Whether a household or a firm chooses to produce a particular service for itself
or contract externally for the service depends on a variety of factors. A proposed model of internal/external exchange suggests that such decisions depend on the following:
-Expertise capacity. The likelihood of producing the service internally is increased if the household or firm possesses the specific skills and knowledge needed to produce it. Having the expertise will not necessarily result in internal service production, however, because other factors (available resources and time) will also influence the decision. (For firms, making the decision to outsource is often based on recognizing that, although they may have the expertise, someone else can do it better.)
- Resource capacity. To decide to produce a service internally, the household or firm must have the needed resources, including people, space, money, equipment, and materials. If the resources are not available internally, external exchange is more likely.
-Time capacity. Time is a critical factor in internal/external exchange decisions.
Households and firms with adequate time capacity are more likely to produce services internally than are groups with time constraints.
-Economic rewards. The economic advantages or disadvantages of a particular exchange decision will be influential in choosing between internal and external options. The actual monetary costs of the two options will sway the decision.
-Psychic rewards. Rewards of a noneconomic nature have a potentially strong influence on exchange decisions. Psychic rewards include the degree of satisfaction, enjoyment, gratification, or happiness associated with the external or internal exchange.
-Trust. In this context, trust means the degree of confidence or certainty the household or firm has in the various exchange options. The decision will depend to some extent on the level of self-trust in producing the service versus trust of others.
-Control. The household or firm's desire for control over the process and outcome of the exchange will also influence the internal/external choice. Entities that desire and can implement a high degree of control over the task are more likely to engage in internal exchange.
-Once the customer's role is clearly defined, the organization can think in terms of facilitating that role. In a sense, the customer becomes a partial employee of the organization,
-Recruit the Right Customers
Before the company begins the process of educating and socializing customers for their roles, it must attract the right customers to fill those roles. The expected roles and responsibilities of customers should be clearly communicated in advertising, personal selling, and other company messages.
-Educate and Train Customers to Perform Effectively Customers need to be educated, or in essence "socialized," so that they can perform their roles effectively. Through the socialization process, service customers gain an appreciation of specific organizational values, develop the abilities necessary to function within a specific context, understand what is expected of them, and acquire the skills and knowledge to interact with employees and other customers.
-Reward Customers for Their Contributions Customers are more likely to perform their roles effectively, or to participate actively, if they are rewarded for doing so. Rewards are likely to come in the form of increased
control over the delivery process, time savings, monetary savings, and psychological or physical benefits.
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.
3. Demand and supply are balanced at the level of optimal 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.
4. Excess capacity. Demand is below optimal capacity. Productive resources in the form of labor, equipment, and facilities are underutilized, resulting in low 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.
-For some service businesses, the primary constraint on service production is time. For example, a lawyer, a consultant, a hairdresser, a plumber, and a psychological counselor all primarily sell their time. In such contexts, if the service worker is not available or if his or her time is not used productively, profits are lost.
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 tax accounting firm, and a repair and maintenance contractor may all face the reality that at certain times demand for their organization's services cannot be met because the staff is already operating at peak capacity.
-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. During the Christmas holidays, UPS, FedEx, and other delivery service providers face this issue.
Finally, many firms face 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 their aircraft, educational institutions 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.
• Loss of competitive focus. Yield management may cause a firm to overfocus on profit maximization and inadvertently neglect aspects of the service that provide longterm 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 do not understand the reasons. However, a study done in the restaurant industry found that, when customers were informed of different prices being charged by time of day, week, or table location, they generally felt the practice was fair, particularly if the price difference was framed as a discount for less desirable times rather than a premium for peak times or table locations. Customer education is thus essential in an effective yield management program.
• Overbooking. Customers can be further alienated if they fall victim (and are not compensated adequately) to the overbooking practices often necessary to make yield management systems work effectively. Research suggests that customers who experience negative consequences of revenue management (i.e., denied service or downgrades), particularly high-value customers, subsequently reduce their number of transactions with the firm.
• Incompatible incentive and reward systems. Employees may resent yield management systems that do not match incentive structures. For example, many managers are rewarded on the basis of capacity utilization or average rate charged, whereas yield management balances the two factors.
• Inappropriate organization of the yield management function. To be most effective with yield management, an organization must have centralized reservations.
Service benefits such as financial security, fun, and health do not correspond directly with objects, making them difficult to visualize and understand. When businesses need consulting, for example, they often do not know where to begin because the concept is so vague that they do not understand the specific goals, processes, or deliverables they are seeking.
Generality refers to a class of things, persons, events, or properties,
whereas specificity refers to particular objects, people, or events. Many services and service promises are described in generalities (wonderful experience, superior education, completely satisfied customers), making them difficult to differentiate from those of competitors.
Because service is a performance, it often cannot be previewed,or inspected in advance of purchase. If we are interested in finding a doctor, an
air-conditioning repair firm, a personal trainer, or virtually any service, we cannot search with certainty the options as easily as we can search the shelves in a grocery store. Considerably more effort must be expended, and what we find may not be useful. For example, if a customer needs a plumber, the information contained in a source such as the Internet may not adequately discriminate among
Services are often complex, multidimensional, and difficult
to grasp mentally. When customers have not had prior exposure, familiarity, or knowledge, services are difficult to interpret. You may have experienced this when buying automobile insurance for the first time. These five aspects of service intangibility make customers feel more uncertain about their purchases, and evidence indicates that, the greater the risk that customers perceive in purchasing services, the more actively they will seek and rely on word-of-mouth communications to guide their choices.
Adress Service Intangibility
-Use Narrative to Demonstrate the Service Experience Many services are experiential, and a uniquely effective approach to communicating them involves story-based appeals. Showing consumers having realistic and positive experiences with services is generally more effective than describing service attributes, particularly because the attributes are often intangible'
Present Vivid Information Effective service marketing communication creates a strong or clear impression on the senses and produces a distinct mental picture. One way to use vivid information is to evoke a strong emotion such as fear.
-Use Interactive Imagery One type of vividness involves what is called interactive imagery. Imagery (defined as a mental event that involves the visualization of a concept or relationship) can enhance recall of names and facts about service.
Interactive imagery integrates two or more items in some mutual action, resulting in improved recall. Some service companies effectively integrate their logos or symbols with an expression of what they do, such as the Prudential rock—the rock symbolizes strength and stability.
-Focus on the Tangibles. Another way that advertisers can increase the effectiveness of service communications is to feature the tangibles associated with the service, such as showing a bank's marble columns or gold credit card.Showing the tangibles provides clues about the nature and quality of the service.
. -Use Brand Icons to Make the Service
Tangible How does an advertiser of services gain in competitive differentiation and strong brand awareness in a highly competitive market
-Use Association, Physical Representation, Documentation, and Visualization
four strategies of tangibilization: association, physical representation, documentation, and visualization.
Association means linking the service to
a tangible person, place, or object, such as "being in good hands with Allstate."
Physical representation means showing tangibles that are directly or indirectly part of the service, such as employees, buildings, or equipment.
-Feature Service Employees in Communication Customer contact personnel are tangible representations of the service and are an important second audience for service advertising. Featuring actual employees doing their jobs or explaining their services in advertising is effective for both the primary audience (customers) and the secondary audience (employees) because it communicates to employees that they are important.
-Leverage Social Media Social media—interactive communication among customers on the Internet through such sites as Twitter, YouTube, and Facebook—are becoming avenues for consumers to exchange information. The growth of social media is
affecting many aspects of consumer purchase behavior. In a comScore survey, almost 28 percent of consumers reported that social media influenced their decisions about holiday purchasing in 2009.
-Aim Messages to Influencers Improved technologies are now allowing companies to identify online influencers—those individuals with more connections than others and
therefore more ability to influence others about services.
-Create Advertising That Generates Talk Because It Is Humorous, Compelling, or
Unique A humorous commercial that generated talk and was highly popular first aired on the 2011 Super Bowl for CareerBuilder.com in which bad-driving monkeys squeeze a driver between them.
-Feature Satisfied Customers in the Communication Advertising testimonials featuring actual service customers simulate personal communications between people
and are thereby a credible way to communicate the benefits of service.
-Generate Word of Mouth through Employee Relationships Research shows that customer satisfaction with a service experience alone is not sufficient to stimulate word-of-mouth activity. However, when customers gained trust in a specific employee, positive word of mouth would result.
-Create a strong service brand
Advertising, the brand name itself, websites, employees, facilities, and all other types of information dissemination must be
coordinated and controlled. These messages lead to brand awareness, the customer's recall and recognition of the brand. The higher and more positive the brand awareness, the stronger the brand image and the more differentiation—or brand equity —the service company has. Customer experience with the company —the actual interactions with company employees and other firm manifestations—is another element that shapes the brand and is likely to be more powerful than any marketing messages.
-Coordinate External Communication
For any organization, one of the most important yet challenging aspects of managing brand image involves coordinating all the external communication vehicles that send information to customers.
*Advertising is any paid form of nonpersonal presentation and promotion of a company's offerings by an identified sponsor.
*Sales promotion includes short-term incentives such as coupons, premiums, discounts, and other activities that stimulate customer purchases and stretch media spending.
*Public relations includes activities that build a favorable company image with a
firm's publics through publicity, relations with the news media, and community events.
-Customer Knowledge of Service Prices
*Service Variability Limits Knowledge
Because services are not created on a factory assembly line, service firms have great flexibility in the configurations of services they offer. Firms can conceivably offer an
infinite variety of combinations and permutations, leading to complex and complicated pricing structures.
*Providers Are Unwilling to Estimate Prices
Another reason customers lack accurate reference prices for services is that many providers are unable or unwilling to estimate price in advance. For example, legal and medical service providers are rarely willing—or even able—to estimate a price in advance. The fundamental reason is that they do not know themselves what the services will involve until they have fully examined the patient or the client's situation or until the process of service delivery (such as an operation in a hospital or a trial) unfolds.
*Individual Customer Needs Vary
Another factor that results in the inaccuracy of reference prices is that individual customer needs vary. Some hairstylists' service prices vary across customers on the basis of length of hair, type of haircut, and whether a conditioning treatment and
style are included. Therefore, if you ask a friend what a haircut costs from a particular stylist, chances are that your haircut from the same stylist will be a different price.
*Collection of Price Information Is Overwhelming in Services Still another reason customers lack accurate reference prices for services is that customers feel overwhelmed with the information they need to gather. With most goods, retail stores display the products by category to allow customers to compare and contrast the prices of different brands and sizes. Rarely is there a similar display of services in a single outlet. If customers want to compare prices (such as for dry cleaning), they must drive to or call individual outlets or search on the Internet in situations where prices are available. This can be an overwhelming task for consumers.
*Prices Are Not Visible
One requirement for the existence of customer reference prices is price visibility —the price cannot be hidden or implicit. In many services, particularly financial services,
most customers know about only the rate of return and not the costs they pay in the form of fund and insurance fees. In securities and term life insurance, customers are made aware of fees. However, price is invisible in certificates, whole-life insurance, and annuities (which have rear-load charges), and customers rarely know how they are charged or what they pay. Credit card fees are assessed on the basis of what consumers spend, and while customers may know their interest rates they are often shocked at what they are spending in fees to the financial institutions.
Most services require customers' direct participation and thus consume real time: time waiting as well as time when the customer interacts with the service provider. Consider the investment you make to exercise, see a physician, or get through the crowds to watch a concert or baseball game. Not only are you paying money to receive these services, but you are also expending time. Time becomes a sacrifice made to receive service in multiple ways.
Search costs—the effort invested to identify and select from among services you desire—are often higher for services than for physical goods. Prices for services are rarely displayed on shelves of service establishments for customers to examine as they shop, so these prices are often known only when a customer has decided to experience the service.
There are also convenience (or, perhaps more accurately, inconvenience) costs of
services. If customers have to travel to receive a service, they incur a cost, and the cost becomes greater when travel is difficult, as it is for elderly persons. Further, if a service provider's hours do not coincide with customers' available time, they must arrange their schedules to correspond to the company's schedule. And if consumers have to expend effort and time to prepare to receive a service they make additional sacrifices.
Often the most painful nonmonetary costs are the psychological costs incurred in
receiving some services. Fear of not understanding (insurance), fear of rejection
(bank loans), and fear of outcomes (medical treatment or surgery) all constitute psychological costs that customers experience as sacrifices when purchasing and using services. New services, even those that create positive change, bring about psychological costs that consumers factor into the purchase of services.
*Reducing Nonmonetary Costs
The managerial implications of these other sources of sacrifice are compelling. First,
a firm may be able to increase monetary price by reducing time and other costs. For
example, a service marketer can reduce the perceptions of time and convenience costs
when use of the service is embedded in other activities (such as when a convenience
store cashes checks, sells stamps, and serves coffee along with selling products).
Second, customers may be willing to pay to avoid the other costs. Many customers willingly pay extra to have items delivered to their homes—including restaurant meals
or bedroom furniture—rather than transporting the services and products themselves.
In cost-based pricing, a company determines expenses from raw materials and labor, adds amounts or percentages for overhead and profit, and thereby arrives at the price.
This method is widely used by industries such as utilities, contracting, wholesaling, and advertising. The basic formula for cost-based pricing is
Price =Direct costs+ Overhead costs + Profit margin
*Examples of Cost-Based Pricing Strategies Used in Services Cost-plus pricing is a commonly used approach in which component costs are calculated and a markup added. In product pricing, this approach is quite simple; in service industries, however, it is complicated because the tracking and identification of costs are difficult. The approach is typically used in industries in which cost must be estimated in advance, such as construction, engineering, and advertising.
*Fee for service is the pricing strategy used by professionals; it represents the cost of the time involved in providing the service.
Pricing Strategies When the Customer Means
"Value Is Low Price"
When monetary price is the most important determinant of value to a customer, the
company focuses mainly on price. This focus does not mean that the quality level and intrinsic attributes are always irrelevant, just that monetary price dominates in importance. To establish a service price in this definition of value, the marketer must
understand to what extent customers know the objective prices of services in this category, how they interpret various prices, and how much is too much of a perceived sacrifice.
Service providers offer discounts to communicate to price-sensitive buyers that they are receiving value.
Odd pricing is the practice of pricing services just below the exact dollar amount to make buyers perceive that they are getting a lower price. Dry cleaners charge $2.98 for a shirt rather than $3.00, health clubs have dues priced at $33.90 per month rather than
$34, and haircuts are $9.50 rather than $10.00. Odd prices suggest discounting and bargains and are appealing to customers for whom value means low price.
Synchro-pricing is the use of price to manage demand for a service by capitalizing on customer sensitivity to prices.
-Place differentials are used for services in which customers have a sensitivity
-Quantity differentials are usually price decreases given for volume purchasing.
This pricing structure allows a service company to predict future demand for its services. Customers who buy a booklet of coupons for a tanning salon or facial, a quantity of tokens for public bridges, or packages of advertising spots on radio or television are all responding to price incentives achieved by committing to future services.
-Differentials as incentives a re lower prices for new or existing clients in the hope of encouraging them to be regular users or more frequent users. Some professionals—lawyers, dentists, electrologists, and even some physicians—offer free consultations
at the front end, usually to overcome fear and uncertainty about high service prices.
Prestige pricing is a special form of demand-based pricing by service marketers who offer high-quality or status services. For certain services—restaurants, health clubs, airlines, and hotels—a higher price is charged for the luxury end of the business.
Skimming, a strategy in which new services are introduced at high prices, is an effective approach when services are major improvements over past services. In this situation, customers are more concerned about obtaining the service than about the cost of the service, allowing service providers to skim the customers most willing to pay
the highest prices. Services related to anti-aging, such as Botox injections and laser liposuction, often are introduced at high prices, thereby attracting customers who are willing to pay more to obtain the services in the short term rather than wait until a later time, when the prices might be reduced.
The widely used term value pricing has come to mean "giving more for less." In current usage, it involves assembling a bundle of services desirable to a wide group of customers and then pricing them lower than they would cost alone.
Market Segmentation Pricing
With market segmentation pricing, a service marketer charges different prices to groups of customers for what are perceived to be different quality levels of service, even though there may not be corresponding differences in the costs of providing the service to each of these groups. This form of pricing is based on the premise
that segments show different price elasticities of demand and desire different quality levels. Service marketers often price by client category, based on the recognition that some groups find it difficult to pay a recommended price. Health clubs located in college communities typically offer student memberships, recognizing that this segment of customers has limited ability to pay full price. In addition to the lower price, student memberships may also carry with them reduced hours of use, particularly in peak times. The same line of reasoning leads to memberships for "seniors," who are less able to pay full price but are willing to patronize the clubs during daytime hours, when most full-price members are working. Companies also use market segmentation by service version, recognizing that not all segments want the basic level of service at the lowest price. When they can identify
a bundle of attributes that are desirable enough for another segment of customers, they can charge a higher price for that bundle.
Because many customers do not possess accurate reference prices for services, service
marketers are more likely than goods marketers to organize price information for customers so they know how to view it. Customers naturally look for price anchors as well
as familiar services against which to judge focal services. If they accept the anchors, they view the price and service package favorably. Groupon, Living Social, and other online couponing sites let customers know the actual values of the offers being made as well as the discounted costs in the offer. As mentioned earlier in the chapter, customers often do not have a reference price for services—particularly household services such as plumbing, gutter cleaning, and pressure washing. Framing the offers by providing actual prices allows customers to recognize the value they will receive if they purchase the Groupon.
Some services are consumed more effectively in conjunction with other services; other services accompany the products they support (such as extended service warranties, training, and expedited delivery). When customers find value in a package of interrelated services, price bundling is an appropriate strategy. Bundling, which means pricing and selling services as a group rather than individually, has benefits to both customers and service companies. Customers find that bundling simplifies their purchase and payment, and companies find that the approach stimulates demand for the firm's service line, thereby achieving cost economies for the operations as a whole while increasing net contributions. Bundling also allows the customer to pay less than when purchasing each of the services individually, which contributes to perceptions of value.
- Complementary Pricing
Services that are highly interrelated can be leveraged by using complementary pricing.This pricing includes three related strategies—captive pricing, two-part pricing, and loss leadership. In captive pricing, the firm offers a base service or product and then
provides the supplies or peripheral services needed to continue using the service. In this situation the company could off-load some part of the price for the basic service to the peripherals. For example, cable services often drop the price for installation to a very low level, then compensate by charging enough for the peripheral services to make up for the loss in revenue. With service firms, this strategy is often called two part pricing because the service price is broken into a fixed fee plus variable usage fees (also found in telephone services, health clubs, and commercial services such as
rentals). Loss leadership is the term typically used in retail stores when providers place a familiar service on special largely to draw the customer to the store and then reveal other levels of service available at higher prices. Cleaners, for example, will offer a
special low price to launder men's shirts to draw customers in to pay the higher regular prices for other items.
In service industries in which outcome is very important but uncertainty is high, the most relevant aspect of value is the result of the service. In personal injury lawsuits, for example, clients value the settlement they receive at the conclusion of the service. From tax accountants, clients value cost savings. From trade schools, students most value getting a job upon graduation. From Hollywood stars, production companies value high grosses. In these and other situations, an appropriate value-based pricing strategy is to price on the basis of results or outcome of the service. The most commonly known form of results-based pricing is a practice called contingency pricing, used by lawyers. Contingency pricing is the major way that personal injury and certain consumer cases are billed. In this approach, lawyers do not receive fees or payment until the case is settled, when they are paid a percentage of the money that the client receives. Therefore, only an outcome in the client's favor is compensated. From the client's point of view, the pricing makes sense in part because most clients in these cases are unfamiliar with and possibly intimidated by law firms. Their biggest fears are high fees for a case that may take years
to settle. By using contingency pricing, clients are ensured that they pay no fees until they receive a settlement. In these and other instances of contingency pricing, the economic value of the service is hard to determine before the service, and providers develop a price that allows them to share the risks and rewards of delivering value to the buyer.
Results-based pricing is demonstrated clearly in the online "pay-per-click"
advertising industry. Rather than buying media with estimated audiences, companies that buy advertisements on Google and Yahoo! pay only for users who actually
respond to their ads. Some public relations firms are also moving from charging fixed fees for obtaining media exposure for their clients to a results-based approach. Pay PerClip, for example, a division of a traditional public relations firm, bases its
fees on very specific results—$750, for example, for a mention in a small-market newspaper. The commission approach to service pricing is compelling in that agents are compensated most when they find the highest rates and fares. It would seem that agents have an underlying motivation to avoid the lowest fares and rates for their clients.
3rd EditionCharles E. Leiserson, Clifford Stein, Ronald L. Rivest, Thomas H. Cormen 5th EditionDavid A. Patterson, John L. Hennessy 3rd EditionMichael Sipser 8th EditionJohn Buck, William Hayt