined precisely or that "everyone knows what we mean." Neither of these explanations
or defenses for imprecision is justifiable, as we illustrate in the model for new-service
development described in this unit.

Because services are produced and consumed simultaneously and often involve interaction
between employees and customers, it is also critical that the new -service development
process involve both employees and customers. Employees frequently are the service, or at
least they perform or deliver the service, and thus their involvement in choosing which new
services to develop and how these services should be designed and implemented can be very
beneficial. Contact employees are psychologically and physically close to customers and
can be very helpful in identifying customer needs for which new services can be offered.
Involving employees in the design and development process also increases the likelihood of
new-service success because employees can identify the organizational issues that need to be
addressed to support the delivery of the service to customers.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

159
 SERVICES AND RELATIONSHIP MARKETING

Because customers are often active participators in service delivery, they too should be
involved in the new-service development process. Beyond just providing input on their own
needs, customers can help design the service concept and the delivery process, particularly
in cases where the customer personally carries out part of the service process.

Activity
Have you ever been involved in a new-service development process in your
organization? What do you think were the benefits of your involvement to the
organization?

Commentary
You could be the service deliverer; you could help in choosing which new
services to develop and how these services should be designed and implemented.
You could also help in identifying customer needs and identifying factors that
should be considered to support the service delivery.

8.1.1 Types of New Services

As we build the new-service development process, remember that not all new services are
"new" to the same degree. The types of new service options can run the gamut from major
innovations to minor style changes, as described in the following.
 Major innovations are new services for markets as yet undefined. Many innovations
now and in the future will evolve from information, computer, and Internet-based
technologies.
 Startup businesses consist of new services for a market that is already served by
existing products that meet the same generic needs.
 New services for the currently served market represent attempts to offer existing
customers of the organization a service not previously available from the company
(although it may be available for other companies).
 Service line extensions represent augmentations of the existing service line, such as
a restaurant adding new menu items, and airline offering new routes, a law firm
offering additions legal services, and a university adding new courses or degrees.
 Service improvements represent perhaps the most common type of service
innovation. Changes in features of services that are already offered might involve
faster execution of an existing service process, extended house of service, or
augmentations such as added amenities in a hotel room.
 Style changes represent the most modest service innovations, although they are often
highly visible and can have significant effects on customer perceptions, emotions,
and attitudes. Changing the color scheme of a restaurant, revising the logo for an
organization, or painting an aircraft a different color all represent style changes.
These do not fundamentally change the service, only its appearance, similar to how
packaging changes are used for consumer products.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

160
 SERVICES AND RELATIONSHIP MARKETING

Activity 7.1
Give your own examples of the range of new service options

Commentary
Make use of the examples used in the paragraph above.

8.1.2 Stages in New-Service Development

Here we focus on the actual steps to be followed in new-service development. The steps can
be applied to any of the types of new services just described. Much of what is presented in
this section has direct parallels in the new-product development process for manufactured
goods. Because of the inherent characteristics of services, however, the development
process for new services requires unique and complex adaptations. Figure 9.1 shows the
basic principles and steps in new-service development. While these may be similar to those
for manufactured goods, their implementation is significantly different. In addition, for
many service industries (e.g. Telecommunication, transportation, utilities, banking),
government agencies that regulate the industries greatly influence the nature and speed of
new-service development.

The process shown in figure 8.1 is divided into two sections:

(1) Front -end planning and
(2) Implementation.

Front End Planning

The front end determines what service concepts will be developed while the back end
implements the service concept. When asked where the greatest weaknesses in product and
service innovation occur, managers typically report problems with the "front end."

Business Strategy Development

It is usually assumed that an organization will have an overall strategic vision and mission.
Clearly a first step in new-service development is to review that vision and mission. If these
are not clear, the overall strategic direction of the organization must be determined and
agreed on. The new-services strategy and specific new-service ideas must fit within the
larger strategic picture of the organization.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

161
 SERVICES AND RELATIONSHIP MARKETING

 Business strategy Development

 New -Service Strategy Development

 Idea Generation
Front-End
Planning Stop
Screen ideas against new service strategy

 Concept Development and Evaluation

Stop
Test concept with customers and employees

 Business Analysis

Stop
Test for profitability and feasibility

 Service Development and Testing

Stop Conduct service prototype test

Implementation
 Market Testing

Stop Test service and other marketing-mix elements

 Commercialization

 Post introduction Evaluation

Figure 8.1 The new-service development process

New-Service Strategy Development

Research suggests that without a clear new-product or services strategy, a well-planned
portfolio of new products and services, and an organizational structure that facilitates
product development via ongoing communications and cross-functional sharing of
responsibilities, front-end decisions become ineffective. Thus, a product portfolio strategy
and a defined organizational structure for new-product/service development are critical -
and are the foundations for success.

The types of new services that will be appropriate will depend on the organization's goals,
vision, capabilities, and growth plans. By defining a new-service strategy (possibly in terms
of markets, types of services, time horizon for development, profit criteria, or other relevant
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
162
 SERVICES AND RELATIONSHIP MARKETING

factors), the organization will be in a better position to begin generating specific ideas. One
way to begin formulating a new-service strategy is to use the framework shown in Figure
10.2 for identifying growth opportunities.

Markets
Current Customers New Customers
Offerings
Share Building Market
Existing Services (Market Penetration) Development

Service Diversification
New Services Development

Figure 8.2 New-service strategy matrix for identifying growth opportunities.

The framework allows an organization to identify possible directions for growth and can be
helpful as a catalyst for creative ideas. The framework may also later serve as an initial idea
screen if, for creative ideas. The framework may also later serve as an initial idea screen if,
for example, the organization chooses to focus its growth efforts on one or two of the four
cells in the matrix. The matrix suggests that companies can develop a growth strategy
around current customers or for new customers, and can focus on current offerings or new
service offerings.

Idea Generation
The next step in the process is the formal solicitation of new ideas. The ideas generated at
this phase can be passed through the new-service strategy screen described in the preceding
step. Many methods and avenues are available for searching out new-service ideas. Formal
brainstorming, solicitation of ideas from employees and customers, lead-user research, and
learning about competitors’ offerings are some of the most common approaches. Observing
customers and how they use the firm's products and services can also generate creative ideas
for new innovations. Sometimes referred to as empathic design, observation is particularly
effective in situations where customers may not be able to recognize or verbalize their needs.

In service businesses, contact personnel, who actually deliver the services and interact
directly with customers, can be particularly good sources of ideas for complementary
services to those already in the marketplace and ways to improve current offerings.

Whether the source of a new idea is inside or outside the organization, there should exist
some formal mechanism for ensuring an ongoing stream of new-service possibilities. This
mechanism might include a formal new-service development department or function with
responsibility for generating new ideas, suggestion boxes for employees and customers, new-
service development teams that meet regularly, surveys and focus groups with customers
and employees, or formal competitive analysis to identify new services. While new-service
ideas may arise outside the formal mechanism, total dependence on luck is not a good
strategy.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

163
 SERVICES AND RELATIONSHIP MARKETING

Service Concept Development and Evaluation

Once an idea surfaces that is regarded as a good fit with both the basic business and the
new-service strategies, it is ready for initial development. In the case of a tangible product,
this would mean formulating the basic product definition and then presenting consumers
with descriptions and drawings to get their reactions.

The inherent characteristics of services, particularly intangibility and simultaneous

production and consumption, place complex demands on this phase of the process.
Drawing pictures and describing an intangible service in concrete terms are difficult. It is
therefore important that agreement be reached at this stage on exactly what the concept is.
By involving multiple parties in sharpening the concept definition, it often becomes
apparent that individual views of the concept are not the same. Through the initial concept
development phase it became clear that not everyone in the organization had the same idea
about how this description would translate into an actual service and that there were a
variety of ways the concept could be developed.

After clear definition of the concept, it is important to produce a description of the service
that represents its specific features and characteristics and then to determine initial customer
and employee responses to the concept. The service design document would describe the
problem addressed by the service, discuss the reasons for offering the new service, itemize
the service process and its benefits, and provide a rationale for purchasing the service. The
roles of customers and employees in the delivery process would also be described. The new-
service concept would then be evaluated by asking employees and customers whether they
understand the idea of the proposed service, whether they are favorable to the concept, and
whether they feel it satisfies and meet need.

Business Analysis
Assuming the service concept is favorably evaluated by customers and employees at the
concept development stage, the next step is to determine its feasibility and potential profit
implications. Demand analysis, revenue projections, cost analyses, and operational
feasibility are assessed at this stage. Because the development of service concepts is so
closely tied to the operational system of the organization, this stage will involve preliminary
assumptions about the costs of hiring and training personnel, delivery system
enhancements, facility changes, and any other projected operations costs.

The organization will pass the results of the business analysis through its profitability and
feasibility screen to determine whether the new-service idea meets the minimum
requirements.

Implementation
Once the new-service concept has passed all of the front-end planning hurdles, it is ready for
the implementation stages of the process.

Service Development and Testing

In the development of new tangible products, this stage involves construction of product
prototypes and testing for consumer acceptance. Again, because services are intangible and
largely produced and consumed simultaneously, this step is difficult. To address the
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
164
 SERVICES AND RELATIONSHIP MARKETING

challenge, this stage of service development should involve all who have a stake in the new
service: customers and contact employees as well as functional representatives from
marketing, operations, and human resources. During this phase, the concept is refined to
the point where a detailed service blueprint is likely to involve over a series of iterations on
the basis of input from all of the parties listed.

A final step is for each area involved in rendering the serve to translate the final blueprint
into specific implementation plans for its part of the service delivery process. Because
service development, design, and delivery are so intricately intertwined, all parties involved
in any aspect of the new service must work together at this stage to delineate the details of
the new service. If not, seemingly minor operational details can cause an otherwise good
new-service idea to fail. For example, often services are promoted without the backup
needed to take calls and answer customer questions. When one telecommunication
company promoted a new service representatives to take the volume of inquiries that came
in, the company aggravated its best customer segment and then didn't have enough
customer service representatives to take the volume of inquiries that came in, the company
aggravated its best customer segment and at the same time lost potential sales of the new
service.

Market Testing
It is at this stage of the development process that a tangible product might be test marketed
in a limited number of trading areas to determine marketplace acceptance of the product as
well as other marketing-mix variables such as promotion, pricing, and distribution systems.
Again, the standard approach for a new manufactured product is typically not possible for a
new service due to its inherent characteristics. Because new-service offerings are often
intertwined with the delivery system for existing services, it is difficult to test new services in
isolation. And in some cases, for example, a one- site hospital, it may not be possible to
introduce the service to an isolated market area since the response to marketing-mix
variables, however. The new service might be offered to employees of the organization and
their families for a time to assess their responses to variations in the marketing mix. Or the
organization might decide to test variations in pricing and promotion in less realistic
contexts by presenting customers with hypothetical mixes and getting their responses in
terms of intentions to try the service under varying circumstances. While this approach
certainly has limitations compared with an actual market test, it is better than not assessing
market response at all.

It is also extremely important at this stage in the development process to pilot run the
service to be sure that the operational details are functioning smoothly.

Commercialization
At this stage in the process, the service goes live and is introduced to the marketplace. This
stage has two primary objectives. The first is to build and maintain acceptance of the new
service among large numbers of service delivery personnel who will be responsible day to
day for service quality. This task is made easier if acceptance has been built in by involving
key groups in the design and development process all along. However, it will still be a
challenge to maintain enthusiasm and communicate the new service throughout the system;
excellent internal marketing will help.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
165
 SERVICES AND RELATIONSHIP MARKETING

The second objective is to monitor all aspects of the service during introduction and through
the complete service cycle. If the customer needs six months to experience the entire
service, then careful monitoring must be maintained through at least six months. Every
detail of the service should be assessed-phone calls, face-to-face transactions, billing,
complaints, and delivery problems. Operating efficiency and costs should also be tracked.

Post introduction Evaluation

At this point, the information gathered during commercialization of the service can be
reviewed and changes made to the delivery process, staffing, or marketing-mix variables on
the basis of actual market response to the offering. No services will ever stay the same.
Whether deliberate or unplanned, changes will always occur. Therefore, formalizing the
review process to make those changes that enhance service quality from the customer's point
of view is critical. The service blueprint serves a valuable purpose in providing a focal point
for discussing and planning changes in the offering.

8.2 Design of the service

Introduction
Services require an operating and delivery system in order to function. That system should
be designed in such a way as to offer effective customer service and an efficiently operated
process. As you will read, that in itself represents a difficult balancing act. The drive to
achieve both efficiency and service quality can become unstuck to the detriment of provider
and/or customer. As services comprise a range of elements, the achievement of a smooth
running system and the delivery of customer satisfaction remains a challenge. Design
formats can, of course, vary with the type of service, and even within a typical service there
may be different approaches to what constitutes the best design. Whatever is decided, the
design is the service.

8.2.1 The concept of design

Design usually starts with a concept or idea followed by a design specification that will spell
out how it works, how it looks and what it symbolizes. In support of this, decisions have to be
made in respect of colour, styling, durability, reliability, materials, cost of manufacture and
so on. Design of a service offers up a somewhat different challenge. Importantly, and in
keeping with product design, there will still be tangible entities that need to be addressed,
e.g. colour, furnishings, equipment, lighting etc. However service, as you will have noted, is
a process where people interact with the production and delivery of an experience. Service
design, therefore, should encapsulate all aspects of that experience:
 The role of the customer
 The balance between front and back office
 The impact of technology, e.g. the involvement of equipment
 The location of service consumption (e.g. a fixed single facility, multi-site, mobile)
 Employee skills/behaviour and degree of discretion
 The nature of the service process, e.g. standardized, customized
 The significance of procedures
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
166
 SERVICES AND RELATIONSHIP MARKETING

 The nature and channels of communication

 The contribution of the physical evidence (see unit 5) to service satisfaction
 How design advances operational efficiency and service quality.

The above points suggest that three important functions should work together and be
actively involved in the design of a service: marketing, human resource management (HRM)
and operations management. One area where the three should come together is that of the
employee uniform. Sometimes overlooked, it is nevertheless a significant aspect of service.
Agreement over its design may nevertheless be difficult to achieve. Consider the concerns of
each function and in doing so, whether they may be in conflict.
 Marketing: Does the uniform create the right impression or image? Will it elicit a
positive, or negative response from customers?
 HRM: Will the uniform make the employee feel confident, credible and professional?
Will it degrade or humiliate the employee?
 Operations: Does the uniform feel comfortable? Is it easily cleaned? Will it interfere
with performance? Does it help customers identify employees easily?

Similar exercises can be carried out for the many ‘moments of truth’ customers experience
in the course of a service delivery. A valuable technique that will facilitate the design of a
service is called blueprinting or service mapping (see later in this unit). From this you can
identify moments of truth together with a sense of how the service operates. By bringing
together all the facets of a service it should focus your mind on how a service works and
why. Not everything can be spelt out in a blueprint, e.g. organization climate, employee attitudes,
but it should serve as a building block for addressing these and other matters of relevance in the
delivery of service quality.

Activity 7.2
1. Why is it challenging to design and develop services?
2. Why do service designers need to understand what customers want?

Commentary
1. Consider the intangibility and heterogeneity nature of services.
2. Because the main focus of service design is customer satisfaction, it is advisable
for them to design with that in mind

8.2.2 Service classification: a design issue

In addition to the conceptual and analytical skills of the designer, several issues and
concerns have been raised in the marketing/operations literature that are significant for the
development of a service operations and delivery system. Several authors have sought to
establish critical dimensions for the design and classification of services.

Thomas, in 1978 proposed a classification of services as either ‘equipment-based’ or

‘people-based’. Equipment-based services were further classified as being automated
(vending machine, car wash), monitored by relatively unskilled operators (taxis, dry
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
167
 SERVICES AND RELATIONSHIP MARKETING

cleaning), or operated by skilled operators (airlines, computer timesharing). People-based

services rely on unskilled labour (janitorial services, guards), skilled labour (car repair,
plumbing) or professionals (lawyers, accountants) for service production. Importantly, he
regards the classification as a spectrum where services may move from people-based to
equipment-based and vice versa. According to Thomas, placing a service on the spectrum
necessitates answering two questions:
(1) How is the service rendered?
(2) What type of equipment or people render the service?

Thomas further acknowledged that ‘many companies are in more than one type of
business’. This portrayal of the mixture of ‘high-tech’ and ‘high-touch’ has been echoed
more recently. Although this classification is from an operations standpoint, it can serve to
remind us of an ongoing tension between mechanization of a service and a desire for human
contact on the part of the customer.

Maister and Lovelock, in 1982, gave prominence to the customer in a 2 X 2 matrix for
service classification. Unfortunately, the extent of customer contact and customization are
not explained and they do not provide examples of services for each of the matrix
quadrants. However, they do identify, as mentioned above, client contact as a classifying
dimension but fail to address the ambiguity surrounding it. The issue of customer contact
will be discussed later in the unit.

Classifying dimension Service operation type

Low client contact

Factory
Low customization

Low client contact

Job shop
High customization

High client contact

Professional service
High customization

High client contact

Mass service
Low customization

Schmenner, in 1986 suggested two elements that can be used to classify different kinds of
service businesses:
 Degree of labour intensity, which is defined as the ratio of the labour cost incurred
to the value of the plant and equipment. As it is a ratio, Schmenner observes that
even a hospital employing large numbers of doctors, nurses, technicians remains

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

168
 SERVICES AND RELATIONSHIP MARKETING

comparatively low in labour intensity because of the very expensive plant and
equipment it deploys.

 Degree of interaction and customization, which is acknowledged by Schmenner as

a more confusing element as it combines two similar but distinct concepts. A high
level of interaction is present where a customer can actively intervene in the service
process. High customization is in evidence when a service is designed to respond to
individual needs and preferences. Although customization and interaction go hand
in hand for many services, Schmenner does concede instances where one may be
high and the other low. The value of this classification lies in the challenges specified
for service management in each quadrant. For example, where the degree of
interaction and customization is low standard operating procedures can be adopted
whilst at the same time seeking to make the service warm and inviting through
design of the service facility.

Degree of interaction and customization

Low High
Service factory: Service shop:
 Airlines  Hospitals
Degree of labor intensity

Low
 Trucking  Auto repair
 Hotels  Other repair
 Resorts & services
recreation
Mass service: Professional services:
 Retailing  Physicians
High
 Wholesaling  Lawyers
 Schools  Accountants
 Retail aspects of  Architects
commercial
banking
Figure 8.3 The service process matrix

Haywood-Farmer, in 1988, pointed to the diversity of the service sector, prompting the need
for classification to make the management job possible. Using dimensions from earlier
authors, he sought to remove any existing confusion (over previous classifications) by
advocating a three-dimensional model. The degree of contact asks whether the customer has
to be present, as is the case with a haircut; degree of labour-intensity raises the issue of
whether it is possible to automate the service, as with automatic teller machines; and the
degree of service customization examines how much standardization is possible, e.g. can a
standard programme be devised for all customers of a health club?

Haywood-Farmer illustrates the significance of his classification for service management.

For example, where a service is low in all three dimensions (cell 1) it is in reality like a
factory, with emphasis on quality control and focusing on physical facilities and procedures. The
back office of a bank is an example. As one moves towards cells 5–8, two factors become

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

169
 SERVICES AND RELATIONSHIP MARKETING

prominent. Where the service is low in labour intensity, the customer’s impression of the
physical facilities, processes and procedures is important. Additionally, care must be taken to
make sure equipment is reliable, easy to use and user proof. Secondly, as high contact and
interaction services increase in labour intensity, more attention must be paid to making sure staff
behave appropriately. As customization increases (moving towards cells 3, 4, 7 and 8) the
service process and product must be designed to fit the customer. In services high on all
three dimensions, physical facilities, procedures, processes, personal behavior and
professional judgment all become important.

Degree of contact High 6

Interaction 8

Low
High 2 4

Degree of labour
Intensity 5 7

1 3
Low
Low High
Degree of service customization

Figure 8.4 A three-dimensional classification scheme

Some examples of services in each octant:

1. Utilities, transportation of goods
2. Lecture, or teaching, postal services
3. Stock broking, courier services
4. Repair services, wholesaling, retailing
5. Computerized teaching, public transit
6. Fast food, live entertainment
7. Charter services, hospitals
8. Design services, advisory services, healing services

Wemmerlöv, in 1989, identified three variables that can aid the design of service systems:
(1) type of customer contact
(2) degree of routinization and
(3) objects of the service process.

High degree of routinization is characterized as having the following attributes:

 Low level of task variety and technical skills

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

170
 SERVICES AND RELATIONSHIP MARKETING

 Low level of information exchange between the service system and customer
 Both service employee and customer make few judgemental decisions
 The volume of goods, people, or information per unit of time is usually high
 The arrival rate of customers or jobs is often fairly predictable or controlled by the
service system
 The process can involve several customers or objects simultaneously
 The response time to a customer-initiated service request is often short.

On the other hand, a fluid service process is characterized by:

 Higher levels of technical skills
 Larger amounts of information to be exchanged between the service system and
customer
 The service employee going through unprogrammed search processes and making
several judgmental decisions
 A usually low unit of time for handling the volume of goods, people or information
 High uncertainty of the workflow
 One customer (or object) at a time
 A fairly long response time to a customer-initiated service.

Objects of the service processes

Design issues will be affected by what is being processed. Where people are to part of the
process, and the question of whether or not they need to be physically present for the service
to be rendered will require to be answered. If physical presence is necessary, the design of
the service facility, the skills of the employees and the management of the customers need to
be addressed. Where customer possessions is the object of service processing, employee
technical skills, quality of equipment and capacity planning are of particular significance.
The final category is that of information processing. For particular services, e.g. banks,
building societies, insurance companies, much if not all of the service activity can occur in a
back office, factory-type setting where efficiency is the crucial operating feature.

Wemmerlöv argued that his classification scheme can, amongst other things, ‘help
management to better understand design and operational aspects of service systems by
relating classified service processes to critical management tasks’. Amongst his ‘uses of the
taxonomy’, he noted that ‘the combination “no customer contact”, “rigid processes” and
“goods” creates a category that normally is thought of as manufacturing. In the same view,
the combination of “direct customer contact”, “interaction with service workers”, “fluid
processes” and “people” or “information” might be considered pure service.’

Customer contact
A central and recurring theme in the classification and design of service systems is the extent
and nature of customer contact. Levitt had encouraged service managers to think of their
operations as manufacturing processes. In an article entitled ‘Where does the customer fit in
a service operation’ Chase took up the mantle of Levitt, urging companies to reduce their
contact with the customer in the name of increased control. Customers were regarded as
interfering with the smooth running of service operations.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

171
 SERVICES AND RELATIONSHIP MARKETING

To address the issue of customer contact and service operational efficiency, Chase proposed
that service systems should be viewed as falling along a continuum from high customer
contact to low customer contact. Specifically, he asserted that ‘the potential efficiency of a
service system is a function of the degree of customer contact entailed in the creation of the
service product’. In effect, the more physical contact the service had with the customer, the
less efficient it would be, and vice versa. He proposed a formula which states that:

Potential operating efficiency = f ( 1) - (Customer contact time)

(service creation time)

Where, customer contact time refers to the physical presence of the customer in the system
and service creation time refers to the work process entailed in providing the service. The
extent of contact is the percentage of time the customer must be in the system relative to the
total time it takes to serve him/her.

If we apply the formula hypothetically in two contrasting situations, hotels (high customer
contact) and the bank branch office (low customer contact), the efficiency measure might be:

For hotels = 1 – 2 hours = 50% efficiency

4 hours

For branch banks = 1 – 0.25 hours = 87.5% efficiency

2 hours

The ratio of customer contact time related to service creation time is obviously much greater
in the case of hotels but does that mean that they are that much less efficient? Furthermore,
if the hotel was to take an ‘inefficient 8 hours’ to create the service, the resulting efficiency
index will be 75%! Clearly, the nature, as well as the amount of customer contact merits
attention. Customer input to the hotel facility would be defined as rather passive, whereas a
relatively low contact organization like a bank branch office may experience a degree of
uncertainty in terms of customer requests.

Chase subsequently reviewed his original position of shifting service activities to a remote
back office in order to maximize efficiency. This, after all, seemed to work well for
manufacturers because it kept outside influences, that is, customers, from disturbing the
production process. If a technician is assembling a widget, you don’t want the customer
asking him what he’s doing. Or if a clerk is processing forms, talking to the customer on the
phone takes her [sic] away from her job. In retrospect, this closed system philosophy
overlooked the fact that there are positive benefits to both the customer and the organization
by having the customer closely linked to the server, even though the job is traditionally
performed in the customer’s absence. From an information exchange perspective, the
greater the links between consumer and producer, the easier it is to understand and respond
to the customer’s needs.

In addition, Chase expanded the notion of contact from the original of ‘physical presence in
the system’ to a range of ‘contact technologies’ (mail, telephone, face-to-face). Contact
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
172
 SERVICES AND RELATIONSHIP MARKETING

remained unclear with further reformulation of the original model defining distance contact
as direct, indirect and none. Unfortunately this approach simply reaffirms the method of
contact over the nature of the contact. Chase’s model, however, remains of value even
today. The physical contact he professed to be so concerned about is still for many services a
matter of significant importance. For certain services the physical presence of the customer
is necessary, for example hairdressing, a train journey, a health spa, etc. For others physical
presence is not a prerequisite, for example electronic banking. Physical presence will also
vary within a service as well as across services, for example a visit to your local bank branch
to finalize a loan application. The remainder of the processing of that loan application
occurs independently of your physical presence. With the development of call (or contact)
centers and information technology, services are looking to minimize physical contact with
customers in line with organization goals for efficiency. But the pursuit of greater and
greater efficiency may come with a cost in the form of poorer service quality. Increases in
customer complaints, system failures, being cut off etc. – are these evidence of an efficient
system? Where the method of contact appears important is in determining the division of a
service between front and back office:

The front office is that part of the system directly experienced and visible to the customer.
This is where the service is performed and is thereby open to customer scrutiny, e.g. the
hotel dining room.

The back office is that part of the system from which the customer is (physically) excluded,
e.g. the hotel kitchens. It is often referred to as the manufacturing side of the service, not
seen by the customer. This means that the technical core of an organization (commonly
referred to as the production process) is sealed off from any uncertainties that may occur in
other parts of the organization. The back office becomes decoupled, separated from the
front office and is allowed to work without hindrance or interference. The main objective is
to enable efficiency to be maximized in the ‘production processes’.

A framework has been suggested as to how the front and back office should be organized
and coordinated. The following concepts were viewed as significant for determining the
design options and conduct of service work between the customer, front, and back office.
 Input uncertainty – refers to the service organization’s incomplete knowledge of
what the customer is going to bring to the service and how he or she is likely to
behave. Input uncertainty will vary with the two environmental variables: customer
willingness to participate and diversity of demand.
o Customer willingness to participate – refers to how far customers wish to
play an active part in the service. Customers’ capacity to become involved can
be limited by lack of knowledge, skills and understanding of their role.
o Diversity of demands – refers to the uniqueness of customer demands. Are
they to be met in a customized or standardized way?
 Interdependencies – refers to different patterns with respect to division of service
work (between front and back office and customer) and customization versus
standardization of standard actions and interdependencies.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

173
 SERVICES AND RELATIONSHIP MARKETING

The four service design options can be seen in Figure 7.5. A brief explanation of each
follows.
 Sequential standardized service design: a customer-dominated design in which they
serve themselves after service employees have provided the goods and facilities
needed for self-service. It is a standardized service in which the front and back office
can be decoupled to allow for efficient delivery of service.
High

III
Sequential customized Reciprocal service design
II
Service design
C- F - B
C
__ - F - B
Examples: Applicant and car Examples: Psychotherapy,
of demand

repair, dry laundry, freight medical care, legal advice,

transportation, cleaning, higher education
gardening
Low
Diversity

Pooled service Sequential standardized

design service design

C-F- B C -F-B
Examples: Launderettes, self-service
Examples: Banks, insurance companies, retail stores, car rentals
theatres, broadcasting companies,
airlines, fast-food restaurants

IV I

Customer disposition to participate

Figure 8.5 A typology of service interdependence patterns matching input uncertainty

C = customers, F = front-office employee(s); B = back-office employee(s).
Main locus of interdependence, supporting interdependencies
Source: Larsson and Bowen (1989)

 Reciprocal service design: joint participation of the parties ‘in which the output of
each becomes the input for the others’. The service is produced largely on the basis of
significant interactions between front-office employees and customers.

 Sequential customized service design: the bulk of the work here is performed by the
service employees in a system of strong interdependence between back and front
offices.

 Pooled service design: most of the work done by an efficient back office, largely
decoupled from front-office disturbances. Customers do not interact extensively with
service employees but engage in the sharing of resources that makes mass service
possible.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
174
 SERVICES AND RELATIONSHIP MARKETING

Striking the right balance between front and back-office activities and responsibilities can be
a difficult exercise. As Wostenholme observed, ‘There is a “back office” mentality currently
permeating service operations thinking. The front office is seen as a complex interactive
process where the customer is variable and unpredictable. The back office, on the other
hand, is controllable and affords labour cost savings by restricting the number of customer
contact personnel. Further, the degree and type of customer contact is progressively moving
towards the “hard” forms of contact as witnessed by the introduction of ATMs and ticketing
machines.’ The precarious future for the front office (as a physical entity accessible by the
customer) is reflected in his comment that, ‘There is undoubtedly a clearly definable trend
towards the distancing of the service organization from the source of its wealth – the
customer.’ What all this means is that in the drive for operational efficiency and control
(back office supremacy), service organizations run the risk of neglecting customer
expectations of what constitutes a satisfactory experience (front-office impoverishment).

The thinking behind Figure 8.5 represented a significant advance for service design. It
recognized the interdependence of three parties to a service exchange, the customer, the
front-office employees and the back office. Depending on the extent of customer
uncertainties, the degree of service standardization/customization, division of work and
relationship between the three parties can be established. Of particular interest in this model
is the specification of a front-office facility wherein (physical) contact is made with the
customer. This is reminiscent of the original position held by Chase. Additionally, physical
contact occurs where the service provider must perform the service at the customer’s
location (cleaning and gardening in quadrant III).

Three questions arise out of the discussion so far:

(1) How much contact with the customer is necessary? (This could be measured in time
as a percentage of the total service creation time, the original Chase model, and
evaluated in terms of activity-based costing of resources deployed in customer
contact).
(2) What should be the nature of that contact (standardized/customized,
passive/active)?
(3) Does the customer need to be physically present to receive the service?

In an ongoing process of addressing these questions, services will be subject to classification

and reclassification. Some, by their very nature, will remain dominated by a front-office
operation, e.g. hairdressing, dentistry. Others will forge ahead in terms of back-office
concentration, e.g. telecommunications, utilities. The rest will be characterized by an
unending tension between back and front office. A further impact on the definition and
deployment of front and back office has been the rise of the call centre. The front office is
now only accessible from a distance and often through fully automated phone systems
where there is no option to speak to a human being. It is as if the front office is displaying
back-office characteristics, namely efficiency, rationality, manufacturing oriented systems.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

175
 SERVICES AND RELATIONSHIP MARKETING

8.2.3 The 3 logics

To fully appreciate the workings of any service system reference must be made to what is
known as ‘the 3 logics’. Logic is defined here as ‘a way of reasoning’ or a ‘perspective’.
Underlining the significance of the 3 logics, Kingmann-Brundage stresses that they are
‘crucial to accurate diagnosis of any service situation’. The attractiveness of this approach
lies in its quest for a seamless (without failure/breakdown) and unified (cross-functional
cooperation) service system. Through the determination of organizing principles, the service
logical model proposes how and why a unified service system should work. The 3 logics are
defined as follows:
(1) Customer logic is the underlying rationale that drives customers’ behaviour, based
on their needs and wants. It will be evident in what customers expect of the service
and how it might compare with other services.
(2) Technical logic is seen as the ‘engine’ of the service operation. It is essentially
concerned with the way things are done dictated largely by organization policy, rules
and regulations.
(3) Employee logic is the underlying rationale that drives employee behaviour. It will be
evident in employees’ perception of working conditions, working methods,
organization of work and role clarity.

The service blueprint is an ideal framework for illustrating the 3 logics. The initial contact
with the garage represents the first step in framing the customer logic. How is the customer
received in relation to how she/he expects to be received? Thereafter additional work and
availability of parts will need to be discussed with the customer. The extra cost and further
delay will be evaluated by the customer in terms of whether it is reasonable and acceptable.
Finally the garage will review with the customer the work that has been done and the
customer will depart reflecting on whether the service has offered value for money.

Technical logic reflects on how well the service has worked in terms of resolving the
problem(s) to the customer’s satisfaction. The correctness of the diagnosis, the availability of
parts and the quality of work performed on the car will indicate how well the service system
is working from a technical logic perspective.

Employee logic examines how working conditions and the related matters of morale and
motivation impact on job performance. Ideally, for the service logic model to operate as a
unified system and provide a seamless service, the 3 logics must share a common interest.
This is not inevitably so. To take just one example in practice, management efforts to
contain costs and be more efficient/profitable (technical logic) may come at the expense of
customer satisfaction and employee support. In the view of Leidner, referring to the three
parties to service work as customers, management and employees, ‘it is not uncommon for
the aims of the three parties to diverge and in the case of employees and management, be
diametrically opposed’. So, although service logic appears attractive in principle, it has some
way to go to overcome the hurdles in practice.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

176
 SERVICES AND RELATIONSHIP MARKETING

Activity
Making use of service blueprint as a framework illustrate the three logics in
a hotel service.

Commentary
Customer logic: consider the expectation of the customer, the reception
rendered, and the availability of the desired dish.
Technical logic: Consider the quality of the food to the customer, the
ventilation, the music, and the intensity of the light in the dining hall.
Employee logic: consider the moral, motivation, and commitment of the
employees

8.3 Service Blueprinting

A major stumbling block in developing new services (and in improving existing services) is
seeming inability to describe and depict the service at the concept development, product
development, and market test stages. One of the keys to matching service specifications to
customer expectations is the ability to describe critical series process characteristics
objectively and to depict them so that employees, customers, and managers alike know what
the service is, can see their role in its delivery, and understand all of the steps and flows
involved in the service process. In this section of the unit we look in depth at service
blueprinting, a tool that addresses the challenges of designing and specifying intangible
service processes.

8.3.1 What is a Service Blueprint?

The manufacturing and construction industries have a long tradition of engineering and
design. Can you imagine a house being built without detailed specifications? Can you
imagine a car, a computer, or even a simple product like a child's toy or a shampoo being
produced without concrete and detailed plans, written specifications, and engineering
drawings? Yet services commonly lack concrete specifications. A service, even a complex
one, might be introduced without any formal, objective depiction of the process.

Process
Service
Points of contact
Blueprint
Evidence

Figure 8.6 A tool for simultaneously depicting the service process, the points of customers
contact, and the evidence of service from the customer's point of view.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

177
 SERVICES AND RELATIONSHIP MARKETING

A service blueprint is a picture or map that accurately portrays the service system so that
the different people involved in providing it can understand and deal with objectively
regardless of their roles or their individual points of view. Blueprints are particularly useful
at the design and redesign stages of service development. A service blueprint visually
displays the service by simultaneously depicting the process of service delivery, the points of
customers contact, the roles of customers and employees, and the visible elements of the
service. It provides a way to break a service down into its logical components and to depict
the steps or tasks in the process, the means by which the tasks are executed, and the
evidence of service as the customer experiences it.

Blueprinting has its origins in a variety of fields and techniques, including logistics,
industrial engineering, decision theory, and computer systems analysis - all of which deal
with the definition and explanation of processes.

Blueprint Components: The key components of service blueprints are shown in Figure 7.7.
They are:
(1) Customer actions,
(2) "Onstage" contact employee actions,
(3) "Back stage" contact employee actions, and
(4) Support processes.

The conventions for drawing service blueprints are not rigidly defined, and thus the
particular symbols used, the number of horizontal lines in the blueprint, and the particular
labels for each part of the blueprint may vary somewhat depending on what you read and
the complexity of the blueprint being described. This is not a problem, as long as you keep
in mind the purpose of the blueprint and view it from the point of view of its usefulness as a
tool, rather than as a set of cast-in-stone rules for designing services.

The customer actions area encompasses the steps, choices, activities, and interactions that the
customer performs in the process of purchasing, consuming, and evaluating the service. In
a legal services example, the customer actions might include a decision to contact and
attorney, a phone call to the attorney, a face-to-face meeting(s), additional phone calls,
receipt of documents, and receipt of a bill.

Paralleling the customer actions are two areas of contact employee actions. The steps and
activities that the contact employee performs that are visible to the customer are the onstage
employee actions. In the legal services setting, the actions of the attorney (the contact
employee) that are visible to the client are, for example, the initial interview, intermediate
meetings, and final delivery of legal documents.

Those contact employee actions that occur behind the scenes to support the onstage
activities are the backstage contact employee actions. In the example, anything the attorney
does behind the scenes to prepare for the meetings or to prepare the final documents will
appear in this section of the blueprint, together with phone call contacts the customer has
with the attorney or to the front-line staff in the firm.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

178
 SERVICES AND RELATIONSHIP MARKETING

The support processes section of the blueprint covers the internal services, steps, and
interactions that take place to support the contact employees in delivering the service.
Again in the legal example, any service support activities such as legal research by staff,
preparation of documents, and secretarial support to set up meetings will be shown in the
support processes area of the blueprint.

Physical Evidence

Customer Actions

Line of interaction

Onstage Contact
Employee actions
Line of Visibility
Backstage Contact
Employee Actions
Line of internal interaction
Support Processes

Figure 8.7 The service blue print components

One of the most significant differences in service blueprints compared with other types of
process flow diagrams is the inclusion of customers and their views of the service process.
In fact, in designing effective service blueprints it is recommended that the diagramming
start with the customer's view of the process and work backward into the delivery system.
The boxes shown within each action area depict steps performed or experienced by the
actors at that level.

The four key action areas are separated by three horizontal lines

First is the line of interaction, representing direct interactions between the customer and the
organization. Anytime a vertical line crosses the horizontal line of interaction, a direct
contact between the customer and the organization, or a service encounter, has occurred.
The next horizontal line is the critically important line of visibility. This line separates all
service activities that are visible to the customer from those that are not visible. In reading
blueprints it is immediately obvious whether the consumer is provided with much visible
evidence of the service simply by analyzing how much of the service occurs above the line
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
179
 SERVICES AND RELATIONSHIP MARKETING

of visibility versus the activities carried out below the line. This line also separates what the
contact employees do onstage from what they do back stage. For example, in a medical
examination situation, the doctor would perform the actual exam and answer the patients
questions above the line of visibility, or onstage, whereas she might read the parent's chart in
advance and transcribe notes following the exam below the line of visibility, or backstage.
The third line is the line of internal interaction, which separates contact employee activities
from those of other service support activities and people. Vertical lines cutting across the
line of internal interaction represent internal service encounters.

At the very top of the blueprint you see the physical evidence of the service. Typically, above
each point of contact the actual physical evidence of the service is listed. Again, using the
legal example, above the encounter depicting the face-to-face meeting with the attorney you
would see listed such things as office decor, written documents, lawyer's clothing, and so
forth.

Service Blueprint Examples

Figures 8-8 shows service blueprints for an express mail. This blueprint is deliberately kept
very simple, showing only the most basic steps in the services. Complex diagrams could be
developed for each steep, and the internal processes could be much more fully developed.
In addition to the four action areas separated by the three horizontal lines, these blueprints
also show the physical evidence of the service from the customer's point of view at each step
of the process.

In examining the express mail blueprint in Figure 10.7, it is clear that from the customer's
point of view there are only three steps in the service process: the phone call, the package
pickup, and the package delivery. The process is relatively standardized; the people that
perform the service are the phone order-taker and the delivery person; and the physical
evidence is the document package, the transmittal forms, the truck, and the handheld
computer. The complex process that occurs behind the line of visibility is of little interest or
concern to the customer. However, for the three visible-to-the-customer steps to proceed
effectively, invisible internal services are needed. What these steps are and the fact that they
support the delivery of the service to the external customer are apparent from the blueprint.

Any of the steps in the blueprint could be exploded into a detailed blueprint if needed for a
particular purpose. For example, if it were learned that the "unload and start" step was
taking too long and causing unacceptable delays in delivery, that step could be blueprinted
in much greater detail to isolate the problems

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

180
 SERVICES AND RELATIONSHIP MARKETING

Truck Truck
Packaging Packaging
EVIDENCE

Forms Forms
SUPPORT PROCESSES OONTACT PERSON CUSTOMER PHYSICAL

Handheld Handheld
Computer Computer
Uniform Uniform

Customer Customer Customer

Calls Gives Receives
Package Package

Driver Driver
(Backstage) (Onstage)

Picks up Delivers
Package Package

Customer
Service
Order

Dispatch Airport Fly to Fly to Unload Load

Driver receives Sort Destination and on
and loads center sort truck

Sort Load on
Packages airplane

Figure 8.8 Blueprint for express mail delivery service

Benefits of Service Blueprinting

1. Provides an overview so that employees can relate “what I do” to the service viewed
as an integrated whole, thus reinforcing a customer-oriented focus among
employees.
2. Identifies fail point, that is, weak links of the chain of service activities, which can be
the target of continuous quality improvement.
3. Line of interaction between external customers and employees illuminates the
customer’s role and demonstrates where the customer experiences quality, thus
contributing to informed service design.
4. Line of visibility promotes a conscious decision on what customers should see and
which employees will be in contact with customers, thus facilitating rational service
design.
5. Line of internal interaction clarifies interfaces across departmental lines, with their
inherent

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

181
 SERVICES AND RELATIONSHIP MARKETING

Activity
What are the risks of attempting to describe services in words alone?

Commentary
It is risky attempting to describe services in words alone for different reasons.
Differences in experience, perception, and attitude can make service users
subjective and biased in describing services. Since customer experiences
cannot be translated into words, it usually tends to be incomplete, and service
users often express their service experiences in simple way. Therefore, when
designing services, businesses should consider these factors that can influence
contact employees.

8.3.2 Building a Blueprint

Recall that many of the benefits and purposes of building a blueprint evolve from the
process of doing it. Thus, the final product is not necessarily the only goal. Through the
process of developing the blueprint, many intermediate goals can be achieved: clarification
of the concept, development of a shared service vision, recognition of complexities and
intricacies of the service that are not initially apparent, and delineation of roles and
responsibilities, to name a few. The development of the blueprint needs to involve a variety
of functional representatives as well as information from customers. Drawing or building a
blueprint is not a task that can be assigned to one person or one functional area. Figure 9-6
identifies the basic steps in blue print.

Step 1 Step 2 Step 3 Step 4 Step 5 Step 6

Identify the Identify the Map the Map contact Link Add
process to customer or process employee customer evidence of
be customer from the actions, and contact service at
onstage and person
blueprinted segment customer’s each
backstage activities to
point of Needed customer
view support action step
Fuctions

Step 1: Identify the Service process to Be Blueprinted

Blueprints can be developed at a variety of levels and there needs to be agreement on the
starting point. For example, the express mail blueprint shown earlier is at the basic service
concept. Specific blueprints could be developed for two-day express mail, large accounts,
Internet-facilitated services, and/or store-front drop-off centers. Each also includes unique
features. Or if the “sort packages” and “loading” elements of the process were found to be
problem areas or bottlenecks that were slowing service to developed. Identifying the process
to be mapped will be determined by the underlying purpose for building in the first place.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

182
 SERVICES AND RELATIONSHIP MARKETING

Step 2: Identify the customer or customer Segment Experiencing the Service

A common rationale for market segmentation is that each segment’s needs are different and
therefore will require variations in the service or product feature. Thus, blueprints are most
useful when developed for a particular customer of customer segment, assuming that the
service process varies across segments. At a very abstract or conceptual level it may be
possible to combine customer segments on one blueprint. However, once almost any level
of detail is reached, separate blueprints should be developed to avoid confusion and
maximize their usefulness.

Step 3: Map the service process from the customer’s point of View
This step involves charting the choices and actions that the customer performs or
experiences in purchasing, consuming, and evaluating the service. If the process being
mapped is an internal service, then the customer will be an employee who is the recipient of
the service. Identifying the service from the customer’s point of view first will help to avoid
focusing on processes and steps that have no customer impact. This step forces agreement
on who the customer is (sometimes no small task) and may involve considerable research to
determine exactly how the customer experiences the service in different ways, then separate
blueprints will be done for each significant segment.

Step 4: Map contact employee actions, both onstage and backstage

First the lines of interaction and visibility are drawn, and then the process from the customer
contact person’s point of view is mapped, distinguishing visible or onstage activates form
invisible backstage activities.

Step 5: Link Customer and contact Person Activities to Needed Support Functions
The line of internal interaction can then be drawn and linkages from contact person
activities to internal support functions can be identified. It is in this process that the direct
and indirect impact of internal actions on customers becomes apparent. Internal service
processes take on added importance when viewed in connection with their link to the
customer. Alternatively, certain steps in the process may be viewed as unnecessary if there
is no clear link to the customer’s experience or to an essential internal support service.

Step 6: Add Evidence of Service at each Customer Action Step

Finally, the evidence of service can be added to the blueprint to illustrate what it is that the
customer sees and receives as tangible evidence of the service at each step in the customer
experience. The photographic blueprint including photos, slides, or video of the process can
be very useful at this stage as well to aid in analyzing the impact of tangible evidence and its
consistency with the overall strategy and service positioning.

Summary
Service providers must effectively match customer expectations to new service innovations
and actual service process designs. However, because of the very nature of services- their
intangibility and heterogeneity specifically- the design and the development of service
offerings are complex and challenging. Many services are only vaguely defined before their
introduction to the market place. This unit has outlined some of the challenges involved in
designing services and some strategies for effectively overcoming the challenges.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

183
 SERVICES AND RELATIONSHIP MARKETING

Service blueprinting is a particularly useful technique in the new service development

process. A blue print can make a complex and intangible service concrete through its visual
depiction of all of the steps, actors, processes, and physical evidence of the service. The key
feature of service blue print is their focus on the customer- the customer’s experience is
documented first and is kept fully in view as the other features of the blue print are
developed.

However a service is portrayed, it is a function of design. A range of decisions have to be

made from seemingly straightforward issues such as employee uniform design through to
the degree and nature of customer contact. Various classifications and options have been
suggested, incorporating major variables. One feature that remains contentious is the
balance between front and back office. For many services the front office appears under
threat, not only in terms of its retention but also the nature of its operation. Specifically, the
front office may adopt the characteristics of the back office. One tool that is valuable for
specifying the precise details of a service is the blueprint. It enables the provider to
determine critical/fail points the existence of which can be attributed to a design issue. But
no matter how attractive the design is on paper, the tensions exhibited by ‘the 3 logics’
illustrate the design challenge in practice.

Self-Assessment Questions
1. What are the various factors that attribute to service failures?
2. List the various activities that have to be undertaken in the process of developing a
new service.
3. Using Schmenner’s model, identify and describe the four types of service designs
which are classified based on degree of labour intensity and degree of interaction or
customization.
4. Kingmann-Brundage stresses that through the determination of organizing
principles, the service logical model proposes how and why a unified service system
should work. Describe the three types of logic which are used for service design.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

184
 SERVICES AND RELATIONSHIP MARKETING

UNIT 9 MANAGING DEMAND AND CAPACITY

Learning Objectives
Upon completion of this unit a student will be able to:
 Explain the underlying issue for capacity, the implications of capacity constraints in the
form of time, labor, equipment, and facilities, and the implications of different types of
demand patterns on matching supply and demand.
 Layout strategies for matching supply and demand through (a) shifting demand to match
capacity or (b) flexing capacity to meet demand.
 Demonstrate the benefits and risks of yield management strategies in forging a balance
among capacity utilization, pricing, market segmentations, and financial return.
 Provide strategies for managing waiting lines for times when capacity and demand
cannot be aligned.

9.1 The Underlying Issue: Lack of Inventory Capability

The fundamental issue of underlying supply and demand management in services is the lack
of inventory capability. Unlike manufacturing firms, service firms cannot build up
inventories during periods of slow demand to use later when demand increases. This lack of
inventory capability is due to the perishability of services and their simultaneous production
and consumption. An airline seat that is not sold on a given flight cannot be resold the
following day: The productive capacity of the seat has perished. Similarly, an hour of a
lawyer's billable time cannot be saved from one day to the next. Services also cannot be
transported from one place to another or transferred from person to person.

Volume Demanded

Excess Demand
Maximum Capacity (Business is lost)

Demand Exceeds Optimum

Capacity (Service quality
declines)

Optimum Capacity
(demand and supply are well balanced) Ideal Use

Excess Capacity
(Wasted resources)

Low utilization
(may send bad signal)

Time
Figure 9.1 Variations in demand relative to capacity

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

185
 SERVICES AND RELATIONSHIP MARKETING

The lack of inventory capability combined with fluctuating demand leads to a variety of
potential outcomes as illustrated in Figure 9.1. The horizontal lines in Figure 9.1 indicate
service capacity, and the curved line indicates customer demand for the service. In many
services, capacity is fixed; thus, capacity can be designated by a flat horizontal line over a
certain time period. Demand for service frequently fluctuates, however, as indicated by the
curved line.

The top most horizontal line in figure 9.1 represents maximum capacity. The topmost
horizontal line in Figure 9.1 may represents the Hilton Hotels 181 rooms, or it could
represent the approximately 25,000 seats of Addis Ababa football stadium. The rooms and
the seats remain constant over time, while demand for the rooms and seats fluctuates. The
band between the second and third horizontal lines represents optimum capacity which is
the best use of the capacity from the perspective of both customers and the company
(optimal versus maximal capacity utilization is discussed later in the unit). The areas in the
middle of Figure 9.1 are labeled to represent four basic scenarios that can result four
different combinations of capacity and demand:

1. Excess demand: The level of demand exceeds maximum capacity. In this situation,
some customers will be turned away, resulting in lost business opportunities. For the
customers who do receive the service its quality may not match what was promised
because of crowding or overtaxing of staff and facilities.

2. Demand exceeds optimum capacity: No one is being turned away, but the quality of
service may still suffer because of overuse, crowding, or staff being pushed beyond their
abilities to deliver consistent quality.

1. Demand and supply are balanced at the level of optimum capacity: Staff and facilities
are occupied at an ideal level. No one is overworked, facilities can be maintained, and
customers are receiving quality service without undesirable delays.

2. Excess capacity/Demand is below optimum capacity/: Productive resources in the

form of labor, equipment, and facilities are underutilized, resulting in lost productivity
and lower profits. Customers may receive excellent quality on an individual level
because they have the full use of the facilities, no waiting, and complete attention from
the staff. If, however, service quality depends on the presence of other customers,
customers may be disappointed or may worry that they have chosen an inferior service
provider.

Activity 9.1
What is the reason for service firms not to be able to build up inventories?

Commentary
Their inventory incapability results from the perishability of services and their
simultaneous production and consumption. Besides, services cannot be
transported from one place to another or transferred from person to person

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

186
 SERVICES AND RELATIONSHIP MARKETING

9.2 Understanding capacity constraints

As we see later in the unit, there are some creative ways to expand and contract capacity in
the short and long term, but at a given point in time we can assume service capacity is fixed.
Depending on the type of service, critical fixed-capacity factors can be time, labor,
equipment, facilities or (in many cases) a combination of these.

9.2.1 Time, Labor, Equipment, Facilities

For some services businesses, the primary constraint on service production is time. For
example, a lawyer , a consultant, a hairdresser, and a psychological counselor all primarily
sell their time. If their time is not used productively, profits are lost. If there is excess
demand, time cannot be created to satisfy it. From the point of view of the individual service
provider, time is the constraint.

From the point of view of a firm that employs a large number of service providers, labor or
staffing levels can be the primary capacity constraint. A law firm, a university department, a
consulting firm, a repair and maintenance contractor may all face the reality that at certain
times demand for their organization' services cannot be met because the staff is already
operating at peak capacity. However, it doesn't always make sense (nor may it be possible in
a competitive labor market) to hire additional service providers if low demand is a reality at
other times.

In other cases, equipment may be the critical constraint, for trucking or air-freight delivery
services; the trucks or airplanes needed to service demand may be the capacity limitation.
Health clubs also deal with this limitation, particularly at certain times of the day (before
work, during lunch hours, after work) and fin certain months of the year.
Telecommunication companies face equipment constraints when everyone wants to use the
telephone lines during prime hours on holidays.

Finally, many firms are faced with restrictions brought about by their limited facilities.
Hotels have only a certain number of rooms to sell, airlines are limited by the number of
seats on the aircraft, educational initiations are constrained by the number of rooms and the
number of seats in each classroom, and restaurant capacity is restricted to the number of
tables and seats available.

Understanding the primary capacity constraint, or the combination of factors that restricts
capacity, is a first step in designing strategies to deal with supply and demand issues (Table
9.1).

9.2.2 Optimal versus Maximal Use of Capacity

To fully understand capacity issues, it is important to know the difference between optimal
and maximal use of capacity. As suggested earlier in Figure 9-1, optimum and maximum
capacity may not be the same. Using capacity at an optimum level means that resources are
fully employed but not overused and that customers are receiving quality service in a timely
manner. Maximum capacity, on the other hand, represents the absolute limit of service
availability. In the case of a football game, optimum and maximum capacity may be the

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

187
 SERVICES AND RELATIONSHIP MARKETING

same. The entertainment value of the game is enhanced for customers when every single
seat is filled, and obviously the profitability for the team is greatest under these
circumstances. On the other hand, in a popular restaurant from the perspective of customer
satisfaction, optimum use of the restaurant’s capacity will be less than maximum use.

In the case of equipment or facilities constraints, the maximum capacity at any given time is
obvious. There are only a certain number of weight machines in the health club, a certain
number of seats in the airplane, and a limited amount of space in a cargo carrier. In the case
of bottling plant, when maximum capacity on the assembly line is exceeded, bottles begin to
break and the system shuts down. Thus, it is relatively easy to observe the effects of
exceeding maximum equipment capacity.

When the limitation is people's time or labor, maximum capacity is harder to specify, since
people are in a sense more flexible than facilities and equipment. When an individual
service provider's maximum capacity has been exceeded, the result is likely to be decreased
quality, customer dissatisfaction, and employee burnout and turnover but these outcomes
may not be immediately observable even to the employee himself/herself. It is often easy
for a consulting firm to take on one more assignment, taxing its employees beyond their
maximum capacity, or for a clinic to schedule a few more appointments in a day, stretching
its staff and physicians beyond their maximum capacity. Given the potential costs in terms
of reduced quality and customer and employee dissatisfaction, it is critical for the firm to
understand optimum and maximum human capacity limits.

Table 9-1 what is the constraint on capacity

Nature of the constraint Type of service

Time Legal
Consulting
Accounting
Medical
Labor Law firm
Accounting
firm
Consulting firm
Health clinic
Equipment Telecommunic
ation
Utilities
Health club
Facilities Restaurants
Hospitals
Airlines
Schools
Theatres
Churches

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

188
 SERVICES AND RELATIONSHIP MARKETING

9.3 Strategies for Matching Capacity and Demand

When an organization has a clear grasp of its capacity constraints and an understanding of
demand patterns, it is in a good position to develop strategies for matching supply and
demand. There are two general approaches for accomplishing this match.
 The first is to smooth the demand fluctuations themselves by shifting demand to match
existing supply. This implies that the peaks and valleys of the demand curve (Figure 9.1)
will be flattened to match as closely as possible the horizontal optimum capacity line.
 The second general strategy is to adjust capacity to match fluctuations in demand. This
implies moving the horizontal capacity line shown in Figure 9-1 to match the ups and
downs of the demand curve. Each of these two basic strategies is described next with
specific examples.

9.3.1 Shifting Demand to Match Capacity

With this strategy an organization seeks to shift customers away from periods in which
demand exceeds capacity, perhaps by convincing them to use the service during periods of
slow demand. This may be possible for some customers but not for others. For example,
many business travelers are not able to shift their needs for airline, car rental, and hotel
services; pleasure travelers, on the other hand, can often shift the timing of their trips. Those
who can't shift and can't be accommodated will represent lost business for the firm. During
periods of slow demand, the organization seeks to attract more and/or different customers
to utilize its productive capacity. A variety of approaches, detailed in the following sections,
can be used to shift or increase demand to match capacity. Frequently a firm uses a
combination of approaches.

1. Vary the Service Offering: One approach is to change the nature of the service offering,
depending on the season of the year, day of the week, or time of day. For example, Airlines
may change the configuration of their plane seating to match the demand from different
market segments. In some planes there may be no first-class section at all. On routes with a
large demand for first-class seating, a significant proportion of seats may be placed in first
class. In this and other cases, the service offering and associated benefits are changed to
smooth customer demand for the organization's resources.

DEMAND DEMAND
TOO HIGH SHIFT DEMAND TOO LOW

 use signage to communicate busy  Use sales and advertising to

days and times increases business from current
market segments
 Offer incentives to customers for  Modify the service offering to
usage during no peak times appeal to new market segments.
 Take care of loyal or "regular"  Offer discounts or price
customers first reductions
 Advertise peak usage times and  Modify hours of operation
benefits of no peak use
 Charge full price for the service - no  Bring the service to the customer
discounts
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
189
 SERVICES AND RELATIONSHIP MARKETING

Care should be exercised in implementing strategies to change the service offering, because
such changes may easily imply and require alterations in other marketing-mix variables-
such as promotion, pricing, and staffing-to match the new offering. Unless these additional
mix variables are altered effectively to support the offering, the strategy may not work. Even
when done well, the downside of such changes can be a confusion in the organization's
image from the customers' perspective, or a loss of strategic focus for the organization and
its employees.

2. Communicate with Customers: Another approach for shifting demand is to

communicate with customers, letting them know the times of peak demand periods so they
can choose to use the service at alternative times and avoid crowding or delays. For
example, signs in banks and post offices that let customers know their busiest hours and
busiest days of the week can serve as a warning, allowing customers to shift their demand to
another time if possible. Forewarning customers about busy times and possible waits can
have added benefits. Research in a bank context found that customers who were
forewarned about the bank's busiest hours were more satisfied even when they had to wait
than were customers who were not forewarned. In addition to signage being used to
communicate peak demand times to customers, advertising and other forms of promotion
can be used to emphasis different service benefits during peak and slow periods.
Advertising and sales messages can also be used to remind customers about peak demand
times.

3. Modify Timing and Location of Service Delivery: Some firms adjust their hours and
days of service delivery to more directly reflect customer demand. Theaters accommodate
customer schedules by offering them on weekends and holidays when people are free during
the day for entertainment. Movie theaters are sometimes rented during weekdays by
business groups- an example of varying the service of faring during a period of low demand.

4. Differentiate on Price: A common response during periods of slow demand is to

discount the price of the service. This strategy relies on basic economics of supply and
demand. To be effective, however, a price differentiation strategy depends on solid
understanding of customer price sensitivity and demand curves. For example, business
travelers are far less price sensitive than are families traveling for pleasure.

For any hotel, airline, restaurant, or other service establishment, all of the capacity could be
filled with customers if the price were low enough. But the goal is always to ensure the
highest level of capacity utilization without sacrificing profits. We explore this complex
relationship among price, market segments, capacity utilization, and profitability later in the
unit in the section on yield management.

Heavy use of price differentiation to smooth demand can be a risky strategy. Over reliance
on price can result in price wars in an industry where eventually all competitors suffer.
Price wars are well known in the airline industry, where total industry profits suffered as a
result of airlines simultaneously trying to attract customers through price discounting.
Another risk of relying on price is that customers grow accustomed to the low price and
expect to get the same deal the next time they use the service. If communications with
customers are unclear, customers may not understand the reasons for the discounts and will
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
190
 SERVICES AND RELATIONSHIP MARKETING

expect to pay the same during peak demand periods. Overuse or exclusive use of price as a
strategy for smoothing demand is also risky due to the potential impact on the
organization's image and the possibility of attracting undesired market segments.

9.3.2 Flexing Capacity to Meet Demand

A second strategic approach to matching supply and demand focuses on adjusting or flexing
capacity. The fundamental idea here is to adjust, stretch, and align capacity to match
customer demand (rather than working on shifting demand to match capacity as just
described). During periods of peak demand the organization seeks to stretch or expand its
capacity as much as possible. During periods of slow demand it tries to shrink capacity so
as not to waste resources. General strategies for flexing the four primary service resources
(time, people, equipment, and facilities) are discussed next. Specific ideas for adjusting
capacity during periods of peak and slow demand are summarized in Figure 9-4. Often a
number of different strategies are used simultaneously.

A. Stretch Existing Capacity: The existing capacity of service resources can often be
expanded temporarily to match demand. In such cases no new resources are added but
rather people, facilities, and equipment are asked to work perhaps harder and longer to meet
demand.
1. Stretch Time: It may be possible to extend the hours of service temporarily to
accommodate demand. Retailers are open longer hours during the Christmas shopping
season.
2. Stretch Labor: In many service organizations, employees are asked to work longer and
harder during periods of peak demand. For example, consulting organizations face
extensive peaks and valleys with respect to demand for their services. During periods of
peak demand, associates are asked to take on additional project and work longer hours. And
front-line service personnel in banks, tourist attractions, restaurants, and telecommunication
companies are asked to serve more customers per hour during busy times than during hours
or days when demand is low.

Figure 9-4 Strategies for flexing capacity to match demand

DEMAND FLEX CAPACITY DEMAND

TOO HIGH TOO LOW

 Stretch time, labor, facilities, and equipment  Subcontract or outsource activities

 Cross-train employees  Perform maintenance, renovations
 Hire part-time employees  Schedule leaves
 Request overtime work from employees  Schedule employee training
 Rent or share facilities  Lay off employees
 Rent or share equipment

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

191
 SERVICES AND RELATIONSHIP MARKETING

3. Stretch Facilities: Theaters, restaurants, meeting facilities, and classrooms can

sometimes be expanded on a temporary basis by the addition of tables, chairs, or other
equipment needed by customers.

4. Stretch Equipment: Computers, telephone lines, and maintenance equipment can often
be stretched beyond what would be considered the maximum capacity for short periods to
accommodate peak demand.

In using these types of "stretch" strategies, the organization needs to recognize the wear and
tear on resources and the potential for inferior quality of service that may go with the use.
These strategies should thus be used for relatively short periods in order to allow later for
maintenance of the facilities and equipment and refreshment of the people who are asked to
exceed their usual capacity. As noted earlier, sometimes it is difficult to know in advance,
particularly in the case of human resources, when capacity has been stretched too far.

B. Align Capacity with Demand Fluctuations: This basic strategy is sometimes known as
a "chase demand" strategy. By adjusting service resources creatively, organizations can be in
effect chasing the demand curves to match capacity with customer demand patterns. Time,
labor, facilities, and equipment are again the focus, this time with an eye toward adjusting
the basic mix and use of these resources. Specific actions might include the following.

1. Use Part-Time Employees: In this case the organization's labor resource is being
aligned with demand. Retailers hire part-time employees during the holiday rush, tax
accountants engage temporary help during tax season; tourist resorts bring in extra workers
during peak season. Restaurants often ask employees to work split shifts (e.g., wok the lunch
shift, leave for a few hours, and come back for the dinner rush) during peak mealtime hours.

2. Rent or Share Facilities or Equipment: For some organizations it is best to rent

additional equipment or facilities during periods of peak demand. For example, express mail
delivery services rent or lease trucks during the peak holiday delivery season. It would not
make sense to buy trucks that would sit idle during the rest of the year. Sometimes
organizations with complementary demand patterns can share facilities.

3. Schedule Downtime during Periods of Low Demand: If people, equipment, and

facilities are being used at maximum capacity during peak periods, then it is imperative to
schedule repair, maintenance, and renovations during off-peak periods. This ensures that
the resources are in top condition when they are most needed. With regard to employees,
this means that vacations and training are also scheduled during slow demand periods.

4. Cross-Train Employees: If employees are cross-trained, they can shift among tasks,
filling in where they are most needed. This increases the efficiency of the whole system and
avoids undertaking employees in some areas while others are being overtaxed. Many
airlines cross-train their employees to move from ticketing to working the gate counters to
assisting with baggage if needed. Grocery stores also use this strategy, with most employees
being able to move as needed from cashiering to stocking shelves to bagging groceries.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

192
 SERVICES AND RELATIONSHIP MARKETING

5. Modify or Move Facilities and Equipment: Sometimes it is possible to adjust, move, or

creatively modify existing capacity to meet demand fluctuations. Hotels accomplish this by
reconfiguring rooms-two rooms with a locked door between can be rented to two different
parties in high demand times or turned into a suite during slow demand. The airline
industry offers dramatic examples of this type o strategy. Using an approach known as
"demand-driven dispatch," airlines have begun to experiment with methods that assign
airplanes to flight schedules on the basis of fluctuating market needs. The method depends
on accurate knowledge of demand and the ability to quickly move airplanes with different
seating capacities to flight assignments that match their capacity. The Boeing 777 aircraft is
so flexible that it can be reconfigured within hours to vary the number of seats allocated to
one, two, or three classes. The plane can thus be quickly modified to match demand from
different market segments, essentially molding capacity to fit demand.

Another strategy may involve moving the service to a new location to meet customer
demand or even bringing the service to customers. Mobile training facilities, libraries, and
blood donation facilities are examples of service that physically follow customers.

Activity 9.2
What are the different approaches that a service provider may use to
match supply and demand making use of the available capacity?

Commentary
 Stretching time
 Stretching labor
 Stretching equipment
 Stretching facilities

9.4 Yield Management: Balancing Capacity Utilization, Pricing, Market

Segmentation, and Financial Return
Yield management is a term that has become attached to a variety of methods, some very
sophisticated, matching demand and supply in capacity-constrained services. Using yield
management models, organizations find the best balance at a particular point in time among
the prices charged, the segments sold to, and the capacity used. The goal of yield
management is to produce the best possible financial return from a limited available
capacity. Specially, yield management has been defined as "the process of allocating the
right type of capacity to the right kind of customer at the right price so as to maximize
revenue or yield."

Although the implementation of yield management can involve complex mathematical

models and computer programs, the underlying effectiveness measure is the ratio of actual
revenue to potential revenue for a particular measurement period:

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

193
 SERVICES AND RELATIONSHIP MARKETING

Yield = Actual revenue

Potential revenue
Where:
Actual revenue = Actual capacity used X average actual price
Potential revenue = Total capacity X maximum price

The equations indicate that yield is a function of price and capacity used. Recall that
capacity constraints can be in the form of time, labor, equipment, or facilities. Yield is
essentially a measure of the existent to which an organization's resources (or capacities) are
achieving their full revenue-generating potential. Yield can be raised by increasing capacity
used or by increasing price, and the trade-offs are immediately apparent.

Yield management examples

Take, for example, a hotel that has 200 rooms that it can rent at a rate of Br100 per night
(potential revenue of Br20,000). One night it rents all of the rooms at a reduced rate of Br50
per night, yielding a revenue of Br10,000. Although capacity was used to the maximum
level that night, yield was only 50 percent (Br10,000/Br20,000). If, on the other hand, the
hotel had charged its full rate it might have sold only 40 percent of its rooms because of
customer price sensitivity. The yield under these circumstances would have been 40 percent
(Br8,000/Br20,000). At the Br100 rate the hotel may thus be maximizing the per-room price
but not the potential yield-or revenue generation for the entire hotel. Perhaps a combination
of the two room rates would be the best solution. If the hotel could fill 40 percent of the
rooms at Br100 per night and the other 60 percent at Br 50, the revenue would be Br14,000,
resulting in a yield of 70 percent (Br14,000/Br20,000), clearly better than the other two
alternatives.

Yield management attempts to manage demand to meet capacity (fixed number of rooms or
fixed number of hours in these examples) by deciding what amount of capacity to offer at
what price to what market segments in order to maximize revenues over a particular period.
It forces recognition of the trade-offs inherent in serving a lower-paying market segment to
fill capacity when there may be some demand from higher-paying clientele.

Implementing a Yield Management System

To implement a yield management system, an organization needs detailed data on past
demand patterns by market segment as well as methods of projecting current market
demand. The data can be combined through mathematical programming models, threshold
analysis, or use of expert systems to project the best allocation of limited capacity at a
particular point in time. Allocations of capacity for specific market segments can then be
communicated to sales representatives or reservations staff as targets for selling rooms,
seats, time, or other limited resources. Sometimes the allocations, once determined, remain
fixed. At other times allocations change weekly or even daily in response to new
information.

Recent research indicates traditional yield management approaches are most profitable
when
(1) A service provider faces different market segments that arrive or make their
reservations at different times and
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
194
 SERVICES AND RELATIONSHIP MARKETING

(2) Where those who arrive or reserve early are more price sensitive than those who
arrive or reserve late. This is exactly the situation for airlines and many hotels -
industries that have effectively and extensively used yield management techniques to
allocate capacity. In other services (entertainment, sports, fashion), those customers
willing to pay the higher prices are the ones who buy early rather than late. People,
who really want to see a particular performance, reserve their seats at the earliest
possible moment. Discounting for early purchases in these situations would reduce
profits. In these situations, the price generally starts out high and is reduced later to
fill capacity if needed.

Challenges and Risks in Using Yield Management

There is evidence that yield management programs can significantly improve revenues.
However, while yield management may appear to be an ideal solution to the problem of
matching supply and demand, it is not without risks. By becoming focused on maximizing
financial returns through differential capacity allocation and pricing, an organization may
find that it risks:
 Loss of competitive focus. Yield management may result in over focusing on profit
maximization and inadvertent neglect of aspects of the service that provide long-term
competitive success.
 Customer alienation. If customers learn that they are paying a higher price for
service than someone else, they may perceive the pricing as unfair, particularly if
they don't understand the reasons. Customer education is thus essential in an
effective yield management program.
 Employee morale problems. Yield management systems take much guesswork and
judgment away from sales and reservations people. While some employees may
appreciate the guidance, others may resent the rules and restrictions on their own
discretion.
 Incompatible incentive and reward systems. Employees may resent yield
management systems if these don't match incentive structures. For example, many
managers are reward on the basis of capacity utilization or average rate charged,
whereas yield management balances the two factors.
 Lack of employee training. Extensive training is required to make a yield
management system work. Employees need to understand its purpose, how it works,
how they should make decisions, and how the system will affect their jobs.
 Inappropriate organization of the yield management function. To be most
effective with yield management, an organization must have centralized reservations.
While airlines and some large hotel chains and shipping companies do have such
centralization, other smaller organizations may have decentralized reservations
systems and thus find it difficult to operate a yield management system effectively.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

195
 SERVICES AND RELATIONSHIP MARKETING

9.5 Waiting Line Strategies: When Demand and Capacity cannot be

Aligned
Sometimes it is not possible to manage capacity to catch demand, or vice versa. It may be
too costly-for example, for most health clinics it would not be economically feasible to add
additional facilities or physicians to handle peaks in demand. Sometimes waits may occur
when demand backs up because of the variability in length of time for service. For example,
even though patients are scheduled by appointments in a physician's office, frequently there
is a wait because some patients take longer to serve than the time allotted to them.

For most service organizations, waiting customers are a fact of life at some point. Waiting
can occur on the telephone-customers put on hold when they call in to ask for information,
order something, or make a complaint- and waiting can occur in person-customers waiting
in line at the bank, post office, or at a physician's office

In today's fast-paced society, waiting is not something most people tolerate well. As people
work longer hours, individuals have less leisure, and families have fewer hours together, the
pressure on people's time is greater than ever. In this environment, customers are liking for
efficient, quick service with no wait. Organizations that make customers wait take the
chance that they will lose business or at the very least that customers will be dissatisfied. To
deal effectively with the inevitability of waits, organizations employ a variety of strategies,
described next and illustrated in Figure 9-5.

Employ operational logic Make waiting fun, or at

to reduce wait least tolerable

Establish a reservation Differentiate waiting

process customers

Figure 9.5 waiting line strategies.

1 Employ Operational Logic

If customer waits are common, the first step is to analyze the operational processes to
remove any inefficiency. It may be possible to redesign the system to move customers along
more quickly. Modifications in the operational system should be part of the solution in an
effort to reduce customer waiting and improve service.

When queues are inevitable, the organization faces the operational decision of what kind of
queuing system to use, or how to configure the queue. Queue configuration refers to the
number of queues, their locations, their spatial requirement, and their effect on customer
behavior. Several possibilities exist, as shown in Figure 9-6.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

196
 SERVICES AND RELATIONSHIP MARKETING

 In the multiple-queue alternative, the customer arrives at the service facility and must
decide which queue to join and whether to switch later if the wait appears to be
shorter in another line.

 In the single -queue alternative, fairness of waiting time is ensured in that the first-
come, first-served rule applies to everyone; the system can also reduce the average
time customers spend waiting overall. However, customers may leave if they
perceive the line is too long or if there is no opportunity to select a particular service
provider.

 In the take-a -number option, where arriving customers take a number to indicate
line positions. Advantages are similar to the single-queue alternative with the
additional benefit that customers are able to browse or talk to each other. The
disadvantage is that customers must be on the alert to hear their numbers when they
are called.

Multiple Queue Single Queues Take a Number

3 4 10 2
8
6
(a) 12
7

11

9
5
Enter
(b) (c)

Figure 9-6 waiting line configurations

Activity 9.3
What kind of queuing system do you prefer, and why?

Commentary
Please consider the benefits and the disadvantages of the alternatives
indicated above

Establish a Reservation Process

When waiting cannot be avoided, a reservation system can help to spread demand.
Restaurants, transportation companies, theaters, physicians, and many other service
providers use reservation systems to alleviate long waits. The idea behind a reservation
system is to guarantee that the service will be available when the customer arrives. Beyond
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
197
 SERVICES AND RELATIONSHIP MARKETING

simply reducing waiting time, a reservation system has the added benefit of potentially
shifting demand to less-desirable time periods.

3 Differentiate Waiting Customers

Not all customers necessarily need to wait the same length of time for service. On the basis
of need or customer priority, some organizations differentiate among customers, allowing
some to experience shorter waits for service than others. Known as "queue discipline," such
differentiation reflects management policies regarding who to select next for service. The
most popular discipline is first-come, first -served. However, other rules may apply.
Differentiation can be based on factors such as:
 Importance of the customer. Frequent customers or customers who spend large
amounts with the organization can be given priority in service by providing them
with a special waiting area or segregated line.
 Urgency of the job. Those customers with the most urgent need may be served first.
This is the strategy used in emergency health care. It is also the strategy used by
maintenance services such as air-conditioning repair that give priority to customers
whose air conditioning is not functioning over those who call for routine
maintenance.
 Duration of the service transaction. In many situations, shorter service jobs get
priority through "express lanes." At other times, when a service provider sees that a
transaction is going to require extra time, the customer is referred to a designated
provider who deals only with these special-needs customers.
 Payment of a premium price. Customers who pay extra (e.g. first class on an airline)
are often given priority via separate check-in lines or express systems.

4 Make Waiting Fun, or at Least Tolerable

Even when they have to wait, customers can be more or less satisfied depending on how the
wait is handled by the organization. Of course the actual length of the wait will affect how
customers feel about their service experience. But it isn’t just actual time spent waiting that
has an impact on customer satisfaction-it’s how customers feel about the wait and their
perceptions during it. In a classic article entitled “ The Psychology of waiting Lines,” David
Master proposes several principles regarding waiting, each of which has implications for
how organizations can make waiting more pleasurable, or at least tolerable.

Unoccupied Time Feels Longer than Occupied Time. When customers are
unoccupied they will likely be bored and will notice the passage of time more than
when they have something to do. Providing something for waiting customers to do,
particularly if the activity offers a benefit in and of itself or is related in some way to
the service, can improve the customer’s experience and may benefit the organization
as well. Example include giving customers menus to look at while waiting in a
restaurant, providing interesting information to read in a dentist’s office, or playing
entertaining programs over the phone while customers are on hold.

Preprocess waits Feel Longer than In-Process Waits. If wait time is occupied with
activities that relate to the upcoming service, customers may perceive that the service
has started and they are no longer actually waiting. This in-process activity will make

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

198
 SERVICES AND RELATIONSHIP MARKETING

the length of the wait seem shorter and will also benefit the service provider by making
the customer better prepared when the service actually does begin. Filling out medical
information while waiting to see the physician, reading a menu while waiting to be
seated in a restaurant, and watching a videotape of the upcoming service event are all
activities that can at the same time educate the customer and reduce perceptions of
waiting. Research in a restaurant context found that customers reacted less negatively
to in-process waits than to either preprocess or post process waits.

Anxiety makes waits seem Longer. When customers fear that they have been forgotten
or don’t know how long they’ll have to wait, they become anxious, and this anxiety can
increase the negative impact of waiting. Anxiety also results when customers are
focused to choose in a multiple-line situation and they discover they have chosen the
“wrong line.” To combat waiting line situation and they discover they have formation
on the length of the wait.

Uncertain waits Are Longer than Known, Finite Waits. Anxiety is intensified when
customers don’t know how long they’ll have to wait. Health care providers combat this
by letting customers know when they check in how far behind the physician is that day.
Some patients resolve this uncertainty themselves by calling a head to ask Master
provides an interesting example of the role of uncertainty, which he terms the “
appointment syndrome.” Customers who arrive early for an appointment will wait
patiently until the scheduled time, even if they arrive very early. However, once the
expected appointment time has passed, customers grow increasingly anxious. Before the
appointment time the wait time is known; after that, the length of the wait is not know.
Research in an airline context has suggested that as uncertainty about the wait increases,
customers become more angry, and their anger in turn results in greater dissatisfaction.
Research also shows that providing customers with information on the length of the
anticipated wait and/or their relative position in the queue can result in more positive
feelings and acceptance of the wait and ultimately more positive evaluation of the
service.

Unexplained Waits Are longer than Equitable Waits. When people understand the
causes for waiting, they frequently have greater patience and are less anxious,
particularly when the wait is justifiable. Being provided with an explanation can reduce
customer uncertainty and may help customers to make at least a ballpark estimate of
how long they’ll be delayed. Customers who don’t know the reason for a wait begin to
feel powerless and irritated.

Unfair Waits Are Longer than Equitable Waits. When customers perceive that they
are waiting while others who arrived after them have already been served, the apparent
inequity will make the wait seem even longer. This can easily occur when there is no
apparent order in the waiting area and many customers are trying to be served. Queuing
systems that work on a first-come, first-served rule are best at combating perceived
unfairness. However, as pointed out earlier, there may be reasons for the use of other
approaches in determining who is to be served next. For example, in an emergency
medical care situation, the most seriously ill or injured patients would be seen first.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

199
 SERVICES AND RELATIONSHIP MARKETING

When customers understand the priorities and the rules are clearly communicated and
enforced, fairness of waiting time should not be an issue.

The More Valuable the Service, the Longer the Customer Will Wait. Customers who
have substantial purchases or who are waiting for a high-value service will be more
tolerant of long wait times and may even expect to wait longer. For example, in a
supermarket, customers who have a full cart of groceries will generally wait longer than
customers who have only a few items and expect to be checked through quickly. And we
expect to wait longer for service in an expensive restaurant than we do when eating at a
“greasy spoon.”

Solo Waits Feel Longer than Group Waits. People will wait longer when they are in a
group than when they are alone due to the distractions provided by other members of the
group. There is also comfort in waiting with a group rather than alone.

Activity 9.4
1. Identify some of the risks of yield management programs.
2. When do customers feel wait longer?

Commentary
(1) Risk factors may be associated to:
 Employee morale problems
 Inappropriate organization of the yield management function
 Loss of competitive focus
 Customer alienation
 Lack of employee training
 Incompatible incentive and reward systems
(2) When
 Waits are unexplained
 Waits are unfair
 customers are unoccupied, etc.

Summary
Because service organizations lack the ability to inventory their products, the effective use of
capacity can be critical to success. Idle capacity in the form of unused time, labor, facilities,
or equipment represents a direct drain on bottom-line profitability. When the capacity
represents a major investment, for example, airplanes, expensive medical imaging
equipment or lawyers and physicians paid on a salary, the losses associated with underused
of capacity are even more accentuated. Overused capacity is also a problem. People,
facilities, and equipment can become worn out over time when used beyond optimum
capacity constraints. People can quit, facilities become run down, and equipment can break.
From the customer’s perspective, service quality also deteriorates. For organizations
focused on delivering quality service, therefore, there is a natural drive to balance capacity
utilization and demand at an optimum level in order to meet customer expectations.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

200
 SERVICES AND RELATIONSHIP MARKETING

This unit has provided you with an understanding of the underlying issues of managing
supply and demand in capacity-constraint services by exploring the lack of inventory
capability, the nature of service constraints (time, labor, equipment, facilities), the
differences in optimal versus maximum use of capacity, and the causes of fluctuating
demand.

Based on grounding the fundamental issues, the unit presented a variety of strategies for
matching supply and demand. The basic strategies fall under two headings: demand
strategies (shifting demand to match capacity) and supply strategies (flexing capacity to
meet demand). Demand strategies seek to flatten the peaks and valleys of demand to match
the flat capacity constraint, whereas supply strategies seek to align, flex, or stretch the fixed
capacity to match the peaks and valleys of demand. Organizations frequently employ
several strategies simultaneously to solve the complex problem of balancing supply and
demand.

Yield management was presented as a sophisticated form of supply and demand

management that balances capacity utilization, pricing, market segmentation, and financial
return. Long practiced by the passenger airline industry, this strategy is growing in use by
hotel, shipping, car rental, and other capacity-constrained industries where bookings are
made in advance. Essentially, yield management allows organizations to decide on a
monthly, weekly, daily, or even hourly basis to whom they want to sell their service
capacity at what price.

All strategies for aligning capacity and demand need to be approached with caution. Any
one of the strategies is likely to imply changes in multiple marketing-mix elements to
supports the strategy. Whenever such changes are made, even if done well, there is a risk of
the firm losing focus or inadvertently altering its image in pursuit of increased revenues.

The last section of the unit discussed situations where it is not possible to align supply and
demand. In these unresolved capacity utilization situations, the inevitable result is customer
waiting. Strategies for effectively managing waiting lines were described such as employ
operational logic, establish a reservation process, differentiate waiting customers, and make
waiting fun, or at least tolerable.

Self Assessment Questions

1. Describe the fundamental issues underlying the management of supply and demand
in services.
2. Describe the four different combinations of capacity and demand in services.
3. Identify the major strategies used by service marketers to deal with gaps between
service capacity and demand.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

201
 SERVICES AND RELATIONSHIP MARKETING

UNIT 10 RELATIONSHIP MARKETING

Learning Objectives
Upon completion of this unit a student will be able to:
 Explain relationship marketing, its goals, and the benefits of long-term relationships
for firms and customers.
 Explain the theoretical bases for relationship marketing
 Explain why and how to estimate customer lifetime value.
 Specify the foundations for successful relationship marketing, namely quality core
services and careful market segmentation.
 Provide examples of successful customer retention strategies.
 Introduce the somewhat controversial idea that “the customer isn’t always right.”

10.1 Meaning of Relationship Marketing

Relationship marketing essentially represents a paradigm shift within marketing away from
a transaction focus toward a relationship focus. Relationship marketing is a philosophy of
doing business, a strategic orientation that focuses on keeping and improving current
customers, rather than on acquiring new customers. This philosophy assumes that
consumers prefer to have an ongoing relationship with one organization than to switch
continually among providers in their search for value. Building on this assumption and the
fact that it is usually much cheaper to keep a current customer than to attract a new one,
successful marketers are working on effective strategies for retaining customers. It has been
suggested that firms frequently focus on attracting customers (the “first act”), but then pay
little attention to what they should do to keep them (the “second act”).

10.2 Background of Relationship marketing

If one looks at the parallel developments of marketing thought with the economic situation
in the second half of the twentieth century, the evolution to a relationship marketing
paradigm is not unexpected.

After the end of the Second World War, most markets were characterized by a lack of
supply and excess demand. Companies sold what they could make. There was no listening
to the ‘voice of the consumer’ and adapting product/service offerings to satisfy their
requirements. This approach is known as product orientation and is typified by Henry Ford
the American car manufacturer’s famous statement: ‘They can have any color as long as it’s
black.’ In the 1970s many markets are exhibiting excess supply. To survive, companies now
have to fight for customers. They have to listen to and meet customers’ needs/wants. They
learn how to segment and differentiate their offerings. This is market orientation. However,
by the 1980s, most companies had adopted a market orientation and the plethora of similar
products/services offering often indistinguishable benefits led companies to seek other
means of securing an advantage over competitors.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

202
 SERVICES AND RELATIONSHIP MARKETING

Companies developed a competition orientation, where they sought to outperform

competitors through value-chain savings, a differentiated route to market, etc. Increasing
variety-seeking behaviour from consumers and an expectation of a continual stream of
service innovations coupled with advances in technology lead to the 1990s being
characterized by a renewed marketing focus on the customer. This customer orientation
was driven by a desire to fulfill the expectations of homogenous groups of customers, often
resulting in marketing to increasingly smaller groups of buyers. The relationship
orientation is a natural extension to that of customer orientation. For many companies,
they have so much invested in strategies designed to meet a customer orientation that they
want to hold on to these customers and optimize their relationships.

10.3 Relationship Marketing Values

Gummesson (1999) provides three principles that define the key values of relationship
marketing.
1. Long-term collaboration for mutual value creation (win–win outcomes of a ‘plus sum
game’ that emphasizes commitment for an extended duration, and care, over and above
attraction);
2. All parties recognized as active (either of the interacting parties can initiate innovation,
etc. i.e., the relationship is co-managed);
3. Relational and service values – bureaucratic–legal values are discarded in favour of
treating customers as differing (within communities of affinity) exchangers of value (co-
defined by them, in various forms).

Traditional marketing thinking is prejudiced in favour of the benefits of competition, while

excluding collaboration as an inhibiting force. Traditional marketing represented the
consumer as a passive and receptive object to be acted upon through market interventions
that would influence their attitudes and, consequently, their behaviour through ‘targeted
communications’. In this break from the tradition, the Relationship Marketing logic views
the Consumer as a highly active agent who acts productively on the basis of personal
motivations. In this way, people can choose whether or not to engage in relationships, and
this perspective brings partnership and negotiation to the fore in marketing thinking.

Activity 10.1
What differences do traditional marketing and relationship marketing have in relation
to consumers?

Commentary
Traditional Marketing views consumers as a passive and to be acted upon through
market interventions to influence their attitudes and behaviors making use of ‘targeted
communications’. Relationship marketing, however, views consumers as active agents
who act productively willingly. They are not forced to engage in relationships, and this
view allows partnership and negotiation to be involved in marketing thinking.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

203
 SERVICES AND RELATIONSHIP MARKETING

Comparison of the traditional transactional marketing and relationship marketing is

presented below.

Table 10.1 The marketing strategy continuum

Transaction marketing Relational marketing

Focus on short-term performance and Long-term performance is the priority with
recruitment of customer for single sales attention to transaction history and
potential, for customer retention
Management of marketing mix Marketing interaction (supported by
marketing mix activities)
Attention to technical quality of product Customers less price-sensitive as value of
benefits and solutions is realized
Quality is production oriented Quality of interactions is paramount
Customers are price-sensitive
Market share is taken as customer Customer satisfaction assured by managing
satisfaction indicator trading relationships
Customer information from adhoc Customer information from real-time ICT
satisfaction surveys
Interface of marketing, operation and human Functional interface is strategically
resource is given little or no importance important
Customer service not valued Customer service is paramount
Little commitment to customers Quality is the concern of all
Internal marketing is given little attention or Internal marketing is strategically important
no attention
Contact with customer is largely Customer contact is frequent and
promotional cooperative
Consumer packaged goods and durables Industrial goods and services

10.3 The Theoretical Origins of Relationship Marketing

A range of bodies of theory is here briefly reviewed to provide some understanding of the
foundations of relationship marketing.

10.3.1 Neo-classical Microeconomic Theory

This theory emphasizes profit maximization in competitive markets in explaining relative
prices, market equilibrium, and income distribution. Exchange parties are price takers seeking
to maximize utility in price equilibrium markets. This assumes well-defined and stable
preference structures where individuals independently worry about creating value. Firms are
seen as engaged in market transactions to secure the resources they require for producing
goods and services they sell in the competitive marketplace. Such market transactions incur
the costs associated with the price paid, searching costs, negotiating and contracting costs,
and costs of monitoring supplier performance.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

204
 SERVICES AND RELATIONSHIP MARKETING

The marketing management tradition based upon the idea of microeconomic maximization
strongly distinguishes the trading environment and controllable decision variables in the
marketing mix. It has thus been very useful in explaining value distribution among
marketing actors. However, it is doubtful that contemporary problems can be adequately
dealt with by a microeconomic approach focusing on costs, functional differentiation, and
market structures. It has limited applicability to transactional exchange situations, due to its
inadequacy in providing in sufficient tools for analyzing exchange structures and processes
within and between exchange parties. For example, contrary to the assumptions of
microeconomic theory, consumers have a natural tendency to reduce choices. Also, the
assumption of rational behavior is often not realistic. Economists have generally viewed
markets as social ‘vacuums’ in which buyers and sellers only know each other in their roles
as dictated by the market (i.e. as no more than buyer and seller).

10.3.2 Transaction Cost Theory

Transaction cost theory (Williamson, 1975) uses arguments from microeconomics and
institutional economics, contract law, and organization theory. In the original transaction
cost theory, transactions were classified according to whether they occurred within a firm or
between the firms in a market. Further developments examined the transaction cost
advantages of different forms of internally and externally organized transactions within the
constraints of bounded rationality and opportunistic behavior. Axioms of this approach are
that certain exchange characteristics give rise to transaction difficulties and that different
governance mechanisms vary in their cost-minimizing properties.

Market transactions may become very costly due to human factors, such as bounded
rationality and opportunism, and environmental factors, such as uncertainty and
economically concentrated input or output markets. Transaction cost theory departs from
the assumptions that individuals are limited in their cognitive capabilities and that they are
inclined toward opportunistic and self-interest seeking behavior. Consequently, in situations
when information is unequally spread among exchange parties, opportunistic behaviour is
believed to prevail and exchange may be commercially hazardous. Opportunism is generally
centered on deceit. In order to reduce the risks of being exploited by each other, exchange
partners can safeguard their interests by making substantial transaction specific investments
that are uniquely related to the exchange relationship and that cannot be retrieved on
termination. If both partners make such investments, they create incentives to maintain, or
obstacles to leave, the relationship they are in by communicating their credibility of
commitment to the relationship. Such investments in transaction-specific assets also create
dependence relationships between exchange partners since they are difficult or costly to
replace. Every market transaction involves transaction costs that lead to inefficiencies for
those engaged in these exchanges. Such transaction costs include costs of information
search, of reaching a satisfactory agreement, of relationship monitoring, of adapting
agreements to unanticipated contingencies, and of contract enforcement.

Transaction costs can be subdivided into performance ambiguity and goal incongruence.
Because of bounded rationality and the existence of transaction costs, a comprehensive
contract related to controlling all aspects of a relationship is not a viable option for partners
in a relationship. Instead, parties have to rely on ‘incomplete contracting’ involving the
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
205
 SERVICES AND RELATIONSHIP MARKETING

development of long-term relationships that permit sequential, adaptive decision-making.

Transaction costs are minimized by selecting a mode of relationship governance that is
‘optimal’, given transaction properties such as asset specificity, uncertainty, and
infrequency, and that curbs bargaining and opportunism. Governance modes range from
arm’s length spot-market governance (external governance mechanism) and vertical
integration (internal governance mechanism). In ‘arm’s length’ exchange situations, buyers
set sellers against each other in order to achieve lower costs. In vertically integrated
exchange situations, buyers and sellers can reduce transaction costs by aligning their
objectives and internal systems. Under conditions of asset specificity, opportunism, and
uncertainty, the transaction costs of arm’s length market exchanges are far larger than those
of more long-term relational exchanges. So, generally, a movement accompanies an
increase in transaction costs from external to internal governance mechanisms. This
approach assumes that a firm will internalize those activities which they are able to perform
at a lower cost, and that they will rely on market mechanisms for those activities in which
other providers have an advantage (e.g. outsourcing). The framework helps to identify
problems that can arise when idiosyncratic or transaction-specific investments are involved
in an exchange relationship. However, there are major limitations. The unilateral focus of
transaction cost theory on the potential costs that are associated with idiosyncratic
investments fails to recognize the potential value that is generated by these investments.
Transaction cost theory focuses on the single criterion of cost-efficiency for shaping
transactions.

The role of other microeconomic criteria tends to be downplayed in most transaction cost
analyses. The term ‘transaction costs’ should also include positive returns that can result
from exchanges. It does not take into account the interdependencies created between
partners in a relationship, and generally only reluctantly acknowledges the potential
contributions of power dependence theory. Transaction cost theory is mainly preoccupied
with the conditions that motivate exchange partners to structure relationships in a particular
way, without specifying the mechanisms that provide the ability to implement these desired
structures. It focuses on a relationship structure at one moment in time and neglects the
possible dynamic evolution of a governance structure and transactions. The role and
importance of people in the governance of exchanges is virtually ignored! The assumption
of opportunistically inclined parties is overly simplistic and misleading. Empirical evidence
demonstrates that human behavior in relationships is not as Machiavellian as described in
transaction cost theory. Sociologists stress that exchange is typically embedded in social
structures in which opportunism is the exception rather than the rule. Transaction cost
theory has failed to offer predictions about the implications of deviance from opportunism.
Further, many exchanges are based on a gradual development of trust that helps exchange
partners to lower transaction costs by safeguarding against opportunism.

The implications of the effect of trusting behavior on governance structures are generally
ignored in transaction cost theory. The theory cannot adequately explain how it is that
idiosyncratic investments occur in relationships that are not vertically integrated. Although
transaction-specific investments play an important role in affecting relationships through
creating dependence and ‘locking-in’ customers, they are not sufficient to explain long term
orientation in exchanges. Transaction cost analysis makes no allowance for safeguarding

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

206
 SERVICES AND RELATIONSHIP MARKETING

transaction-specific assets, other than by vertical integration, which is not always a feasible
or relevant strategy.

Activity 10.2
Identify factors that could make market transactions very costly.

Commentary
Human factors such as bounded rationality and opportunism, and environmental
factors including uncertainty and economically concentrated input or output
markets

10.3.3 Relational Contracting Theory

This is primarily rooted in contract law that applies to the legal rights of exchange parties
and guides the planning and conduct of exchange. While classical contract law views
exchange as composed of single, independent, and static transactions, modern contract law
tries to deal with the dynamic nature of intermediate and long-term exchanges. Modern
contract law explicitly refers to exchange planning and contract formation, adjustments to
established contract relationships, and the resolution of contractual conflict. Relational
contracting theory has provided a rich conceptual framework that is able to capture the
dimensions and dynamics that underlie the nature of exchange relationships as well as the
belief structures and activities that are necessary for successful exchange relationships.
MacNeil (1980) distinguished intermediate types of exchange between discrete transactions
and complete internalization of exchanges. Such intermediate forms of exchange are termed
‘contractual ways of exchange’ or ‘relational transactions’, where exchange parties are still
independent but at the same time coupled by weak or strong contractual agreements. Since
a pure reliance on the mechanism of law can be costly in terms of both resources and time,
and since unforeseen circumstances can affect the exchange relationship, extra-legal
governance methods are needed. So, the concept of contract has been defined very broadly
as a relationship between exchange parties who expect to sustain this relationship into the
future.

Therefore, contracts are about exchange because they capture the relations among parties
and these relations project exchange into the future. MacNeil’s (1980) relational contracting
framework describes types of contract in terms of the norms that are expectations about
behavior that are at least partially shared by a group of decision-makers. These differ in
content and general orientation and may relate to particular kinds of behavior. For example,
while norms can be oriented toward a more discrete or a more relational nature (general
orientation), relational norms may be translated into several different behaviors such as
flexibility, mutuality, consistency, solidarity, creation and use of power, and information
exchange. A general property of relational norms is their prescription of behaviors that are
aimed at maintaining a relationship and their rejection of behaviors that promote individual
goal seeking. During an exchange act, buyers and sellers often establish norms that did not
exist prior to this exchange. Contracts can be based on the traditional promise of contract
law (promissory norms) or more relationship-based promises (non-promissory norms).
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
207
 SERVICES AND RELATIONSHIP MARKETING

MacNeil (1980) argued that formal contracts guided by promissory norms do not play a
substantial role in most relationships. Rather, it is the set of understandings among
exchange partners or the ‘implicit contract’ guided by non-promissory norms that
substantially affects relationships. Parties who engage in exchanges based upon implicit
contracts are less in need of monitoring of their exchange partners or of building safeguards
into the relationship.

Relational contracting theory deals with the criticisms that have been directed at transaction
cost theory by including social dimensions of exchange, and by making clear that
hierarchical relationship governance mechanisms are not the only mechanisms available.
Consequently, the theory of relational contracting offers a valuable complement to
Williamson’s (1975) transaction cost approach. However, this theory has been criticized for
failing to prescribe optimal types of governance to deal with specific characteristics of the
exchange. Until now, relational exchange theory has mainly been used for descriptive and
conceptual purposes.

Activity 10.3
1. Compare and contrast transaction-and relationship-based exchanges.
2. In what conditions can a transaction-based exchange be more appropriate?

Commentary
1. Transactional exchanges are based on a view that each transaction is carried
out irrespective of previous history or potential future business, while
relationship-based exchanges consider the impact of any business engagement
on the relations between the buyer and supplier and the likely impact on
potential future business.
2. Transaction-based exchange may be desirable where for either party the costs
of building and maintaining a relationship outweigh the benefits.

10.3.4 Social Exchange Theory

People use cognitive schema to organize their perceptions of social interactions and
relationships. The basis of social exchange theory is derived from marital theory, bargaining
theory, and power theory. The qualities of interpersonal relationships have been extensively
investigated in disciplines such as psychology and social psychology. Social exchange
theory compares the formation and continuity of a relationship with those of a marriage and
places interactions between people at the core of relationships. Marketing is seen as an
interactive process occurring in a social context where relationship management is central
(Gro¨nroos, 1994). The interaction approach suggested six different types of bond: social,
technological , knowledge, planning, legal, and economic.

10.3.5 Equity Theory

Equity theory is related to social exchange theory, relative deprivation theory, and
distributive justice theory, given their unifying basic premise that outcomes should be
evaluated in a relative sense within some frame of reference. Equity theory focuses upon
outcome evaluations that result from relationships characterized by economic productivity
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
208
 SERVICES AND RELATIONSHIP MARKETING

objectives. Equity theory postulates that parties in exchange relationships compare their
ratios of exchange inputs to outcomes. Inequity is said to exist when the perceived inputs
and/or outcomes in an exchange relationship are psychologically inconsistent with the
perceived inputs and/or outcomes of the referent. Since parties sometimes need to evaluate
each other before engaging in an exchange, role expectations play a crucial role in
determining the equity level of a potential exchange relationship. Each party to the
exchange has certain expectations about their own role as well as that of the other party.

According to role theory, each exchange partner has learned a set of behaviours that is
appropriate in an exchange context – this will increase the probability of goal attainment by
each partner. Role stress can affect long-term relationships if role expectations are unclear
(role ambiguity) or if actual behaviors deviate from expectations (role conflict). Believed
inequities lead exchange parties to feel under-rewarded or over rewarded , angry, or
resentful, and will affect behaviors in subsequent periods by encouraging these parties to
change their inputs into the relationship, and thus result in suspicion and mistrust of the
exchange partner. The closer the exchange relationship, the more likely it is that relationship
participants will perceive inequity. If equity prevails, the ratio of one person’s outcomes to
inputs is assumed to be constant across exchange partners, which results in the satisfaction
of exchange partners with their outcomes.

Equitable outcomes stimulate confidence that parties do not take advantage of each other
and that they are concerned about each other’s welfare. Parties in a relationship can
compare their own ratio to that of their exchange partner, to those of others who interact
with their exchange partner at the same level, and to that of their best alternative exchange
partner. Though both equity and disconfirmation are comparison processes, these processes
are viewed as conceptually distinct and complementary. While one person’s outcomes and
inputs are compared to those of the other party in equity processes, outcomes in general are
compared to their expectations for those outcomes in expectancy disconfirmation processes.

Equity theory is fundamentally different from cognitive dissonance theory. While cognitive
dissonance research primarily focused on the relationship between a person and a product,
equity theory research is concerned with a group process and an equitable distribution of
benefits among people. Equity theory explicitly recognizes the inherent inequality between
exchange partners. In the case that roles are dissimilar, theories of distributive justice or
‘expectation states theory’ are useful in understanding exchange relationships. These
theories require only that each party has expectations of the role of the other party, and
interpret justice in terms of how well this other party performs on their role dimensions.
Equity theory is more useful in commercial exchange situations than is social exchange
theory (with its assumption of equal partners to the exchange).

Because contradictory findings have been generated on the effects of over rewarding parties
in a relationship, equity theory has declined in research popularity and application. A
significant shortcoming of equity theory is the absence of a unifying framework that can
explain both positive as well as negative effects of over-rewarding.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

209
 SERVICES AND RELATIONSHIP MARKETING

Activity 10.4
What do you think is the negative effect of over-rewarding?

Commentary
In cases where the reward goes above and beyond what would be expected of a
standard workplace incentive, and if it is not purely performance-based, there might
be a danger of favoritism, besides, any criteria that is used at the discretion of
managers or other employees may be subject to personal bias. This, of course,
decreases the motivation and commitment of employees

10.3.6 Political Economy Theory

The political economy paradigm integrates economic efficiency theories of organizations
with behavioral power theories. It is an institutional analysis based on political science,
sociology, and organization theory (Arndt, 1983). The political economy framework draws
on social exchange theory, the behavioral theory of the firm, and transaction cost theory.
Moreover, political economy theory is related to many of the subfields within marketing.
For instance, the macro-marketing school addresses the environment. The political
economy framework has most often been used in order to conceptualize structure and
process in channels of distribution. It has also been claimed that it helps to better understand
all types of relationship and alliance in marketing (Arndt, 1983). Political economy theory
views a social system as interacting sets of major economic and socio-political forces that
affect collective behaviour and performance.

Adopting analysts evaluate exchanges between parties on the basis of three dimensions: (1)
polity–economy, (2) external–internal, and (3) substructure–superstructure (Arndt, 1983).
An essential characteristic of political economy theory is its simultaneous and
interdependent analysis of political and economic systems of production and consumption.
Economy refers to institutions that transform inputs into output and to the processes by
which goods and services are allocated within and between institutions (ranging from
market to vertical exchange processes).

Polity refers to the power and control systems that legitimize, facilitate, monitor, and
regulate exchange transactions. The economy and polity can be considered as allocation
systems, allocating scarce economic resources and power or authority, respectively. The
main contribution of political economy theory results from its dyadic approach that
integrates both economic and socio-political factors, and explicitly insists that economic and
socio-political forces are not analyzed in isolation. The value of the theory lies in its capacity
of identifying socio-economic interactions between exchange partners in terms of their
internal structure and external environment. It is considered to be a more appropriate
paradigm than the microeconomic paradigm as it focuses on authority and control patterns,
conflict and conflict management procedures, and external and internal determinants of
institutional change.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

210
 SERVICES AND RELATIONSHIP MARKETING

The value of political economy theory results from both its generality and its integrative
potential. It is a fairly general theory that can support theory construction in a wide range of
marketing areas. It is integrative in that it offers a unifying framework in which major
economic and socio-political constructs can be used for comparing marketing relationships.
The microeconomic and political economy paradigms are complementary rather than
alternatives. The microeconomic framework, with its emphasis on controllable variables
and problem solving, is appropriate in the normative marketing management tradition.
However, for purposes of building positive theories in marketing, the political economy
world view seems more relevant.

However, the theory is so comprehensive that it has proven difficult to apply empirically.
Due to its complexity, political economy theory is often confronted with criticisms reflecting
its methodological problems, vagueness, and incompleteness. It specifies many constructs
and relationships that are difficult to capture through conventional research methods. At its
present level, political economy is more vague and less precise than, for instance, the
microeconomic paradigm. It may also be criticized for putting too little emphasis on
performance or goal attainment of social units in terms of effectiveness and efficiency.

10.3.7 Resource Dependence Theory

The resource-based theory of the firm was developed from organization behaviour,
economics, and strategic management, and has moved beyond the traditional emphasis on
the microeconomic paradigm. The ideas are based upon balance power theories, bilateral
oligopoly and duopoly theories in economics, and relative deprivation theories of collective
conflict. Many theorists regard dependence and power as central to explaining
organizational and interpersonal behaviour. Yet, the traditional discussion of exchange in
marketing generally does not focus on differences in negotiation power and the
consequently unequal and unsatisfactory nature of exchange transactions. Resource
dependence theory explicitly addresses these issues by examining sources of power and
dependence in exchange relationships.

10.3.8 Resource-Advantage Theory

A resource is available to a firm to enable it to produce efficiently and/or effectively an
offering to market that has value for one or more segments (groups whose members have
relatively homogeneous tastes and preferences). Comparative advantage in resources allows
the firm to occupy a position of competitive advantage in the marketplace. This results in a
superior financial performance, with environmental limitations from societal resources,
societal institutions that govern the operating rules, competitor actions, consumer behaviors,
and public policy decisions. Innovation, in this view, is produced by learning in the process
of competitive struggle.

Relationship Marketing is theoretically supported by the possibility that some kinds of co-
operative relationships can enhance competition. Relationships are not part of the
‘resources’ in neoclassical theory. Yet, they are increasingly held nowadays to be valuable in
the production–consumption process. The problem in neoclassical thinking is that

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

211
 SERVICES AND RELATIONSHIP MARKETING

relationships are not for sale (they are immobile) and have unique characteristics (they are
heterogeneous), so they cannot be considered to be resources.
Hunt’s Resource-Advantage Theory (Hunt and Morgan, 1995; Hunt, 1997) classified
resources in to financial, physical, human, organizational, informational, and relational.
These resources need not be owned by the firm, but must be available for the purpose of
producing value for some segment(s). Relationships are thus conceived of as organizational
capital. This element of the total value of a firm is growing in significance, and relationships
are becoming the most important asset for many businesses. A relationship is thus viewed as
a particular immobile pro-competitive resource.

10.3.9 Institutional Theory

This is an alternative, multi-constituent, and dynamic view that sees social actors in support
of the corporation when institutional norms are upheld. The corporation is then seen as
legitimate.

10.4 The Six Markets model

The Six Markets model provides the basis for a simple framework to convey the complex
reality of relationship marketing. It has the potential to provide a strategic overview of
relationship marketing; its scope, nature and purpose. The Six Markets model addresses
relationship marketing at the organizational level. It presents for consideration six role-
related market domains or ‘markets’, each representing dimensions of relationship
marketing and involving relationships with a number of parties – organizations or
individuals – who can potentially contribute, directly or indirectly, to an organization’s
marketplace effectiveness. The six market domains were initially presented as is shown in
Figure 1.1, with the focal firm, the ‘internal market’, placed at the centre of the model. This
configuration emphasizes internal marketing’s role as an integrator and facilitator,
supporting the management of relationships with parties within the other ‘markets’.

Customer markets
The link between customer retention and profitability in a service situations has done much
to promote the benefits of customer retention through relationship building. Whether a
customer is the end user of a product or service does of course depend on the position a
supplier occupies in a particular value delivery sequence. Many organizations market both
to trade customers (intermediaries, distributors or retailers) and consumers (end purchasers,
users and consumers), but their relative power within the value system is likely to determine
which relationships are cultivated most diligently. For the manufacturers of consumer
goods, the rising power of retailers has focused their attention on these relationships.
Meanwhile retailers and distributors are pouring considerable effort into managing direct
relationships with increasingly capricious consumers. A point which must not be
overlooked, however, is that relationship marketing is not a universal panacea.

There are situations, often involving low-involvement or commodity products, when a swift
and simple transaction approach is most appropriate and most valued by the customer. For
businesses offering professional or financial services, regularly replaced consumer durables

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

212
 SERVICES AND RELATIONSHIP MARKETING

such as cars, and for many organizations involved in business to business marketing, the
long-term investment in building relationships with individual customers is easily justified.
Similarly, for manufacturers of some low-priced consumer products with high frequency
purchase rates and easily identifiable target groups, the approach can readily prove its
worth.

Referral markets
Referrals can be a decisive element in the creation of relationships between an organization
and its customers. The professional services sector has always used informal networks and
reciprocal referrals to direct business towards established contacts. Word-of-mouth
recommendations are certainly known to be an important part of the information search
undertaken by consumers before buying high value or high risk services. Recommendations
may also be used by consumers as a convenient way of reducing choice between many
seemingly similar products or services. Similarly, in situations where the product or service
may be complex or difficult to evaluate, customers will seek the advice of trusted third
parties to reduce the perceived risk associated with the purchase. Given that satisfied
customers will happily endorse the products or services of the supplier if prompted,
relationships with existing customers are an unrecognized or underutilized facility for many
organizations. Closer relationships with referral sources can provide early access to
specifications and a better understanding of non-product related buying criteria.

Internal
markets

Supplier Referral
& markets
alliance Customer
markets Markets

Recruitment
Influence
markets markets

Figure 10-1: The six market domains

Internal markets
In 1987 Judd conceptualized the employee of an organization as an element of the
organization’s marketing strategy. Schlesinger and Heskett linked the constructs of
employee satisfaction and retention to customer satisfaction and retention in service

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

213
 SERVICES AND RELATIONSHIP MARKETING

businesses. The links between employee retention (particularly front-line employee

retention) and customer or business retention also exist in product-centred, business to
business marketing situations.

Recruitment markets
The move away from traditional employment practices towards contract working,
outsourcing and partnering allows organizations to access a wider range of specialist skills
on a temporary basis. Nevertheless, there are certain categories of employees whose skills
and experience create and sustain the organization’s core competencies. Christopher, Payne
and Ballantyne’s recruitment market represents those potential employees who possess the
attributes needed to sustain and enhance these core competencies. It also refers to third
parties – colleges, universities, recruitment agencies or other employers – who have early
access to pools of these potential employees. The logic is that if a would-be employer wants
to attract the best people, it must present itself to influential third parties and to the
individuals themselves as the employer of first choice. But if it also wants to keep these
valuable employees, it must be the employer of first choice.

Influence markets
Whereas Webster and Wind list influencers and gatekeepers among the members of a
buying unit within the firm, Christopher, Payne and Ballantyne look beyond the confines of
customers’ internal buying units and into the wider business environment. They apply the
term ‘influencer’ to a range of third parties who exercise influence over the organization and
its potential customers. These influencers may be governments and their agencies, press and
other media, professional bodies, investors and pressure groups. In fact ‘influence markets’
will likely include all of the constituencies that have traditionally fallen within the domain of
public relations and corporate affairs. While relationships with these parties may not
directly add value to a product or service, they can directly influence the likelihood of
purchase or prevent an offer from even reaching the market.

If carefully and proactively managed, these relationships can not only open doors to
markets, but they can enhance or even replace some other marketing activities. The skilful
management of media relationships can, in some instances, be cheaper and more effective
than formal advertising. While well-managed relationships with other influencers might not
be so overtly beneficial, they can be used to influence public opinion and legislators in the
organization’s favour. They can also mitigate the effects of potentially disastrous operational
mishaps.

Supplier markets
During the 1980s, changes began to occur in purchasing behaviour of some large
manufacturing companies. The traditional adversarial approach to procurement that played
multiple suppliers off against each other began to take on a more cooperative nature. This
followed the gradual realization that, when suppliers were squeezed to the point of collapse,
they were unwilling and unable to invest in the new plant and technologies required to
allow them to deliver better products and services, faster and more cheaply. Instead these
manufacturers were choosing to build less exploitative relationships with fewer suppliers. In
doing so they are creating integrated and relatively stable supply chains, which allow quality
and flexibility to be engineered into the systems while costs are reduced. Often this will
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
214
 SERVICES AND RELATIONSHIP MARKETING

involve shared infrastructural investments and the merging of some business systems. The
result is improved competitiveness through the creation and delivery of a better value
proposition for the end customer.

Activity
Explain the major difference between traditional marketing and the broader view
of relationship marketing.

Commentary
Traditionally marketing has tried to satisfy the needs of customer groups,
whereas the broader view of relationship marketing suggests that six key
(stakeholder groups) markets should be considered.

10.5 The “Bucket Theory of Marketing”

James L. Schorr, executive vice president of marketing at Holiday Inns stated that
marketing can be thought of as a big bucket: It’s what the sales, advertising, and promotion
programs do that pours business in to the top of the bucket. As long as these programs are
effective, the bucket stays full. However, “There’s only one problem,” he said, “there’s a
hole in the bucket.” When the business is running well and the firm is delivering on its
promises, the hole is small and few customers are leaving. When the operation is weak and
customers are not satisfied with what they get, however, people start failing out of the
bucket through the holes faster than they can be poured in through the top.

The bucket theory illustrates why a relationship strategy that focuses on plugging the holes
in the bucket makes so much sense. Historically, marketers have been more concerned with
acquisition of customers, so a shift to a relationship strategy often represents changes in
mind set, organizational culture, and employee reward systems.

10.6 Goals of Relationship Marketing

The primary goal of relationship marketing is to build and maintain a base of committed
customers who are profitable for the organization. To achieve this goal, the firm will focus
on the attraction, retention, and enhancement of customer relationships.
 First, the firm will seek to attract customers who are likely to become long-term
relationship customers. Through market segmentation the company can come to
understand the best target markets for building lasting customer relationships. As
the number of these relationships grows, the loyal customers themselves will
frequently help to attract (through word of mouth) new customers with similar
relationship potential.

 Once they are attracted to begin a relationship with the company, customers will be
more likely to stay in the relationship when they are consistently provided with
quality products and services and good value over time. They are less likely to be
pulled away by competitors if they feel the company understands their changing
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
215
 SERVICES AND RELATIONSHIP MARKETING

needs and seems willing to invest in the relationship by constantly improving and
evolving its product and service mix.

 Finally, the goal of customer enhancement suggests that loyal customers can be even
better customers if they buy more products and services from the company over
time. Loyal customers not only provide a solid base for the organization, they may
represent growth potential. In recent years, in fact, many companies have aspired to
be the “exclusive supplier” of a particular product or service for their customers.
Over time these enhanced relationships can increase market share and profits for the
organization.

Figure 9-2 illustrates the goals of relationship marketing graphically. The overriding goal is
to move as many profitable customers up through the pyramid from being newly attracted
customers through to being highly valued, enhanced customers.

Enhancing

Retaining

Satisfying

Getting

Figure 10.2 Customer goals of relationship marketing: Getting customers, satisfying

customers, retaining customers, and enhancing customers.

10.7 Benefits of Customer/Firm Relationships

Both parties in the customer/ firm relationship can benefit from customer retention. That
is, it is not only in the best interest of the organization to build and maintain a loyal
customer base, but customers themselves also benefit from long-term associations.

A. Benefits for Customers

Assuming they have choice, customers will remain loyal to a firm when they receive greater
value relative to what they expect from competing firms. Perceived value is the consumer’s
overall assessment of the utility of a product based on perceptions of what is received and what is given.
Value represents a trade-off for the consumer between the “give” and the “get” components. Consumers
are more likely to stay in a relationship when the gets (quality, satisfaction, specific benefits) exceed the
gives (monetary and nonmonetary costs). When firms can consistently deliver value from the
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
216
 SERVICES AND RELATIONSHIP MARKETING

customer’s point of view, clearly the customer benefits and has an incentive to stay in the
relationship.

Beyond the specific inherent benefits of receiving service value, customers also benefit in
other ways from long-term associations with firms. Sometimes it is these relationship
benefits that keep customers loyal to a firm more than the attributes of the core service.
Research has uncovered specific types of relational benefits, of the sort just described, that
customers experience in long-term service relationships including:
1. Confidence benefits
2. Social benefits and
3. Special treatment benefits.

1. Confidence Benefits
These benefits comprise feelings of trust or confidence in the provider, along with a sense of
reduced anxiety and comfort in knowing what to expect. Human nature is such that most of
us would prefer not to change service providers, particularly when we have a considerable
investment in the relationship. If the service provider knows us, knows our preferences, and
has tailored services to suit our needs over time, then changing providers would mean
educating a new provider on all of these factors. The costs of switching are frequently high in
terms of both dollar costs of transferring business and the psychological and time-related costs.

2. Social Benefits
Over time, customers develop a sense of familiarity and even a social relationship with their
service providers. These ties make it less likely that they will switch, even if they learn
about a competitor that might have better quality or a lower price. A quote from the
research illustrates this as a customer describes her hair stylist: “I like him. . . He’s really
funny and always has lots of good jokes. He’s kind of like a friend now. . . It’s more fun
to deal with somebody that you’re used to. You enjoy doing business with them.

In some long-term customer/firm relationships a service provider may actually become part
of the consumer’s social support system. Hairdressers, as in the example just cited, often
serve as personal confidantes. Less common examples include proprietors of local retail
stores who become central figures in neighborhood networks; the health club or restaurant
manager who knows her customers personally; or the private school principal who knows
an entire family and its special needs. These types of personal relationships can develop for
business customers as well as for end consumers of services. The social support benefits
resulting from these relationships are important to the consumer’s quality of life (personal
and /or work life) above and beyond the technical benefits of the service provided.

3. Special Treatment Benefits

Special treatment includes such things as being given a special deal or price, getting
preferential treatment, or benefit of the doubt etc.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

217
 SERVICES AND RELATIONSHIP MARKETING

B. Benefits for the Organizations

The benefits to an organization of maintaining and developing a loyal customer base are
numerous. They can be linked directly to the firm’s bottom line. The major benefits
include:
1. Increasing sales and profit
2. Lower costs
3. Free advertising through word of mouth
4. Employee retention

1. Increasing Sales
As consumers get to know a firm and are satisfied with the quality of its services relative to
that of its competitors, they will tend to give more of their business to the firm. And as
customers mature (in terms of age, life cycle, growth of business), they frequently require
more of a particular service.

2. Low Costs
There are many startup costs associated with attracting new customers. They include
advertising and other promotion costs, operating costs of setting up accounts and systems,
and time costs of getting to know the customer. Sometimes these initial costs can outweigh
the revenue expected from the new customer in the short term. A prime example occurs in
the insurance industry. Typically the insurer doesn’t recover its up-front selling costs until
the third or fourth year of the relationship. Thus, from a profit point of view there would
seem to be great incentive to keep new customers once the initial investment has been made.
Even ongoing relationship maintenance costs are likely to drop over time. For example, early
in a relationship a customer is likely to have questions and to encounter problems as he or
she learns to use the service. Once learning has taken place the customer will have fewer
problems as he or she learns to use service. Once learning has taken place the customer will
have fewer problems and questions (assuming the quality of service is maintained at a high
level) and the service provider will incur fewer costs in serving the customer.

3. Free Advertising through Word of Mouth

When a product is complex and difficult to evaluate, and there is risk involved in the
decision to buy it –as is the case with many services – consumers most often look to others
for advice on which providers to consider. Satisfied, loyal customers are likely to provide a
firm with strong word-of-mouth endorsements. This form of advertising can be more effective
than any paid advertising the firm might use, and has the added benefit of reducing the costs
of attracting new customers. Further, customers that show up based on a referral tend to be
better – quality customers (in terms of profitability, likelihood of being loyal) than are
customers who are attracted by price promotions or a new advertising campaign.

4. Employee Retention
An indirect benefit of customer retention is employee retention. It is easier for a firm to
retain employees when it has a stable base of satisfied customers. People like to work for
companies whose customers are happy and loyal. Their jobs are more satisfying and they
are able to spend more of their time fostering relationships than scrambling for new
customers. In turn, customers are more satisfied and become even better customers – a

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

218
 SERVICES AND RELATIONSHIP MARKETING

positive upward spiral. Because employees stay with the firm longer, service quality
improves and costs of turnover reduced, adding further to profits. Figure 9.3 illustrates the
underlying logic of customer retention and its multiple benefits to the firm.

Customer
Satisfaction

Customer Retention & Quality Services

Increased profits

Employee
Loyalty
Figure 10.3Underlying logic of customer retention benefits to the Organization

10.8 Lifetime Value of a Customer

Lifetime value of a customer is a concept or calculation that looks at customers from the
point of view of their lifetime revenue and profitability contributions to a company. This
type of calculation is obviously needed when companies start thinking of building long-term
relationships with their customers. Just what is the financial value of those long-term
relationships? Here, we’ll first overview the factors that influence a customer’s lifetime
value, and then show some ways it can be estimated.

Factors that influence lifetime value

The lifetime value of a customer is influenced by:
 the length of an average “lifetime,”
 the average revenues generated per relevant time period over the lifetime,
 sales of additional products and services over time, and
 referrals generated by the customer over time.

Lifetime value sometimes refers to lifetime revenue stream only; other times, when costs re
considered, lifetime value may truly mean “lifetime profitability.”

Estimating Lifetime Value

“If companies knew how much it really costs to lose a customer, they would be able to
make accurate evaluations of investments designed to retain customers. Unfortunately,
today’s accounting systems do not capture the value of a loyal customer.” One way of
documenting the dollar value of loyal customers is to estimate the increased value or profits
that accrue for each additional customer who remains loyal to the company rather than
defecting to the competition.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

219
 SERVICES AND RELATIONSHIP MARKETING

A research on a lifetime value of a customer showed that a 20- person office (firm ‘X’) had
approximately Br 1,500 per month in business with company ‘Z’. Assuming a 10-year
average lifetime for a customer, the value of a firm to company ‘Z’ becomes:
Br 1,500/month X 12 months/year X 10 years = Br 180,000
Further an assumption is drawn that a happy customer will create at
least one new customer via word of mouth that makes total income:
Br 180,000 X 2 = Br 360,000
If the company has got 40 customers of firm ‘X’s size, the portfolio of
life time business for the company would be:
Br 360,000 X 40 = Br 14,000,000

10.9 Foundations for Relationship Strategies

The preceding discussion should have convinced you that it is good business to focus on
current customers, to understand them, and to build strategies around retaining their
business. Later in the unit we describe specific retention strategies that firms use to keep
their current customers. But first, in this section, we discuss the foundations needed to begin
focusing on retention strategies:
(1) Quality offered in the core service
(2) Careful market segmentation and targeting
(3) Continuous monitoring of relationships

1. Quality in the Core Service

Retention strategies will have little long-term success unless there is a solid base of service
quality and customer satisfaction to build on. This doesn’t necessarily mean that the firm
has to be the very best among its competitors, or “world class” in terms of quality and
customer satisfaction. It must be competitive, however, and frequently better than that. All
of the retention strategies we describe later are built on the assumption of competitive
quality being offered.

2. Market Segmentation and Targeting

A second basic foundation of relationship marketing is market segmentation - learning and
defining who the organization wants to have relationships with. In earlier units we
discussed consumers of services and described their behavior, expectations, and perceptions.
If we were to aggregate all the behavior, expectation, and perception information for all the
customers in a particular market, we would probably be overwhelmed with the variations
across customers. At one extreme, service firms historically those with a relatively small
number of customers, each of whom is vitally important treat customers as individuals and
develop individual marketing plans for each customer. For example, a law firm an advertising
agency, or even a large manufacturer like the Boeing Airplane Company will develop
service offerings customized specifically and individually for their large corporate clients.

At the other extreme, some service firms offer one service to all potential customers as if their
expectations, needs and preferences were homogeneous. Providers of gas or electricity, for
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
220
 SERVICES AND RELATIONSHIP MARKETING

example, often view the needs of customers as varying only in terms of quantity purchased;
for this reason their marketing approach is standardized. Between these two extremes are
options that most service marketers choose – offering different groups of customers. To do this
effectively companies need market segmentation and targeting.

Process for Market Segmentation and Targeting in Services

Many aspects of segmentation and targeting for services are the same as those for
manufactured goods. For that reason we include Exhibit 7-1 as a review of basic marketing
principles for segmentation and targeting. There are differences, however. The most
powerful difference involves the need for compatibility in market segments. Because other
customers are often present when a service is delivered, service providers must recognize the
need to choose compatible segments or to ensure that incompatible segments are not receiving
service at the same time. A second difference between goods and services is that service
providers have a far greater ability to customize service offerings in real time than manufacturing
firms have. Figure 10.4 illustrates the steps involved in segmenting and targeting services,
and a brief discussion of each step follows.

Step 1 Step 2 Step 3 Step 4 Step 5

Identify Develop Develop Select the Ensure that

bases for profiles of measures of target segments are
segmenting resulting segment market compatible
the market segments attractiveness

Figure 10.4 Steps involved in segmenting and targeting services, and a brief discussion of
each step follows.

Identify Bases for Segmenting the Market

Market segments are formed by grouping customers who share common characteristics that
are in some way meaningful to the design, delivery, promotion, or pricing of the service.
Common segmentation bases for consumer markets are shown in Exhibit 10-4, including
demographic segmentation, geographic segmentation, psychographics segmentation and
behavioral segmentation.

Develop Profiles of Resulting Segments

Once the segments have been identified it is critical to develop profiles of them. In
consumer markets these profiles usually involve demographic characterizations or
psychographics or usage segments. Of most importance in this stage is clearly understanding
how and whether the segments differ from each other in terms of their profiles. If they are
not different from each other, the benefits to be derived from segmentation will not be
realized.

Develop Measures of Segment Attractiveness

The fact that segments of customers exist does not justify a firm’s choice of them as targets.
Segments must be evaluated in terms of their attractiveness, some aspects of which are

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

221
 SERVICES AND RELATIONSHIP MARKETING

shown in Exhibit 7-1. The size and purchasing power of the segments must be measurable
so that the company can determine if the segments are worth the investment in marketing
and relationship costs associated with the group. The chosen segments also must be
accessible, meaning that advertising or marketing vehicles must exist to allow the company
to reach the customers in the segments.

Table 10.4 Bases and requirements for effective segmentation

Review of Basic Marketing Principles: Requirements for effective segmentation

Market Segmentation and Market Measurability: The degree to which the size and
Targeting purchasing power of the segments can be
measured
Bases for Market Segmentation
Demographic Segmentation: Dividing
Accessibility: The degree to which the segments
the market to form groups based on
can be reached and served.
variables such as age, sex family size,
income, occupation, or religion.
Substantiality: the degree to which the segments
are large or profitable enough.
Geographic segmentation: Dividing
the market to form different geographic
Actionability: The degree to which effective
units such as nations, countries, etc
programs can be designed for attracting and
servicing of the segments
Psychographic segmentation: dividing
buyers to form groups based on social
Criteria for evaluating market segments for market
class, life style, or personality
targeting
characteristics.
Segment size and growth: It includes information
Behavioral Segmentation: dividing
on current dollar sales, projected growth rates, and
buyers to form groups based on
expected profit margin
knowledge, attitude, uses, or responses
to a service
Segment structural attractiveness: It includes
current and potential competitors, substitute
products and services, relative power of buyers,
and suppliers.

Company objectives and resources: It involves

whether the segment fits the company’s objectives.

Select the Target Segments

Based in part on the evaluation criteria in the section above; the services marketer will
select the target segment or segments for the service. The firm must decide if the segment is
large enough and trending toward growth. Market size will be estimated and demand
forecasts completed to determine whether the segment provides strong potential. Finally,
the firm must decide whether serving the segment is consistent with company objectives and
resources.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

222
 SERVICES AND RELATIONSHIP MARKETING

Ensure That the Target Segments Are Compatible

This step, of all the steps in segmentation strategy, is arguably more critical for service
companies than for goods companies. Because services are often performed in the presence
of the customer, the services marketer must be certain that the customers are compatible
with each other. If during the non peak season a hotel chooses to serve two segments that
are incompatible with each other- for example, families who are attracted by the discounted
prices and college students on their vacation- it may find that the two groups do not merge
well. It may be possible to manage the segments in this example so that they do not directly
interact with each other, but if not they may negatively influence each other’s experiences,
hurting the hotel’s future business. In identifying segments it is thus important to think
through how they will use the service and whether segments will be compatible. Later in
this course we will examine specific strategies for balancing demand for service while
serving the right segments and strategies for managing the customer mix.

3. Monitoring Relationships
A thorough means of monitoring and evaluating relationship quality over time is another
foundation for relationship marketing. Basic market research in the form of (at a
minimum) annual customer relationship survey can be the foundation for such a monitoring
strategy. Current customers should be surveyed to determine their:
 perceptions of value received,
 quality,
 satisfaction with services, and
 satisfaction with the provider relative to competitors.
The organization will also regularly communicate with its best customers in person or over
the telephone. In a competitive market it is difficult to retain customers unless they are
receiving a base level of quality and value. A well-designed customer database is also
critical. The following information forms the foundation of a customer data base.
 Knowing who the organization’s current customers are (names, addresses,
phone numbers, etc,),
 what customers buying behavior is,
 the revenue customers generate,
 the related costs to serve customers, customers preferences, and
 relevant segmentation information (e.g., demographics, lifestyle, usage
patterns) forms the foundation of a customer database.
The two basics (relationship survey and customer database) combined with a variety of
other types of marketing research are means for monitoring relationships. With a
foundation of customer knowledge combined with quality offerings and value, a firm can
engage in relation strategies to hold on to its customers.

10.10 Retention Strategies

1. Financial Bonds
2. Social Bonds
3. Customization bonds
4. Material(structural) bonds

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

223
 SERVICES AND RELATIONSHIP MARKETING

To this point in the unit we have focused on the rational for relationship marketing, the
benefits of customer retention, and the importance of identifying the right market segment(s)
for relationship building. In this section we look at some of the specific strategies and tactics
used by firms to build relationships and tie customers closer to the firm. That is, once a firm
has carefully identified its market segments and developed quality services, what are some
of the specific tactics it can use to accomplish the goal of retaining its customers?

Leonard Berry and A. Parasuraman have developed a framework for understanding types
of retention strategies. The four types of retention strategies built on foundations of quality
services, market segmentation, and monitoring of changing relationship needs are presented
below.
1. Financial bonds
 Volume and frequency rewards
 Bundling and cross selling
 Stable pricing
2. Social bonds
 Continuous relationships
 Personal relationships
 Social bond among customers
3. Customization bonds
 Anticipation/innovation
 Mass customization
 Customer intimacy
4. Structural bonds
 Integrated information system
 Joint investments
 Shared processes and equipment

10.10.1 Financial Bonds

At level 1, the customer is tied to the firm primarily through financial incentives-lower
prices for greater volume purchases or lower prices for customers who have been with the
firm a long time. Examples of level 1 relationship marketing are not hard to find. Think
about the airline industry and related travel service industries like hotels and car rental
companies. Frequent flyer programs provide financial incentives and rewards for travelers
who bring more of their business to a particular airline. Hotels and car rental companies do
the same.

Other types of retention strategies that depend primarily on financial rewards are focused on
bundling and cross selling of services. Frequent flyer programs again provide a common
example. Most airlines now link their reward programs with hotel chains, and auto rentals

In other cases, firms aim to retain their customers by simply offering their most loyal
customers the assurance of stable prices, or at least lower price increases than those paid by
new customers. In this way, they are rewarding their loyal customers by sharing with them
some of the cost savings and increased revenue the firm receives through serving them over
time.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
224
 SERVICES AND RELATIONSHIP MARKETING

While widely and increasingly used as retention tactics, cautions are warranted when
implementing a financial rewards loyalty program.
 As pointed out earlier, these programs are often easily imitated. Thus, any increased
usage or loyalty from customers may be short lived.
 Second, these strategies are not likely to be successful unless they are structured so
that they truly lead to repeat or increased usage rather than serving as means to
attract new customers and potentially causing endless switching among competitors.
Finally, these strategies will not be successful long term unless they build customers’
perceptions of increased value received from the service.

10.10.2 Social Bonds

Level 2 strategies bind customers to the firm through more than financial incentives. While
price is still assumed to be important, level 2 retention marketers build long-term
relationships through social and interpersonal as well as financial bonds. Customers are
viewed as “clients.” Not nameless faces, and become individuals whose needs and wants
the firm seeks to understand. Services are customized to fit individual needs, and marketers
find ways of staying in touch with their customers, thereby developing social bonds with
them. For example, in a study of customer/firm relationships in the insurance industry, it
was found that behaviors such as staying in touch with clients to assess their changing
needs, providing personal touches like cards and gifts, and sharing personal information
with clients all served to increase the likelihood that the client would stay with the firm.

Social, interpersonal bonds are common among professional service providers (e.g.,
lawyers, accountants, and teachers) and their clients as well as among personal care
providers (hairdressers, counselors’ health care providers) and their clients. A dentist who
takes a few minutes to review her patient’s file before coming in to the exam room is able to
jog her memory on personal facts about the patient (occupation, family details, interests,
dental health history). By bringing these personal details into the conversation, the dentist
reveals her genuine interest in the patient as an individual and builds social bonds.

Sometimes relationships are formed with the organization due to the social bonds that
develop among customers rather than between customers and the provider of the service.
This is frequently the case in health clubs, country clubs, educational settings, and other
service environments where customers interact with each other. People who exercise
together regularly at a health club may develop social ties and friendships that bind them to
each other and to the particular fitness center where they work out.

While social bonds alone may not tie the customer permanently to the firm, they are much
more difficult for competitors to imitate than are price incentives. In the absence of strong
reasons to shift to another provider, interpersonal bonds can encourage customers to stay in
a relationship. In combination with financial incentives, social bonding strategies may be
very effective.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

225
 SERVICES AND RELATIONSHIP MARKETING

10.10.3 Customization Bonds

Level 3 strategies involve more than social ties and financial incentives, although there are
commonly elements of level 1 and 2 strategies encompassed within a customization strategy
and vice versa. Two commonly used terms within the customization bonds approach are:
 mass customization and
 customer intimacy.

Both of these strategies suggest that customer loyalty can be encouraged through intimate
knowledge of individual customers and through the development of “one-to-one” solutions
that fit the individual customers’ needs. Mass customization has been defined as “the use of
flexible processes and organizational structures to produce varied and often individually
customized products and services at the price of standardized, mass-produced alternatives”.
Mass customizations does not mean providing customers with endless solutions or choices
that only make them work harder for what they want; rather it means providing them
through little effort on their part with tailored services to fit their individual needs.

10.10.4 Structural Bonds

Level 4 strategies are the most difficult to imitate and involve structural as well as financial,
social, and customization bonds between the customer and the firm. Structural bonds are
created by providing services to the client that are frequently designed right into the service
delivery system for that client. Often structural bonds are created by providing customized
services to the client that are technology based and serve to make the customer more
productive.

10.11 Customer Relationship Management (CRM) Systems

The whole approach to monitoring and evaluating customers’ services experience should be
undertaken in a radically different way to the traditional approach to market research. In the
late 1990s a whole new industry sector developed out of the market research industry and
computer software industry. Some companies in these industries saw that many
organizations had a need to understand and monitor their customers’ behaviour in real time
(or as near to this as possible). So there was a desire for this type of system, and now there is
the technology that can deliver it.

CRM systems are designed to keep a history of all contacts a customer has had with the
service provider. So even in mass marketed services where there is little chance that
customers will be ‘served’ by the same employee in the service company on repeated
occasions, the company can pick up with the customer where they last left off.

The Common CRM applications are:

 Data collection
 Data analysis
 Sales force automation
 Marketing automation
 Call centre automation

Early proponents of such CRM systems considered their implementation would deliver a
competitive advantage. Such rewards were often short-lived since such systems were easy to
copy. More frequently the expected benefits were never realized. Since many failed to
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
226
 SERVICES AND RELATIONSHIP MARKETING

realize that it was not the possession of a CRM system that would deliver the advantage, it
was what was done with the information that such systems generated. The CRM system is
only a tool to drive the strategy; it does not design, and can only help deliver the strategy.

Summary
In this unit we focused on the rationale for, benefits of, and strategies for developing long-
term relationship with customers. It should be obvious by now that organizations that focus
only on getting new customers may well fail to understand their current customers and thus
may be bringing customers through the front door while equal or greater numbers are
exiting. Estimates of life time relationship value accentuate the importance of retaining
current customers.
The unit continues with a discussion of the idea that, although long-term customer
relationships are critical and can be extremely profitable, firms should not attempt to build
relationship with just any customer. In other words, “the customer is not always right.”
Building from these foundations, the unit detailed four levels of retention strategies offering
increasing levels of competitive advantage. Each strategic approach focuses on a different
type of bond between the customer and the firm: financial bonds, social bonds,
customization bonds, and structural bonds.

Self Assessment Questions

1. Define relationship marketing and describe its basic tenet.

2. Explain the notion of the “bucket theory of marketing”.
3. Explain the goals of relationship marketing.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

227
 SERVICES AND RELATIONSHIP MARKETING

KEY TO SELF ASSESSMENT QUESTIONS

UNIT 1
1. The basic characteristics that underlie the difference between services marketing and
marketing of tangible goods
Services Goods
Intangibility of services Tangibility of goods
Variability or heterogeneity of services Uniformity of tangible goods
Simultaneous production and Separation of production and
consumption of services consumption
Perishability of services Storability of goods

2. Services are offered for sale by companies. Customer service is also provided by all
types of companies - manufacturers, IT companies, service companies. Customer
service is the service provided in support of a company's core products. Customer service
most often includes answering questions, taking orders, dealing with billing issues,
handling complaints, and perhaps scheduling maintenance or repairs.

3. The services marketing triangle shows the three interlinked groups that work together
to develop, promote and deliver services. These key players are labeled on the points
of the triangle: the company, the customers, and the providers. Through its external
marketing efforts, a company makes promises to its customers regarding what they
can expect and how it will be delivered. Traditional marketing activities such as
advertising, sales, special promotions, and pricing facilitate this type of marketing.
Keeping promises, or interactive marketing, is the second type of marketing activity
captured by the triangle and is the most critical from the customer's point of view.
Service promises are most often kept or broken by the employees of the firm or by
third-party providers, most often in real time. A third form of marketing, internal
marketing, takes place through the enabling of promises. In order for providers and
service systems to deliver on the promises made, they must have the skills, abilities,
tools, and motivation to deliver.

UNIT 2
1. The major differential factors of consumer behavior in services are related to:

 information search,
 evaluative criteria,
 size and composition of the evoked set of alternatives,
 perceived risk,
 adoption of innovations,
 brand loyalty,
 assessment of value, and
 attribution of dissatisfaction.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

228
 SERVICES AND RELATIONSHIP MARKETING

2. Examples of offerings high in credence qualities include appendix operations

and brake relining on automobiles.

3. When purchasing a service, the following seven types of risk are potentially
involved in the consumer’s decision-making process.
 performance risk
 financial risk
 time loss risk
 opportunity risk
 psychological risk
 social risk
 physical risk

4. The five characteristics that influence the rate of diffusion of innovation are:
 relative advantage
 compatibility
 communicability
 divisibility
 complexity

Unit 3
1. The six components of a customer service environment are:
 the customer
 organization culture
 human resources
 product/ deliverables
 delivery systems
 service

2. The key elements that make up a service culture are:

 Service philosophy or mission
 Employee roles and expectations
 Policies and procedures
 Products and services
 Service delivery systems
 Motivation and rewards
 Training
 Management support

3. Typical things that customers want and expect for a mutually benefiting and
continuing business relationship.
 Personal Recognition
 Courtesy
 Timely Service

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

229
 SERVICES AND RELATIONSHIP MARKETING

 Professionalism
 Enthusiastic Service
 Empathy and
 Patience

4. Recognizing, understanding and reacting appropriately to the body language of

others, as well as using positive body language yourself, allow you to communicate
with your customers more effectively. The 5 categories of nonverbal cues.
 Eye Contact
 Posture
 Facial Expressions
 Nodding of the Head
 Gestures

Unit 4
1. Service employees play a critical role in services marketing because:
 Service employees are the service.
 Service employees are the organization in the customer’s eyes.
 Service employees are marketers.

2. The basic tenet of the service profit chain model is that there are critical linkages
among internal service quality; employee satisfaction/productivity; the value of
services provided to the customer; and ultimately customer satisfaction, retention,
and profits.Through their research with customers and employees Benjamin
Schneider and David Bowen have shown that both a climate for service and a
climate for employee well-being are highly correlated with overall customer’s
perception of service quality. It is also found that customer satisfaction to be
strongly related to employee turnover. Ultimately there is connection between
employee retention levels, poorer quality service, and negative customer reactions.

3. The term emotional labor was coined by Arlie Hochschild to refer to the labor that
goes beyond the physical or mental skills needed to deliver quality service. It means
delivering smiles, making eye contact, showing sincere interest, and engaging in
friendly conversation with people. Friendliness, courtesy, empathy, and
responsiveness directed toward customers all require huge amounts of emotional
labor from the front-line employees.

4. Describe the three operational positions that can be adopted and implemented by a
service provider.
 Customization Operational Approach: The servicescape is designed to focus
on the needs of customers.
 Cost Efficiency Approach: The needs of the firm are paramount where the
physical setting is designed in such a way to increase the staff’s efficiency and
productivity.
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
230
 SERVICES AND RELATIONSHIP MARKETING

 Service Quality Approach: The service quality approach intended to enhance

either the functional quality or the technical quality. Firms using functional
quality will want to design the facility to focus on the needs of customers,
firms using technical quality will want to design the service to focus on the
needs of employees.

5. The four basic human resource strategy themes are.

 Retain the best people
 Develop people to deliver service quality
 Provide the needed support systems and
 Hire the right people

Unit 5
1. From consumers’ viewpoint, branding assures customers they will receive uniform
quality. From a service firm’s stand point, branding provides value that enhances the
efficiency and effectiveness of the marketing programs, increases repeat purchase
behavior and brand loyalty of consumers, and allows a firm to charge a higher price
for the service.
2. In centralized management structures, key decisions and power are located in top
management personnel. In decentralized management structure, key decisions and
power are shared among both top managers and middle managers.

3. Factors that affect pricing decisions are.

 organizational pricing objectives
 cost
 demand curve
 elasticity of price
 competition
 operational position and
 marketing mix composition.

4. Price bundling is offering consumers two or more goods or services in a single

package for a special price.

5. To increase market coverage, many service firms are using a multichannel approach.
Multichannel distribution involves the use of two or more channels to reach one or
more market segments. Service firms have seven distribution growth strategies
available to them.
 multisite
 multiservice
 multisegement
 Multisite, multiservice
 Multisite, multisegement
 Multiservice, multisegement

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

231
 SERVICES AND RELATIONSHIP MARKETING

 Multisite, multiservice, multisegement

Unit 6
1. Zone of tolerance is the extent to which customers recognize and are willing to
accept service performance variation across providers, across employees from the
same provider, and even within the same service employee.
2. Adequate service level is influence by:
 Enduring service intensifiers and
 Personal needs

Desired service level is influence by:

 Transitory service intensifiers
 Perceived service alternatives
 Customer self-perceived service role
 Situational factors
 Predicted service
3. The SERVQUAL instrument operationalizes this construct as the difference between
expected and actual (perceived) performance. Alternatively, SERVPERF is based on
the “performance only” perspective and operationalizes service quality as customers’
evaluations of the service encounter. As a result, SERVPERF uses only the
performance items of the SERVQUAL scale.
4. Remote Encounters occur without any direct human contact (remote encounters),
such as when a customer interacts with a bank through the ATM system. Phone
encounters occur between an employee and a customer in direct contact (face-to-face
encounters). Face- to- face encounter takes place between an end customer and the
firm occurs over the telephone (phone encounters).

Unit 7
1. Some of the possible reasons for service failure include, but not limited to:
 The service may be unavailable when promised
 The service may be delivered late or too slowly
 The outcome may be incorrect or poorly executed or
 Employees may be rude or uncaring.

2. The four types of complainers are passives, voicers, irates, and activists.
 Passives are least likely to take any action, unlikely to say anything to the
provider, less likely than others to spread negative word of mouth, and
unlikely to complain to a third party.
 Voicers are actively complain to the service provider, but they are less likely
to spread negative word of mouth, to switch patronage, or to go to third
parties with their complaints.
 Irates are more likely to engage in negative word of mouth to friends and
relatives and to switch providers than are others. They are about average in

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

232
 SERVICES AND RELATIONSHIP MARKETING

their propensity to complain to the provider and unlikely to complain to third

parties.
 Activists are characterized by above average propensity to complain on all
dimensions: They will complain to the provider, they will tell others, and
they are more likely than any other group to complain to third parties.
3. When customers place their complaint to the service provider, they expect fair
treatment which are classified in to:
 Outcome fairness
 Procedural fairness
 Interaction fairness

4. The major service recovery strategies are:

 Do it right the first time
 Welcome and encourage complaints
 Act quickly
 Treat customers fairly
 Learn from recovery experiences
 Learn from Lost customers

Unit 8
1. Factor that influence service failures are:
 Failure to understand customers expectations
 Failure to match service standards & design with customers expectations.
 No unique benefits offered
 Insufficient demand
 Unrealistic goals for the service
 Poor fit within the organization portfolio
 Poor location
 Insufficient financial backing
 Poor timing
 Design and specification flaws

2. A new service development involves front end planning and implementation with
various interrelated activities.

Front end planning involves:

 Business strategy development
 New-service strategy development
 Idea generation
 Service concept development and evaluation
 Business analysis
Implementation involves:
 Service development and testing
 Market testing
 Commercialization
ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM
233
 SERVICES AND RELATIONSHIP MARKETING

 Post introduction evaluation

3. According to Schmenner’s model, the four types of service designs classified based
on degree of labour intensity and degree of interaction or customization are:
 Service factory: These type of services are low both in terms of labour
intensity and degree of interaction or customization.
 Service shop: These type of services are low in terms of labour intensity
and high in terms of degree of interaction or customization.
 Mass service: These type of services are high in terms of labour intensity
and low in terms of degree of interaction or customization.
 Professional service: These type of services are high both in terms of
labour intensity and degree of interaction or customization

4. The 3 logics are described as follows:

 Customer logic: It is the underlying rationale that drives customers’
behaviour, based on their needs and wants. It will be evident in what
customers expect of the service and how it might compare with other
services.
 Technical logic: It is seen as the ‘engine’ of the service operation. It is
essentially concerned with the way things are done dictated largely by
organization policy, rules and regulations.
 Employee logic: It is the underlying rationale that drives employee
behaviour. It will be evident in employees’ perception of working
conditions, working methods, organization of work and role clarity.

Unit 9
1. The fundamental issues underlying management of supply and demand in services:
 Lack of inventory capability due to the perishability of services and
simultaneous production and consumption.
 Services cannot be transported from one place to another or transferred
from person to person.
 High fluctuating demand of services

2. The four different combinations of capacity and demand in services are:

 Excess demand: The level of demand exceeds maximum capacity. In
this situation, some customers will be turned away, resulting in lost
business opportunities.
 Demand exceeds optimum capacity: No one is being turned away, but
the quality of service may still suffer because of overuse, crowding, or staff
being pushed beyond their abilities to deliver consistent quality.
 Demand and supply are balanced at the level of optimum capacity: Staff
and facilities are occupied at an ideal level. No one is overworked,
facilities can be maintained, and customers are receiving quality service
without undesirable delays.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

234
 SERVICES AND RELATIONSHIP MARKETING

 Excess capacity/Demand is below optimum capacity/: Productive

resources in the form of labor, equipment, and facilities are underutilized,
resulting in lost productivity and lower profits.

3. Strategies for matching capacity and demand:

A. Shifting demand to match existing supply
 Vary the service offering
 Communicate with customers
 Modify timing and location of service delivery
 Differentiate on price
B. Adjust capacity to match fluctuations in demand
I. Stretch Existing Capacity
 Stretch Time
 Stretch Labor
 Stretch Facilities
 Stretch Equipment
II. Align capacity with demand fluctuation
 Use Part-Time Employees
 Rent or Share Facilities or Equipment
 Schedule Downtime during Periods of Low Demand
 Cross-Train employees
 Modify or Move Facilities and Equipment

Unit 10
1. Relationship marketing is a philosophy of doing business, a strategic orientation that
focuses on keeping and improving current customers, rather than on acquiring new
customers. This philosophy assumes that consumers prefer to have an ongoing
relationship with one organization than to switch continually among providers in
their search for value.
2. The bucket theory illustrates why a relationship strategy that focuses on plugging the
holes in the bucket makes so much sense. Historically, marketers have been more
concerned with acquisition of customers, so a shift to a relationship strategy often
represents changes in mind set, organizational culture, and employee reward
systems.

3. The primary goal of relationship marketing is to build and maintain a base of

committed customers who are profitable for the organization. To achieve this goal,
the firm will focus on the attraction, retention, and enhancement of customer
relationships.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

235
 SERVICES AND RELATIONSHIP MARKETING

References

1) Lovelock Christopher, Services Marketing: People, Technology, Strategy, 4th ed. Pearson
Education, 2001.
2) Zeithaml Valerie A & Bitner Mary Jo., Services Marketing: Integrated Customer focus
across the Firm, New York. 2nd ed. McGraw-Hill, 2000.
3) Palmer Adrian, Principles of Services marketing, 3rd ed., McGraw-Hill, London, 2001.
4) Clow Kenneth E & Kurtz David L, Services Marketing: Operation, Management, and
Strategy, 2nd ed, Atomic Dog Publishing, USA.
5) Denton D.K., How to Give Quality Service to Your Customers, New Delhi, Taj press, 1998.
6) Nash Susan & Nash Derek, Deliver Outstanding Customer Service, 2nd ed. New Delhi, UBS
publishers, 2003.
7) Greenberg Paul, Customer Relationship Management: Capturing and Keeping Customers in
Internet Real Time, Tata McGraw-Hill, 1st ed., New York, 2001.
8) Sheth J.N., Parvatiyar A., Shainessh, G., Customer Relationship Management: Emerging
Concepts, Tools and Applications, Tata McGraw-Hill Publishing, 1st ed, New Delhi, 2001.
9) Mudie Peter and Pirre Angela, Services Marketing Management, Elsevier, 3rd ed, 2006.
10) Gilmore Audrey, Services Marketing and Management, Sage Publications, 1st ed., New
Delhi, 2003.
11) Varey R. J., Relationship Marketing: Dialogue and Networks in the e-commerce era, John
Willey and Sons, 1st ed., 2002.

ADDIS ABABA UNIVERSITY SCHOOL OF COMMERCE GRADUATE PROGRAM

236