Services Marketing - Chapter 3: Developing Service Concepts
Fundamentals of the Service Economy and Service Strategy
Dominance of the Service Sector:
Services dominate the global economy, contributing to over of global Gross Domestic Product (GDP).
The service sector represents the primary engine of job creation worldwide and constitutes the fastest-growing area of marketing application.
Possessing a comprehensive understanding of services marketing offers significant personal and professional competitive advantages.
Macroeconomic Contribution and Statistics:
In the United States, private sector service industries account for of total GDP. When combined with government services (, which are mostly services), the overall service sector represents (almost four-fifths) of the U.S. economy.
Industry value-added breakdown to U.S. GDP:
Real estate, rental, and leasing:
Professional and business services:
Manufacturing and construction:
Finance and insurance:
Government (mostly services):
Healthcare and social assistance:
Retail trade:
Wholesale trade:
Information:
Transportation and warehousing:
Accommodation and food services:
Other services (except government):
Agriculture, forestry, mining, and fishing:
Arts, entertainment, and recreation:
Educational services:
International comparisons of service sector size as a percentage of GDP:
Cayman Islands:
Jersey:
Bahamas:
Bermuda:
Luxembourg:
Panama:
United States:
Japan:
France:
United Kingdom:
Canada:
Mexico:
Australia:
Germany:
Poland:
South Africa:
Israel:
Russia:
South Korea:
Argentina:
Brazil:
India:
China:
Saudi Arabia:
NAICS and NAPCS Industry Classifications:
National statistical agencies in the U.S., Canada, and Mexico compile economic data using the North American Industry Classification System (NAICS), which replaced the older Standard Industrial Classification (SIC) system.
NAICS captures thousands of new and emerging service industries, assigning distinct codes to categories such as Casino Hotels, Continuing Care Retirement Communities, Diagnostic Imaging Centers, Diet and Weight Reducing Centers, Environmental Consulting, Golf Courses and Country Clubs, Hazardous Waste Collection, HMO Medical Centers, Industrial Design Services, Investment Banking and Securities Dealing, Management Consulting Services, Satellite Telecommunications, Telemarketing Bureaus, and Temporary Help Services.
The North American Product Classification System (NAPCS) complements NAICS by assigning codes to individual service products, proving particularly effective for evaluating rented goods services.
Forces Transforming the Service Economy:
Five macro-environmental driver groups actively transform service markets:
Government Policies: Deregulation, privatization of public assets, implementation of new rules to protect consumers, employees, and the environment, and international trade agreements in services.
Social Changes: Rising consumer expectations, increased affluence, time poverty among working populations, growing preference for purchasing experiences over physical goods, widespread ownership of high-tech equipment, seamless access to information, immigration, and aging populations.
Business Trends: Corporate pressure to increase shareholder value, productivity and cost-saving mandates, manufacturers adding value through service or selling services directly, expansion of strategic alliances and outsourcing, focus on total quality management and customer satisfaction, growth of franchising, and aggressive marketing adoption by non-profit organizations.
Advances in Information Technology (IT): Expansion of the Internet, higher bandwidth availability, compact mobile hardware, wireless networking, advanced software algorithms, and digital convergence of text, graphics, audio, and video.
Globalization: Growth of transnational companies, expansion of international business and leisure travel, international mergers and cross-border strategic alliances, offshoring of customer support and administrative services, and foreign competitors penetrating domestic markets.
Defining Services and the Non-Ownership Framework:
Historical perspectives:
Adam Smith (1776) distinguished services from goods by noting that service output perishes at the moment of performance.
Jean-Baptiste Say (1803) noted that service consumption cannot be separated from its production, emphasizing its intangible nature.
Modern Definition: Services are economic activities offered by one party to another, typically utilizing time-based performances to bring about desired results in recipients themselves or in objects/assets for which purchasers have responsibility. In exchange for money, time, and effort, customers receive value through access rather than taking physical ownership.
Five Non-Ownership Rental Categories:
Rented goods services: Renting durable goods for a temporary period (e.g., auto rentals, construction equipment).
Defined space and place rentals: Renting a specific portion of a larger physical facility (e.g., office spaces, hotel rooms, storage units).
Labor and expertise rentals: Hiring individuals or teams to perform specialized physical or intellectual work (e.g., auto repair, surgical procedures, legal defense).
Access to shared physical environments: Entering operated facilities with shared usage capacity (e.g., theme parks, golf courses, toll roads).
Systems and networks access and usage: Gaining rights to participate in managed utility, communication, or information networks (e.g., cellular networks, internet service providers, banking networks).
Eight Distinctive Marketing Challenges of Services:
Inability to inventory service products: Unused capacity in a given period is lost forever; firms must use dynamic pricing, promotions, and reservations to manage demand against capacity.
Intangible elements dominate value creation: Services cannot be touched or easily visualized; marketers must emphasize physical evidence and vivid metaphors.
Difficulty in evaluation: Services possess high experience and credence attributes; firms must educate customers and offer satisfaction guarantees.
Customer involvement in co-production: Customers actively participate in service creation; facilities and self-service interfaces must be user-friendly, and customers must be properly trained.
People as part of the service experience: Contact staff and fellow customers directly impact perceived quality; firms must recruit, train, and manage personnel and customer behavior carefully.
Operational input and output variability: Quality consistency is difficult to maintain; processes must be standardized, failure-proofed, and supported by robust service recovery mechanisms.
Importance of time: Customers equate time with monetary cost; firms must compete on delivery speed, convenience, and extended hours.
Nonphysical distribution channels: Information-based services can be distributed electronically; user-friendly digital portals are mandatory.
The Goods-Services Evaluation Continuum (Shostack):
Goods and services range along a continuum based on the dominance of physical versus intangible elements:
High in physical elements (High Search Attributes): Salt, Detergents, CD Player, Wine, Golf Clubs, New Car, Tailored Clothing.
Balanced / Mid-range: Fast-Food Restaurant, Plumbing Repair.
High in intangible elements (High Experience / Credence Attributes): Health Club, Airline Flight, Landscape Maintenance, Consulting, Life Insurance, Internet Banking.
Information-based service concepts (such as Progressive Car Insurance) can be distributed completely via digital channels, whereas goods-centric models (such as REI camping gear) require physical distribution logistics following online purchase transactions.
The Expanded 8Ps Marketing Mix for Services:
Product Elements: The core service concept fulfilling the customer's primary need, augmented by value-adding supplementary service features.
Place and Time: Delivering service features through appropriate physical and electronic distribution channels at convenient times and locations.
Price and Other User Outlays: Setting financial selling prices, discounts, and terms, while actively minimizing nonmonetary customer costs (time, effort, sensory unpleasantness).
Promotion and Education: Informing, persuading, educating, and guiding customers through media advertising, personal selling, public relations, and clear instruction.
Process: Designing the sequence and activity flows of service delivery, balancing customer co-production roles, contact employee tasks, and automation.
Physical Environment: Structuring the servicescape (buildings, interior design, equipment, staff attire, ambient noise, and scent) to provide positive tangible evidence.
People: Recruiting, training, motivating, and managing contact employees whose interactions determine perceived quality, while managing customer-to-customer interactions.
Productivity and Quality: Simultaneously optimizing operational efficiency to keep costs low while maintaining high service quality to drive satisfaction and retention.
Integration of Key Management Functions:
Successful service strategy requires the seamless integration of three central management functions: Marketing Management, Operations Management, and Human Resources Management.
Customer Behavior and Decision-Making in Service Encounters
Four Categories of Service Processing:
People Processing (Tangible actions directed at people's bodies):
Examples: Barbers, healthcare services, passenger transportation, fitness centers, hotels.
Operational Requirements: Customers must physically enter the service factory and actively cooperate with service personnel throughout delivery.
Management Priorities: Focus on minimizing physical and nonmonetary costs (time, physical fatigue, discomfort).
Possession Processing (Tangible actions directed at physical possessions):
Examples: Refueling, equipment maintenance and repair, freight transport, laundry and dry cleaning, waste disposal/recycling.
Operational Requirements: The item requiring service enters the service process; customer presence is not required during delivery.
Characteristics: Production and consumption are separable; involvement is limited primarily to drop-off, payment, and retrieval.
Mental Stimulus Processing (Intangible actions directed at people's minds):
Examples: Education, news, advertising/public relations, entertainment performances, religious services.
Operational Requirements: Physical presence is not mandatory; services can be delivered remotely via electronic communication channels or recorded for later consumption.
Ethics: Because these services influence customer beliefs and attitudes, providers must maintain high ethical standards to avoid ideological or behavioral manipulation.
Information Processing (Intangible actions directed at intangible assets):
Examples: Accounting, banking, legal services, investment management, insurance underwriting.
Operational Requirements: Information is the primary operational input and output. Physical presence is completely optional; interactions occur via digital or telecommunication platforms.
Three-Stage Model of Service Consumption:
Stage 1: Prepurchase Stage:
Need Arousal: The purchase decision begins when a person or organization experiences a need arousal driven by internal cues or external stimuli (e.g., targeted advertising such as Prudential Financial's campaigns highlighting retirement planning needs).
Product Attribute Classification and Evaluation:
Search Attributes: Tangible characteristics evaluated prior to purchasing (e.g., style, color, texture, sound, price). Highly prominent in physical manufactured goods.
Experience Attributes: Features that cannot be evaluated prior to purchase; performance and quality must be experienced during consumption (e.g., restaurant dining, vacations, haircuts, live entertainment).
Credence Attributes: Characteristics that customers find impossible to evaluate confidently even after purchase and full consumption (e.g., complex surgical procedures, legal defense quality, corporate auditing, sophisticated auto repair).
- Note: The difficulty of service evaluation decreases as customer exposure to a service category increases and usage frequency with a specific supplier rises.
Seven Perceived Risks in Service Purchases:
Functional Risk: Uncertainty regarding whether the service will perform as desired and deliver expected benefits.
Financial Risk: Fear of monetary loss, unexpected extra charges, or repair expenses.
Temporal Risk: Worry over wasted time, delays, or consequential delays in personal schedule.
Physical Risk: Fear of personal injury or damage to personal physical possessions.
Psychological Risk: Fear that the service experience will cause mental anxiety, stress, or loss of self-esteem.
Social Risk: Concerns regarding how friends, family, or colleagues will react to the purchase decision.
Sensory Risk: Fear of unpleasant impacts on the five senses (uncomfortable heat, bad smells, loud noise, poor visual aesthetics).
Consumer Risk Reduction Strategies:
Seeking word-of-mouth recommendations from trusted personal contacts.
Patronizing established firms with strong market reputations.
Requesting performance guarantees and explicit warranties.
Visiting service facilities or requesting free trials prior to full purchase.
Asking detailed questions of knowledgeable contact employees.
Inspecting tangible physical cues and environmental evidence.
Utilizing internet portals to compare offerings and read independent customer reviews.
Strategic Service Firm Responses to Risk:
Offering unconditional performance money-back guarantees.
Providing free trials, service previews, and sample sessions (e.g., AOL distributing promotional CDs offering 1,175 hours of free internet trial usage).
Deploying vivid advertising to help customers visualize intangible benefits.
Implementing and displaying visible safety procedures.
Distributing automated status updates and maintaining transparent website FAQs.
Training employees to display high empathy, respect, and technical authority.
Customer Expectations Framework:
- **Desired Service Level**: The "wished-for" performance quality level that the customer believes can and should be delivered. Driven by personal needs and fundamental beliefs about what is achievable.
- **Adequate Service Level**: The minimum acceptable performance quality level without causing outright dissatisfaction. Shaped by situational factors and perceived service alterations.
- **Predicted Service Level**: The performance level that the customer realistically expects the firm to deliver in a specific transaction. Driven by explicit firm promises, implicit price/facility cues, word-of-mouth, and past consumption experiences.
- **Zone of Tolerance**: The extent to which customers accept performance variation between their desired and adequate service levels. Performance falling below the adequate level leads to dissatisfaction; performance exceeding the desired level creates surprise and customer delight.
Stage 2: Service Encounter Stage:
Contact Level Spectrum:
High-Contact Services: Customers visit the service facility in person and remain throughout service delivery. Frequent, active personal interactions occur between staff and customers (e.g., hospitals, hair salons, passenger airlines, full-service hotels).
Medium-Contact Services: Physical customer presence is limited to short visits or remote physical contact (e.g., dry cleaning drop-off, retail banking, auto repair).
Low-Contact Services: Zero physical contact between customers and service staff. Service delivery occurs at arm's length via technology, mail, or digital interfaces (e.g., internet banking, insurance, cable television).
The Servuction System Architecture:
Service Operations System: The operational core where inputs are processed and service elements are created. Divided into:
Backstage (Invisible): Technical core, support infrastructure, and administrative functions hidden from public view.
Front Stage (Visible): Physical facilities, visible equipment, operational environments, and service staff.
Service Delivery System: The front-stage environment where the final assembly and delivery of service elements occur in direct contact with the customer.
Service Marketing System: Encompasses the service delivery system plus all other potential contact points between the customer and the firm (advertising, billing statements, market research surveys, direct mail, web portals, facility pass-by exposures, news media, and word-of-mouth).
Theatrical Metaphor for Service Delivery:
Service performance is conceptualized as drama played out on a stage:
Stage: The physical servicescape, environment, and setting.
Cast: Front-stage contact employees who perform specific roles, wear distinct uniforms/costumes, and execute standardized scripts.
Backstage Team: Operations personnel supporting front-stage actors.
Audience: Customers who observe the performance and participate as active co-producers or passive observers.
Customer Co-Production Role: Because customer actions impact outcomes, firms must supply clear instructions, pre-encounter previews, and structural training to ensure customers execute their roles effectively.
Stage 3: Post-Encounter Stage:
Confirmation / Disconfirmation Model:
Customers evaluate service quality by comparing perceived performance against prior expectations:
Confirmation: Perceived performance exactly matches predicted expectations.
Positive Disconfirmation: Perceived performance exceeds expectations, driving high customer satisfaction.
Negative Disconfirmation: Perceived performance falls below adequate service expectations, causing customer dissatisfaction.
Customer Delight Architecture:
Customer delight moves beyond basic satisfaction and is generated by three specific elements: unexpectedly high service performance, physiological arousal (e.g., surprise or excitement), and positive affect (e.g., joy or pleasure).
Achieving delight builds long-term customer loyalty and positive word-of-mouth (exemplified by best practices such as Progressive Insurance's rapid response vehicle units).
Planning and Designing Service Products
Service Product Architecture:
A service product is a defined, consistent output bundle that provides problem-solving value to target customers.
Components of the overall Service Concept:
Core Product: The central component that delivers the principal benefits seeking to satisfy the customer's primary need.
Supplementary Services: Auxiliary activities and options that augment the core product, facilitating its use and enhancing its overall value and appeal.
Delivery Processes: The structural methods, operational sequences, and timing mechanisms used to deliver both core and supplementary service elements.
Shostack's Molecular Model:
Illustrated via Passenger Airline Service:
Tangible Elements: The aircraft vehicle, food and beverages served.
Intangible Elements: The underlying transport performance (core), service frequency, in-flight attendant service, pre-flight and post-flight service, and price charged.
Documenting Service Delivery Sequence Over Time:
Service concept design requires mapping the chronological customer usage sequence, identifying exact touchpoints, step durations, and waiting intervals.
Example Architecture: Luxury Hotel Accommodation:
- Core Product: A bed for the night in an elegant private room with an en-suite bathroom.
- Supplementary Touchpoints over Time: Advance reservation -> Valet parking arrival -> Reception check-in -> Luggage porter service -> Room access -> Use of internet / wake-up call / room service / cocktail bar / restaurant / business center / sports and entertainment facilities -> Cashier checkout.
Flowcharting Four Processing Categories:
People Processing Flowchart (Stay at Motel):
Customer Path: Park car -> Check in -> Spend night in room -> Eat breakfast -> Check out.
Backstage Support Path: Maid makes up room; Kitchen staff prepares breakfast.
Possession Processing Flowchart (Repair a DVD Player):
Customer Path: Travel to repair store -> Technician examines player and diagnoses problem -> Leave store -> (Later) Return to store, pick up player, and pay -> Play DVDs at home.
Backstage Support Path: Technician repairs DVD player mechanism during customer absence.
Mental Stimulus Processing Flowchart (Weather Forecast Broadcast):
Customer Path: Turn on television -> Select channel -> View weather forecast presentation -> Confirm plans for outdoor picnic.
Operations Path: Collect atmospheric weather data -> Meteorologists input data into computer models and create forecast -> Television weatherperson prepares local broadcast presentation.
Information Processing Flowchart (Health Insurance Policy):
Customer Path: Learn about coverage options -> Select policy plan and complete application forms -> Pay initial premium -> Receive printed policy documents -> Coverage active.
Operations Path: University and insurance company establish master coverage terms -> Customer information entered into central database -> Coverage active.
The Flower of Service Framework:
The Flower of Service comprises a central Core Product surrounded by eight supplementary service petals categorized into Facilitating and Enhancing elements:
Facilitating Supplementary Services (Required to enable core product usage):
Information: Supplying clear data needed to obtain and use the service.
Elements: Directions to service location, operating schedules/hours, itemized price lists, conditions of sale, and equipment operating instructions.
Order Taking: Process for accepting applications, bookings, and reservations.
Elements: Membership applications, order entry routines, seat/table/room reservations, and check-in procedures.
Billing: Presenting clear, accurate, and intelligible statements of account charges.
Elements: Periodic activity statements, digital machine displays of amounts due, itemized paper/electronic invoices.
Payment: Methods provided for customers to settle bills promptly and conveniently.
Elements: Self-service payment terminals, direct merchant payments, automated bank debits, credit/debit card processing.
Enhancing Supplementary Services (Add extra value, appeal, and competitive differentiation):
Consultation: Providing customized advice and tailored problem-solving.
Elements: Professional advice, individual counseling, management consulting, personal training.
Hospitality: Showing welcome and care for the customer as an invited guest.
Elements: Warm greetings, comfortable waiting lounges, complimentary beverages/snacks, clean washroom facilities, security guards.
Safekeeping: Caring for personal possessions brought by customers to the service site.
Elements: Coat checking, baggage storage, valet parking, secure storage lockers, safe maintenance of customer-owned or rented equipment.
Exceptions: Handling non-routine requests, special needs, or operational failures.
Elements: Advance special requests (dietary, disability accessibility), formal complaint and compliment logging, emergency problem solving, financial restitution, and service recovery compensation.
Branding Service Products and Lines:
Most service organizations market a line of services rather than a single product.
Spectrum of Branding Alternatives (Aaker & Joachimsthaler):
Branded House: Applying a single master corporate brand name to all products and service lines offered (e.g., Virgin Group: Virgin Atlantic, Virgin Active, Virgin Money).
Sub-Brands: Combining a master corporate brand with a distinct product brand name to signal explicit positioning (e.g., Singapore Airlines offering "Raffles Class").
Endorsed Brands: Product brand dominates the identity, but the master corporate identity lends underlying credibility (e.g., Courtyard by Marriott).
House of Brands: A portfolio of individual, stand-alone product brands marketed independently without corporate brand linkage (e.g., Procter & Gamble).
Example: British Airways Sub-Branding Strategy:
Offers six targeted air travel product brands:
Intercontinental offerings: First (deluxe first class), Club World (business class), World Traveller Plus (premier economy class), World Traveller (economy class).
Intra-European offerings: Club Europe, Euro-Traveller.
Creating Branded Customer Experiences:
Effective branding moves beyond corporate logos and color schemes to fulfill an authentic value proposition.
Don Schultz quote: "The brand promise or value proposition is not a tag line, an icon, or a color or a graphic element, although all of these may contribute. It is, instead, the heart and soul of the brand…"
Developing New Services:
Hierarchy of Seven New Service Categories:
Major service innovations: Developing entirely new core products for undefined or emerging markets.
Major process innovations: Applying new operational methods to deliver existing core products with added customer benefits.
Product-line extensions: Adding new service offerings within an existing firm product line.
Process-line extensions: Introducing alternative, more convenient delivery procedures for existing service offerings.
Supplementary service innovations: Adding new facilitating or enhancing supplementary elements or significantly improving existing ones.
Service improvements: Executing modest incremental enhancements in the actual performance quality of current services.
Style changes: Making visible cosmetic modifications to physical designs, uniforms, visual identity, or staff scripts.
Reengineering Service Processes:
Involves analyzing activity sequences to eliminate non-value-adding steps, run task sequences in parallel, reduce waiting times, or convert manual steps into self-service automated options.
Physical Goods as Sources of Service Ideas:
Service concepts can be developed as substitutes for owning physical goods or performing work oneself:
Goods Rental: Renting durable goods (vehicles, tools, appliances) for temporary use instead of purchasing.
Labor Hire: Hiring personnel to operate owned or rented equipment (e.g., driver, typist).
Non-ownership alternative matrix:
Drive own car vs. Rent a car and drive vs. Hire a chauffeur to drive own car vs. Hire a taxi/limousine.
Use own computer vs. Rent computer usage vs. Hire a typist to type on own machine vs. Send work out to a secretarial service firm.
Caterpillar Inc. promotes expanded standalone service lines built around heavy machinery sales: Equipment Financing, Equipment Insurance, Equipment Rental, Maintenance & Support, Technical Training, Remanufacturing, and Supply Chain Logistics.
Success Factors in New Service Development:
Market Synergy: Strong fit between the new service concept and the firm's existing image/resources, clear competitive advantage in fulfilling target customer needs, strong top management launch support, and deep organizational understanding of customer buying behavior.
Organizational Factors: Excellent cross-functional coordination (Marketing, Operations, HR), rigorous internal marketing to educate staff on product features and competitive positioning, and widespread employee alignment.
Market Research Factors: Conducting rigorous, scientific market research early in the process to define clear service concepts prior to full field development.
Service Pricing and Revenue Management Strategies
Business Models and Unique Pricing Challenges:
A business model defines the strategic logic explaining how a firm creates value for customers while transforming sales into revenues, recovering operational costs, and generating returns for owners.
Third-Party Payers: In many service business models, the end consumer does not pay the full cost directly; costs are offset by third parties (e.g., advertisers funding broadcast media/web portals, health insurers paying medical providers, taxpayers subsidizing public transit, or donors funding non-profits).
Distinctive Challenges in Service Pricing:
Financial costs of creating intangible service performances are complex to define and calculate accurately.
Input and output variability makes establishing a standardized "unit of service" difficult.
Customers find intangible services difficult to evaluate prior to and following consumption.
Time is a central factor; service value changes based on delivery speed or consumption time.
Service distribution across physical versus digital channels alters perceived customer value.
Dual Pricing Objectives:
Revenue and Profit Objectives: Profit maximization, cost coverage, meeting explicit return-on-investment targets.
Patronage and User-Based Objectives: Maximizing demand, achieving full capacity utilization, building a large active user base, stimulating trial of new service offerings, and increasing market share.
The Pricing Tripod Framework:
Leg 1: Cost-Based Pricing (The Floor):
Pricing must cover the financial costs of producing and delivering the service plus a profit margin.
Traditional Costing: Emphasizes standard expense categories and arbitrary overhead allocations; can miscalculate true job costs.
Activity-Based Costing (ABC): Connects resource expenses directly to the specific activity complexity and volume required to serve individual customers, providing highly accurate cost foundations.
Leg 2: Competition-Based Pricing (The Benchmark):
Firms must monitor competitor price points, especially when services lack structural differentiation. Price leader strategies determine baseline market pricing.
Leg 3: Value-Based Pricing (The Ceiling):
Prices are set relative to the overall value perceived by the customer.
Net Value Formula:
- Value exchange occurs only when Net Value is positive.
- **Consumer Surplus**: The economic difference between the maximum monetary price a customer would have been willing to pay and the actual lower price charged.
- *Strategies to Enhance Net Value*:
- Increase Gross Value: Add new core/supplementary benefits or enhance perceived value through marketing communications.
- Reduce Outlays: Decrease direct monetary selling prices, lower acquisition costs, reduce required customer time, eliminate physical fatigue, and reduce mental stress.
- Reduce Uncertainty: Implement flat-rate pricing, offer money-back guarantees, or deploy benefit-driven pricing structures.
Total Customer Costs and Nonmonetary Outlays:
Customer outlays span Search Costs, Purchase & Encounter Costs, and After Costs across five distinct categories:
Monetary Costs: Purchase price, travel expenses, operating costs, and incidental expenses.
Time Costs: Time spent searching, traveling, waiting, and consuming the service.
Physical Effort: Physical exertion required to travel to or participate in service delivery.
Psychological Burdens: Mental stress, anxiety, confusion, or fear experienced during purchase and usage.
Sensory Burdens: Unpleasant sights, loud noises, uncomfortable seating, bad smells, or extreme temperatures.
Comparative Trade-off Analysis: Medical Clinic Chest X-Ray Study:
- **Clinic A**:
- Financial Price:
- Travel Distance: 1 hour away by car or public transit.
- Appointment Availability: Next available appointment in 3 weeks.
- Operating Hours: Monday–Friday, 9:00 AM–5:00 PM.
- Estimated Wait Time at Facility: Approximately 2 hours.
- *Trade-off Profile*: Lowest monetary cost; highest time, effort, and scheduling burdens.
- **Clinic B**:
- Financial Price:
- Travel Distance: 15 minutes away by car or transit.
- Appointment Availability: Next available appointment in 1 week.
- Operating Hours: Monday–Friday, 8:00 AM–10:00 PM.
- Estimated Wait Time at Facility: Approximately 30 to 45 minutes.
- *Trade-off Profile*: Moderate monetary cost; moderate time and nonmonetary burdens.
- **Clinic C**:
- Financial Price:
- Travel Distance: Located immediately adjacent to customer's office or college.
- Appointment Availability: Next available appointment in 1 day.
- Operating Hours: Monday–Friday, 8:00 AM–10:00 PM.
- Estimated Wait Time at Facility: 0 to 15 minutes (strict appointment scheduling).
- *Trade-off Profile*: Highest monetary cost; minimal nonmonetary outlays and maximum time savings.
Revenue Management (Yield Management):
Definition: Mathematical optimization technique that analyzes historical usage patterns and real-time demand data to allocate perishable service capacity across dynamic "price buckets" to maximize total revenue.
Customizes prices by charging different market segments different price levels for essentially the same core capacity based on price sensitivity, booking timing, and usage flexibility.
Strategic Revenue Management Matrix (Kimes & Chase):
- **Quadrant 1** (Predictable Duration / Fixed Price): Movie theaters, sports stadiums/arenas, convention function spaces.
- **Quadrant 2** (Predictable Duration / Variable Price): Hotel room nights, airline seats, rental car fleets, cruise lines.
- **Quadrant 3** (Unpredictable Duration / Fixed Price): Full-service restaurants, golf courses.
- **Quadrant 4** (Unpredictable Duration / Variable Price): Continuing care facilities, hospital emergency/operating rooms.
Price Elasticity of Demand:
Formula:
Elastic Demand (): Small percentage changes in price trigger large percentage shifts in quantity demanded.
Inelastic Demand (): Large percentage changes in price result in minimal shifts in quantity demanded.
Rate Fences Architecture:
Rate fences are logical rules established by firms to prevent high-willingness-to-pay customers from trading down to lower-priced buckets, thereby protecting consumer surplus capture.
Physical (Product-Related) Rate Fences:
Basic Product: First class vs. economy class airline seats, luxury suite vs. standard hotel room, front-row vs. balcony theater seats.
Amenities: Free hot breakfast at hotel, complimentary airport pickup, free golf cart usage.
Service Level: Priority wait-listing, expanded baggage allowances, dedicated customer service hotlines, dedicated account managers.
Nonphysical Rate Fences:
Transaction Characteristics: Advance booking rules (e.g., mandatory non-refundable full payment 2 weeks prior), booking channel restrictions, usage flexibility penalties/cancellation fees.
Consumption Characteristics: Time or duration of usage (e.g., early-bird restaurant dining before 6:00 PM, mandatory Saturday night stayover, minimum 5-day stay), location of consumption.
Buyer Characteristics: Frequency/volume of consumption (loyalty tier membership discounts), group membership affiliations (student, senior citizen, military, alumni discounts), size of customer booking group.
Managing Customer Conflicts in Revenue Management:
Conflict Cause 1: Perceived unfairness and financial risk associated with multi-tier pricing and selective inventory availability.
Mitigation Tools: Structure explicit rate fences, bundle products, clear target categorizations, publish high baseline prices.
Conflict Cause 2: Unfulfilled inventory commitments due to overbooking.
Mitigation Tools: Execute well-designed customer service recovery and compensation programs.
Conflict Cause 3: Unfulfilled demand from high-value regular customers.
Mitigation Tools: Implement preferred availability and priority reservation access policies.
Conflict Cause 4: Unfulfilled price expectations of large group customers.
Mitigation Tools: Offer alternative low displacement cost dates or off-peak times.
Conflict Cause 5: Perceived changes in the nature or quality of service.
Mitigation Tools: Provide physical segregation between service tiers, deliver perceptible extra services, and set optimal capacity utilization targets.
Designing Fairness into Revenue Management:
Formulate simple, logical, and transparent rate schedules.
Publish high standard reference rates and frame dynamic pricing as frame-aligned discounts rather than surcharges.
Clearly communicate consumer benefits resulting from revenue management.
Hide price discounts inside bundled packages.
Build long-term relationships and protect loyal high-tier customers.
Putting Service Pricing Strategy into Practice:
Service managers must systematically answer seven operational pricing questions:
1. How much should be charged? (Set specific price points using the Pricing Tripod).
2. What should be the specified basis for pricing? (Execution of a complete task, admission fee, time duration, percentage commission on monetary value delivered, or physical resources consumed).
3. Who should collect payment? (Direct service firm staff vs. specialized intermediaries).
4. Where should payment be made? (Service facility, mail-in processing, bank transfer, online portal).
5. When should payment be made? (In advance of service delivery vs. following service completion).
6. How should payment be made? (Cash, physical tokens, stored-value cards, direct electronic fund transfers, credit/debit cards, vouchers, third-party billing, or RFID contactless interfaces such as Chase Blink).
7. How should prices be communicated to target markets? (Clear, intelligible promotion directly related to competitive value).
Impact of Payment Timing on Usage Frequency (Gourville & Soman Study):
The timing of fee payments directly impacts service consumption behavior.
Monthly Payment Plans: Generate steady, evenly distributed health club visits across every month of the year due to recurring payment recognition.
Annual Advance Lump-Sum Payment Plans: Result in an immediate spike in usage during the first month, followed by a continuous decay in facility visits over subsequent quarters as the psychological pain of payment fades.