Services Marketing:

People, Technology, Strategy

CHAPTER 1
Creating Value In The Service
Economy

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Learning Objectives (1/2)
By the end of this chapter, the reader should be able to:
• Understand how services contribute to a country’s economy.
• Know the principal industries of the service sector.
• Identify the powerful forces that are transforming service
markets.
• Understand how business-to-business services improve the
productivity of their client organizations and drive economic
development.
• Be familiar with the difference between outsourcing and
offshoring of services.
• Define services using the non-ownership service framework.
• Identify the four broad “processing” categories of services.
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Learning Objectives (2/2)
• Be familiar with the characteristics of services and the
distinctive marketing challenges they pose.
• Understand the components of the traditional marketing mix
applied to services.
• Describe the components of the extended marketing mix for
managing the customer interface.
• Appreciate that the marketing, operations, human resources,
and information technology functions need to be closely
integrated in service businesses.
• Understand the implications of the Service-Profit Chain for
service management.
• Know the five-part framework for developing effective service
marketing strategies.
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OPENING VIGNETTE
The World of Services Marketing
• A university is a complex service organization that
offers educational services, libraries, student
accommodation, healthcare, athletic facilities,
museums, security, counseling, and career services.

Figure 1.1 Tertiary education may be one

of the biggest service purchases in life

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Chapter Overview

• Why Study Services?

• What are Services?

• Marketing Challenges Posed by

Services

• Extended Marketing Mix

Required for Services

• Integration of Marketing with

Other Management Functions

• Developing Effective Service

Marketing Strategies

Figure 1.3 Introduction to services marketing

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Why Study Services?

• Services Dominate the Global Economy

– The size of the service sector across the globe is
increasing.
– The relative share of employment between
agriculture, industry, and services is changing
dramatically.
– Service output is growing rapidly and represents
more than 50% of gross domestic product (GDP).

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Evolution of Service Dominated Economy

Figure 1.4 Changing structure of employment as an economy develops

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Contribution of Services Industries to GDP
Globally

Figure 1.5 Contribution of services industries to GDP globally

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Size of Service Sector in Various Economies

Figure 1.6 Estimated size of service sector in selected countries as a percentage of

GDP
Source: The World Factbook 2020, Central Intelligence Agency, www.cia.gov, accessed February 5, 2021.
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Service Dominated Economy

Figure 1.7 The Panama Canal forms the backbone of Panama’s service economy

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 Why Study Services?
• Most new jobs are generated by services
– In most countries around the world, new job creation
comes mainly from services.
– Knowledge-based industries — such as professional
and business services, education, and healthcare
generate high-paid jobs.
• Rolls-Royce Sells Power by the Hour
• Understanding Services Offers Personal
Competitive Advantage
– The distinctive characteristics of services and how
they affect both customer behavior and marketing
strategy will give important insights and perhaps
create a competitive advantage.

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The Principal Industries of the Service
Sector

Figure 1.8 Value added by service industry categories to United States GDP.

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Powerful Forces are Transforming Service
Markets

• Government policies, social changes, business

trends, globalization, and advances in information
technology and communications are among the
powerful forces transforming today’s service
markets.

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Factors stimulating transformation of
service economy (1/5)
Government Policies

• Changes in regulations
• Privatization
• New rules to protect consumers, employees, and the
environment
• New agreements on trade in services

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Factors stimulating transformation of
service economy (2/5)
Social Changes

• Rising consumer expectations

• Ubiquitous social networks
• More affluence
• More people short of time
• Increased desire for buying experiences versus things
• Rising consumer ownership of computers, smart phones,
wearables, and other high-tech equipment
• Easy access to more information
• Immigration
• Aging population

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Factors stimulating transformation of
service economy (3/5)
Business Trends
• Push to increase shareholder value
• Emphasis on productivity and cost savings
• Manufacturers add value through service and sell services
• Firms increasingly focus on developing platform-type business
models
• More strategic alliances and outsourcing
• Focus on quality and customer satisfaction
• Growth of franchising
• Marketing emphasis by non-profits

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Factors stimulating transformation of
service economy (4/5)
Advances in Technology
• Ubiquity of the Internet and mobile connectivity
• Robotics
• Artificial intelligence
• Analytics and big data
• User-generated content
• Internet of things (IoT)
• Mobile technologies
• Cloud technology
• Geotagging
• Text processing
• Speech processing
• Image processing
• Virtual reality

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Factors stimulating transformation of
service economy (5/5)

Globalization

• Companies increasingly operate on a global level

• Increased international travel
• International mergers and alliances
• Offshoring of customer service
• Foreign competitors invade domestic markets

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Factors stimulating transformation of
service economy
Collective effect of the five powerful sources:

• Introduces new markets and product categories

creating increased demand for services in many
existing markets, making it more competition
intensive.

• Innovation in service products and delivery systems

is stimulated by application of new and improved
technologies.

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Factors stimulating transformation of
service economy
• Success hinges on:

understanding creation of value

viable business for both customers
customers and
models and the firm
competitors

agility and increased focus on

capabilities related services marketing
to technology and management

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 B2B Services as Core Engine of Economic
Development

Figure 1.10 Outsourcing is an important driver for the growth of the service sector.

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Outsourcing and Offshoring (1/2)

• Outsourcing refers to the contracting of services that

were previously conducted internally in an
organization to an external service provider.

• Offshoring refers to services that are conducted in

one country and consumed in another.

• 11% of service jobs around the world could be

carried out remotely.

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 Outsourcing and Offshoring (2/2)

Figure 1.12 Outsourcing and offshoring are independent, but often work in tandem.
Source: Jochen Wirtz, Sven Tuzovic, and Michael Ehret (2015), “Global Business
Services: Increasing Specialization and Integration of the World Economy as Drivers
of Economic Growth,” Journal of Service Management, Vol. 26, No.4, pp. 565--587. 23
What are Services? (1/3)
1. Production and consumption inseparable in services
2. Benefits Without Ownership
i. Labor, skills, and expertise rentals: Other people are hired to perform
work that customers either cannot or choose not to do themselves.
Some of these include:
• Car repair
• Medical check-up
• Management
ii. Rented goods services: These services allow customers to obtain the
exclusive temporary right to use a physical object that they prefer
not to own.
Examples include:
• Boats
• Fancy dress costumes
• Construction and excavation equipment

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What are Services? (2/3)
iii. Defined space and facility rentals: This is when customers obtain the use
of a certain portion of a larger facility such as a building, vehicle, or
area. They usually share this facility with other customers.
Examples include:
• A seat in an aircraft
• A suite in an office building
• A storage container in a warehouse
iv. Access to shared facilities: Customers rent the right to share the use of
the facility. The facilities may be a combination of indoors, outdoors,
and virtual.
Examples include:
• Theme parks
• Golf clubs
• Toll roads

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What are Services? (3/3)
v. Access and use of networks and systems: Customers rent the right to
participate in a specified network. Service providers offer a variety of
terms for access and use, depending on customer needs.
Examples include:
• Telecommunications
• Utilities and banking
• Social online networks and games

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Definition of Services
• Services are economic activities performed by one
party to another. Often time-based, these
performances bring about desired results to
recipients, objects, or other assets.
• In exchange for money, time, and effort, service
customers expect value from access to labor, skills,
expertise, goods, facilities, networks, and systems.
However, they do not normally take ownership of the
physical elements involved.

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Reduced Gap between Services and
Manufacturing
Service-dominant (S-D) logic:
All products are valued for the service they provide, and that the
value derived from a physical good, for example, is not the good
itself, but the service it provides during consumption.

Figure 1.14 Lufthansa Technik promotes its maintenance services

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Four Categories of Services –
A Process Perspective

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1. People Processing
• Implications of People Processing Services:
– Service production and consumption are simultaneous.
– Active cooperation of the customer is needed in the service delivery
process.
– Careful consideration of location of the service operation, the design
of service processes and the service environment, demand and
capacity management, and output from the customer’s point of view
is needed.

Figure 1.16 A customer getting treated to a

luxurious manicure

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2. Possession Processing

• Production and consumption are not necessarily

simultaneous.
• Customers tend to be less involved in these services,
compared to people-processing services.

Figure 1.17 Elevator

repair is a possession-
processing service

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3. Mental Stimulus Processing

• These services touch people’s minds and have the

power to shape attitudes and influence behavior.
• Customers do not have to be physically present in the service
factory.
• Services can be “inventoried” for consumption at a later date
or consumed repeatedly.

Figure 1.18 Orchestral concerts provide mental

stimulation and pleasure

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4. Information Processing

• Information is the most intangible form of service output.

• It can be transformed into more permanent and tangible forms like
letters, reports, books, or files in any type of format.
• It is not very different from mental stimulus processing services.

Figure 1.19 A young couple getting

financial advice on buying a new home

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Marketing Challenges Posed by Services

• Four characteristics of Services:

– Intangibility
–Heterogeneity (variability of quality)
–Inseparability of production and
consumption and
–Perishability

IHIP
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 Eight Features of Services (1/4)
Difference between Implications Marketing-Related Topics
Services and Goods
1. Most service products • Customers may be turned • Smooth demand through
cannot be inventoried away or have to wait promotions, dynamic pricing,
(i.e., output is and reservations
perishable) • Work with operations to
adjust capacity

2. Intangible elements • Customers cannot taste, • Make services tangible

usually dominate value smell, or touch these through emphasis on
creation elements and may not be able physical clues
(i.e., service is physically to see or hear them • Employ concrete metaphors
intangible) • Harder to evaluate service and vivid images in
and distinguish from advertising and branding
competitors

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 Eight Features of Services (2/4)
Difference between Implications Marketing-Related Topics
Services and Goods
3. Services are often • Customers perceive greater risk • Educate customers to make
difficult to visualize and and uncertainty good choices, explain what to
understand look for, document
(i.e., service is mentally performance, offer
intangible) guarantees
• Create confidence in the
firm’s experience, expertise,
and credentials
4. Customers may be • Customers interact with • Develop user-friendly
involved in co- providers’ equipment, facilities, equipment, facilities, and
production and systems systems
(i.e., if people • Poor task execution by • Train customers to perform
processing is involved, customers may hurt effectively; provide customer
the service is productivity, spoil the service support
inseparable) experience, and curtail benefits

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 Eight Features of Services (3/4)
Difference between Implications Marketing-Related Topics
Services and Goods
5. People may be part • Appearance, attitude, and • Recruit, train, and reward
of the service behavior of service personnel employees to reinforce the
experience and other customers can shape planned service concept
the experience and affect • Target the right customers at
satisfaction the right times; shape their
behavior

6. Operational inputs • Harder to maintain consistency, • Set quality standards based

and outputs tend to reliability, and service quality on customer expectations;
vary more widely • Lower costs through higher redesign product elements for
(i.e., services are productivity simplicity and failure-proofing
heterogeneous) • Difficult to shield customers • Automate customer–provider
from results of service failures interactions; perform work
while customers are absent
• Institute good service
recovery procedures

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 Eight Features of Services (4/4)
Difference between Implications Marketing-Related Topics
Services and Goods
7. The time factor often • Customers see time as a scarce • Find ways to compete on
assumes great resource to be spent wisely, speed of delivery, minimize
importance dislike wasting time waiting, burden of waiting, offer
want service at times that are extended service hours
convenient

8. Distribution may take • Information-based services can • Seek to create user-friendly,

place through be delivered through electronic secure websites and apps,
nonphysical channels channels such as the Internet or and free access by telephone
voice telecommunications, but • Ensure that all information-
core products involving physical based service elements are
activities or products cannot delivered effectively and
• Channel integration is a reliably through all key
challenge; that is to ensure channels
consistent delivery of service
through diverse channels,
including branches, call centres,
websites, and apps.

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Tangible-Dominant to Intangible-
Dominant

Figure 1.20 Relative value added by physical versus intangible elements in

goods and services
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The 7 ‘P’s of Services Marketing

The 4 ‘P’s
product, price, place (or distribution), and promotion
(or communication)
• The traditional marketing mix does not cover the
customer interface.

Thus the extended Marketing Mix for Services – The

3 ‘P’s
process, physical environment, and people

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The Traditional Marketing Mix Applied to
Services
1. Product Elements
– Service products consist of a core product that meets the
customers’ primary need and a variety of supplementary
service elements that are mutually reinforcing, and add
value to help customers use the core product more
effectively.
– Supplementary service elements include providing
information, consultation, order-taking, hospitality,
handling exceptions, etc.

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The Traditional Marketing Mix Applied to
Services
2. Place and Time
– Distribution of core versus supplementary Services
➢ Facilitate purchase and use of physical goods.
➢ Much e-commerce activity concerns supplementary services that are
based on transfer of information, making reservations and payments,
as opposed to downloading the core product itself.
– Importance of the time factor
➢ Willing to pay extra to save time
➢ Busy customers expect service to be available when it suits them,
rather than when it suits the supplier

Figure 1.21 Taking a taxi can

save time for busy commuters

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The Traditional Marketing Mix Applied to
Services
3. Price and Other User Outlays (1/2)
– Pricing strategy is highly dynamic, with price levels
adjusted over time according to factors like customer
segment, time and place of delivery, level of demand, and
available capacity.
– For customers, price is a key part of the costs they must
incur to obtain desired benefits.

Figure 1.22 Money is not the only consideration

when measuring the cost of a service

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The Traditional Marketing Mix Applied to
Services
3. Price and Other User Outlays (2/2)
– The outlays include additional monetary costs, time spent,
unwanted mental and physical effort, and exposure to
negative sensory experiences.
– Most Service Products Cannot be Inventoried
➢Services involve actions or performances, they
are temporary and perishable. Hence cannot be
stocked as inventory for future use.
➢ A key task for service marketers is to find ways of
smoothing demand levels to match available
capacity using dynamic pricing strategies.

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The Traditional Marketing Mix Applied to
Services
4. Promotion and Education (1/2)
Suppliers need to teach their customers about the
benefits of the service, where and when to obtain
it, and how to participate in service processes to
get the best results.
– Services are often difficult to visualize and understand as intangible
elements tend to dominate value creation.
➢ Intangibility: Mental and physical
• Mental intangibility – Difficult for customers to visualize the
experience in advance of purchase and to understand the value and
benefits they will be getting.
• Physical intangibility – Cannot be touched or experienced by the other
senses.
• Firms can use physical images and metaphors to promote service
benefits and demonstrate the firm’s competencies.

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The Traditional Marketing Mix Applied to
Services
4. Promotion and Education (2/2)
– Customer–customer interactions affect the service
experience
➢ Encounter with other customers at a service facility can
affect your satisfaction.
➢ How they’re dressed, who they are, and how they behave
can reinforce or negate the image a firm is trying to project
and the experience it is trying to create.
➢ The implications are:
o attract the right customer segments to the service
facility
o educate them on the proper behavior

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Extended Marketing Mix Required for
Services
5. Process (1/3)
➢As far as services are concerned, how a firm does
things is as important as what it does.
➢Creating and delivering product elements requires
design and implementation of effective processes.
➢Service processes differ from manufacturing in
three ways:
i. Operational Inputs and Outputs Can Vary Widely
ii. Customers Are Often Involved in Co-production
iii. Demand and Capacity Need to be Balanced

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Extended Marketing Mix Required for
Services
5. Process (2/3)
i. Operational Inputs and Outputs Can Vary Widely
• Operational inputs and outputs tend to vary more widely
for services, and can make customer service process
management a challenge.
• When operations are distributed it is difficult for service
organizations to ensure reliable delivery, control quality,
and improve productivity.
ii. Customers Are Often Involved in Co-production
• Require customers to participate actively in co-producing
the service product
• Customers often function as partial employees
• Use of self-service technologies (SSTs) facilitated by smart
machines, apps, and the Internet.

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Extended Marketing Mix Required for
Services
5. Process (3/3)
iii. Demand and Capacity Need to be Balanced
• Manufacturing can ensure a smooth process flow by
having an inventory of materials and parts ready for use.
• Areas related to service process management involve the
balancing of demand and capacity, design of waiting and
queuing systems, and management of the impact of
waiting on the customer’s psychology.

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Extended Marketing Mix Required for
Services
6. Physical Environment
– Appearance of buildings, landscaping, vehicles,
interior furnishings, equipment, staff members’
uniforms, signs, printed materials, and other
visible cues provide tangible evidence of a firm’s
service quality.
– Servicescape also facilitates service delivery and
guides customers through the service process.

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Extended Marketing Mix Required for
Services
7. People
– Service firms need to work closely with their human
resources (HR) departments and devote special care in
selecting, training, and motivating their service employees.
– Employees need to possess good interpersonal skills and a
positive attitude.

Figure 1.24 Hospitality is shown through

employees wearing a ready smile and being
ready to serve customers

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Integration of Marketing with Other
Management Functions

Figure 1.25 Marketing, operations, human resources, and information

technology departments must collaborate to serve the customer
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Integration of Marketing with Other
Management Functions (1/2)
• Marketing, operations, human resources, and information
technology (IT) – Play central and interrelated roles in
meeting the needs of service customers.
• Marketing: Only a minority of people who work in a service
firm are employed in formal marketing positions.
➢ All those whose work affects the customer in some way
— either through direct contact or the design of
processes, systems, and policies that shape customers’
experiences — need to think of themselves as part-time
marketers.

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Integration of Marketing with Other
Management Functions (2/2)
• Operations – Primary line function in a service business,
responsible for managing service delivery through equipment,
facilities, systems, and many tasks performed by customer-
contact employees.

• Human resources (HR) – Staff function responsible for job

definition, recruitment, training and development, reward
systems, and quality of work life — all of which are central to
the people element.

• Information Technology (IT) is:

➢ a key function as service processes are information-heavy
➢ manage the functions of marketing, operations, human
resources, and create value for the organization’s
customers.
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The Service-Profit Chain (1/3)

• A conceptual framework that shows how marketing,

operations, human resources, and information
technology (IT) are integrated in high-performance
service organizations.

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The Service-Profit Chain (2/3)

Source: Reprinted with permission of Harvard Business Review: James L. Heskett, Thomas O. Jones, Gary W. Loveman, W. Earl Sasser, Jr., and
Leonard L. Schlesinger (March–April 1994), “Putting the Service-Profit Chain to Work,” Harvard Business Review, p. 166. Copyright © 1994 by
the Harvard Business School Publishing Corporation; all rights reserved.
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The Service-Profit Chain (3/3)
• A summary highlighting the behaviors required of
service leaders in order to manage their
organizations effectively.

Table 1.2 Links in the Service-Profit Chain

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Integrated Model of Services
Marketing

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Conclusion (1/2)
• Modern economies are driven by individual service
businesses operating within a remarkable array of industries.
• Services are responsible for the creation of a substantial
majority of all new jobs, both skilled and unskilled, around the
world.
• Many of the industries are undergoing dramatic
transformations, driven by advances in technology,
globalization, changes in government policies, evolving
consumer needs, and lifestyles.
Figure 1.28 Advances in
technology are changing the
ways in which the service
industry works

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Conclusion (2/2)

• Effective marketing plays a vital role in determining whether

an individual organization survives and thrives — or declines
and fails.
• Services require a distinctive approach to marketing because
the context and the tasks often differ in important aspects
from those in the manufacturing sector.
• Succeeding as a marketing manager in a service business
requires you to understand key marketing concepts and tools,
and also know how to use them effectively.
• Each of the 7 Ps — the strategic levers of services marketing
— has a role to play, but it’s how well you tie them together
that will make the difference.

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