New Perspectives On Marketing in The Service Economy

Chapter 1:
New Perspectives on
Marketing in the
Service Economy
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 1 - 1
Overview of Chapter 1
 Why Study Services?
 What are Services?
 The Marketing Challenges Posed by Services
 The Expanded Marketing Mix Required for Services
Why Study Services?
Why Study Services? (1)
 Services dominate economy in most nations
 Understanding services offers you personal competitive

advantages
 Importance of service sector in economy is growing

rapidly:
 Services account for more than 60 percent of GDP worldwide
 Almost all economies have a substantial service sector
 Most new employment is provided by services
 Strongest growth area for marketing
Services Dominate the U.S. Economy
(Fig 1.1)
Services, 68% Agriculture, Forestry, Mining,

Fishing, 2.3%
Manufacturing and
Construction,
17.3%
Government, 12.4%
(mostly Services)
Source: Bureau of Economic Analysis, Survey of Current Business, May 2005, Table 1
INSIGHTS
 Private sector service industries account for over two-thirds of GDP
 Adding government services, total is almost four-fifths of GDP
Estimated Size of Service Sector in
Selected Countries (Fig 1.2—updated 10/06)
Cayman Islands (95%), Jersey (93%)

Bahamas (90%), Bermuda ( 89%)
Luxembourg (83%)
Panama (80%), USA (79%)
Japan (74%), France (73%), U.K. (73%), Canada (71%)
Mexico (69%), Australia (68%), Germany (68%)
Poland (66%), South Africa (65%)

Israel (60%), Russia (58%), S. Korea (56%)
Argentina (53%), Brazil (51%)
India (48%)
China (40%)
Saudi Arabia (33%) Services as Percent of GDP

10 20 30 40 50 60 70 80 90
Value Added by Service Industry
Categories to U.S. GDP in 2004
Other (except government) 3.6%
Accommodation and food services 4.0%
Arts, entertainment, and recreation 1.5%
Healthcare and social assistance 10.4%
Educational services 1.3%
Professional and business services 17.3%
Real estate and rental and leasing 18.7%

Finance and insurance 12.6%
Information 7.1%
Transportation and warehousing 4.4%
Retail trade 10.3%
Source: Bureau of Economic Analysis, Wholesale trade 8.9%
Survey of Current Business, May 2005, Table 1
Some Newer Service Industries
 Casino Hotels  HMO Medical Centers

 Continuing Care Retirement  Industrial Design Services
Communities
 Investment Banking and
 Diagnostic Imaging Centers Securities Dealing
 Diet and Weight Reducing
Centers  Management Consulting Services
 Environmental Consulting  Satellite Telecommunications

 Golf Courses, Country Clubs  Telemarketing Bureaus
 Hazardous Waste Collection  Temporary Help Services
 Most new jobs are generated by services
 Fastest growth expected in knowledge-based industries

 Significant training and educational qualifications required,
but employees will be more highly compensated
 Will service jobs lost to lower-cost countries? Yes, some service
jobs can be exported
Changing Structure of sectors as Economic
Development Evolves
 Three Major sectors:
Primary Secondary Tertiary
(agriculture) (manufacturing) (services)
 The structure of an economy is defined by the shares of these

sector’s in total output, total employment, total trade etc.
 There is a definite relationship between economic

development and structural changes of an economy.
 As the economy is on the development path, the structure of

the economy shifts away from agriculture to industry and
then from industry to services.
Changing Structure of Employment as
Economic Development Evolves
Share of
Employment Agriculture
Services
Industry
Time, per Capita Income Source: IMF, 1997
 Powerful forces are transforming service markets

 Government policies, social changes, business trends,
advances in IT, internationalization
 These forces are reshaping

 Demand
 Supply
 The competitive landscape
 Customers’ choices, power, and decision making
Transformation of the Service Economy
Social Business Advances in

Changes Trends IT
Government
Globalization
Policies
 New markets and product categories
 Increase in demand for services
 More intense competition
Innovation in service products & delivery systems, stimulated by better

technology
Customers have more choices and exercise more power
Success hinges on:

 Understanding customers and competitors
 Viable business models
 Creation of value for customers and firm
Factors Stimulating Transformation
of the Service Economy (1)

Changes Trends IT
Government
Globalization
Policies
 Changes in regulations- smoking ban in

restaurant providing healthy
environment
 Privatization
 New rules to protect customers,
employees, and the environment – inc.
tax to airline
 New agreement on trade in services


Changes Trends IT
Government
Globalization
Policies
 Rising consumer expectations
 More affluence
 More people short of time- home cleaning,
baby care services
 Increased desire for buying experiences
versus things
 Rising consumer ownership of high tech
equipment
 Easier access to information- internet
 Immigration
 Growing but aging population – service
directed to elder people.

Changes Trends IT
Government
Globalization
Policies
 Push to increase shareholder value

 Emphasis on productivity and cost savings-
self service tech.
 Manufacturers add value through service and

sell services- computer service
 More strategic alliances and outsourcing

 Focus on quality and customer satisfaction
 Growth of franchising- fast food chain
 Marketing emphasis by nonprofits - museums

Changes Trends IT
Government
Globalization
Policies
 Growth of the Internet

 Greater bandwidth- sophisticated and
interactive educational content
 Compact mobile equipment

 Wireless networking- wifi
 Faster, more powerful software
 Digitization of text, graphics, audio, video-
online download

Changes Trends IT
Government
Globalization
Policies
 More companies operating on transnational

basis- MNCs
 Increased international travel

 International mergers and alliances
 “Offshoring” of customer service- call center
 Foreign competitors invade domestic markets-
HSBC in Bangladesh, USA
What Are Services?
Services
 Combination of outcomes and experiences delivered to

and received by customers.
 Deeds, processes, performances.

 All economic activities whose output is not a physical product.
 Generally consumed at the time it is produced
 Provides added value in forms that are essentially intangible.
 Services deal with processes rather than with things

and are experienced than consumed.
 Usually cover a vast array of different and often

complex activities.
Challenges Posed by Services
Service Characteristics:
 Intangibility
 Inseparability
 Variability
 Perishability
 Customer participation
 No ownership
Services Pose Distinctive
Marketing Challenges
 Marketing management tasks in the service sector
differ from those in the manufacturing sector
 The eight common differences are:

1. Most service products cannot be inventoried
2. Intangible elements usually dominate value creation
3. Services are often difficult to visualize and understand
4. Customers may be involved in co-production
5. People may be part of the service experience
6. Operational inputs and outputs tend to vary more widely
7. The time factor often assumes great importance
8. Distribution may take place through nonphysical channels
 What are marketing implications?

Differences, Implications, and
Marketing-Related Tasks (1) (Table 1.1)
Difference Implications Marketing-Related Tasks
Most service
products
Customers may be Use pricing, promotion,
and
turned away or have to reservations to smooth
cannot be inventoried wait
demand; work with
operations to manage capacity
Intangible elements Harder to evaluate Emphasize physical clues,
usually dominate service and distinguish employ metaphors and vivid
value creation from competitors, images in advertising
cannot smell, touch
Greater risk and

Services are often uncertainty perceived Educate customers on
difficult to visualize making good choices; offer
and understand guarantees
Interaction between
Customers may be customer and provider; Develop user-friendly
involved in co- but poor task execution equipment, facilities, and
Production- IKEA could affect satisfaction systems; train customers,
provide good support
Differences, Implications, and
Marketing-Related Tasks (2) (Table 1.1)
Difference Implications Marketing-Related Tasks
People may be part Behavior of service Recruit, train employees to

of personnel and customers
service experience reinforce service concept
can affect satisfaction
Target right customer to
shape customer behavior
Operational inputs Hard to maintain quality,
and consistency, reliability 
outputs tend to vary
Difficult to shield
more widely customers from failures Institute good service
recovery procedures
Time is money;
Time factor often customers want service Find ways to compete on
assumes great at convenient times speed of delivery; offer
importance extended hours
Electronic channels or
Distribution may take voice telecommunications Create user-friendly,
place through secure websites and free
nonphysical channels access by telephone
Value Added by Physical, Intangible Elements
Helps Distinguish Goods and Services (Fig 1.6)
Physical
Elements
High
Salt
Detergents
CD Player
Wine
Golf Clubs
New Car
Tailored clothing Plumbing Repair
Fast-Food Restaurant
Health Club
Airline Flight
Landscape Maintenance
Consulting
Life Insurance
Internet Banking
Low Intangible Elements High

Source; Adapted from Lynn Shostack
Expanded Marketing Mix
for Services
Services Require
An Expanded Marketing Mix
 Marketing can be viewed as:

 A customer-driven orientation for the entire organization
 Marketing is the only function to bring operating

revenues into a business; all other functions are cost
centers
 The “8Ps” of services marketing are needed to create

viable strategies for meeting customer needs profitably
in a competitive marketplace
The 8Ps of Services Marketing
 Product Elements (Chapter 3)
 Place and Time (Chapter 4)
 Price and Other User Outlays (Chapter 5)
 Promotion and Education (Chapter 6)
 Process (Chapter 8)
 Physical Environment (Chapter 10)
 People (Chapter 11)
 Productivity and Quality (Chapter 14)

Fig 1.9 Working in
Unison: The 8Ps of
Services Marketing
The 8Ps of Services Marketing:
(1) Product Elements
 Embrace all aspects of service performance that

create value
 Core product responds to customer’s primary need
 Array of supplementary service elements

 Help customer use core product effectively
 Add value through useful enhancements
 Planning marketing mix begins with creating a service
concept that:
 Will offer value to target customers
 Satisfy their needs better than competing alternatives
(2) Place and Time
 Delivery decisions: Where, When, How
 Geographic locations served
 Service schedules
 Physical channels Bank
 Electronic channels
 Customer control and convenience
 Channel partners/intermediaries
(3) Price and Other User Outlays
 Marketers must recognize that customer outlays

involve more than price paid to seller
 Traditional pricing tasks:
 Selling price, discounts, premiums
 Margins for intermediaries (if any)
 Credit terms
 Identify and minimize other costs incurred by users:

 Additional monetary costs associated with service usage (e.g.,
travel to service location, parking, phone, babysitting, etc.)
 Time expenditures, especially waiting
 Unwanted mental and physical effort
 Negative sensory experiences
(4) Promotion and Education
 Informing, educating, persuading, reminding customers
 Marketing communication tools

 Media elements (print, broadcast, outdoor, retail, the Internet, etc.)
 Personal selling, customer service
 Sales promotion
 Publicity/PR
 Imagery and recognition

 Branding
 Corporate design
 Content
 Information, advice
 Persuasive messages
 Customer education/training
(5) Process
 How firm does things may be as important as what it does
 Customers often actively involved in processes, especially

when acting as co-producers of service
 Process involves choices of method and sequence in
service creation and delivery
 Design of activity flows
 Number and sequence of actions for customers
 Nature of customer involvement
 Role of contact personnel
 Role of technology, degree of automation
 Badly designed processes waste time, create poor

experiences, and disappoint customers
(6) Physical Environment
 Design servicescape and provide
tangible evidence of service
performances
 Create and maintain physical

appearances
 Buildings/landscaping
 Interior design/furnishings
 Vehicles/equipment
 Staff grooming/clothing
 Sounds and smells
 Other tangibles
 Manage physical cues carefully—
can have profound impact on
customer impressions
(7) People
 Interactions between customers and contact
personnel strongly influence customer
perceptions of service quality
 The right customer-contact employees
performing tasks well
 Job design
 Recruiting
 Training
 Motivation
 The right customers for firm’s mission
 Contribute positively to experience of
other customers
 Possess—or can be trained to have—
needed skills (co-production)
 Can shape customer roles and manage
customer behavior
(8) Productivity and Quality
 Productivity and quality must work hand in hand
 Improving productivity key to reducing costs
 Improving and maintaining quality essential for building

customer satisfaction and loyalty
 Ideally, strategies should be sought to improve both

productivity and quality simultaneously—technology
often the key
 Technology-based innovations have potential to create high payoffs
 But, must be user friendly and deliver valued customer benefits
How Differences among Services
Affect Customer Behavior
Differences among Services Affect
Customer Behavior
 Consumers are rarely involved in the manufacture of goods but often participate
in service creation and delivery
 Challenge for service marketers is to understand how customers interact with
service operations
 Based on differences in nature of service act (tangible/intangible) and who or
what is direct recipient of service (people/possessions), there are four
categories of services:
 People processing
 Possession processing
 Mental stimulus processing
 Information processing
Four Categories Of Services (Fig 2.1)
Who or What Is the Direct Recipient of the Service?

Nature of the Service Act People Possessions
Tangible Actions People processing Possession processing
(services directed at (services directed at

people’s bodies): physical possessions):
 Barbers  Refueling
 Health care  Disposal/recycling

Intangible Actions Mental stimulus Information processing
processing
(services directed at
(services directed at
intangible assets):
people’s minds):
 Education
 Accounting
 Advertising/PR
 Banking
Four Categories Of Services
People Processing
 Customers must:
 Physically enter the service
factory
 Co-operate actively with the
service operation
 Managers should think about

process and output from
customer’s perspective
 To identify benefits created and
non-financial costs:
― Time, mental, physical effort
Possession Processing
Possession Processing
 Customers are less physically

involved compared to people
processing services
 Involvement is limited
 Production and consumption
are separable
Mental Stimulus Processing
Mental Stimulus Processing
 Ethical standards required when

customers who depend on such
services can potentially be
manipulated by suppliers
 Physical presence of recipients

not required
 Core content of services is

information-based
 Can be “inventoried”
Information Processing
Information Processing
 Information is the most

intangible form of service
output
 But may be transformed into

enduring forms of service
output
 Line between information

processing and mental stimulus
processing may be blurred.

New Perspectives On Marketing in The Service Economy

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

New Perspectives On Marketing in The Service Economy

Uploaded by

Copyright:

Available Formats

Chapter 1:

 Why Study Services?

 What are Services?

 The Marketing Challenges Posed by Services

 The Expanded Marketing Mix Required for Services

 Services dominate economy in most nations

 Understanding services offers you personal competitive

 Importance of service sector in economy is growing

Services, 68% Agriculture, Forestry, Mining,

Cayman Islands (95%), Jersey (93%)

Japan (74%), France (73%), U.K. (73%), Canada (71%)

Mexico (69%), Australia (68%), Germany (68%)

Poland (66%), South Africa (65%)

Saudi Arabia (33%) Services as Percent of GDP

Real estate and rental and leasing 18.7%

 Casino Hotels  HMO Medical Centers

 Environmental Consulting  Satellite Telecommunications

 Most new jobs are generated by services

 Fastest growth expected in knowledge-based industries

 The structure of an economy is defined by the shares of these

 There is a definite relationship between economic

 As the economy is on the development path, the structure of

Time, per Capita Income Source: IMF, 1997

 Powerful forces are transforming service markets

 These forces are reshaping

Social Business Advances in

Innovation in service products & delivery systems, stimulated by better

Customers have more choices and exercise more power

Success hinges on:

Social Business Advances in

 Changes in regulations- smoking ban in

 New agreement on trade in services

Social Business Advances in

Social Business Advances in

 Push to increase shareholder value

 Manufacturers add value through service and

 More strategic alliances and outsourcing

Social Business Advances in

 Growth of the Internet

 Compact mobile equipment

Social Business Advances in

 More companies operating on transnational

 Increased international travel

 Combination of outcomes and experiences delivered to

 Deeds, processes, performances.

 Services deal with processes rather than with things

 Usually cover a vast array of different and often

 The eight common differences are:

 What are marketing implications?

Difference Implications Marketing-Related Tasks

Greater risk and

Difference Implications Marketing-Related Tasks

People may be part Behavior of service Recruit, train employees to

Low Intangible Elements High

 Marketing can be viewed as:

 Marketing is the only function to bring operating

 The “8Ps” of services marketing are needed to create

 Product Elements (Chapter 3)

 Place and Time (Chapter 4)

 Price and Other User Outlays (Chapter 5)

 Promotion and Education (Chapter 6)

 Physical Environment (Chapter 10)

 People (Chapter 11)