mkt 9

The Role, Strategy, and Marketing of Services

Why Services Matter

• Services Dominate Economies
  • Over two-thirds of GDP globally
  • Approximately 75% of Canada’s GDP (2021)
  • 79% of Canadian employment is in services
  • 40% of Canadian exports are services
  • Services are a key source of growth, jobs, and innovation

How Services Differ from Goods

• Characteristics
  • Intangibility: Cannot be touched, seen, or stored.
  • Example: Lawyer’s advice, haircut
  • Inseparability: Produced & consumed simultaneously; tied to provider.
  • Example: Haircut, restaurant service
  • Inconsistency: Quality varies with provider/person.
  • Example: Retail staff performance, healthcare delivery
  • Inventory (Perishability): Services cannot be stored or warehoused.
  • Example: Hotel rooms, airline seats

Categories of Services (Service as a Process)

• Types
  • People Processing: Service directed at people.
  • Examples: Haircut, dentist appointment
  • Possession Processing: Directed at customer’s belongings.
  • Examples: Car repair, dry cleaning
  • Mental Stimulus: Affects the mind; no physical presence needed.
  • Examples: Education, therapy sessions
  • Information Processing: Uses technology on customer assets.
  • Examples: Insurance, banking, consulting services

5-Gap Model of Service Quality

• Gaps Identified
  1. Knowledge Gap: Difference between what customers want vs. what the company thinks they want.
  2. Standards Gap: Difference between company perception vs. service quality standards.
  3. Delivery Gap: Difference between service standard vs. actual service delivered.
  4. Communication Gap: Difference between what’s promised vs. what’s delivered.
  5. Perception Gap: Difference between customer expectations vs. actual experience.
  • The larger the gaps, the lower the perceived quality.

The Expanded 7 Ps of Services Marketing

• Original 4 Ps

  • Product: Core + supplementary services (e.g. hotel room + room service)
  • Price: Includes time, effort, travel – beyond just monetary costs.
  • Place: Delivery location and channels (in-person, digital)
  • Promotion: Strategies to make the intangible tangible (logos, visuals, testimonials)

• Additional 3 Ps

  • People: Employees and customers involved in the service experience.
  • Process: Flow and procedures during service delivery (e.g., Amazon's one-click ordering)
  • Physical Evidence: Tangible cues indicating service quality, such as facility design or employee appearance.

Pricing in Services

• Key Challenges:

  • Hard to standardize services
  • High non-monetary costs (time, effort)
  • Prices need to adjust to demand shifts (Yield Management)

• Pricing Strategies:

  • Task-based: Fixed rate for specific services (e.g., oil change).
  • Time-based: Fees based on time (e.g., consulting).
  • Bundled: Packages that include multiple services (e.g., cruise packages).
  • Variable Pricing: Prices fluctuate based on demand (e.g., airline tickets).

Promotion Strategy for Services

• Emphasize reliability, experience, and customer reviews
• Use tangible cues for intangible offerings (photos, awards)
• Focus on emotions and building trust in messaging
• Leverage customer testimonials and social proof

Distribution (Place) Strategy

• Must balance convenience and costs
• Distribution channels include physical branches, ATMs, websites, and mobile apps
• Time and accessibility are important, e.g., 24/7 banking facilities

Process Management

• Co-production: Customers are co-producers of services
  • Example: Fast checkouts at Amazon or personalized onboarding at Apple
• Effective processes lead to consistent, satisfying customer experiences

People Strategy

• Employees are essential to customer satisfaction
  • Firms should focus on training and motivating staff, offering recognition programs
• Other customers can also influence the experience (e.g., disruptive behavior in stores)

Physical Evidence

• The service environment signals quality through design, employee appearance, marketing materials, and cleanliness.
  • Example: TD Bank’s “Comfortable Banking” reputation built around cozy chairs and warm colors

Customization vs. Standardization Strategy

• Customization: Tailored to customer needs, often with higher costs (e.g., interior design).
• Standardization: Ensures consistency and cost-effectiveness (e.g., auto repairs).

Break-even Analysis

• Definition: When a company's operating profit equals 0; the point where fixed operating costs are covered.
• The break-even point can be expressed as:
  ext{Break-Even Units} = rac{ ext{Fixed Operating Costs}}{ ext{Margin ($) per unit}}
• The marginal contribution should help cover fixed costs, after which profits are generated.

Calculating Break-Even Units

• To find the break-even units, companies must understand the contribution margin and fixed operating costs.
• Example formula:
  $ext{Break-Even Units} = \frac{ ext{Fixed Operating Costs}}{ ext{Sales Price} - ext{Variable Costs}}$

Calculating Break-Even Revenue

• Definition: Revenue = Price per Unit x Units Sold
• Formula if Break-Even Units and Price are known:
  $ext{Break-Even Revenue} = ext{Price per Unit} imes ext{Break-Even Units}$
• If fixed operating costs are known, can also use:
  ext{Break-Even Revenue} = rac{ ext{Fixed Operating Costs}}{ ext{Margin (%)}}
• Alternate approach to find revenue if variable and fixed costs are known:
  $ext{Break-Even Revenue} = ext{Fixed Operating Costs} + ( ext{Variable Costs} imes ext{Break-Even Units})$

Real-World Examples of Break-even Application

• Example: Calculation for cloud computing service provider (SWA) to determine required clients for break-even.
  • Given:
  • Cost of acquiring a customer = $5,000
  • Sales commission per customer = $1,500
  • Annual fixed costs = $650,000
  • Price for service = $10,000
  • Total variable cost per client = $6,500.
  • Contribution margin = $3,500.
  • Break-even in clients = $\frac{650,000}{3,500} = 186$ clients needed for break-even.