Service Marketing

Indira Gandhi National Open University School of Management Studies
MS-65
Marketing of Services
Block
1
MARKETING OF SERVICES: AN INTRODUCTION
UNIT 1 Marketing of Services: Conceptual Framework UNIT 2 Role of Services in Ec
onomy UNIT 3 International Trade in Services, The WTO, and India UNIT 4 Consumer
Behaviour in Services 5 20 37 53
1
Marketing of Services: An Introduction
Course Preparation Team*
Prof. L.M. Johari FMS, Delhi University Delhi Prof. J.D. Singh IMI New Delhi Pro
f. P.K. Sinha IIM Bangalore Mr. Amrish Sehgal Bhutan Tourism Dev. Corpn. Bhutan
Mr. D. Ramdas Management Consultant New Delhi Prof. M.L. Agarwal XLRI Jameshedpu
r Mr. Arun Shankar Citi Bank New Delhi Dr. V. Chandrashekhar Mahindra Days Hotel
s & Resorts, Bangalore Ms. Sudha Tewari Parivar Seva Sansthan New Delhi Mr. Pram
od Batra EHIRC New Delhi Ms. Rekha Shetty Apollo Hospitals Madras Ms. Malabika S
haw AIMA New Delhi Mr. Saurabh Khosla Tulika Advertising Agency New Delhi Mr. Sa
njeev Bhikchandani Sanka Information Pvt. Ltd., New Delhi Prof. J.B. Nadda Goa U
niversity Goa Mr. M. Venkateswaran Transportation Corporation of India, Hyderaba
d Prof. Rakesh Khurana School of Management Studies IGNOU, New Delhi Prof. Madhu
lika Kaushik School of Management Studies IGNOU, New Delhi Mr. Kamal Yadava Scho
ol of Management Studies IGNOU, New Delhi
* The course was initially prepared by these experts and the present material is
the revised version. The profile of the Course Preparation Team given is as it
was on the date of initial print.
Course Revision Team (2004)
Prof. Ravi Shankar Course Editor IIFT, New Delhi Dr. Tapan K. Panda IIM, Khoziko
de Calicut Prof. B.B. Khanna Director School of Management Studies IGNOU, New De
lhi Dr. Kamal Yadava Course Coordinator and Editor School of Management Studies
IGNOU, New Delhi
Prof. Madhulika Kaushik School of Management Studies IGNOU, New Delhi Prof. Raja
t Kathuria IMI, New Delhi
Dr. Rupa Chanda IIM, Bangalore
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June, 2004 (Revision) © Indira Gandhi National Open University, 2004 ISBN-81-266-1
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BLOCK 1
MARKETING OF SERVICES : AN INTRODUCTION
The first block of the course is concerned with the conceptual framework regardi
ng services marketing and also gives the role of services in national economies
as well as international trade. The block consists of four units. The first unit
entitled ‘Marketing of Services : Conceptual Framework’ explains as to why marketin
g practices and applications need to be specifically evolved for services, as th
ey are in certain characteristics distinct from goods. The unit deals with the c
oncept of a service and its classifications, the difference between goods and se
rvices, the marketing implications of these differences and the service marketin
g mix. The second unit on ‘Role of Services in Economy’ brings about the importance
of service sector in the national economies. The unit outlines details of intern
ational as well as Indian scenario. It also brings out brief details of some imp
ortant service sectors in India. The next unit is on ‘International Trade in Servi
ces, The WTO, and India’. It outlines recent trends in international trade in serv
ices, provides an overview of GATS and India’s negotiating strategy and domestic r
eforms. The last unit of the block gives details of consumer behaviour in servic
es.
3
MS-65: MARKETING OF SERVICES Course Components
BLOCK UNIT NOS. 1. UNIT TITLE AUDIO PROGRAMME VIDEO PROGRAMME
1. 2. 3. 4. Marketing of Services: Conceptual Framework Role of Services in Econ
omy International Trade in Services, the WTO, and India Consumer Behaviour in Se
rvices
2.
5. 6. 7.
SERVICES MARKETING MIX
Product and Pricing Decisions Place and Promotion Decisions Extended Marketing M
ix for Services
3.
8. 9. 10.
STRATEGIC ISSUES
Service Quality Managing Capacity/Demand Retaining Customers
4.
11. 12. 13. 14.
SECTORAL APPLICATIONS–I
Financial Services Tourism and Hospitality Services Health Services Case Study:
Serving the Global Indian Issues in Social Destination Marketing India Marketing
of Health Services
5.
15. 16. 17. 18. 19.
SECTORAL APPLICATIONS–II
Educational Services Professional Support Services: Advertising Agencies Telecom
munication Services Product Support Services Case Studies 1. Is the Customer Alw
ays Right? 2. The Case of Dosa King.
4
UNIT 1 MARKETING OF SERVICES : CONCEPTUAL FRAMEWORK
Objectives
After going through this unit you should be able to: define the concept of servi
ces, identify the reasons for growth of the service sector, explain the characte
ristics that distinguish services from products, explain the implications of the
se characteristics in terms of designing a marketing strategy, explain the ways
in which services can be classified so as to develop frameworks for managing the
m, and identify the services marketing mix.
Structure
1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 Introduction The Concept of Service Rea
sons for Growth of the Service Sector Characteristics of Services Services Class
ified The Services Marketing Mix Summary Self Assessment Questions Further Readi
ngs References
1.1 INTRODUCTION
Economists have divided all industrial and economic activities into three main g
roups: primary, secondary, and tertiary. Primary activities include agriculture,
fishing and forestry. Secondary activities cover manufacturing and construction
; tertiary activities refer to the services and distribution. In the pre-industr
ialised era, primary activities were the mainstay of the economy. The Industrial
Revolution marked the beginning of increasing importance of secondary activitie
s and the gradually decreasing the status of agriculture and allied activities.
The period following World War II saw USA become the world’s first ‘service economy’ w
ith more than 50 per cent of the working population employed in producing servic
es and today 80 per cent of the US economy is service-oriented. This led a New Y
ork Congressman to remark that America is becoming a nation of people who are “ser
ving each other hamburgers or taking in each others’ laundry”. However, the US servi
ce industry is a very technical and sophisticated one comprising computer and so
ftware development, business consultancy, telecommunication, banking and insuran
ce. This pattern of economic development is not universally applicable to all co
untries. In many African and Asian countries the agricultural sector is till the
dominant one. In countries like India, we can observe the growing importance of
the manufacturing and service sectors while agriculture still continues to reta
in its stronghold on the economy. The manufacturing and service sectors are grow
ing not only in volume but also in sophistication and complexity. The
5
wide array of services found in the metropolitan cities in India compare favoura
bly with those found anywhere in the world. Deniel Bell, in his book ‘The Coming o
f the Post-industrial Society’ called this period of dominance by the service sect
or as the post-industrial society1 . According to him: “if an industrial society i
s defined by the quantity of goods as marking a standard of living, the post-ind
ustrial society is defined by the quality of life as measured by the services de
sirable and possible for everyone.”
1.2 THE CONCEPT OF SERVICE
Widespread interest in the effective management and marketing of services as wel
l as the inconclusive debate on how distinct is the marketing of intangible serv
ices from that of the tangible products, have enriched the literature by highlig
hting the service characteristics as that of intangibility, immediacy, individua
lity, perishability, heterogeneity, ownership, inseparability of production from
consumption, and being experimental. In common parlance, these characteristics
are also referred as: Services are performed, not produced. Services are more pe
ople-based than technology-based. Services supply cannot be easily changed to me
et the suddenly changed market needs. Service demand has greater elasticity. Ser
vices face unique quality control issues and a larger number of problems in cust
omer servicing. Service quality is an amalgam of services. Activity 1 If we take
tangibility and intangibility as the opposite ends of a continuum, can you by l
ooking around identify services which can be classified along this continuum? Th
ink of the services utilized by you as an individual, as a family and as an orga
nisation. ......................................................................
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............................. The term service is rather general in concept, and
it includes a wide variety of services. There are the business and professional
services such as advertising, marketing research, banking, insurance, computer-
programming, legal and medical advice. Then there are services which are provide
d by professionals but consumed for reasons not of business, rather for leisure,
recreation, entertainment and fulfillment of other psychological and emotional
needs such as education, fine arts, etc. Faced with such a broad spectrum we nee
d to define the concept of service from a marketing view-point. Kolter offers on
e such definition: A service is any activity or benefit that one party can offer
to another that is essentially intangible and does not result in the ownership
of anything.2 . Its production may or may not be tied to physical product. W.J.
Stanton views services as fulfilling certain wants and states that, “services are
those separately identifiable, essentially intangible activities which provide w
ant-satisfaction, and are not necessarily tied to the sale of a product or
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Table 1.1: List of Selected Services
Marketing of Services: Conceptual Framework
Utilities Electricity Water Supply Law Enforcing, Civil, Administrative and Defe
nce Services Police Army Air Force Navy Judiciary Civil Administration Municipal
Services (Sewage, maintenance of roads parks and public buildings)
Transport and Communication Railways (Passenger and Freight) Air Transport (Pass
enger and Freight) Post and Telegraph Telephone and Telecommunication Broadcasti
ng (All India Radio) Telecasting (Doordarshan) Distributive Trades Wholesale Dis
tribution Retail Distribution Dealers, Agents
Insurance, Banking, Finance Banks Share and Stock Brokers Business, Professional
and Scientific Activities Advertising Marketing Research Consultancy Accountanc
y Legal Medical Educational Research Maintenance and Repairs (of plants, machine
ry and equipment) Leasing Computer Programming Employment Agencies Leisure, Recr
eation Cinema, Theatre Clubs, Gymnasiums Restaurants, Hotels Video Game Parlors
Casinos Self-improvement Courses Miscellaneous Beauty Parlors Health Clubs Domes
tic Help Drycleaning Matrimonial Service
Source: Adapted from Donald Cowell, ‘The Marketing of Services’, Heinemann, London.
another service. To produce a service may or may not require the use of tangible
goods. However, when such use is required, there is no transfer of title (perma
nent ownership) to these tangible goods.”3 As in the case of a product, in the cas
e of services also your starting point for understanding the marketing dynamics
is the want satisfaction of the customers. It is important to correctly identify
the particular want(s) which your service is fulfilling, since this will provid
e the clue for designing the most appropriate marketing strategy. A restaurant p
rovides satisfaction to its customers on the basis of type and quality of its fo
od, its decor and environment and the behaviour of its staff and its location in
a busy commercial-cum office complex. For instance, ‘Class Touch’ was started as a
restaurant serving exclusive Western and Chinese cuisine with an expensive decor
, a live band, beautifully liveried waiters and a high-price menu. The venture w
as a flop right from the start. On the advice of its marketing consultant, the r
estaurant changed over from serving elaborate, expensive meals to a ‘fast-food’ outl
et providing quick, reasonably priced meals
7
for consumption both within and outside the restaurant. Today this restaurant is
a big success. It was the correct identification of the want-satisfaction which
helped the restaurant become successful. Located in a predominantly office comp
lex, the owners realised that in lunch-break, people do not visit a restaurant f
or relaxation or status satisfaction. They have limited time at their disposal a
nd want a quick clean meal at a reasonable price, with minimum frills and fancy.
In this case, the restaurant was satisfying the basic hunger need, but was cate
ring to a very specific class of customer (office-goers) with a special kind of
constraint (that of time and money). To be successful, you have to firstly, iden
tify the basic need which is being fulfilled by your service, and secondly, find
ways and means to differentiate it from that of the competitors so that you can
increase your number of customers and also command their loyalty. In our earlie
r example of the restaurant it was only after the basic need had been correctly
identified that the restaurant could adopt an appropriate marketing strategy and
turn the corner. Thus, as a marketing manager involved in the marketing of serv
ices your first concern should be the identification of the customers’ needs. A cl
ue to this can be provided by looking into the reason for the phenomenal growth
of the service sector in recent times. Activity 2 Study an organisation engaged
in Marketing of Education and Training Services to describe: i) ii) iii) The nee
d or want that these services satisfy. The nature of services which these organi
sations are providing. How the services of these organisations are differentiate
d from those of their competitors? .............................................
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1.3 REASONS FOR GROWTH OF THE SERVICE SECTOR
Manufacturing industries grew because they produced tangible goods which satisfi
ed people’s physiological needs of food, shelter and clothing. As the basic need w
as fulfilled there was demand for improved satisfaction, and this led to a proli
feration of variations of the same product and a number of companies involved in
its manufacture. The growth of service industries can be traced to the economic
development of society and the socio-culture changes that have accompanied it.
Table 1.2 presents the reasons for growth of service industries. Sometimes, the
growth of a specific service industry is the result of a combination of several
reasons. Increasing affluence coupled with the desire to utilise leisure time fo
r leisure rather than for doing odd repair jobs in the house had led to the grow
ing tribe of plumbers and electricians. Increasing affluence combined with incre
asing complexity of life and increasing insecurity has led to the phenomenon of
credit cards and travelers cheques which have proved to be almost perfect substi
tutes for money. These credit cards provide convenience and safety. In fact, con
venience is proving to be a key concept in the provision of services.
8
Table 1.2: Reasons for Growth of Service Industries
Reasons 1 Increasing affluence
Types of services required Greater demand for services (activities which consume
rs used to perform themselves) such as interior decoration, laundry, care of hou
sehold products such as carpets, care of garden etc. Greater demand for recreati
on and entertainment facilities, travel resorts, adult education and self-improv
ement courses. Greater demand for crèches, baby sitting, household domestic help G
reater demand for nursing homes and health care services Greater demand for skil
led specialists to provide maintenance for complex products such as aircondition
ers, cars, home computers. Greater demand for specialists in income-tax, labour
laws, legal affairs, marriage counseling, employment services. Greater demand fo
r purchased or leased services, car rental, travel, resort to time sharing rathe
r than ownership basis. The computer-sparked development of such service industr
ies as programming, repair and time sharing.
2
More leisure time
3
Higher percentage of women in labour force Greater life expectancy
4
5
Greater Complexity of products
6
Increasing complexity of life
7
Greater concern about ecology and resource scarcity
8
Increasing number of new products
Source: Schoell, K.F. and J.T. Ivy, 1981 “Marketing : Contemporary Concepts and Pr
actices,“ Allyn and Bacon; Boston.
1.4 CHARACTERISTICS OF SERVICES
Services have a number of unique characteristics that make them so different fro
m products. Some of the most commonly accepted characteristics are: a) Intangibi
lity b) Inseparability c) Heterogeneity d) Perishability e) Ownership
9
Intangibility When you buy a cake of soap, you can see, feel, touch, smell and u
se it to check its effectiveness in cleaning. But when you pay fees for a term i
n college, you are paying for the benefit of deriving knowledge and education wh
ich is delivered to you by teachers. In contrast to the soap where you can immed
iately check its benefits, there is no way you can do so in case of the teachers
who are providing you the benefits. Teaching is an intangible service. When you
travel by an aeroplane, the benefit which you are deriving is a service (transa
ction) but it has some tangible aspects such as the particular plane in which yo
u fly (and the food and drink which is served). In this case the service has bot
h a tangible and intangible aspect as compared to teaching which has hardly any
tangible aspect. Figure 1.1 presents the tangible-intangible dominant aspect on
a goods-service continuum. This continuum highlights the fact that most services
are in reality a combination of products and services having both tangible and
intangible aspects. There are only a few truly pure tangible products or pure in
tangible services.
Figure 1.1: Goods Services Continuum
Salt Soft drinks Detergents Automobiles Fast-food Cosmetics outlets
Intangible Dominant Tangible Dominant
Fast-food outlets Advertising agencies Airlines
Investment Consulting Teaching management
Source: G. Lynn Shostack, “Breaking Free From Product Marketing,” Journal of Marketi
ng 41 (April 1977): 73-80. American Marketing Association.
The distinguishing feature of a service is that its intangible aspect is dominan
t. J. Bateson has described the intangible characteristics of services which mak
e them distinct from products4. These intangible features are: A service cannot
be touched Precise strandardisation is not possible There is no ownership transf
er A service cannot be patented Production and consumption are inseparable There
are no inventories of the service Middlemen roles are different The consumer is
part of the production process so the delivery system must go to the market or
the customer must come to the delivery system. Inseparability In most cases a se
rvice cannot be separated from the person or firm providing it. A service is pro
vided by a person who possesses a particular skill (singer), by using equipment
to handle a tangible product (dry cleaning) or by allowing access to or use of p
hysical infrastructure (hotel, train). A plumber has to be
10
physically present to provide the service, the beautician has to be available to
perform the massage. This is in direct contrast to products which can be produc
ed in the factory today, stocked for the next two, three or more months and sold
when an order is procured. Heterogeneity The human element is very much involve
d in providing and rendering services and this makes standardisation a very diff
icult task to achieve. The doctor who gave you his complete attention in your la
st visit may behave a little differently the next time. The new bank clerk who c
ashed your cheques may not be as efficient as the previous one and you have to s
pend more time for the same activity. This is despite the fact that rules and pr
ocedures have been laid down to reduce the role of the human element and ensure
maximum efficiency. Airlines, restaurants, banks, hotels have large number of st
andardised procedures. You have to reserve a room in a hotel and this is a strai
ght forward procedure for which all the steps are clearly defined. Human contact
is minimal in the computerised reservation systems, but when you go to the hote
l there will be a person at the reception to hand over the key of your room. The
way this person interacts with you will be an important factor in your overall
assessment of the service provided by the hotel. The rooms, the food, the facili
ties may be all perfect, but it is the people interacting with you who make all
the difference between a favourable and unfavourable perception of the hotel. Pe
rishability Services cannot be stored and are perishable. A car mechanic who has
no cars to repair today, spare berths on a train, or unsold seats in a cinema h
all represent a service capacity which is lost forever. Apart from the fact that
a service not fully utilised represents a total loss, the other dimension of th
is perishability aspect is that most services may face a fluctuating demand. The
re is a peak demand time for buses in the morning and evening (office hours). Ce
rtain train routes are always more heavily booked than others. This fluctuating
demand pattern aggravates the perishability characteristic of services. Ownershi
p When you buy a product you become its owner-be it a pencil, book, shirt, refri
gerator or car. In the case of a service, you may pay for its use but you never
own it. By buying a ticket you can see the evening film show in the local cinema
theater; by paying wages you can hire the services of a chauffeur who will driv
e your car; by paying the required charges you can have a marketing research fir
m survey into the reasons for you product’s poor sales performance, etc. In case o
f a service, the payment is not for purchase, but only for the use or access to
or for hire of items or facilities. A service is purchased for the benefits it p
rovides. If we closely examine the reasons why products are purchased, we find t
hat they are bought because they provide certain intangible benefits and satisfa
ctions. Detergent powder provides the primary benefit of cleanliness, air-condit
ioners provide the benefit of a cool, comfortable environment, a mixer-cum-grind
er provides convenience. The only difference between products and services is th
at in the latter, the intangible component is greater than in the former. Thus,
services can be treated as a special kind of product. From a marketing view-poin
t, the same concepts and techniques are applicable for both products and service
s. The successful marketing of both requires market research, product design, pr
oduct planning and development, pricing, promotion and distribution. However, fo
r marketing services, the marketing
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manager must understand the nature of the five characteristics of services and t
he manner in which they impinge on the marketing strategy. Table 1.3 describes t
he implications of characteristics of services and how the marketing strategy ca
n be focused to overcome these constraints. Besides the constraints highlighted
in Table 1.3, are some other factors which have inhibited the active marketing o
f services. Professionals such as doctors and lawyers have traditionally been op
posed to the idea of marketing, rather they have relied on the word of mouth of
satisfied customers for increasing their clientele.
Table: 1.3: Implication of service characteristics and ways of overcoming them
Service characteristics 1 Intangibility Implications Sampling difficult. Difficu
lt to judge quality and value in advance. Not possible to patent or have copyrig
ht Relatively difficult to promote. Requires presence of performer/producer. Dir
ect sale. Limited scale of operations. Geographically limited market Difficult t
o standardise quality. Means of overcoming characteristics Focus on benefits. Us
e brand names. Personalise service. Develop reputation. Increase tangibility (e.
g. its physical representation)
2
Inseparability
Learn to work in larger groups. Work faster. Train more service performers
3
Heterogeneity
Careful selection and training of personnel. Define behaviour norms. Reduce role
of human element. Mechanise and automate maximum possible operations. Better ma
tch between supply and demand by price reduction in low demand season Stress adv
antages of nonownership such as easier payment scheme.
4
Perishability
Cannot be stored. Problem of demand fluctuation
5
Ownership
Customer has access to but not ownership of facility or activity.
Source: Cowell, Donald, ‘The Marketing of Services’. Heinemann, London.
The small size of many service organisations such as beauty parlours, repair sho
ps, barber shops etc. also limits the use of marketing techniques which can be s
uccessfully used in larger organisations and then there is the case of service o
rganisations such as schools, hospitals and, universities which enjoy more deman
d than they can cope with. These institutions have, therefore, never felt the ne
ed for actively marketing their services. Activity 3 Looking at inseperability o
f the service and its producer as a major characteristic that distinguishes prod
ucts and services, you can imagine the implications for marketing the services o
f consultants, musicians, stage performers and advertising creatives. Talk to so
me of these people or organisations to find out in what ways have they tried to
overcome the marketing implications of inseparability. 12 ......................
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1.5 SERVICES CLASSIFIED
A larger number of classification schemes for services have been developed to pr
ovide strategic insights in managing them. Utilizing different bases, these sche
mes allow us to understand the nature of the service act, the relationship betwe
en service organisation and its customers, the nature of service demand and the
attributes of a service product. Let us discuss the schemes briefly. 1. The Natu
re of the Service Act Using two dimension of tangibility of the service act and
to whom services are directed at. Lovelock5 has classified services according to
whether services are directed at people or possessions, at minds, physical poss
essions or assets. Table 1.4 will help you understand this classification scheme
.
Table 1.4
Nature of the Service Act Tangible Action People
Services Directed At Possession Directed at goods, Physical possessions Transpor
tation Laundry/Dry cleaning Lawn care Services directed at intangible assets Ban
king Legal Services Insurance Accounting
Services directed at peoples bodies Healthcare, Salons, Restaurants, Transportat
ion Intangible Action Services directed at peoples minds. Education Broadcasting
Information Museums
2. Relationship between Service Organisation and Customers In the service sector
both institutional and individual customers may enter into continuing relations
hips with service providers and opt for receiving services continually. Services
can therefore be classified on the basis of whether the nature of the relations
hip is continuous or intermittent and whether a consumer needs to get into a mem
bership relationship with the service organisation to access and utilise the ser
vice.
Table 1.5: Services and Customer Relationships Type of Relationship Nature of De
livery Continuous Membership Insurance Education Banking Theatre seat subscripti
on commuter tickets Non Membership Police protection Public highway
Discrete
Car rental Pay telephone Restaurant
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3. How the Service is delivered Lovelock has used two issues of number of delive
ry sites (whether single or multiple) and the method of delivery to classify ser
vices in a 2 × 3 matrix. Then implications here are that the convenience of receiv
ing the service is the lowest when the customer has to come to the service and m
ust use a single or specific outlets. As his options multiply, the degree of con
venience can go on rising, from being able to choose desirable sites, to getting
access at convenient locations. (Table 1.6.) Table 1.6
Service Delivery Modes Nature of Interaction between Customer and Organisation C
ustomer goes to service organisation Service organisation comes to the customer
Customer and organisation transact business at arms length Availability of outle
ts Single site Theatre Lawn care Pest control Credit cards Local TV station Mult
iple site Bus Service Fast Food Chain Mail delivery Emergency auto repair Teleph
one company Broadcasting
4. Proportion of Tangibility and Intangibility Using the characteristic of intan
gibility of services, Shostack6 proposed that all goods and services can be plac
ed on a tangibility intangibility continuum, with services clustering towards lo
w to high intangibility. Accordingly, services can be classified as those with a
low intangibility content (a fast food restaurant) and a pure service, having v
ery high intangibility content (Education, consultancy, Medical advice). 5. Serv
ice Inputs Services based on this criterion have been classified as primarily eq
uipment based or primarily people based service depending upon which input is pr
imary applied to get service outputs. The equipment based services can be furthe
r classified according to whether they are fully automated, or consist of equipm
ent monitored by unskilled persons (lift operators, delivery van personnel) or n
eed the presence of skilled personnel to man the equipment (quality control, dia
gnostics services). 6. Contact between the Consumer and the Service Provider Ser
vices also differ in the extent of contact that needs to be maintained between t
he User and Provider, the marketing implication in this case being the necessity
of physical presence of the provider as well as need to manage desired quality
of personnel in case of high contact services. On this basis all services can be
classified as high contact or low contact services, depending upon the time a u
ser needs to spend with the service organization/provider in order to utilize/ac
quire the service. Examples of low contact services are telecommunications, dryc
leaning and broadcasting while high contact services are education, hospitality,
theatre performance. 7. Profit and Public vs Private Services Service can also
be classified on the basis of whether they are primarily directed at public at l
arge or primarily at individuals7. The public services include utilities and inf
rastructural services like transport and communication. They also include servic
es provided by the state for public welfare like hospitals, educational and voca
tional institution, parks and museums etc. The private services on the other han
d include the whole gamut of service designed
14
for and consumed by customers as individuals for e.g., restaurants, beauty care
and medical advice. The implications underlined by this classification manifest
themselves in issues regarding planning and design of service for public vs. pri
vate consumption. Involved here are issues of process, volume and distribution o
f services when they are designed as public services. Services have also been cl
assified by Kotler8 as services designed for profit and non profit services, dep
ending upon the marketing objectives to be pursued in the exchange of services.
1.6 THE SERVICES MARKETING MIX
The unique characteristics of services make the traditional 4 P marketing mix se
em inadequate. Careful management of these 4 Ps – Product, Price, Place and Promot
ion though essential, are not sufficient for successful marketing of services. F
urther the strategies for the four Ps require some modification while applying t
o services. Since services are produced and consumed simultaneously, the contact
personnel or the service delivery personnel become extremely important. It is d
uring these encounter of service providers and customers i.e. the process – on whi
ch a lot depends with regards to the final outcome as well as the overall percep
tion of the service by the customer. The actual physical surroundings during the
se encounters have also a substantial bearing on the service delivery. All these
facts lead to the development of an expanded marketing mix with three new P’s add
ed to the traditional mix. These are: People All human actors who play a part in
service delivery and thus influence the buyer’s perceptions; namely, the firm’s per
sonnel, the customer, and other customers in the service environment The environ
ment in which the service is delivered and where the firm and customer interact,
and any tangible components that facilitate performance or communication of the
service.
Physical evidence
Figure 1.2: The Marketing Mix for Services
PRODUCT PRICE PLACE PROMOTION PEOPLE PHYSICAL EVIDENCE PROCESS
Range Quality Brand name Warranty Post Transaction service
Level discounts, Allowances Commissions Payment terms Consumer’s perceived value Q
uality/ Price relationships
Location Accessibility Distribution channels Distribution coverage
Advertising Personal Selling Sales Promotion Publicity Public relation
Training Discretion Commitment Incentives Appearance Inter personal behaviour At
titudes Other customers Degree of involvement Customer contact
Environment Polices Furnishings Procedures Colour, Mechanisation Layout Employee
Noise levels customer Facilitating involvement goods Flow of Tangible clues act
ivities
Source: Booms, B.H. and Bitner, M.J, Marketing Strategies and Organisation Struc
ture for Services Firms, in Donnelly J and George W.R. (eds), Marketing of Servi
ces, AMA, 1981
15
Process
The actual procedures, mechanisms and flow of activities by which the service is
delivered - the service delivery and operating system
Because of the simultaneous production/delivery and consumption of services, the
nature of marketing departments and marketing functions become quite different
as compared to goods. The marketing function all activities which influence the
preferences of the consumers towards the offerings—is mainly handled by marketing
departments in case of goods. Here as far as consumers are concerned, marketing
departments (the organizational entity which is responsible for some, but not ne
cessarily all marketing activities performed by the firm) can plan and implement
most of the marketing activities i.e. the marketing department is able to contr
ol almost the total marketing function. In the service sector the situation is e
ntirely different. A traditional marketing department in services can only contr
ol a minor part of the marketing function. Usually, it doesn’t have the necessary
authority to manage the buyer/seller interaction. The marketing department, ther
efore, cannot plan and implement activities pertaining to interactive marketing
function. Therefore the marketing function, which is a key function in service s
ector require a special treatment. The total marketing in services include three
different types of marketing as shown in Figure 1.3.
Figure 1.3: The Services Marketing Triangle
Company (Management)
Internal Marketing Enabling the Promise
External Marketing Setting the Promise
Providers Interactive Marketing Delivering the Promise
Customers
As can be seen from the triangle, the traditional marketing mix and marketing de
partments basically address to ‘External Marketing’ only. However, all three sides a
re critical to successful services marketing and the triangle can’t be supported i
n the absence of any one of the sides.
1.7 SUMMARY
The term service is rather general in concept and includes a wide variety of ser
vices. Services are essentially performance. The service sector has grown substa
ntially in all the developed economies as well as in India. The reasons for grow
th in service industries include increasing affluence, more leisure time, greate
r life expectancy, increasing complexity of life etc. Marketing of services need
a different treatment because of the unique characteristics of services that di
stinguish them from tangible goods. These characteristics are intangibility, 16
inseparability, heterogeneity, perishability and ownership. The unit discussed t
heir marketing implications and means of overcoming them. A number of classifica
tion schemes for services have been identified and discussed to provide strategi
c insights in managing them. The unit ends with the identification of the servic
e marketing mix which includes product, price, place, promotion, people, process
and physical evidence.
1.8 SELF–ASSESSMENT QUESTIONS
1) What do you understand by the term ‘service? Describe the reasons behind the ra
pid growth of service sector. 2) How do services differ from products? What are
the marketing implications of service characteristics? 3) Explain the different
classification schemes for services giving suitable examples. 4) Briefly discuss
the services marketing mix and the services marketing triangle. 5) Attempt the
following objective type questions: Q.1: In the pre-industrialised era which act
ivity/activities are/were the mainstay of the economy? 1. Primary and Secondary
2. Primary, Secondary and Tertiary 3. Secondary and Tertiary 4. Primary only Q.2
: The first service economy of the world was/were: 1. Those countries which part
icipated in the World War-II 2. USA 3. USA and Japan 4. Russia, Japan and United
States Q.3: Marketing implications of the service characteristic “Intangibility” ar
e all of the following, except: 1. Sampling difficult 2. Difficult to judge qual
ity and value in advance 3. Relatively easy to promote 4. Not possible to patent
or to have copyright Q.4: Marketing implications of the service characteristic “I
nseparability” are all of the following, except: 1. Limited scale of operations 2.
Geographically distributed market 3. Requires presence of performer 4. Direct s
ale Q.5: The marketing solution to the problems posed by service characteristic “I
ntangibility” are all of the following, except: 1. Use of brand name 2. Increase t
he tangibility 3. Increase the production of service 4. Create “world-of-mouth” 17
Q.6: The marketing solution to the problems posed by service characteristic “Insep
arability” are all the following, except: 1. Develop reputation 2. Work faster 3.
Train more service performances 4. Learn to work in large groups Q.7: The market
ing solution to the problems posed by service characteristic “Perishability” are all
of the following, except: 1. Increase tangibility 2. Match demand to supply 3.
Differential pricing to create demand during low demand periods 4. None of the a
bove Q.8: Which one out of the following is not the example of the services orga
nisations where service provided is a tangible action directed at the customer’s b
odies: 1. Hospital 2. Beauty Parlors 3. Information 4. Transportation Q.9: From
the point of view of service delivery and type of relationship, banking services
are examples of: 1. Discrete delivery and membership 2. Non continuous and non-
membership 3. Continuous and non-membership 4. Continuous and membership Q.10: F
rom the point of view of the service delivery and type of relationship fast food
outlets are the examples of: 1. Discrete delivery and membership 2. Non continu
ous and non-membership 3. Continuous and non-membership 4. Continuous and member
ship Q.11: Out of the following, which one is the example of a service delivery
mode in which the service organisation goes to the customer: 1. Theatre 2. Mail
Delivery 3. Education 4. Health Service Answers: 1. 4 7. 1 2. 2 8. 3 3. 3 9. 4 4
. 2 10. 2 5. 3 11.2 6. 1
1.9 FURTHER READINGS
Adrian Palmer, Principles of Services Marketing, (New York: McGraw Hill), 1998.
18 Christian Groonross, Service Management and Marketing, New York. John Wiley,
2000.
Christopher H. Lovelock, Services Marketing: People, Technology, Strategy, (New
Jersey: Pearson), 2001. Donald W. Cowell, The Marketing of Services, (London: He
ineman), 1996. Hans Kaper, Piet Van Helsdinger and Wonter de Vries Jr, Services
Marketing Management (New York: John Wiley), 1999. John E.G. Bateson, Managing S
ervices Marketing, (III ed), (Oriando: Dryden Press), 1995. K. Douglas Hotfman J
ohn E. G. Bateson, Essentials of Services Marketing, (Orlando: Harcourt College
Publishers), 2002. Payne: Essence of Services Marketing, (New Delhi: Prentice Ha
ll of India). Ravi Shanker, “Services Marketing: Text and Readings,” (New Delhi: Exc
el Books, 2002). Teresa A. Swartz and Dawn Iacobncci, Handbook of Services Marke
ting and Management, (New Delhi: Sage),2000. Valarie A. Zeithaml and Mary Jo Bit
ner, Services Marketing, (New Delhi, Tata McGraw-Hill), 2000.
1.10 REFERENCES
1. Bell, Daniel “The Coming of the Pass Industrial society” as qusted in Cowel Donal
d, 1985, The Marketing of Services, Hinemann; London 2. Kotler, Philip, 1989, “Mar
keting Management – Analysis Planning and Control”, Prentice Hall of India Private L
imited: New Delhi. 3. Stanton, W.J., 1981, “Fundamentals of Marketing”, McGraw Hill;
New York. 4. Batesou J, “Do We Need Services Marketing”, Marketing Consumer Service
s, New Insights, Report 75-115, Marketing Science Institute, Boston 1977. 5. Lov
e lock, Christopher H. 1991, “Services Marketing”, Prentice Hall Englewood Cliffs, N
.J. 6. Shostack, G.Lynn, 1977, Breaking Free from Product Marketing, “Journal o f
Marketing”, Vol. 41, No.2. 7. Philip Kotler, 1991. 8. Ibid. (7).
19
UNIT 2 ROLE OF SERVICES IN ECONOMY
Objectives
After going through this unit you should be able to: explain the International s
cenario regarding service sector and trends in service trade, understand how Ind
ia is also becoming a service economy, employment in service sector, and the eme
rging national scenario on services, and identify key service sectors and discus
s their present scenario.
Structure
2.1 2.2 2.3 2.4 2.5 2.6 2.7 Introduction International Scenario Service Sector i
n India Analysis of Specific Service Sectors Summary Self Assessment Questions A
ppendix : Service Tax in India
2.1 INTRODUCTION
The unit beings with an introduction on how globalization has given a boost to t
he services sector. Thereafter, the international scenario showing the contribut
ion of services sector, as against agriculture and industry, to the GDP of vario
us countries across the globe, has been described. This section also covers Serv
ice sector liberalization, role of WTO and the share of services sector in the w
orld trade. The next section of this unit details the Indian scenario and the gr
owth in specific sectors like, tourism, financial services, telecom services, he
alth services and information technology. Services are extensively used by peopl
e day to day in all aspects of life. From education to entertainment, finance to
fast food, travel to telephone, advertisement to amusement parks, market resear
ch to maintenance services, and retailing to recreation…and so on. Today services
are increasingly being used by corporate as well as household sector. The explos
ive growth in this sector started in the 20th century, especially after the end
of World War II. Due to large scale destruction during the war lot of economic a
ctivities, had to be carried out to bring the war torn economies back to strengt
h. This resulted in a number of new projects fuelling the demand for financial s
ervices. Today households as well as firms are demanding more services as well a
s services of increasing quality and sophistication. There are number of reasons
for this growth in service sector which have been discussed in the previous uni
t (Unit 1). In addition to these factors, globalization has resulted in growth o
f service sector as well. Globalization of economies has led to an increased dem
and for communication, travel and information services. This has been fuelled by
the rapid changes brought by new information technology. Globalization has also
made increased and new demands on legal and other professional services. Also,
increased specialization has led to greater reliance on specialist service provi
ders at international level e.g., advertising and market research. 20
It is quite obvious from Figure 2.1 that while the role of agriculture has been
reducing in the economies of industrial societies, that of service sector has be
en increasing at a fast pace. As the economies shift from developing to develope
d stage they will show more and more shift towards services.
Role of Services in Economy
Figure 2.1: The growing importance of service sector in industrial societies
100
% of Output and Employment
Primary Primary
Manufacturing Manufacturing
Services Services 0 1700
1800 YEAR
1900
2000
Source: J. Geruhuny and I. Miles, The New Service Economy, London, 1983.
In US economy, the fastest growing segment is services. The economies of other d
eveloped countries are also dominated by services. This trend of growing dominan
ce of services has been so strong that some people term it as the Second Industr
ial Revolution. At times it is argued that growth in services is at the expense
of manufacturing sector of the economy. However, it is not true. In fact service
s and manufacturing are positively linked to each other. Micheal Porter in his b
ook, ‘The Competitive Advantage of Nations’ identified three distinct links between
manufacturing and services as explained below: i) Buyer/supplier relationship: M
any service industries have come into existence through the de-integration of se
rvice activities by manufacturing firms. An automobile manufacturer may outsourc
e number of service activities like transportation, warehousing, marketing resea
rch, legal services, education and training of its employees, information proces
sing etc. Service industries depend a lot on manufacturing firms for a significa
nt share of their sales. ii) Services tied to the sale of manufactured goods: Sa
le of a wide variety of manufactured goods creates demand for associated service
s. The sale of consumer durables require ongoing need for servicing, sale of com
puters leads to demand for training services and after sales services, exports o
f any manufactured goods would require sale of insurance, financial services and
transportation services. 21
iii) Manufactured goods tied to the sale of services: This link is reverse of th
e previous one. The sale of certain services leads to demand for manufactured go
ods, for example sale of engineering or management consulting from a nation can
lead to demand for equipment and other associated manufactured goods from that n
ation. Also provision of a service requires a lot of manufactured goods.
2.2 INTERNATIONAL SCENARIO
The tremendous growth of service sector has resulted in its increased importance
to the world economies. As early as in 1948, US service sector contributed 54%
of GDP, and with the increasing trend in the use of services it now generates 80
% of the GDP.
Table 2.1: Sectoral Distribution of GDP (in %), 2002 (Estimates)
GDP Country Denmark France Germany India South Korea Russia Nigeria Switzerland
U.S.A Taiwan Services 71 71 68 50 54 59.6 35 64 80 67 Industry 26 26 31 25 41.6
34.6 20 34 18 31 Agriculture 3 3 1 25 4.4 5.8 45 2 12 2
Source: The World Fact Book 2003, www.cia.gov
Service sector dominates the economies of other developed nations as well. As co
untries develop, the role of agriculture in the economy declines and that of ser
vices rises. Highly developed countries all have more than 50% of GDP and employ
ment derived from services. A particular characteristic of the development of se
rvice employment over time is that it is less sensitive to business cycle fluctu
ations than other types of employment. The service sector comprises 80% of US em
ployment, up from 55% in 1950. Most of the absolute growth in number of jobs in
US in recent years is in service sector. According to University of Michigan stu
dy, a 1/3rd cut in global barriers to trade in services would increase US annual
income by $150 billion ($ 2,100 per American family of four). Total elimination
of barriers in services would raise US annual income gain by over $ 450 billion
($ 6,380 per family of four). Apart from US, leaders of major global service in
dustry associations representing the EU, Australia, Hong Kong, and Japan called
for urgent progress in the multilateral liberalization of trade in services. Tra
de in services also benefits developing countries greatly. The infrastructure of
modern and growing economies and the gains made from liberalizing trade in serv
ices and agriculture are enhanced with open service sectors. The benefits of a m
odern services sector reverberate across an entire economy, touching
22
every product, idea and consumer. Modernizing services can help developing count
ries jump start the economic growth necessary for reducing poverty. The service
sector is the fastest growing part of the economy in many developing countries,
with the World Bank reporting that services account for 54 per cent of their GDP
. In the OECD countries, services account for 69% of economic output, while agri
culture accounts for 2.1%. Even in low income countries, services account for an
average of nearly 50% of GDP, with agriculture representing 23%. More than half
of all global flows of foreign direct investment are now in the services sector
. This investment is normally in the form of investment in local companies, ofte
n with local partners. Access to modern services (financial, professional and in
frastructure services, for example) is essential to growth and development in an
y country. WTO commitments are vital to attracting this investment. While the va
lue of trade in services is well below that of merchandise trade, services accou
nt for a larger portion of virtually all the world’s economies; liberalization of
services trade is therefore clearly in the interest of developing countries. (So
urce: http://www.esf.be/) Service Sector — Role of WTO WTO’s 134 trade ministers met
in Seattle Summit (1999). The broad objective of the summit was to expand priva
te markets by removing barriers to the global movement of goods, services, and c
apital, with a major focus on public services. The WTO hopes to open the public
funding streams which pay for public services for commercial exploitation. US an
d European governments use the WTO to promote the commercial interests of their
transnational corporations, which they see as the source of economic prosperity.
As profits in manufacturing industry are falling, the corporate lobby is target
ing the proportion of gross domestic product that governments spend on public se
rvices. In many European countries, governments are spending more than 15 per ce
nt of GDP, in health and education alone. The WTO is devising the international
laws and regulatory frameworks which will enable to open up public funding pools
and public services to the market. For example, The General Agreement on Trade
in Services (GATS) opens up service provision, like education and health care, t
o direct foreign competition and ownership. In addition to GATS, the WTO has two
other devices crucial to opening up public services and their funding pools. 1.
Procurement Reform WTO devised it to supply the legal and regulatory framework
within which public bodies contract for goods, services, and investment funds. P
rocurement reform is a primary mechanism for opening up public services to inter
national competition. European Commission proposals focus to unlock ‘new potential
markets’ by extending private firms’ involvement with public services and by creati
ng contracting rules to ensure ‘acceptable returns for investors’. 2. Disputes Settl
ement Procedure The WTO disputes settlement procedure allows one member state to
challenge the domestic laws of another and provides a mechanism for changing th
e ways in which governments regulate and subsidize public services. The US is co
mmitted to making mandatory a disputes system which outlaws subsidies and regula
tions which are not market-friendly. The next unit of this block discusses the i
ssues related to international trade in services, the WTO, and India in detail.
23
Leading Exporters and Importers in commercial services Besides the US most of th
e West European countries as well as Mediterranean countries are net exporters o
f services. Germany, Japan,, most of the South East Asian countries, and Canada
are net importers. The Third World countries are net service importers too. As p
er 1999 figure India ranked 25th in exports of commercial services valued at U.S
.$ 13.9 billion and ranked 21st in imports, valued at U.S.$ 17.2 billion. Table
2.2 and Table 2.3 give details of international trade in services. You may visit
the WTO website to find out further details on the regional shares in world tra
de in services.
Table 2.2: World exports of commercial services by category, 2002
(Billion dollars and percentage) Value 2002 All commercial services Transportati
on Travel Other commercial services Source: WTO 1570 350 480 740 Share 1995 100.
0 25.2 33.7 41.1 2002 100.0 22.3 30.6 47.0 Annual percentage change 1995-00 4 3
3 6 2000 6 7 4 7 2001 0 -1 -2 2 2002 6 4 4 9
Table 2.3: Leading exporters and importers of other commercial services, 2002
($ bn and percentage) Share in world exports/imports 1995 2002
Value 2002 Exporters United States United Kingdom Germany Japan France Netherlan
ds Ireland Italy Hong Kong, China Belgium Spain Canada India Austria Singapore A
bove 15 Importers United States 86.2 65.3 141.2 84.1 54.7 37.4 34.3 28.7 23.4 23
.4 21.1 19.8 19.0 18.7 18.1 17.8 17.2 560.0
Annual percentage change 1995-00 2000 2001 2002
16.0 8.2 7.7 7.8 7.2 4.1 ... 4.4 2.5 ... 1.7 2.5 0.5 3.0 3.5 ...
19.1 11.4 7.4 5.1 4.6 3.9 3.2 3.2 2.9 2.7 2.6 2.5 2.4 2.4 2.3 75.7
11 13 3 1 -3 1 ... -2 10 ... 12 11 41 3 -1 ...
5 5 -3 16 1 -3 ... -5 17 ... 8 9 38 8 14 ...
4 -1 4 -8 2 21 ... 20 0 ... 15 -2 28 6 2 ...
6 15 20 3 9 11 23 2 5 ... 15 -5 12 0 6 ...
8.5 10.6
12.5 9.5
13 5
12 -2
8 8
11 -1
24
Germany
Japan United Kingdom Ireland Italy France Netherlands Spain Austria Canada China
Belgium Korea, Republic of Sweden Above 15 Source: WTO
48.4 34.9 34.8 30.9 30.6 30.0 21.7 21.4 21.0 17.1 17.0 15.4 12.4 485.0
10.6 4.4 ... 5.7 5.9 4.2 2.4 2.9 3.2 2.5 ... 2.0 1.5 ...
7.0 5.1 5.1 4.5 4.4 4.3 3.2 3.1 3.1 2.5 2.5 2.2 1.8 70.7
0 10 ... 0 -2 5 10 6 8 2 ... 10 11 ...
-4 8 ... 1 -6 7 2 5 6 1 ... 26 7 ...
-1 -4 ... 14 10 10 10 5 2 12 ... -6 6 ...
1 8 14 5 16 9 14 12 -4 24 ... 9 0 ...
The composition of service exports is very different from country to country. Mi
chael Porter, in his work “The Competitive Advantages of Nations” has suggested that
nations exhibit strikingly different patterns of national competitive advantage
s in services as they do in manufactured goods. Table 2.4 shows pattern of inter
national leadership in different service industries.
Table 2.4: Estimated leading positions of National Competitive Advantage in Inte
rnational Service Industries
Country USA
Leading Position in Industry Fast Food, Education and Training, Health Care Serv
ices and Hospital Management, Hotels, Car Rental, Accounting, Advertising, Comme
rcial Banking, Money Management, Information, Trading, Entertainment Specialty S
tores, Auctioneering, Advertising, Trading, Money Management Trading, Commercial
Banking, Money Management Design Services Money Management
U.K. Switzerland Italy Germany
Source: Adapted from ‘The Competitive Advantage of Nations’, Michael Porter, 1990, p
225.
For a greater number of developed countries services industries have grown to a
level of definite competitiveness in international trade whereas their competiti
ve advantage in merchandise has started to recede. However, for most developing
countries service industries are at various stages of development ranging from l
ow to intermediate. For most of these countries service sectors are recognized a
s strategic to their development and consequently, are subjected to intensive re
gulations. Ranging from architecture to telecommunications, financial to health
services and beyond, services today are the largest and most dynamic component o
f both developed and developing country economies. 25
2.3 SERVICE SECTOR IN INDIA
The service sector is also assuming increasing importance in Indian economy. In
line with the global trend, the services sector in India is growing rapidly. In
2002, India’s service exports are recorded $ 20.70 bn, as against $ 4.60 bn in 199
0, a growth of 350%.
Table 2.5: World Service Exports and India’s Share
Year
Total world India’s service India’s share in service exports exports in $ bn world s
ervices $ bn exports 807.01 844.83 960.79 943.40 1052.63 1192.99 1250.00 1313.43
1321.43 1333.33 1435.00 1460.00 1540.00 4.60 4.90 4.90 5.00 6.00 6.80 7.00 8.80
11.10 13.20 17.60 20.40 20.70 0.57 0.58 0.51 0.53 0.57 0.57 0.56 0.67 0.84 0.99
1.20 1.40 1.30
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: WTO
The share of services in the country’s GDP was 56.1% in 2002-03 (RE), up from the
51.5% recorded in 1998-99 and 36% in 1980-81. In contrast, the industrial sector’s
share in GDP has declined from 25.38 per cent to 21.8 per cent in 1990-91 and 2
002-03 respectively. The agricultural sector’s share has fallen from 30.93 per cen
t to 22.1 per cent in the respective years. The growth in the services sector ha
s averaged 8.5 per cent during the period 1994-2000. Dr. Manmohan Singh, the the
n Union Finance Minister, in his budget speech for the year 1994-95 introduced t
he new concept of Service Tax. The number of services being taxed has increased
from 3 in 1994-95 to 51 in 2002-03. The corresponding increase in revenues from
services tax has been from Rs. 410 crores to 4,125 crores. The details of servic
e tax in India have been given in Appendix at the end of this unit. The rise in
the service sector’s share in GDP marks a structural shift in the Indian economy a
nd takes it closer to the fundamentals of a developed economy. If the service se
ctor bypasses the industrial sector, economic growth can be distorted. Service s
ector growth must be supported by proportionate growth of the industrial sector;
otherwise the service sector grown will not be sustainable. It is true that, in
India, the service sector’s contribution in GDP has sharply risen and that of ind
ustry has fallen. But, it is equally true that the industrial sector too has gro
wn, and grown quite impressively through the 1990s (except in 1998-99). Three ti
mes between 1993-94 and 1998-99, industry surpassed the 26
growth rate of GDP. Thus, the service sector has grown at a higher rate than ind
ustry which too has grown more or less in tandem. The rise of the service sector
therefore does not distort the economy. The service sector is further subdivide
d into several groupings. Figure 2.2 gives the major groupings and their relativ
e share in Indian economy.
Figure 2.2: Service Share by Sub-sectors % of GDP, 2002-03 (Revised Estimates)
Service Sector (56.1%)
Trade, Hotels, Restaurants, Transport and Communication 24.3%
Financing, Insurance Real Estate and Business Services 12.7%
Community, Social and Personal Services 13.8%
Construction 5.3%
Source: RBI Annual Report 2002-03
Employment in Indian Service Sector Exhibit 2.1 Services Sector : The growth Eng
ine
Indians eat out more than ever. They take their clothes to dry cleaners, their c
ars to mechanics, their dogs to veterinarians. They go to beauty salons for hair
cuts. For home they hire maids, gardeners, plumbers, electricians, interior dec
orators and architects. Outside the home, school teachers, police officers and p
ublic servants contribute to their daily lives. Lawyers, accountants, stock brok
ers and insurance agents help keep finances and personal affairs in order. To ma
intain their health and well being they turn to doctors, nurses and dentists. Al
l this – and more – is India’s service economy. One in every two Indians earns his liv
elihood by providing services. An INDIA TODAY – ORG MARG poll shows that a majorit
y of middle class families want their children to work in the services sector.
Source: Rohit Saran, Growth Engine, India Today, February 19, 2001
The importance of service sector in Indian economy can be further gauged by the
fact that the majority of new employment in the organized sector has come in the
service sector only. According to economic survey, from 1993-94 to 1999-2000, t
he financial, insurance, real estate and business services sector, employment in
creased to over. 46 lakh from 33 lakhs in this period. In the hotel and restaura
nt sector employment increased to 3.75 crore from 2.68 crore and in the transpor
t, storage and communication services sector, it increased to 1.36 crore from 98
lakh. India is a signatory to the General Agreement on Trade in Services, and i
s actively engaged in seeking full opportunities for free movement of “natural per
sons” on a temporary basis as non-residents across borders to enable it to supply
services globally. India should explore all possibilities to export services whi
ch might solve its economic problems, including unemployment and poverty.
27
Table 2.6: Employment in organized sector by industry division
(Figure in ‘000) For the year ending March 31, Total Agriculture etc. Mining and q
uarrying Manufacturing Electricity, gas and water etc Construction Services 2001
27790 1433 954 6443 987 1138 16835 1991 26734 1447 1099 6333 945 1222 15689 198
1 22879 1321 948 6047 718 1161 12684 1971 17473 1074 586 4761 481 1019 9552
Source: Statistical Outline of India, 2003-04, Tata Services Limited p.167
Table 2.6 gives statistics of employment in organized sector in India. The highe
r growth of employment in service sector is partly because with the growth of ec
onomy and technological developments, a smaller proportion of work force is need
ed by the manufacturing sector. Total employment in the organized sector in the
last 30 years has increased by around 59%, the increase in employment in service
sector in the corresponding period has been around 76%. With the changing patte
rn of Indian economy, a shift in employment pattern is bound to happen.
2.4 ANALYSIS OF SPECIFIC SERVICE SECTORS
The fact that the service sector now accounts for more than half the GDP probabl
y marks a watershed in the evolution of the Indian economy. India’s high capabilit
ies in Information Technology, and its booming IT software exports which now acc
ount for 2% of the GDP, are well known. India’s health services, manned by highly
qualified and experienced personnel, super-specialty hospitals specializing in b
oth modern and traditional Indian medical systems like Ayurveda, Unani, and natu
re- cure supported by state-of-the-art equipment, are attracting patients from a
cross the world, and constitute a significant segment of India’s services sector.
Education is another field which is not only a huge segment of the services sect
or within the country, but also a foreign exchange earner by way of NRIs and for
eign students enrolled in major medical, technological and other institutions in
India, and also export of manpower even to the western world. The entertainment
industry, particularly films and TV, which happen to be among the fastest growi
ng in the world. Indian films are popular across West Asia, Afghanistan, Central
Asia, Russia and in South East Asia and are now penetrating the Western world.
India, the second largest scientific and technical manpower in the world, has be
en providing varied consultancy and other services to the world. There is immens
e scope for India to undertake project and management consultancy, repair and ma
intenance work pre-publishing services, and R&D in various disciplines, and inte
rested parties from across the world are welcome to tap these and other capabili
ties available in abundance in the country. The tourism industry in the country
is well equipped, and also fast growing to offer
28
tourists with diverse interests and means, all the services needed to make their
visit memorable. India, as a subcontinent with varied geographical, climatic, e
thnic, cultural, religious and social strands intertwined, India is a one-stop d
estination for any tourist wanting a kaleidoscopic experience of life in its ent
irety. We will now discuss some of the prominent service sectors in brief. The l
ast two blocks of this course are devoted to sectoral applications of services m
arketing concepts discussed in the first three blocks. Hospitality and Tourism T
ourism has become the world’s largest employer and this sector is one of the world’s
largest economic forces with more than 200 trillion dollar yearly. This sector
is today second largest foreign exchange earner for India. A record 2.8 million
tourists made their way from various parts of the world to India in calendar 200
3, registering a rise of 15.3 percent over 2002, while as many as 4.5 million In
dians traveled abroad accounting for a rough 30 percent growth. The number of go
vernment approved hotels increased from 348 in 1980 to 1,490 in 2002 bringing in
a corresponding increase in number of hotel rooms available from 21,581 to 80,9
36. Table 2.7 gives the details of foreign tourist arrival in India and earnings
from tourism.
Table 2.7: Foreign Tourist Arrivals and Earnings from Tourism
Year 1980 1990 1996 2001
Foreign Tourist Arrivals (Million) 0.80 1.71 2.29 2.54
Earnings (US$ Billion) 1.40 1.51 2.96 3.04
Source: Statistical outline of India 2003-2004 , TSL, p.98
Marketing issues specific to Hospitability and Tourism services and detailed dat
a regarding this sector will be covered in Unit 12. Financial Services The role
of financial services in stimulating and sustaining economic growth is well know
n. A distinct feature of Indian Financial System is the dominance of public sect
or institutions in practically all areas like banking, term lending and insuranc
e. At the end of March 2002, 97 commercial banks, 196 Regional rural banks, 52 s
cheduled urban co-operative banks and 16 scheduled state co-operative banks were
operating. One of the most important segments of the financial system is commer
cial banking. The saving deposits with the commercial banks have shown a steady
rise from Rs. 101,861 crores in 1995-96 to Rs. 279,107 crores in 2001-02. With t
he opening of the banking sector to the foreign competition, and liberalized reg
ulatory norms followed by RBI, the private banks have been using technological a
dvances in every sphere of banking to up the performance levels. With an emphasi
s on retail finance and growing use of new technologies, Indian banks have repos
itioned themselves as universal finance solution provider with capabilities rang
ing from investment banking to project financing, and export financing on the co
rporate side, and from providing loans to selling
29
Table 2.8: Saving Deposits with Commercial Banks (Rs. Crores)
Year 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Source: India infoline.com
Indian Banks 99347 112570 136770 160889 187173 217452 272119
Foreign Banks 2514 2875 3194 3836 4727 5530 6988
Total 101861 115445 139964 164725 191900 222982 279107
insurance and mutual funds on the retail side. More details about the financial
services sector will be taken up in Unit 11. Telecommunication Services Telecomm
unication sector has witnessed a total transformation throughout the world in th
e last two decades due to rapid technological advances. Today, an advanced telec
om system is a necessity for a nation’s manufacturing as well as service industrie
s. Consider for example, the growing use of telecom in services like banking, re
tailing, trading, health, education and transportation. At the beginning of the
seventh five year plan in 1985, the then government decided to focus on improvin
g the telecommunication sector and constituted the Telecommunication Board and t
he Department of Telecommunication (DOT) within the Ministry of Commerce to over
see operations, maintenance and development of telecom services. The emphasis on
this sector increased further with liberalization initiative taken by governmen
t in the current decade. The plan outlay for telecom sector, which was 2.5 per c
ent of national plan outlay during the sixth plan, was increased substantially t
o 11.9 per cent in the eighth plan amounting to a whopping Rs. 406 billion. The
outlays on communication (including IT) during tenth plan was Rs. 990 billion.
Figure 2.3: Investment in Telecom in Plan Periods
Telecom plan outlay 450 400 350 300 250 200 150 100 50 0
% of National Plan Outlay 14 12 10 8 6 4 2 0
Rs. Billion
30
Source: The India Infrastructure Report, Vol. III, 1996, p. 115
Ip la n 51 II -5 P 6 la n 56 III -6 An P n u lan 1 al 61 P -6 la 6 n 66 IV -6 P
9 la n 69 V -7 P An 4 n u lan 74 al -7 P la 8 n 78 VI -8 P 0 la VI n 8 I P 0-8 A
n 5 n u lan 85 al P -9 la 0 VI n 9 II 09 Pl an 2 92 -9 7
The number of fixed lines has increased from 5.8 million in 1991-92 to 42.58 mil
lion (Fixed including WLL-F) in 2003-04. Mobile telephony has brought about a re
volution in Indian telecom sector. During the year 2003-04 it witnessed a growth
of 160% over 2002-03. The growth of fixed and mobile subscribers during 2003-20
04 is shown below in Table 2.9.
Table 2.9: Fixed and Mobile Subscribers (in Million) in India
Service
March 2003
March 2004
% growth during the year 3 160
Fixed including WLL(F) Mobile including Cellular and WLL(M) Gross Total
Source: TRAI
41.48 13.00
42.58 33.58
54.48
76.16
40
You will study the details of telecommunication sector and the marketing issues
related to it in Unit 17 of this course. Health Services According to The econom
ic Times healthcare 2001-02 report, India’s healthcare industry grew by 13 per cen
t per annum over the last decade and is currently growing at 17 percent annually
. Presently the industry size is $18 billion. According to the report, India can
reach a size of $ 40 billion by 2005-06. The growth is being propelled by an in
creasingly affluent and more consumer oriented middle class population of 100 mi
llion, who are seeking and willing to pay for a higher standard of healthcare. D
uring 1990 to 1996, the middle and higher income group has increased from 14% to
20%.
Table 2.10: Health Services in India during last four decades
(Figure in ‘000) 1996/97 Hospitals Hospital Beds Doctors Primary Health Nurses 15.
1 870 484 22.4 566 1992 13.7 835 411 20.7 385 1991 11.2 810 394 20.4 340 1981 6.
8 569 269 5.7 154 1971 3.9 349 151 5.1 81 1961 3.1 230 84 2.6 36
Source: Statistical Outline of India 2000-2001, TSL, P. 212
However, a number of changes in the last few years like more consumer awareness,
increasing purchasing powers and especially setting up of corporate hospitals w
ith huge capital investment has led to more competition and marketing efforts. W
ith the growing population and other factors cited above, the health services ar
e going to increase at a fast pace with more participation coming from the priva
te sector. In Unit 13 we will be taking up details related to the health service
s sector. 31
IT and BPO The Indian IT sector has proved to be the country’s fastest growing seg
ment, even in troubled times in the globally challenging economic environment of
2001-03. Outsourcing of IT requirements by leading global companies to Indian m
ajors picked up pace during 2002-03, in line with worldwide trends. The software
sector logged in a revenue of Rs.47,500 crore during 2002-03, a jump of 30% fro
m the previous year. Similarly, offshore project revenues grew by blazing 49%. I
ndian companies entered in to high value segments such as system integration, pa
ckage implementation, IT outsourcing, and IT consulting. The revenue contributio
ns by the US market continued to rise on account of the large number of ITES / B
PO projects getting outsourced to India. The Indian ITES industry is estimated t
o grow to Rs. 810 bn in 2008. In India, ITES-BPO segment registered a growth of
59% to reach Rs. 113 bn (US $2.3 billion). The ITES contributed 25% to the total
IT Software and Service exports from India during FY03. Captive ITES-BPO player
s have almost doubled their share in Indian software exports, growing by a pheno
menal 90% in last financial year. ITES-BPO segment is projected to register a gr
owth of 54% to clock revenues of US $ 3.6 billion during FY 2003-04. India conti
nues to offer great value proposition for the ITES companies. “Outsourcing to Indi
a has helped companies achieve 40-50 per cent cost savings. Companies are also a
ble to generate higher free cash flows due to reduced investments in physical in
frastructure, telecom and equipment.” (Source: India Infoline)
2.5 SUMMARY
This unit explained the role of services in national economies and their signifi
cance in international trade. Services are used by individual as well as corpora
tions. All the developed economies have more than sixty percent of their GDP con
tributions from the service sector. As the economies develop, the role of agricu
lture declines and that of service rises. The world exports of commercial servic
es was valued at U.S. $ 1,570 billion in 2003 with U.S.A, U.K. Germany, Japan, F
rance being the leading exporters while U.S.A, Germany, Japan, U.K. and Ireland
were the leading importers. India’s service export stood at U.S. $ 20.7 billion in
2002. The share of services in India’s GDP is more than half and the growth in em
ployment in organized sector has been greater in service sector. The unit also g
ave you brief details of hospitality and tourism, financial services, telecommun
ication services, health services and IT sector.
2.6 SELF ASSESSMENT QUESTIONS
1. Discuss the international scenario of role played by services sector in natio
nal economies. Do you feel India is following the trend displayed by developed e
conomies in this regard? 2. Explain the trends in international trade in service
s and identify the key exporting and importing nations? 3. Select any three majo
r service industries in India and explain the trends of growth in them.
32
2.7 APPENDIX
SERVICE TAX IN INDIA* 1. INTRODUCTION OF SERVICE TAX IN INDIA Dr. Manmohan Singh
, the then Union Finance Minister, in his Budget speech for the year 1994-95 int
roduced the new concept of Service Tax and stated that ‘’ There is no sound reason f
or exempting services from taxation, therefore, I propose to make a modest effor
t in this direction by imposing a tax on services of telephones, non-life insura
nce and stock brokers.’’ Service Tax had been levied on the recommendations made in
early 1990’s by the Tax Reforms Committee headed by Dr. Raja Chelliah. The Committ
ee also recommended charging of tax on services such as advertising, insurance,
share broking and telecom etc. to begin with on the pattern of advanced economie
s. The basic objective of Service Tax is broadening the tax base, augmentation o
f revenue and larger participation of citizens in the economic development of th
e nation. Bringing services under taxation is not simple as the services are int
angible and are provided by large groups of organized as well as unorganized ser
vice providers including retailers who are scattered across the country. Further
, there are several services, which are of intermediate nature. The low level of
education of service providers also poses difficulties to both-tax administrati
on and assessees. As stated earlier, service tax was introduced in India for the
first time in 1994. The Finance Acts of 1996, 1997, 1998, 2001, 2002 and 2003 a
dded more services to tax net by way of amendments to Finance Act, 1994. As of 2
003, total number of services on which Service Tax is levied has gone upto 58 de
spite withdrawal of certain Services from the tax net or grant of exemptions (Go
ods Transport Operators, Outdoor Caterers, Pandal and Shamiana Contractors, and
Mechanized Slaughter Houses). 2. SERVICES COVERED UNDER SERVICE TAX The provisio
ns relating to Service Tax were brought into force with effect from 1st July 199
4. It extends to whole of India except the state of Jammu & Kashmir. The service
s, brought under the tax net in the year 1994-95 ,are as below: 1. Telephone 2.
Stockbroker 3. General Insurance The Finance Act (2) 1996 enlarged the scope of
levy of Service Tax covering three more services, viz., 4. Advertising agencies
5. Courier agencies 6. Radio pager services. But tax on these services was made
applicable from 1st November, 1996. The Finance Acts of 1997 and 1998 further ex
tended the scope of service tax to cover a larger number of services rendered by
the following service providers, from the dates indicated against each of them.
7. Consulting engineers (7th July, 1997)
* www.servicetax.gov.in (part of CBEC website)
33
8. 9. 10. 11. 12.
Custom house agents Steamer agents Clearing and forwarding agents Air travel age
nts — Tour operators
(15th June, 1997) (15th June, 1997) (16th July, 1997) (1st July, 1997) (exempted
upto 31.3.2000 Notification No.52/98, 8th July, 1998, reintroduced w.e.f. 1.4.2
000) (exempted upto 31.3.2000 Vide Notification No.3/99 Dt. 28.2.99, reintroduce
d w.e.f. 1.4.2000) (1st July, 1997) (1st July, 1997)
13.
Rent-a-Cab Operators
14. 15.
Manpower recruitment Agency Mandap Keepers
The services provided by goods transport operators, outdoor caterers and pandal
shamiana contractors were brought under the tax net in the budget 1997-98, but a
bolished vide Notification No.49/98, 2nd June,1998. The Service Tax is leviable
on the ‘gross amount’ charged by the service provider from the client, from the date
s as notified and indicated above. Government of India has notified imposition o
f service Tax on twelve new services in 1998-99 union Budget. These services lis
ted below were notified on 7th October, 1998 and were subjected to levy of Servi
ce Tax w.e.f. 16th October, 1998. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. Ar
chitects Interior Decorators Management Consultants Practicing Chartered Account
ants Practicing Company Secretaries Practicing Cost Accountants Real Estates Age
nts/Consultants Credit Rating Agencies Private Security Agencies Market Research
Agencies Underwriters Agencies
In case of mechanized slaughter houses, since exempted, vide Notification No.58/
98 dtd. 07.10.1998, the rate of Service Tax was used to be a specific rate based
on per animal slaughtered. In the Finance Act’2001, the levy of service tax has b
een extended to 14 more services, which are listed below. This levy is effective
from 16.07.2001. 27. 28. 29. 30. 31. 32. 33. 34 Scientific and technical consul
tancy services Photography Convention Telegraph Telex Facsimile (fax) Online inf
ormation and database access or retrieval
34. 35. 36. 37. 38. 39. 40. 41.
Video-tape production Sound recording Broadcasting Insurance auxiliary activity
Banking and other financial services Port Authorised Service Stations Leased cir
cuits Services
In the Budget 2002-2003, 10 more services have been added to the tax net which a
re listed below. This levy is effective from 16.08.2002. 42. 43. 44. 45. 46. 47.
48. 49. 50. 51. Auxiliary services to life insurance Cargo handling Storage and
warehousing services Event Management Cable operators Beauty parlours Health an
d fitness centres Fashion designer Rail travel agents. Dry cleaning services.
and these services have been notified on 1-8-2002 and were subject to levy of Se
rvice Tax w.e.f. 16-8-2002. In the Budget 2003-04 seven more services along with
extension to three existing services have been added to the tax net which are l
isted below. The levy of service tax on these services is effective from 1st Jul
y, 2003. 1. Commercial vocational institute, coaching centres and private tutori
als 2. Technical testing and analysis (excluding health and diagnostic testing)
technical inspection and certification service. 3. Maintenance and repair servic
es 4. Commission and Installation Services 5. Business auxiliary services, namel
y business promotion and Support services (excluding on information technology s
ervices) 6. Internet café 7. Franchise Services The extension to following three s
ervice was given in the Budget 2003-04 as aforesaid. 1. Foreign Exchange broking
services 2. Maxicab repair services 3. Minor ports (other than major ports) The
rate of Service Tax has also been increased from 5% to 8% on all the taxable se
rvices w.e.f. 14.5.2003. Service Tax is administered by the Central Excise Commi
ssionerates working under the Central Board of Excise and Customs, Department of
Revenue,
35
Ministry of Finance, Government of India. The unique feature of Service Tax is r
eliance on collection of tax, primarily through voluntary compliance. 3. SERVICE
TAX REVENUE The Service Tax collections have shown a steady rise since its ince
ption in 1994. They have grown almost to 10 folds since 1994-95 i.e. Rs. 410 cro
res (1994-95) to Rs. 4125 crores (2002-03). The revenue and assessee statistics
from the year 1994-95 to 2002-03 are shown in Table 1.
Table 1
Financial year 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2
002-03 Revenue Rs. Crores 410 846 1022 1515 1787 2072 2540 3305 4125 % Growth Ba
se year 101 24 49 18 16 23 26 25 No. of Services taxed 3 3 6 18 30 27 26 41 51 N
o. of assessees 3,943 4,866 13,982 45,991 1,07,479 1,15,495 1,22,326 1,87,577 2,
32,048 % Growth Base year 19 187 228 133 7.45 5.91 53 24
Source: www.servicetax.gov.in (Part of CBEC website).
36
UNIT 3 INTERNATIONAL TRADE IN SERVICES, THE WTO, AND INDIA
Objectives
After studying this unit you should be able: to outline recent trends in service
sector trade and investment flows with particular focus on India’s prospects in t
his sector, to provide an overview of the GATS and recent developments in the GA
TS negotiations, and to discusses India’s broad sectoral as well as cross-sectoral
negotiating strategy in the GATS negotiations and associated domestic reform is
sues that need to be addressed if India is to realize its potential in services.
Structure
3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 Introduction Global Trends in Services India’s
Opportunities and Constraints in the Service Sector GATS: An Overview Negotiati
ng Strategy and Domestic Reforms Summary Self Assessment Questions Further Readi
ngs References
3.1 INTRODUCTION
The service sector today encompasses a wide range of areas and activities. It ex
tends beyond the traditional areas of finance, insurance, transport, communicati
on, and tourism to new and dynamic areas such as software and information techno
logy services, environmental, and consultancy services. Over the past two decade
s, the service sector has expanded rapidly and has come to play an increasingly
important role in national economies and in the international economy. Given the
growing role of services in the Indian economy and India’s emergence as a global
player in services like software and health, globalization of services presents
new opportunities and challenges for India. The WTO negotiations on services und
er the General Agreement on Trade in Services or GATS is thus of great significa
nce as it provides India with a multilateral negotiating forum to address its tr
ade and investment interests and concerns in the service sector.
3.2 GLOBAL TRENDS IN SERVICES
Around the world, there has been a structural shift away from primary activities
and manufacturing towards services. Services today account for over 70 per cent
of production and employment in many advanced countries with producer services
such as transport, communication, and distribution alone accounting for 20 per c
ent of GDP. In developing countries, services have similarly risen in importance
, accounting for 40 per cent or more of total output in some countries and also
constituting a significant share of total employment. 37
The growth in service sector output and employment has also been accompanied by
increased internationalization of service sector transactions, driven by rapid a
dvances in information and communication technology, the growing presence of mul
tinational corporations and outsourcing of activities, and deregulation of servi
ces. According to the WTO, the value of commercial services exports grew sevenfo
ld between 1980 and 1999, from $ 358 billion in 1980 to US $ 933 billion in 1990
to $1.4 trillion in 2000 while trade in merchandise goods recorded a fivefold i
ncrease over this same period. Between 1990-2000, world exports of commercial se
rvices kept pace with the growth in merchandise exports, at an average rate of 6
percent per year.1,2 FDI in services has also expanded considerably in the past
decade. By the end of the 1990s, FDI in services constituted about 40 per cent
of the global stock of FDI. It consistently exceeded FDI in manufacturing during
the 1990s. Overall, services trade represents about 20 per cent of global trade
flows.3 Even this latter estimate is likely to underestimate the true value of
services trade as it excludes the value of cross-border intrafirm services trans
actions, which have been rising rapidly in recent years. Activity 1 Select any o
ne service out of Financial Services, Hospitality Services, Telecommunication Se
rvices or Healthcare Services and find out the trends of growth in that sector.
(You may refer to business magazines, Internet or any other Source). ...........
................................................................................
................................ ...............................................
............................................................................ ...
................................................................................
........................................ .......................................
................................................................................
....
Characteristics of Services Trade4
Services have traditionally been viewed as being nontradable, intangible, and no
nstorable. However, recent trends clearly indicate that services are tradable in
various forms and that services trade is concentrated among certain countries,
sectors, and activities. The following discussion highlights some of the main ch
aracteristics of services trade in terms of its modes of delivery, geographic, a
nd sectoral profile. A) Four Modes of Service Delivery Services can be traded th
rough various forms and modes of delivery, including transborder data and inform
ation flows and movement of capital, labour, consumers, and goods embodying serv
ices. The GATS conceives of services as being traded through four modes of suppl
y, namely: cross border supply (mode 1) consumption abroad; (mode 2) commercial
presence; (mode 3) and; movement of natural persons (mode 4). i) Cross-border Tr
ade: Mode 1 Cross-border trade is similar to the traditional notion of goods tra
de. In this mode, the service is embodied in a transportable media such as paper
documents, computer diskettes, or digital form, and is transmitted via telecom
links. In the balance of payments (BoP), mode 1 is represented mainly by service
s minus travel and government services, although this is not fully accurate due
to overlap with other modes of services trade. Mode 1 based services trade has g
rown rapidly in recent years, in large part due to advancements in information t
echnology and increased scope for transmission of information and transborder da
ta flows. It grew faster than world GDP between 1985 and 1997. By 1997, cross bo
rder trade in services accounted for 3.1 per cent of world GDP and 13 percent of
total world exports of goods and
38
services. In value terms, it increased threefold during this period, from US $ 2
70 billion in 1985 to $890 billion in 1997. Even for countries with modest servi
ce exports, if one looks at indicators of relative specialization (ratio of mode
1 based services trade to total exports of goods and services), crossborder ser
vices trade features importantly. Given the growing potential for services trade
via means such as e-commerce, telemedicine, and e-banking, mode 1 based service
s trade is likely to expand significantly in future. ii) Consumption Abroad: Mod
e 2 Consumption abroad refers to services trade where the consumer of the servic
e moves to the country that produces the service, as in the case of tourism. Mod
e 2 refers mainly to travel services, as given in the BoP, although there is lik
ely to be some underestimation due to reasons such as e-commerce which make it d
ifficult to separate out modes 1 and 2. In 1997, exports of travel services have
increased faster than for mode 1, rising from US $120 billion in 1985 to US $ 4
30 billion, or 20 per cent of total services trade. Consumption abroad as measur
ed by the travel services component of the BoP accounted for 1.5 per cent of wor
ld GDP and 6.3 per cent of global exports of goods and services. iii) Commercial
Presence: Mode 3 Commercial presence is when services trade involves the establ
ishment of service operations in the consuming country as in the case of setting
up bank branch offices or law offices overseas. It is analogous to foreign dire
ct investment. Mode 3 covers juridical persons and legal entities that share cha
racteristics of corporations, joint ventures, partnerships, and representative o
ffices and branches. In existing BoP statistics, commercial presence is recorded
in the form of data on international FDI flows and income stocks in financial a
ccounts. However, FDI information alone does not provide an accurate picture of
the total value of operations by service firms overseas. For instance, if a fore
ign affiliate is treated as a resident in the host country, the value of its ser
vices is not recorded in the BoP. An important supplementary measure of mode 3 b
ased services trade is provided by the Foreign Affiliates Trade in Services (FAT
S) statistics. The FATS collects both inward and outward information on commerci
al presence through indicators such as sales, employment, and value added of maj
ority owned enterprises located in foreign countries. Inward FATS statistics dea
l with the value of services provided by foreign affiliates established in the h
ome country while outward FATS statistics deal with the value of services provid
ed by foreign affiliates owned abroad by residents of the home country5. Gross o
utput of foreign affiliates for 1997 is estimated at $ 820 billion, or about 38
per cent of total services trade. The value of production by foreign affiliates
constituted 2.9 per cent of world GDP and 12.1 per cent of world exports of good
s and services. iv) Movement of Natural Persons: Mode 4 This mode involves the d
elivery of the service through the temporary crossborder movement of service sup
pliers as in the case of software and construction services. There are two categ
ories of such service providers, the self-employed and employees. The self emplo
yed are individual foreign service suppliers who go overseas on their own to sup
ply services. Employees are foreign natural persons employed by service supplier
s to provide services, where the employer could be from the home or third countr
ies. At present, mode 4 based services trade is captured in the BoP accounts und
er compensation for those established abroad. By this measure, world income from
the compensation of employees stood at $ 30 billion in 1997, or 1 per cent of t
otal services trade and a meagre 0.1 percent of world GDP. These values are
International Trade in Services, the WTO, and India
39
small relative to those associated with other modes of supply. Mode 4 based serv
ices trade is less than 4 per cent of the value of cross border trade in service
s. While the relative insignificance of mode 4 based trade reflects the smaller
volume of trade via movement of natural persons, due to various restrictions on
cross-border labour mobility, it is also due to problems in capturing the extent
of such trade. Measures of mode 4-based services trade are the most problematic
. The compensation category does not capture compensation to service providers w
ho are temporarily abroad for more than one year, since by the BoP definition, s
uch persons are defined as residents of the host country. This lends a downward
bias to the estimates. Activity 2 Classify the following services, as per the cl
assification given above: Financial Services ...................................
................................................................................
.. Hospitality Services ........................................................
............................................................. Telecommunication
Services .......................................................................
.............................................. Healthcare Services .............
................................................................................
........................ B) Geographic Profile Services trade is highly concentr
ated among a few developed countries and a few regions of the world. Developed c
ountries account for 70 per cent or more of global services trade and this predo
minance holds across all four modes of supply. 6Developing countries are relativ
ely smaller players in services trade than in merchandise trade. Services trade
between developed and developing countries occurs mostly in the context of modes
3 and 4 which relate to cross border flows of capital and labour, respectively.
The latter reflects the importance of capital and labour endowments in determin
ing comparative advantage and the direction of trade and factor flows in service
s. C) Sectoral Composition Trade data on commercial services is collected in the
BoP for three broad categories of services, namely. travel, transport, and othe
r services. Based on available BoP statistics, transportation services account f
or about one quarter of total services trade, travel services for about one thir
d, and other commercial services for the remaining 40 per cent. A look at the re
lative growth performance of the three sub sectors further indicates a shift in
composition towards “other” services and away from transport and travel services, wi
th the former category recording relatively higher annual growth rates in recent
years. Within the miscellaneous “other” services category, other business services,
which include a variety of professional services such as advertising, legal, ac
countancy, technical, repair and maintenance, and other supporting services (man
y of which go unreported) account for 50 per cent of trade. Individual activitie
s such as communication, finance, and insurance occupy a much smaller share of t
rade in this category. D) Data Issues in Services While existing data clearly in
dicate the predominance of certain countries, subsectors, and forms of delivery
in services trade, it is important to note that service sector data are subject
to many shortcomings due to statistical,
40
conceptual, and methodological difficulties in measuring this sector. There are
major discrepancies between national income accounts and balance of payments sta
tistics for the service sector. Such measurement problems and the resulting lack
of comprehensive and accurate data on services are a major constraint to analys
ing services trade and investment flows.
3.3 INDIA’S OPPORTUNITIES AND CONSTRAINTS IN THE SERVICE SECTOR
Over the past two decades, the service sector has replaced agriculture as the do
minant sector in India. The service sector’s share in India’s GDP has risen from 36
per cent in 1980-81 to around 56 percent in 2002-03 while the share of the prima
ry sector has fallen over this period, from 38 per cent to 24 per cent. The shar
e of manufacturing has remained stagnant at about 22 per cent of GDP.7 This aspe
ct has been discussed in detail in the previous unit. India has witnessed consid
erable growth in service sector trade, particularly during 1990s. Net inflows of
invisibles stood at $16 billion in 2002-03. Net invisibles receipts from non-fa
ctor services were an estimated $ 6 billion and net receipts from software servi
ces stood at $8.8 billion in 2002-03.8 The service sector accounts for about one
quarter of total trade in goods and services, with services exports and imports
each constituting about 25 per cent of total exports and total imports, respect
ively. Close to 80 per cent of this trade is in transport, travel, and other bus
iness services.9 The most notable expansion has been in the software services se
ctor. Exports of software services have risen from a few hundred million US doll
ars in the early 1980s to around $ 9.6 billion in 2003-03 and are expected to re
ach $ 50 billion by 2008.10 Today, India’s presence as well as its future potentia
l in the global software industry is well recognized, at home and abroad. In sev
eral other areas such as construction and engineering services, health services,
telecommunications, and financial services, there is growing recognition in Ind
ia and abroad of the country’s trade and investment potential. Activity 3 Identify
those Services in India which have grown during the last 4-5 years. Also think
about the possible reasons for growth. .........................................
................................................................................
.. .............................................................................
.............................................. .................................
................................................................................
.......... .....................................................................
...................................................... .........................
................................................................................
.................. .............................................................
.............................................................. Characteristics o
f India’s Service Sector Trade Trade statistics for India’s service sector are highl
y aggregate in nature. BoP data are available for only a few services, including
, travel, transport, insurance, and other business services including software s
ervices. Several categories, including important sectors such as communication,
construction, finance, computer and information services, and personal, cultural
, and recreational services, are not covered in India’s BoP statistics or are subs
umed within broader categories, reflecting the problems in collecting informatio
n on specific service activities. Tables 3.1 show trends in the value of India’s s
ervice sector exports and imports.
41
Table 3.1: India’s Services Trade (US $ million)
Items 1) Travel, net Receipts Payments Transportation, net Receipts Payments Ins
urance, net Receipts Payments Miscellaneous, net Receipts Payments Of Which : So
ftware Services, net Receipts Payments 1990-91 1,064 1,456 392 -110 983 1,093 23
111 88 161 1,986 1,825 1995-96 1,546 2,713 1,167 -158 2,011 2,169 36 179 143 -1
,405 2,411 3,846 2000-01 294 3,168 2,874 -1,257 1,913 3,170 135 257 122 2,990 12
,875 9,885 2002-03 -438 3,029 3,467 - 3 2,544 2,547 57 371 314 6,511 18,735 12,2
24
2)
3)
4)
N.A. N.A. N.A.
N.A. N.A. N.A.
5,750 6,341 591
8,863 9,600 737
Source: RBI Annual Reports (www.rbi.org)
The data clearly indicate that India’s services trade has undergone a major expans
ion during the last few years. This expansion, however, has not been uniform acr
oss subsectors. The composition of India’s services trade has shifted away from tr
aditional service activities such as travel and transport towards other services
, and in particular, towards other business services. The share of transport and
travel services in total services trade has declined considerably. This structu
ral change in India’s services trade mirrors the structural changes in global serv
ices trade where there has been a similar shift from traditional sectors towards
business and professional services. The latter shift is due in large part to th
e growth in information technology and software services with their enabling imp
act on many business activities. However, as noted earlier, the BoP statistics s
hould be interpreted with caution. The categories are very broad and heterogeneo
us. There is considerable overlap across activities and sectors and many service
s may be altogether excluded from India’s BoP statistics for lack of information a
nd systematic compilation of data. The BoP figures also exclude FDI in India’s ser
vice sector, which is likely to result in under-representation of subsectors suc
h as communications, transport, and financial services where FDI plays a greater
role. Using the mode-wise classification of services trade, all four GATS modes
appear to be important in India’s service trade. Consumption abroad or mode 2 is
an important mode of supply given the significant share of travel services in bo
th services exports and imports. Cross border supply or mode 1 is also important
given the recent growth in business process outsourcing and back office activit
ies in India and the growing scope to deliver services cross border through elec
tronic and telephonic means. India also relies heavily on movement of natural pe
rsons for its services exports, reflecting its comparative advantage in exportin
g labour-intensive services. The importance of cross border labour mobility is e
vident from the growing role of other business services in total services trade,
since many of these professional services require movement of professional serv
ice providers to the overseas market. The predominant 42
subsector within this segment is software services which relies on cross border
movement of software service providers to provide on-site and customized softwar
e services in overseas markets. It is difficult, however, to gauge the significa
nce of this mode in India’s services trade since data on compensation of employees
and on transfers and remittances and the usual proxy measures for mode 4 are no
t available separately for service activities and because there is no separation
of temporary from permanent movement of labour. Nevertheless, if private transf
ers and remittances are any indicator of the importance of revenues from cross b
order labour mobility, inflows amounted to a significant $12 billion in 2001-02
and $14.8 billion in 2002-03 while outflows have been very small in comparison a
t $ 67 million and $ 367 million respectively. Through the 1990s, India has been
a net recipient of labour income as indicated by positive net transfers, indica
ting the role of cross-border labour mobility in India’s services exports. On the
import side, the main mode of interest to India is commercial presence, or mode
4. Data available from the RBI’s Annual Report indicate that services receive a la
rge share of FDI in the country. For instance, between August 1991 and upto July
2000, FDI inflows totalled $16.5 billion in the telecommunications sector, $10.
7 billion in the financial sector, and $ 6 billion the transport sector. Within
services, financial and telecommunications services account for the bulk of FDI.
Given impending deregulation and liberalization of many state monopoly sectors
such as insurance, telecommunications, and air transport, and relaxation of fore
ign equity norms in view of the need for major capital investments in many areas
, the role of FDI in India’s services trade is likely to grow. Constraints to Indi
a’s Trade in Services There are many policy-related, infrastructural, and other co
nstraints to India’s trade in services. On the export front, India’s exports of prof
essional services are adversely affected by external barriers such as immigratio
n and labour market regulations, recognition and licensing provisions, and discr
iminatory treatment with respect to taxes, subsidies, and government procurement
policies. For instance, Indian professionals are subject to entry quotas, cumbe
rsome administrative procedures for issuance of visas and work permits, wage par
ity requirements, economic needs tests, and nationality and residency conditions
. In professions like health, architecture, and accountancy services, credential
s of Indian professionals are not recognized in major countries due to the absen
ce of mutual recognition agreements, which either requires them to undergo furth
er training in the host country or restricts their scope of practice. Deficienci
es in domestic standards of training and infrastructure and quality of manpower
also affect India’s’ exports of professional services. On the import front, there ar
e again numerous domestic regulatory barriers. For instance, India’s imports in ke
y infrastructure services such as energy, banking, insurance, and telecommunicat
ions are constrained by restrictions on foreign equity participation, authorizat
ion and approval requirements, and restrictions on the scope of activity and for
m of legal entity. Such barriers not only affect competitiveness and efficiency
in the sector concerned, but also have larger economy-wide implications for expo
rt prospects in other sectors, given their vital input role. For example, regula
tory barriers in the air transport services sector affect India’s export potential
in tourism services. There are also licensing and nationality based restriction
s arising from regulatory capture in various professional services, which affect
market access by foreign firms and individual service providers, consequently h
urting quality, cost competitiveness, and the scope for technology and skill tra
nsfer in such services.
43
3.4 GATS : AN OVERVIEW
One of the most significant achievements of the Uruguay Round of negotiations fr
om 1986-1993, was to broaden the scope of world trade rules to cover services. S
ervices negotiations were conducted on a separate track from those on goods, und
er the aegis of the Group for Negotiations on Services (GNS).11 The resulting ag
reement, GATS, establishes multilateral rules and disciplines to govern internat
ional trade and investment in services. Key features of the GATS The GATS is a c
omprehensive legal framework of rules and disciplines covering 161 service activ
ities across 12 classified sectors. These include activities as wide ranging as
telecommunications, financial, maritime, energy, business, education, environmen
tal, and distribution services. It excludes services supplied in the exercise of
governmental functions.12 The GATS has three main elements. The first is a set
of general concepts, principles, and rules, which are applicable across the boar
d to measures affecting trade in services. Some of the key provisions include ob
ligations concerning transparency, domestic regulation, restrictive business pra
ctices, behavior of public monopolies, and Most Favoured Nation (MFN) treatment.
13 The second element is a set of sector-specific or cross-sectoral commitments
on national treatment and market access which are applicable to those activities
listed in a country’s schedule of commitments. The third important element TS is
a series of attachments including annexes to the agreement which pertain to sect
oral specificities and Ministerial Declarations regarding GATS’ implementation. Th
is three tier structure reflects the need to have: 1. General principles applica
ble to all services to advance overall liberalization in services; 2. National s
chedules to enable countries to proceed at their own pace in liberalizing servic
es; and 3. Sectoral agreements to ensure that trade liberalization in some secto
rs is supported by the establishment of compatible regulatory regimes or modific
ation of existing ones. The GATS defines services trade as occurring through fou
r modes of supply, modes as discussed earlier. This modal breakdown addresses th
e complex nature of international transactions in services and the diverse forms
in which services are embodied, in consumption, production, and distribution-re
lated activities and in the form of goods, human capital, and information. It al
so brings into the purview of GATS, regulatory issues concerning investment poli
cies and immigration and labour market legislation, hitherto outside the domain
of the multilateral trading system. The GATS’ commitment structure and framework i
s distinct from that of other WTO agreements. Countries make commitments on mark
et access and national treatment for specific sectors in sectoral schedules of c
ommitments and across sectors in horizontal schedules of commitments. The former
are applicable to the particular sector at hand while the latter relate to all
sectors and could compliment, override, or qualify the sectoral commitments. Cou
ntries are free to decide which service sectors they wish to schedule, i.e., tab
le for negotiations, and thus subject to market access and national treatment di
sciplines. The latter has also been termed as a positive list approach to libera
lization. These market access and national treatment commitments are made for ea
ch of the four modes of supply, i.e., there are in all eight commitments per sub
sector or activity in both the sectoral and the horizontal schedules. In additio
n, countries
44
also specify in their schedules, the limitations and exceptions they wish to mai
ntain which violate market access and national treatment, again by mode of suppl
y. Limitations listed in the horizontal schedules typically include general laws
and policies, which restrict the use of a mode of supply by foreign suppliers,
independent of the sector concerned. Countries may also choose to inscribe addit
ional limitations or qualifying conditions to their commitments. Under the marke
t access obligation, a country must accord treatment to foreign service provider
s which is no less favourable than that provided for under the terms, limitation
s, and conditions specified in its commitment schedule. These limitations take t
he form of restrictions on the number of foreign service suppliers, the value of
transactions or assets, the total quantity of services output, the number of na
tural persons who may be employed, the type of legal entity, and the extent of f
oreign capital participation. Table 3.2 below illustrates the typical format of
the horizontal and sectoral schedules of commitments.
Table 3.2: Sample Schedule of GATS Commitments
Commitments Mode of supply Conditions and limitations on market access “None” Condit
ions and qualifications on national treatment E.g., “None” other than tax measures t
hat result in differences in treatment with respect to R&D services. “Unbound” for s
ubsidies, tax incentives, and tax credits E.g., “Unbound” for subsidies. Approval re
quired for equity stake over 25 percent. E.g., “Unbound” except for categories of na
tural persons referred to in the market access column.
Horizontal commitments (i.e., across all sectors)
Cross-border supply
Consumption abroad
“None”
Commercial presence
E.g., “Maximum foreign equity stake of 49 percent” E.g., “Unbound” except for the follow
ing: Intra-corporate transferees of executives and senior managers; specialist p
ersonnel subject to economic needs test for stays longer than one year; service
sellers for upto three months E.g., “Commercial presence is required” E.g., “None”
Temporary entry of natural persons
Specific commitment E.g., Architectural services
Cross-border supply Consumption abroad Commercial presence Temporary entry of na
tural persons
E.g., “Unbound” E.g., “None”
E.g., “25 percent of senior management should be nationals E.g., “Unbound, except as
indicated in Horizontal Commitments
E.g., “Unbound”
E.g., “Unbound, except as indicated in Horizontal Commitments”.
Source: Hoekman in (eds.) W. Martin and A. Winters (1995).
45
The national treatment obligation requires a country to accord treatment to fore
ign service suppliers which is no less favourable than that accorded to its dome
stic service providers, except as specified in its limitations and conditions un
der its national treatment commitments. Typical violations of national treatment
include differential treatment of foreign service providers in the case of subs
idies, taxes, government procurement policies, and provision of various benefits
. An entry of “none” in the above schedule means that a member binds himself not to
have any measures, which violate market access and national treatment for a spec
ific sector and mode of supply. These are also termed full commitments. Unbound
implies that no commitment is made for a particular mode of supply. The rest of
the entries, which include specification of some conditions and limitations are
known as partial commitments. Thus, the GATS not only gives countries the discre
tion to choose sectors for negotiations but also gives them the flexibility to d
ecide the degree of liberalization which they wish to commit in these tabled sec
tors. GATS Commitments Liberalization has been limited thus far under the GATS.
Given the discretionary nature of the commitment process, countries have typical
ly not scheduled the more sensitive and regulated service sectors. More commitme
nts have been forthcoming in sectors like tourism and software which are relativ
ely open and unregulated as opposed to services like education, health, distribu
tion, and transport where there may be equity, employment, and government monopo
ly related considerations. Moreover, even in sectors that have been scheduled, o
ften the coverage of subsectors and activities is quite limited. Commitments are
mostly partial in nature and tend to bind less than the status quo, especially
in the case of developing country commitments on commercial presence. Hence, exi
sting policies have often not been locked in through commitments. Liberalization
in mode 1 has also been limited as commitments in this mode are mostly unbound
for reasons of technical infeasibility, indicating the uncertainty about telecom
based delivery of services and e-commerce at the time of the Uruguay Round. How
ever, the most strikingly limited liberalization has been in the case of mode 4
where countries have refrained from making sector specific commitments and have
made broad horizontal commitments for select categories of service suppliers, na
mely those associated with commercial presence and at higher skill and professio
nal levels. Moreover, even these horizontal commitments have been subject to a l
arge number of restrictions relating to immigration and labour market policies,
recognition requirements, nationality and residency conditions, and differential
treatment in terms of taxes, subsidies, and procurement policies. Thus, the int
erest of developing countries in exporting labour based services, especially thr
ough cross border movement of semi-skilled and unskilled service providers, has
been completely unmet. India has made limited commitments in the Uruguay Round.
It did not schedule major sectors like energy, distribution, accountancy, and le
gal services and even in sectors like financial services, which it did schedule,
its commitments did not extend to subsectors like life insurance. India’s commitm
ents are largely uniform across sectors and are more restrictive than existing p
olicies, reflecting the fact that India did not try to address sector-specific i
nterests and concerns and took a conservative approach to the negotiations. Its
commitments in modes 1, 2, and 4 are mostly unbound and commitments in mode 3 ar
e subject to a foreign equity ceiling and local incorporation requirement. Overa
ll, India has not used the GATS negotiations to lock in its existing policies in
various service sectors. It has also not benefited from greater market access i
n other countries given the limited liberalization in its key modes of interest,
namely modes 1 and 4.
46
GATS 2000 Negotiations Talks resumed in GATS 2000 as mandated during the Uruguay
Round and are currently underway. The objective of this round is to deepen the
existing commitments through a request-offer process, to strengthen and develop
various provisions in the GATS, and to establish mechanisms for better implement
ation of these provisions. The request-offer process and India As of June 30, 20
02, many countries have put forward their sectoral and horizontal requests to ot
her member countries. Developed country requests largely reflect their interest
in liberalizing capital-intensive sectors like telecommunications, financial, en
ergy, and distribution services through improved market access commitments in mo
de 3, as well as their interest in improving transparency in regulation and in a
dministrative procedures in developing countries. Requests by developing countri
es are mainly focused on labourintensive services and on improving market access
under mode 4, through coverage of a wider range of skill categories and of inde
pendent and contractual service providers, who are de-linked from commercial pre
sence. India has received requests from all major developed countries. The thrus
t of these requests has been to commit to full market access in a variety of inf
rastructure services like insurance, banking, telecommunications, and energy ser
vices and to reflect India’s FDI liberalization and regulatory reforms in these se
ctors in its commitments. Greater market access has also been sought for commerc
ial presence and movement of intracompany transferees and business visitors in b
usiness services like legal and accountancy services. India has in turn made req
uests to all its major trading partners. These requests have mainly focused on I
ndia’s export interests in mode 4. In this regard, India has made a bold proposal
on mode 4, also endorsed by several other developing countries, to institute a s
treamlined GATS or service provider visa for intracompany transferees, business
visitors, contractual service providers, and independent professionals for a uni
form one year period. This visa would be distinct from normal immigration visas,
so as to effectively separate temporary from permanent movement of labour. Indi
a has further proposed that entry quotas, wage parity requirements, social secur
ity taxes, economic needs test and other such restrictions be eliminated for tho
se qualifying for a service provider visa. The GATS or service provider visa wou
ld be characterized by: i) ii) iii) iv) v) vi) vii) Strict time frame for issuan
ce (2-4 weeks maximum); Flexibility in issuance on shorter notice for select cat
egories of providers and border availability; Transparent and streamlined applic
ation process; Mechanisms to find status of application, rejection, requirements
; Easier renewal and transfer procedures; Safeguard mechanisms to prevent enteri
ng permanent labour market and abuse; Scope to challenge rejections, delays, and
unfair practices under the dispute settlement mechanism.
India has also requested due recognition of qualifications for its service provi
ders and improved enforcement of GATS provisions for facilitating entry into Mut
ual Recognition Agreements. Initial offers have been forthcoming as of March 31,
2003. There are more full commitments in mode 1. This is of significance to Ind
ia as it ensures liberal and predictable market access through cross border supp
ly and thus for
47
business process outsourcing and back office service exports by India. There is
also some improvement in the offers on commercial presence, with removal of limi
tations such as economic needs tests and authorization/approval requirements and
relaxing of limits on foreign equity participation. However, improvements in mo
de 4 have been very limited. A few offers, such as by the EU and Canada, cover n
ew categories of service providers such as graduate trainees, independent profes
sionals, and contractual service suppliers that are of export interest to develo
ping countries like India. These offers also increase the length of stay and rel
ax associated conditions on stay and entry. However, these offers still do not d
istinguish between temporary and permanent movement of labour. They continue to
subject GATS related movement which is temporary to the usual immigration and la
bour market regulations which are applicable to permanent migration. Moreover, l
imitations in the form of entry quotas, differential taxes and subsidies, econom
ic needs tests, and discretionary application of recognition norms continue to h
old. Hence, so far, India does not have much to gain from the offers in this mod
e. It is expected that the offers would be finalized by the end of 2004 and woul
d become part of a new round of WTO negotiations. Although the initial commitmen
ts to date show only marginal improvements in terms of market access and conditi
ons of operation relative to the earlier Uruguay Round commitments, there has be
en much greater willingness on the part of developing countries to negotiate fur
ther liberalization of services. India, which had earlier resisted the inclusion
of services in the multilateral trading system, is today one of the most vocal
proponents of improving multilateral guidelines under the GATS and for increasin
g market access for developing country service providers. This shift in position
on services reflects the growing awareness of the significance of this sector t
o the country’s overall reform and liberalization agenda, its wider implications f
or growth and productivity, and the realized comparative advantage in selected s
ervices. Activity 4 Write your understanding of GATS in 50 words. ..............
................................................................................
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3.5 NEGOTIATING STRATEGY AND DOMESTIC REFORMS
In order to benefit from the GATS negotiations, India needs to have a coherent e
xternal and domestic strategy. It needs to: (a) identify the country’s strengths,
weaknesses, and trade potential and requirements in individual service sectors;
(b) identify the concessions India would like to obtain in specific service sect
ors and from specific markets; (c) determine what it could concede in turn; (d)
recognize the political economy constraints and limitations it would face in lib
eralizing services; and (e) identify the domestic reforms and measures it would
need to implement to support its negotiating strategy. The thrust of India’s strat
egy in infrastructure services, where it is primarily an importer, has to be on
opening up the domestic market to greater competition and in particular, to fore
ign direct investment. India should consider liberalizing its earlier commitment
s on market access and national treatment, keeping in mind needs such as capital
infusion, technology upgradation,
48
synergies with other sectors, and the larger economy-wide impact on efficiency a
nd competitiveness. The commitments have to be framed in the larger context of o
ngoing regulatory reforms and liberalization in these sectors and must reflect p
olicy intentions. Overall, it must: 1. Bind the status quo at a minimum so as to
reflect the current regulatory environment and recent reforms, signal predictab
ility of its policies, and reduce the scope for backtracking. 2. Expand the cove
rage of its commitments by including new subsectors and activities which were pr
eviously not bound, by including more sectors which were not previously schedule
d, and by increasing the scope of the existing commitments by removing or relaxi
ng various limitations. 3. Pre-commit to further liberalization so as to signal
future intentions, particularly where the course of future policy and a timetabl
e for phasing in has been declared and use the transition period to undertake ne
cessary domestic measures on regulatory capacity and institutional frameworks. 4
. Leverage across sectors by offering greater market access through FDI in secto
rs like insurance and telecommunications which are of interest to major develope
d countries like the EU and the US in return for improved market access under cr
oss border supply and movement of natural persons for services like IT, health,
BPO, and others where it has export potential. India’s strategy in the area of pro
fessional services has to be both outward and inward oriented since these are se
rvices where India has both export and import interests. Given its comparative a
dvantage in labour and knowledgeintensive services, India needs to obtain more l
iberal commitments from key export markets, particularly for modes 1 and 4. In t
his regard, India needs to advance with its proposal on mode 4 through its devel
oping country coalition, “Friends of mode 4”, for the institution of a separate GATS
or service provider visa and its model schedule of commitments for mode 4. The
introduction of a GATS visa to separate temporary from permanent labour would al
so facilitate the removal of social security taxes, economic needs and other nec
essity tests, and other restrictions. In addition, India would also need to insi
st on discussing issues relating to classification of service providers and tran
sparency in administrative procedures. In view of India’s recent emergence as an o
utsourcing hub, its negotiating strategy also needs to put sufficient emphasis o
n liberalizing market access through cross border supply. Recently, India has pr
oposed a horizontal formula for mode 1 whereby countries would make a full commi
tment in this mode across all sectors, barring those like financial services whe
re there may be concerns of financial stability and fraudulent practices arising
from unrestricted cross border flows of capital. This approach has been motivat
ed by the protectionist backlash to BPO and back office services in developed co
untries and would help pre-empt future protectionism in the private domain by gu
aranteeing unrestricted market access under mode 1. Although India cannot challe
nge the latest US bill which bans offshoring of US government contracts, given t
he carve out clause for government services under the WTO, it needs to re-think
its position on government procurement under the WTO. It needs to assess the mar
ket access implications of government procurement restrictions. As noted earlier
, it would be India’s interest to advance the proposals on both modes 1 and 4 thro
ugh a quid pro quo negotiating strategy of offering greater market access in sec
tors of commercial interest like banking and insurance through commercial presen
ce for improved market access in these two modes. On the domestic side, India sh
ould also consider scheduling more professional service sectors and opening up t
hese services to foreign commercial presence
49
and service suppliers. Such an approach would be conducive to the needs of great
er efficiency, competition, higher quality and standards in many of these servic
es and would help overcome the regulatory capture that exists in the home market
in some of these professions. These negotiating strategies have to be supported
by various domestic reforms and measures. More liberal market access conditions
in infrastructure services need to be supported by initiatives to encourage pri
vate participation in such services. This would require liberalization of FDI po
licies, divestment of the government’s share in related public sector enterprises,
and creation of an appropriate regulatory structure to ensure transparency, fai
rness, and a level playing field without jeopardizing consumer and national inte
rests. The fallout in terms of displacement of labour and associated reforms in
labour laws and in legal and institutional frameworks, would also need to be add
ressed. Similarly, in the case of professional and manpower based services, Indi
a will not be able to realize its export potential unless it undertakes steps to
improve quality, standards of training and infrastructure, and regulatory mecha
nisms to enforce standards. Investments in telecom infrastructure and supporting
facilities and amendments to domestic laws and acts affecting competitiveness i
n such services may also be required. Activity 5 Talk to some corporate people f
rom a service organization and ask them about their understanding of implication
s of GATS for India. Summarize your interviews in 50 words. ....................
................................................................................
....................... ........................................................
................................................................... ............
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............................... ................................................
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3.6 SUMMARY
Service sector trade and investment are likely to grow rapidly in the coming yea
rs. The prospects for further liberalization of these flows are also promising g
iven heightened awareness about the importance of a competitive and efficient se
rvice sector and much greater willingness on the part of governments across deve
loped and developing countries to deregulate and liberalize services autonomousl
y. The GATS framework provides countries with the opportunity to lock in their l
iberalization in the service sector. India is likely to emerge as an important p
layer in both exports and imports of services. So far, India has taken a very ca
utious and conservative approach to the GATS negotiations. But if India is to re
alize significant market access gains in sectors and modes of interest, then it
must also be willing to make substantial market access commitments in services a
nd to overcome its defensive posture in these negotiations.
1. What are the four modes of service delivery? Explain by taking examples. 2. W
hat is your understanding of GATS and its implications for India? 3. In what spe
cific Services sector, India has core competence, which can be strategically exp
orted. Give Justifications. 50
Chanda, R., Globalization of Services: India’s Opportunities and Constraints, Oxfo
rd University Press, New Delhi, 2002. “Movement of Natural Persons and Trade in Se
rvices: Liberalizing Temporary Movement of Labour under the GATS”, ICRIER Working
Paper No. 51, New Delhi, November 1999. “Movement of Natural Persons and the GATS”,
World Economy, Vol. 24, No. 5, May 2001, pp. 631-654. Chaudhuri, S., A Mattoo, a
nd R. Self, “Liberalizing Mode 4: A Possible Approach”, prepared for the UNCTAD Expe
rt Group Meeting on Movement of Natural Persons, Geneva, July 29-31, 2003. GATT,
General Agreement on Trade in Services, Geneva, April 1994. Government of India
, Economic Survey 2002-03, New Delhi, 2003. Hoekman, B., “”Assessing the General Agr
eement on Trade in Services” in W. Martin and A. Winters (eds.), The Uruguay Round
and the Developing Economies, 307, World Bank Discussion Papers, World Bank, Wa
shington, DC, 1995. IMF, Balance of Payments Statistics, Washington, DC, 1999. K
arsenty, G., “Just How Big are the Stakes? An Assessment of Trade in Services by M
ode of Supply”, WTO, Geneva, 1999. NASSCOM, The IT Software and Services Industry
in India: A Strategic Review, New Delhi, 2000. Sauve, P. and R. Stern (eds.), GA
TS 2000-New Directions in Services Trade Liberalization: An Overview, Centre for
Business and Government, Harvard University and Brookings Institution Press, Wa
shington, DC, 2000. Warren, T. And C. Findlay, “How Significant are the Barriers?
Measuring Impediments to Trade in Services,” in Sauve and Stern (eds.), Washington
, DC, 2000. WTO, Annual Reports, Geneva. WTO, Council for Trade in Services, Spe
cial Session, “Proposed Liberalization of Movement of Professionals under the Gene
ral Agreement on Trade in Service”, Communication from India, S/CSS/W/12, Geneva,
24 November, 2000. WTO, Initial Offers and Requests, Geneva, 2002 and 2003.
3.9 REFERENCES
1. Warren and Findlay (2000), p.5. 2. WTO Annual Report (1999 and 2000). 3. Ster
n and Sauve (2000) and Karsenty (1999). 4. Estimates for the different modes of
supply were obtained from Karsenty (1999). The latest available estimates are fo
r 1997 for such a mode-wise allocation of services trade. 5. There are differenc
es, however, between the GATS and the FATS concepts of foreign affiliates and re
lated service trade statistics. GATS refers to all foreign affiliates while the
FATS only refers to the majority owned affiliates. GATS covers services provided
by service and manufacturing companies while the FATS covers the output of comp
anies by primary activity. Since FATS proxies service products with total produc
tion of companies in service sectors and leaves out the value of service activit
ies undertaken by
51
companies in agriculture or manufacturing, it may result in some underestimation
. At the same time, since the service sector also produces goods, FATS may overe
stimate the value of service activity. 6. Statistics on the geographic profile o
f services trade are from the WTO Annual Report (2000). 7. RBI Annual Report (20
02-03). 8. Ibid 7. 9. IMF, Balance of Payments Statistics (1999). 10. Nasscom (2
000). 11. During the course of the discussions, it was decided, however, that se
rvices would be part of a single legal undertaking, the WTO, and would be subjec
t to the same principles, i.e., those of Most-Favoured Nation treatment, nationa
l treatment, and transparency. 12. This carve out clause would apply to sectors
such as health and education services which are typically in the public sector d
omain. However, due to lack of clear terminology in this carve out provision and
given the growing role of private delivery in even such sectors, it is often di
fficult to determine which activities can be covered by GATS and which are exclu
ded. 13. Article VI on domestic regulation establishes disciplines to ensure tha
t regulations such as qualification requirements, technical standards, and licen
sing procedures are based on objective and transparent criteria, are not more bu
rdensome than required for ensuring the quality of the service, and do not const
itute restrictions in themselves. Article VII on recognition which establishes p
rocedures for mutual recognition of licenses, education, and experience and call
s for equal opportunities to other countries to negotiate accession to bilateral
or plurilateral mutual recognition agreements. Article III on transparency requ
ires countries to establish enquiry points to provide specific information on la
ws, regulations, and administrative practices with bearing on services trade. Th
ere are also several safeguard type provisions which permit a country to introdu
ce restrictions for BoP reasons or to safeguard public morals, law and order, co
nsumer interests, security, and privacy.
52
UNIT 4 CONSUMER BEHAVIOUR IN SERVICES
Objectives
After studying this unit you should be able to: review the basic concepts of Con
sumer Behaviour; outline the stages in consumer decision making process; explain
the factors influencing buyer behaviour; and understand the concepts of search,
experience and credence qualities and their implications on consumer decisions
making process for services.
Structure
4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Introduction Decision Making Roles Classific
ation of Buyers Consumer Decision Making Factors Influencing Buyer Behaviour Sea
rch, Experience and Credence Quality Summary Self Assessment Questions Further R
eadings
4.1 INTRODUCTION
All of us buy different services for various reasons. One person may prefer to g
o to a restaurant for good food while the other may opt for an exclusive restaur
ant, for status. One person may prefer to read ‘The Times of India’ early in the mor
ning, while the other may prefer to read the same newspaper after coming back fr
om the office. There are women who don’t go to beauty parlors at all, whereas ther
e are others who go regularly. Similarly, there are many such examples telling u
s that people show different behavior in buying and using different products and
services. The discipline of marketing which helps in developing a deeper insigh
t in these behavioral differences is called “Buyer Behaviour”. We have developed an
appreciation that the meaning of marketing orientation is that a firm should aim
all its efforts at satisfying its customers. And to keep customers satisfied it
becomes essential to have a deeper knowledge regarding the behavior of the buye
r.
4.2 DECISION MAKING ROLES
It is being said, that for the purchase decision some other people might also be
involved and they may have different roles to play. But generally, and more oft
en for services, both individual or organizational, these roles are played by mo
re than one person. For a marketing person, it is important to know who plays wh
at role in the purchase decision, so as to adapt the service format and promotio
nal efforts to these key players. 53
Conceptually, the consumer decision making roles are best exhibited by the follo
wing example. At a confectionery shop visited by a family to buy bread, a child
asks his parents for a candy. The child becomes the ‘initiator’. The mother suggests
that only one piece may be purchased of ‘X’ brand, she plays the role of ‘influencer’.
The father orders for one piece of ‘X’ brand and pays for it, playing the role of ‘dec
ider’ and ‘buyer’. Finally, the candy is eaten away by the child, which means that he
plays the role of ‘user’. In the purchase of any particular service six distinct rol
es are played. These are: i) ii) Initiator: The person who has a specific need a
nd proposes to buy a particular service. Influencer: The person or the group of
people who the decision maker refers to or who advise. These could be reference
groups, both primary and secondary. It could be even secondary reference group l
ike word of mouth or media, which can influence the decision maker. Gatekeepers:
The person or organization or promotional material which act as a filter on the
range of services which enter the decision choice set. Decider: The person who
makes the buying decision, irrespective of whether he executes the purchase hims
elf or not. He may instruct others to execute. It has been observed at times, mo
re typically in house hold or family or individual related services, one member
of the family may dominate in the purchase decision. Buyer: The person who makes
the actual purchase or makes bookings for a service like travel, hotel room, ho
spital, diagnostic lab, etc. User: The person who actually uses or consumes the
product. It can be other than the buyer. In a number of services, it has been ob
served that users are also the influencers.
iii)
iv)
v) vi)
The number of persons who play these six distinct roles is not fixed. At times m
ore than one persons are involved (as we have seen in the above example) and at
times only one person plays all the six roles. For example, while buying househo
ld grocery items a housewife plays all the roles and makes the purchases. In org
anizational buying the dynamics of these six roles becomes much different and wh
ile selling to an organization due care should be taken in identifying who is pl
aying what role. To summarize, let us take the example of a business traveler wh
o is asked by his superior to visit a particular branch office. May be in this c
ase the boss works as the initiator. The travel agency, which handles that compa
ny’s travel booking, with its limited resources may work as a gatekeeper. The fina
nce office may put restrictions on economy class and that too in the state run a
irlines, may work as influencer. The administrative division which makes the boo
king and handles the bills may become the buyer and finally the executive, who t
ravels is the user, who was not left with any choice. Activity 1 You are the sal
es manager for credit cards in your bank and you have learnt that a company is s
etting up a branch office in your city. You are planning to make a visit for ins
titutional sales. Identify the people you would come across and also the roles t
hey are likely to play. ........................................................
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54
4.3 CLASSIFICATION OF BUYERS
Typically, buyers can be classified into two categories: Personal and Organizati
onal. Personal buyers are those who buy a particular item for his or her own con
sumption or use. For example you may like to buy an Annual Maintenance Contract
(AMC) for you personal computer installed in your house. The other category of b
uyers is called organizational buyers. The organizational buyers are those who b
uy the goods or services for the organizational use. For example, a government d
epartment may buy a similar AMC for the office computers. Another example can be
of a hospital which may buy beds for the use of patients. However, irrespective
of the type of buyer, the buying roles remain the same, though the number of pe
rsons who play these roles may vary. In organization purchases, also called B-2-
B (Business to Business) purchases more people are involved and typically they f
all under influencer’s category. Because of large number of people working as infl
uencers, generally the B-2-B purchases take longer time to minimize on perceived
risks. The elements which are reviewed in the evaluation process might range fr
om price, quality, reliability, etc. As the complexity of the service offer incr
eases, in B-2-B purchases, the importance of confidence in service supplier incr
eases.
Consumer Behaviour in Services
4.4 CONSUMER DECISION MAKING
The consumer’s decision to purchase or reject a product or service is the moment o
f final truth for the marketer. It signifies whether the marketing strategy has
been wise, insightful, and effective, or whether it was poorly planned and misse
d the mark. Marketers are therefore interested in the consumer decision-making p
rocess by which a consumer selects one alternative amongst the lot available. Th
e decision not to buy is also an alternative. A simple consumer decision-making
model, as shown in Figure 4.1, ties together the psychological, social and cultu
ral concepts into an easily understood framework. The decision model has three d
istinct components input , process , and output. Input component of the model in
clude firm’s marketing efforts (marketing mix activities) which communicate the be
nefits of the products and services to potential consumers and the non-marketing
socio-cultural influences. Sociocultural influences include family, friends, so
cial class, subculture and culture. The combined effect of firm’s marketing effort
s, influence of family and friends, culture etc. affect what consumers purchase
and how they use them. The process components deals with the consumer decision m
aking which involves need recognization , prepurchase search and evaluation of a
lternatives.
Figure 4.1: Input, Process, Output Model of Consumer Behaviour
External Influences Firm’s Marketing Efforts Socio-cultural Environemtn
Psychological
Purchase Post purchase Evaluation
Decision Making
Field INPUT PROCESS OUTPUT
55
The decision making is affected by the psychological field i.e. the internal inf
luences. These influences include motivation, perception, learning, personality
and attitudes. The output portion of consumer decision making model includes two
associated activities i.e. purchase behaviour and post purchase evaluation. A m
ore comprehensive purchase model was suggested by Fisk3, who divided the purchas
e behavior into three distinct stages viz. Pre-consumption Phase, Consumption Ph
ase (Service Encounter) and Post-consumption Phase. The first stage called the p
re-purchase stage includes activities which take place before the actual purchas
e decision. These activities are typically called, problem/need recognition, inf
ormation search on various alternatives and evaluation of alternatives to select
the best of them. At this stage, the individual recognizes a need or problem wh
ose solution usually involves a potential purchase. He searches for information
from various sources-both internal and external and arrives at a set of possible
solutions – ‘The evoked set’. The second stage is called the consumption stage. This
arises if outcome of the prepurchase stage is a decision to buy a certain brand
of service. In this stage the expectations of the pre-consumption stage are comp
ared with the actual service delivery. This stage is therefore called the servic
e encounter stage. Finally, the post-purchase stage, which results in a decision
whether to purchase the same service again or not.
Figure 4.2: The Three-stage model of consumer behaviour
Pre Consumption
Consumtion
Post Consumption
The reasons why people buy or the motives of buying can be put into three catego
ries, namely: buyers goals, wants and beliefs. As far as general intentions are
concerned, people prefer to be in good or positive conditions and not otherwise.
They prefer to be rich and not poor, entertained and not bored, clean and not d
irty, healthy and not sick, fed and not starved etc. A more acceptable and posit
ive condition gives rise to a vision which the consumer tracks in the pattern of
purchase for a better life. This positive and preferred vision in pursuit of be
tter life is also called as the set of goals to which a buyer strives. These set
of goals, perhaps, cannot be achieved simultaneously and therefore priorities a
re being set to attain these goals. The other aspect of these goals is that they
also keep on changing as the time passes, hence leaving a scope for the firm to
influence the goals of a buyer. On the other hand, wants emerge from the buyer’s
goals. To want a particular product or service is nothing but to have a preferen
ce and desire to use it or possess it. For the purpose of convenience, wants are
classified into two; standing wants and a current wants. Standing wants are tho
se wants which are related to permanent goals and the current wants are those re
flecting our existing circumstances. At this stage a clarification may be noted
that the needs are common to all but wants are socially and culturally oriented.
For example, all of us have the basic need for food when we are hungry while th
e choice of a restaurant will be made by different people, differently, keeping
in view a set of variables, like type of food, quality of food, price, atmospher
e, etc. 56
Activity 2 In continuation to Activity 1, carry out this activity. If the branch
manager of this new office is considering to give ‘Corporate Card’ to his executive
s, what decision process he is likely to go through? Discuss. ..................
................................................................................
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................................................................................
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4.5 FACTORS INFLUENCING BUYER BEHAVIOUR
There are a number of factors or variables which affect the buying behaviour. Fo
r example; people go on holiday during the vacation time so vacations become a v
ariable. Similarly, a person may not buy any of the saving schemes till he comes
in the tax bracket, so “tax payer” becomes a variable. A person may visit an exclus
ive restaurant during ‘happy hours’, which he does not visit normally. In this case
the marketing efforts of the organization (sales person and the scheme) becomes
the factor influencing to buy. Similarly, there are other factors which affect t
he buying decision. These factors can be classified into four major categories,
namely: situational factors, buyer’s socio-cultural factors, personal factors and
psychological factors. These have been summarized in the Figure 4.3 1. Situation
al Factors The situational factors influencing the buying behaviour are, the inf
luence of time pressure in product and brand choice, the atmosphere of the retai
l outlet, occasion of purchase etc. For example, if you are traveling, then dema
nd for lodging and boarding will obviously be there. 2. Socio Cultural Factors B
uyers or consumers do not take buying decision or the decision not to buy, in a
vacuum. Rather, they are strongly influenced by Socio Cultural factors.
Figure 4.3: Factors Influencing Buyer Behaviour
Situational Factors Time, store s atmosphere, marketing stimuli P sy ch o l og i
ca l F act o r s P er s o n al F a ct o rs
Perception, attitudes, motivation
Buying Decision
Personality, life style, other demographic factors like; age, gender, occupation
etc.
Culture, Reference Groups, Family
Socio-Cultural Factors
57
a) Cultural Factors: Children acquire from their environment a set of beliefs va
lues, and customs which constitute culture. These beliefs, values and customs go
deeper and deeper as a person grows. Therefore, it is sometimes said that cultu
re is learnt as a part of social experience. The various sub-categories within a
culture can be identified based on religion, age, gender, occupation, social cl
ass, geographical location etc. This classification is significantly relevant fr
om the consumer behaviour point of view. To elaborate, let us come back to our e
arlier example of people buying hospitality and tourism services. It has been ob
served that people from Gujarat go out on vacations more often. Eating out is a
very common phenomenon in the north of India. b) Reference Groups: There are cer
tain groups to which people look to guide their behaviour. These reference group
s may guide the choice of a product but may not be the brand. Peer groups and th
e peer pressure has generally been observed to play an important role in the pur
chase of credit cards, cell phones, etc. The knowledge of reference group behavi
our helps in not only offering substitutes but also in pricing and positioning t
hem. It is important to note that there are ‘negative’ reference groups also and som
e persons don’t want to associate themselves with these groups. The negative refer
ence groups guide the behaviour in terms of “what not to do”. c) Family: The family
is another major influence on the consumer behaviour. The family consumption beh
aviour to a large extent depends on the family life cycle. The stages in family
life cycle include bachelorhood, newly married, parenthood with growing or grown
up children, post-parenthood and dissolution. Knowledge of these stages helps g
reatly in knowing the buying process. Often family members play a significant ro
le in the purchase of a particular service, for example it’s the teenage children
who influence the parents to decide on a destination and middle aged buy more of
insurance services than the younger ones. 3. Psychological Factors a) Perceptio
ns: It is the process by which buyers select, organize and interpret information
into a meaningful impression in their mind. Perception is also selective in whi
ch only a small part is perceived out of the total what is perceptible. Buyer’s pe
rception of a particular product greatly influences the buying behaviour. For ex
ample, if the buyer’s perception of a product is not positive it requires much har
der efforts from the marketing or sales person to convince the buyer on the qual
ities of the product and thus suggesting him to purchase it. b) Attitude: An att
itude is a learned predisposition to respond in a consistently favourable or unf
avorable manner with respect to a market offer ( i.e. a brand, a particular shop
or retail outlet, an advertisement, etc.). Attitude is a dispositional term ind
icating that attitudes manifest themselves in behaviour only under certain condi
tions. Knowing a buyer’s attitude towards a product without knowing the personal g
oals is not likely to give a clear prediction of his behavior. For example, some
one may have a highly favourable attitude towards car insurance but stays away f
rom buying it since he has no use for it, as he doesn’t own a car. c) Motivation:
Motivation is the driving force within individuals that compel them to action. T
his driving force is subconscious and the outcome of certain unfulfilled need. N
eeds are basically of two types. First, the ‘innate needs’
58
those needs an individual is born with and are mainly physiological. They includ
e all the factors required to sustain physical life e.g., food, water, shelter,
clothing, etc. Secondly, the ‘acquired needs’ those which a person acquires as he/sh
e grows and these needs are mainly psychological, like love, fear, esteem, accep
tance etc. For any given need, there could be a variety of goals. The specific g
oal selected is dependent on the experiences, cultural norms and values, (apart
from other characteristics) of the individual. Failure to achieve a goal generat
e two types of responses. First, called the defense mechanism, which includes wi
thdrawal, rationalization etc. and second is called search for substitute. 4. Pe
rsonal Factors a) Personality: Personality can be described as the psychological
characteristics that determine how an individual will react to his or her envir
onment. There are a number of dimensions (personality traits) against which an a
ppreciation of an individual’s personality can be developed. Each personality trai
t denotes two absolute points and a person’s personality characteristics can be id
entified somewhere between those two absolute points, indicating the proximity t
o either of the two. Some of the traits are as follows: Personality Trait Rigidi
ty Leadership Neuroticism Extroversion Dependability Achievement Behavioural Dim
ensions Rigid—————–––––––– Flexible Leader————————– Follower Stable————————–– Neurotic Extr
Let us examine how buyer behaviour is affected by the personality of an individu
al and for this we take the example of extroversion. Extrovert is a person who i
s more sociable, likes meeting people, making more friends, prefers to move abou
t, careful about his appearances and doesn’t like reading books or confining to th
e four walls of a room. On the other hand an Introvert is a person who prefers t
o be left alone, would like to read books rather than making friends, shies away
from social gatherings. There are a number of products which are preferred more
by extroverts rather than introverts. Perhaps the products suggesting status ar
e purchased more by the extroverts than the others. b) Life Style: Lifestyle as
distinct from social class or personality is nothing but a person’s pattern of liv
ing and is generally expressed in his/her activities, interests and opinions. So
me of the dimensions of life style are as follows: Activities Work Hobbies Enter
tainment Shopping Interests Family Home Job Fashion Media Achievements Life styl
es suggests differences in the way people opt to spend on different products dif
ferently. Life style variables (psychographics variables) help a firm to identif
y the ‘Inner consumer’ or the feelings of the consumer about their products which ne
eds to be stressed in advertising campaigns. Opinions Themselves Special issues
Products Future
59
c) Demographic Factors: Buyer’s demographic factors like age, gender, education, o
ccupation, etc. also have influence on the purchase behaviour. These factors are
very much significant in the study of behaviour of buyers. For example, fast fo
od outlets are more patronized by the teenagers than the elderly persons- exampl
e of age as a factor; air travel is more used by the executives than the factory
workers-examples of occupation as a factor. In sum, knowledge of all such dimen
sions of the buyer will help you in understanding his needs and wants and also h
elp you in integrating all those elements in your product offer which the consum
er wants.
4.6 SEARCH, EXPERIENCE, AND CREDENCE QUALITIES
One of the most significant differences between goods and services is that in go
ods “Search Qualities” dominate while services are dominated by “Experience and Creden
ce Qualities”.
Figure 4.3: Continuum of evaluation for different types of products
Most goods
Most Services
Easy to evaluate
Restaurant meals Root canal Furniture Houses Jewelry Medical diagnosis Televisio
n repair Vacation Legal services Automobiles Clothing Child care Auto repair Hai
rcuts
Difficult to evaluate
High in search qualities
High in experience qualities
High in credence qualities
Source: Zeithaml and Bitner, Services Marketing, Tata McGraw-Hill.
Search qualities are those attributes of a product which the consumer can determ
ine before the purchase. This is more common in physical goods. For example colo
ur, style, fit, feel, smell etc. The second is the experience qualities, which a
re the attributes which can only be determined after the purchase, or during the
process of consumption. The third, is the credence qualities i.e. characteristi
cs which the consumer can not evaluate even after the consumption, like auto rep
air or medial diagnosis. For example, it may be difficult for a patient to asses
s whether or not a hospital provided appropriate services. Such characteristics
exist invariably in services. In nutshell, most goods are high in search qualiti
es and most services are high in experience or credence qualities. Figure 4.3 gi
ves a continuum of evaluation for different types of products based on search, e
xperience and credence qualities. As services are rich in experience and credenc
e qualities, the following important aspects related to consumer decisions makin
g process need to be understood.
60
Information Search: In the case of services, consumers rely more on personal sou
rces of information for pre purchase evaluation. Also they indulge in more post
purchase evaluation than pre purchase evaluation and as a result the amount of p
ost purchase evaluation done in services is much higher that in case of goods. S
ome of the reasons for this are: i. ii. iii. iv. Mass communication conveys very
little about experience qualities. Most of the service providers are local/inde
pendent and therefore lack the financial or marketing acumen to promote their of
fering. Shared advertising is rare as the producer and retailer are the same in
services. Very few attributes of services could be discovered prior to purchase.
Criteria for Evaluating Quality: Consumers normally tend to evaluate the quality
of a service offering through its price and physical facilities provided by the
service provider. Higher the price better is the quality perceived. Same holds
good for physical facilities. This is especially true when other cues for evalua
ting quality are not available. Evoked Set of Alternatives: In services the cust
omers’ “evoked set of offering” is small. This is due to the following: i) Differences
in retailing: In services the offerings of the competitors are rarely exhibited
unlike in case of goods. Also it is highly uncommon to find more than one provi
der of a service in a given area. ii) The consideration set is small as very lit
tle information is available prior to purchase. In case of Non-professional serv
ices the evoked set includes self provision of services. e.g. housekeeping, laun
dry etc. Innovation Diffusion: Consumer adoption of innovations is much slower i
n case of services than in products. This is because consumers have to find a di
stinct benefit in the offering of the competitor to shift to that. Complexity of
services makes it difficult to evaluate the ability of the provider and indivis
ibility does not allow trying the service before consumption. Perceived Risk: Co
nsumers associate greater risk with buying services than with goods. This is on
account of intangibility of services which makes it difficult to get information
about the offering. Most services are not standardized even if they are provide
d by the same provider because a lot depends on the person’s caliber and ability t
o customize it based on the need of the consumer. Another important reason is th
at unlike in goods most services do not come with guarantees/warranties. Brand L
oyalty: Brand switching is lesser with services as compared to services. This is
due to the following factors: i) Greater search and monetary cost associated wi
th moving to another service provider. ii) Fewer substitutes are available for s
ervices. iii) The rapport that a consumer creates with a service provider preven
ts him from moving to a new provider as there is always a possibility that the n
ew provider may not understand his needs as well as the previous one did. Attrib
ution of Dissatisfaction: The provision of the service is based on the requireme
nts stated by the consumer. As such he holds himself partly responsible if the s
ervice provided is not up to his requirements and hence complains less frequentl
y. Perceived Control: The model proposed by Bateson emphasizes that consumers ev
aluate services control, they are able to exercise in a given situation. Perceiv
ed control theory is based on the premise that customers
61
feel more satisfied with a service if they believe that they have greater contro
l over the service delivery. This notion is useful when designing new services S
imilarly, if the employees also think the same way, satisfaction drawn from the
job is higher. However, they two may not co-exist. Simultaneously, therefore, it
is important for the organization to balance out between the two, by developing
adequate service standards, communicating the same to the consumers, to deliver
the services adhering to those standards and developing systems for operational
efficiency.
4.7 SUMMARY
The buying process of services are typically different from the manufactured goo
ds. Since the services are intangible, it is difficult to evaluate them before t
he purchase. Though similar to manufactured goods, the three stages of consumer
decision making, input variables, process variables and output variables are the
same, but in services, the process variable differs significantly. There are a
number of factors which influence buyer behaviour. These include socio-cultural
factors, psychological factors, personal factors and situational factors. The bu
yer behaviour for services is quite different from goods as services are rich in
experience and credence qualities unlike goods, which are rich in search qualit
ies.
1. In what ways the buying process differs between individual buyer and the orga
nizational buyer? 2. What are the differences between ‘search’ , ‘experience’ and ‘credenc
e’ qualities? Explain with the help of examples. 3. Why do consumers of services p
erceive higher levels of risks associated with their purchases? Discuss with the
help of examples. 4. Briefly describe the buying process taking the example of ‘H
ome-Loan Financial Services’.
1. Adrian Palmer, Principles of Services Marketing, London: McGraw Hill, 1998, p
.87 2. J.A. Howard and J.N. Sheth, The Theory of Buyer Behaviour, New York, John
Wiley and Sons; 1969 3. R.P. Fisk, Toward a Consumption/Evaluation Process Mode
l for Services, in Donnelly and George, Marketing of Services, 1981 pp.191-195.
4. Valarie A. Zeithaml, How Consumer Evaluation Processes Differ Between Goods a
nd Services, in (Donnelly and George, Marketing of Services, 1981 pp.191-195) pp
.39-47. 5. John E.G. Bateson, “Perceived Control and the Service Encounter, in, Jo
hn A.Czepiel, Michael R. Solomon, and Carol F. Suprenanat, eds., The Service Enc
ounter, (Health: Lexington Mass), 67-82.
62
FURTHER READINGS : BOOKS ON SERVICES MARKETING
Given below is a list of books on “Marketing of Services” which you may find useful
for further reading for this course. S. Baron and K. Harris, Services Marketing –
Text and Cases , Palgrave, 2003 J. Bateson, Managing Services Marketing: Text an
d Readings, Dryden, 1995 L.L. Berry and A. Parasuraman, Marketing Services : Com
peting Through Quality, The Free Press, 1991 D. Carson and A. Gilmore (eds.), Se
rvice Marketing- Text and Readings, Mercury Publications, 1996 D. Cowell, The Ma
rketing of Services, Heinemann, 1996 W.J. Glynn and J.G. Barnes (eds.), Understa
nding Service Management, John Wiley and Sons, 1995 C. Groonross, Service Manage
ment and Marketing, Lexington Books, 1990 J.L. Heskett, W.E. Sasser, Jr. and C.W
.L. Hart, Service Breakthroughs Changing the Rules of the Game, The Free Press,
1990 D.L. Kurtz and K.E. Clow, Service Marketing, John Wiley, 2002 C. H. Loveloc
k, Services Marketing, Prentice Hall A. Payne, Essence of Services Marketing, Pr
entice Hall of India, 1996 R.T. Rust, A.J. Zahorik and T.L. Keiningham, Service
Marketing, Harper Collins, 1996 Ravi Shanker, Services Marketing- The Indian Per
spective, Excel Books, 2002 T.A. Swartz, and D. Iacobucci (eds.), Handbook of Se
rvices Marketing and Management, Sage Publications, 2000 H. Woodruffe, Services
Marketing, Macmillan India, 1997 V.A. Zeithaml , A. Parasuraman and L.L. Berry,
Delivering Quality Service – Balancing Customer Perceptions and Expectations, The
Free Press, 1990 V.A. Zeithaml and M.J. Bitner, Services Marketing, , Tata McGra
w-Hill, New Delhi, 2003.
63
MS-65
Block
2
UNIT 5 Product and Pricing Decisions UNIT 6 Place and Promotion Decisions UNIT 7
Extended Marketing Mix for Services 5 17 29
1
Services Marketing Mix
f. P.K. Sinha IIM Bangalore Mr. Amrish Sehgal Bhutan Tourism Development Corpn.
Bhutan Mr. D. Ramdas Management Consultant New Delhi Prof. M.L. Agarwal XLRI Jam
eshedpur Mr. Arun Shankar Citi Bank New Delhi Dr. V. Chandrashekhar Mahindra Day
s Hotels & Resorts Bangalore Ms. Sudha Tewari Parivar Seva Sansthan New Delhi Mr
. Pramod Batra EHIRC New Delhi Ms. Rekha Shetty Apollo Hospitals Madras Prof. J.
B. Nadda Goa University Goa Mr. M. Venkateswaran Transportation Corporation of I
ndia, Hyderabad Prof. Rakesh Khurana School of Management Studies IGNOU, New Del
hi Prof. Madhulika Kaushik School of Management Studies IGNOU, New Delhi
Ms. Malabika Shaw AIMA New Delhi Mr. Saurabh Khosla Tulika Advertising Agency Ne
w Delhi Mr. Sanjeev Bhikchandani Sanka Information Pvt. Ltd., New Delhi
Mr. Kamal Yadava School of Management Studies IGNOU, New Delhi
Prof. Ravi Shankar Course Editor IIFT, New Delhi Dr. Tapan K. Panda IIM Khozikod
e Calicut Prof. B.B. Khanna Director School of Management Studies IGNOU, New Del
hi Dr. Kamal Yadava Course Coordinator and Editor School of Management Studies I
GNOU, New Delhi
Dr. Rupa Chanda IIM Bangalore
Print Production
Mr. A.S. Chhatwal, Asstt. Registrar (Publication), Sr. Scale, SOMS, IGNOU
Paper Used: Agro-based Environment Friendly Laser Composed by: ICON Printograph
ics, B-107 Fateh Nagar, New Delhi-110 018
2
Printed at:
BLOCK 2 STRATEGIC ISSUES
In unit 1 of the course you were introduced to the marketing mix for services. A
s you are now aware, in addition to the traditional 4Ps of marketing mixProduct,
Price, Place and Promotion, marketing mix for services includes three additiona
l elements - People, Physical Evidence and Process. In this block we will be dis
cussing these seven marketing mix elements. Unit 5 on Product and Pricing decisi
ons explains the concept of the service product, issues involved in developing n
ew services offerings, service branding and positioning, and pricing of services
. Unit 6 details out issues related to Place and Promotion decisions. In this un
it different methods of distribution have been discussed alongwith the various e
lements of promotional mix. The last unit of this block covers the extended mark
eting mix elements of People, Physical Evidence and Process.
3
UNIT NOS. UNIT TITLE AUDIO PROGRAMME VIDEO PROGRAMME
BLOCK
1.
rvices
2.
5. 6. 7.
ix for Services
3.
8. 9. 10.
STRATEGIC ISSUES
4.
11. 12. 13. 14.
of Health
5.
15. 16. 17. 18. 19.
4
UNIT 5 PRODUCT AND PRICING DECISIONS
Objectives
After studying this unit, you should be able to: Define the service product conc
ept , describe the various elements of the total service package and suggest how
to go about developing a new service offering. Understand the concepts of servi
ce branding and positioning. Describe how characteristics of the services influe
nce the pricing decisions. Discuss the pricing strategies that may be used to se
ll services.
Structure
5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 Introduction The Service Product Developing New
Service Offerings Service Branding and Positioning Pricing Summary Self Assessme
nt Questions References
5.1 INTRODUCTION
In practice the core of marketing is considered to be the marketing mix. Neil Bo
rden1, while quoting from an article of James Culliton2, wrote that a marketer i
s viewed as a "decider", or an "artist" or a "mixer of ingredients" who plans va
rious means of competition. "He may follow a recipe prepared by others, or prepa
re his own as he goes along, or adopt a recipe to the ingredients immediately av
ailable, or experiment with or invent ingredients no one else has tried." If a m
arketer was a "mixer of ingredients", what he designed was a marketing mix. Bord
en further wrote that "it was logical to proceed from a realization of the exist
ence of a variety of marketing mixes to the development of a concept that would
comprehend not only this variety, but also the market forces that cause manageme
nts to produce a variety of mixes. It is the problems raised by these forces tha
t lead marketing managers to exercise their wits in devising mixes or programmes
to fight competition." As discussed in Unit1, the marketing mix in services inc
ludes 7 Ps. This unit covers two of the marketing mix elements i.e. Product and
Price.
5.2 THE SERVICE PRODUCT
Product, in the marketing context is anything which is offered to the market for
exchange or consumption. In goods marketing we always say that there is a tangi
ble component to which some intangibles like style, aftersales service, credit,
etc., are integrated. In the case of services, on the contrary, the tangible com
ponent is nil or minimal.
5
Conventionally, we describe a product as an object, which is developed, produced
, delivered and consumed. However, in services there is no or a little tangible
element. Therefore, the services are considered to be as benefits which are offe
red to the target market. There are two important things to note. First, a servi
ce is a bundle of features and benefits and secondly, these benefits and feature
s have relevance for a specific target market. Therefore, while developing a ser
vice product it is important that the package of benefits in the service offer m
ust have a customer s perspective. Kotler3 has identified five levels of a produ
ct, as listed in Table 5.1. The example given in the table is that of a hotel. I
t is the core and the basic which might be the same for most of the competing pr
oducts and it is the other levels which make them different. Table 5.1
FIVE PRODUCT LEVELS 1 2 3 CORE BENEFIT BASIC PRODUCT EXPECTED PRODUCT The fundam
ental benefit or service the customer is buying (Hotel : Rest / Sleep) Basic, Fu
nctional Attributes (Room; Bed; Bath…) Set of attributes / Conditions the buyer no
rmally expects (clean room, large towel, quietness) That meets the customers de
sires beyond expectations(Prompt Room Services, and Check in / out, Music, Aroma
) The possible evolution to distinguish the offer (all-suite hotel)
4
AUGMENTED PRODUCT
5
POTENTIAL PRODUCT
Activity 1 For any 3 brands of a particular service (say Hospitals), prepare a c
omparative table of all the 5 product levels.
Brand 1 1 2 3 4 5 CORE BENEFIT BASIC PRODUCT EXPECTED PRODUCT AUGMENTED PRODUCT
POTENTIAL PRODUCT Brand 2 Brand 3
Gronroos4 construed that the services a product offers consist of three levels.
As shown in Figure 5.1, the first level is that of the basic service package whi
ch includes core service, facilitating services and supporting services. The sec
ond level is that of an augmented service offering where accessibility, interact
ion and customer participations is given equal importance in delivering the serv
ice product. The third level is that of the market communication of the service
offering as in its absence the augmentation service package does not have any re
levance to the customer. 1. The Service Package The package concept of service
product suggests that what you offer to the market is a bundle of different ser
vices, tangible and intangible but there is a
6
main or substantive or core service and around it are built the auxiliary or p
eripheral or facilitator services. It is important to note that facilitating ser
vices are mandatory, and if they are left out, the entire service would collapse
. In the service package there are yet other types of services called supporting
services. The basic difference between these services from facilitating service
s is that these services do not facilitate the consumption of core service, but
are used to increase the value, and, thus, differentiate it from competition. Fo
r example, in a 500-room hotel the core service is lodging and room service, bel
l boy service is facilitating service, and health club, car rental are supportin
g services. However, it may not be always possible to draw a line of distinction
between facilitating and supporting services. For example, in a typical city ho
tel, business center might be the supporting service, but in a business and conv
ention hotel, the same service would be facilitating service. Figure 5.1: The Se
rvice Product
Product and Pricing Decisions
CORPORATE IMAGE
WORD OF MOUTH
Accessibility of the Services
Core Service Facilitating Services Supporting Services
Consumer Participation
MARKETING COMMUNICATION
Source: Christian Gronroos, Service Management and Marketing, Lexington Books, 1
990
Nevertheless, it is important while developing the service product package to co
nsider all the three levels of service: core, facilitating and supporting. 2. Th
e Augmented Service Offering It has been said that the basic service package is
not equivalent to the service product the customer perceives, which is, in fact
based on customer s experience and evaluation. Therefore, there is a need to inv
olve the customer in the production of service offering and thereby reinforcing
that the basic service package has to be expanded to a more holistic model of au
gmented service offering. Here the suggestion is that issues related to the acce
ssibility of the service, interaction with the service organization and consumer
participation are also integral elements of the service product. Gronross ident
ified the relevance of these issues in relation to the augmented services offeri
ng. The details are summarized in the Table 5.2. Some of these aspects are cover
ed in the Unit on extended marketing mix. 7
Table 5.2: Elements of Augmented Service Offer
Accessibility of the Service – – – – – – Interaction with service organization – – Number a
ills of personnel Working hours and time used in performing various tasks Locati
on of service outlet Exterior and interior of service outlet Infrastructure, har
dware, documentation The number and knowledge of consumers simultaneously involv
ed in the process. Interactive communication between employees and customers Int
eractions with the physical and technical resources of the organization needed i
n the service production process Interaction with other customers involved in th
e process How well the customer is aware about the process of service delivery a
nd his or her role How well the customer is prepared to share information How we
ll the customer is willing to share information or use service equipment
– Customer participation – – –
Source: Christian Gronross, Services Management and Marketing, Lexington Books,
1990, pp 76-80.
3. Market Communication of the Service Offering It is true that a favorable imag
e enhances the service experience, and a bad image may even destroy it. Therefor
e, the issue of management of image through communication becomes an integral pa
rt of developing the service product. But the important point to note here is th
at apart from the conventional methods of promotion, corporate image and word of
mouth are, if not more, equally important. A negative comment from a fellow cus
tomer is more than adequate to neutralize the effect of your efforts of mass med
ia advertising, media blitz and direct promotions. You will study more about com
munication in the next unit. Activity 2 For any service organization, identify a
ll the levels of service offer, as suggested in the Gronroos model and also stud
y the marketing implications. ..................................................
......................................................................... ......
................................................................................
..................................... ..........................................
................................................................................
. ..............................................................................
............................................. ..................................
................................................................................
.........
5.3 DEVELOPING NEW SERVICE OFFERINGS
In order to develop a service product, as a manager you will have to follow the
following stages: i) ii) 8 the customer benefit concept; the service concept;
iii) iv) v) i)
the service offer; service forms, and the service delivery system Customer Benef
it Concept: The service product which you offer in the market place must have it
s origin in the benefits which the customers are seeking. But the problem is tha
t customers themselves may not have a clear idea of what they are seeking or the
y may find it difficult to express or it may be a combination of several benefit
s and not a single one. Over a period of time, the benefits sought may also chan
ge. This change in customers may come about by a satisfactory or unhappy experie
nce in utilising the service, through increased sophistication in service use an
d consumption, and changing expectations. All these make the issue of marketing
a service product very complex. Service Concept: Using the customer benefits as
the starting point, the service concept defines the specific benefits which the
service offers. At the generic level the service concept refers to the basic ser
vice which is being offered. A centre for the performing arts may offer entertai
nment and recreation. But within this broad framework, there can be specific cho
ice paths for satisfying the entertainment objective, such as, drama, musical co
ncerts, mime, poetry recitation, dance etc. Defining the service concept helps a
nswer the fundamental question, What business are we in? Service Offer: Having
defined the business in which you are operating, the next step is to give a spe
cific shape and form to the basic service concept. To refer to the example of th
e centre for the performing arts, the service concept is to provide entertainmen
t. The service offer is concerned with the specific elements that will be used t
o provide entertainment: drama, music, mime, poetry recitation, and dance. In th
e category of musical concerts the choice may be vocal or instrumental, with voc
al whether light or classical, Hindustani or Western. While these represent the
intangible items of the service offer, the physical infrastructure of the centre
, in terms of its seating capacity, comfortable seats, quality and acoustics, pr
ovision of air-conditioning, snack bar and toilets are the tangible items. The t
angible aspects can be controlled by offering the best possible benefit, but the
quality and performance of the actors, singers, musicians cannot be controlled.
Theoretically, a manager must control both the tangible and intangible componen
ts. But in practice, he can control only the tangible components and lay down no
rms for the intangible components (e.g. maximum duration of recital, brief intro
duction before each dance item, etc.) Service Forms: In what form should the ser
vices be made available to the customers is another area of decision-making. Sho
uld all the shows of the centre be available in a package deal against a yearly
membership fee or seasonal ticket? Should there be daily tickets with the consum
er having the freedom to watch any one or more performances being staged on that
particular day? Or should each performance have a separate entrance ticket, wit
h a higher priced ticket for a well-known performance? Service form refers to th
e various options relating to each service element. The manner in which they are
combined gives shape to the service form. Service Delivery System: When you go
to your bank to withdraw money from your account, you either use a cheque or a w
ithdrawal slip in which you fill all the particulars and hand it over to the cle
rk , who after verifying the details, gives you money. The cheque or withdrawal
slip and the clerk constitute the delivery system. In a restaurant, the
ii)
iii)
iv)
v)
9
waiters are the elements of the delivery system. The two main elements in a deli
very system are the people and the physical evidence. The competence and public
relations ability of a lawyer represents the people component, while his offic
e building, office door, letterhead, etc. are all elements of the physical evid
ence . The physical evidence components have also been called facilitating good
s and supporting goods . These are the tangible elements of the service and th
ey exert an important influence on the quality of the service as perceived by th
e consumers. Figure 5.2 presents a graphical conceptualisation of the service pr
oduct.
Figure 5.2: Conceptualisation of the Service Product
Level 1 Consumer Benefit Concept Concerned with what benefits do customers seek
Translated into Service Concept Level 2 Translated into Level 3 Service Offer
Concerned with what general benefits will the service offer
Concerned with greater detailed shaping of the service concept decision on: serv
ice elements (tangible and intangible) service forms (in what way and how) servi
ce levels (quality and quantity)
Translated into Level 4 Service Delivery System Creation and delivery of service
using guidelines built into the service offer. Concerned with people processes,
facilities etc.
As a manager marketing services, you would like to market not just one service b
ut a range of services. You would need to take decisions on the length and width
of the range of services, the manner in which they complement and support each
other, and how well they face up to the competitor s offerings. Table 5.3 illust
rates the concept of a range of services, using the example of a club. Table 5.3
: Examples of Range of Service
Customer Groups
Children Swimming lessons Badminton lessons Indoor games Library Film shows Mixe
d Adults Swimming lessons Badminton, Tennis lessons Card rooms Billiards Facilit
ies for parties & receptions Only women or men Beauty parlor/Massage facility Yo
ga/Judo Lessons Tournaments Kitty parties Business groups Conference rooms Secre
tarial assistance Video coverage
10
The service or services which you offer must be targeted at specific market segm
ent. The target market segment must have a definite need for the service. In the
illustration of the club in Table 5.3 the recreation facilities for children wo
uld succeed only if the parents of the children perceive a definite advantage in
the trade-off of money versus time. The parents must perceive it worthwhile to
spend money on the children to keep them busy rather than spending their own tim
e. Activity 3 You have studied that a service product can be analysed at the lev
el of the customer benefit concept, the service concept, the service offer and t
he service delivery system. Try to recapitulate the services that you have enjoy
ed, while at a restaurant or a hotel. Analyse the services offered by the hotel
or restaurant at the five levels studied by you. ...............................
................................................................................
............ ...................................................................
........................................................ .......................
................................................................................
.................... ...........................................................
................................................................
5.4 SERVICE BRANDING AND POSITIONING
Choosing a brand name for a consumer product or service is one of the most impor
tant decisions. A well chosen brand name can provide a number of specific advant
ages to the organisation. These include suggesting product benefits, evoking fee
ling of trust, confidence, security and simplifying shopping. The American Marke
ting Association defines a brand as follows: A brand is a name , term, sign, sy
mbol, or design, or a combination of these, intended to identify the goods or se
rvices of one seller or group of sellers and to differentiate them from those of
competitors. Though branding has received considerable attention from marketer
s and academicians, the main focus has been on physical goods rather than servic
es. However, services branding has started to receive considerable attention lat
ely. The intangibility factor associated with services has led to the suggestion
that branding and image creation may be even more critical for services. For a
service brand to be effective it should possess distinctiveness, relevance and m
emorability. Keeping in view the transition of Indian economy to one which is do
minated by services, The Economic Times in its survey of India s most trusted br
ands has started including a separate category of service brands. According to i
ts survey Table 5.4: Top Service Brands of India 2003
Category Rank 1 2 3 Reliance Indian India Mobile Airlines BSNL Airtel Air Sahara
Jet Airways Pizza Hut McDonalds Café Coffee Day Taj Hotels Oberoi Hotels ITC Hote
ls ICICI Bank LIC UTI Bank HDFC Bank ICICI Prudential HDFC Standard Life Telecom
Airlines Food Services Hotels Pvt. Sector Life Banks Insurance
Source: Brand Equity, The Economic Times, 17 Dec 2003
11
of most trusted brands - 2003,the top services in different service categories w
ere as given in Table 5.4 below. It is important to learn that brand can be a ma
jor determining element in the purchase of services and a means of adding differ
entiation. Service managers should keep their focus on branding and differentiat
ion in order to avoid the shift to commodity status where competition is primari
ly on price and terms. On the other hand competition in speciality branded servi
ces is based on the other elements of the marketing mix including customer servi
ce, advertising, brand name etc. Service Positioning Positioning is the act of d
esigning the company s offering and image to occupy a distinctive place in the t
arget market s mind. This requires the companies to examine their markets, deter
mine the structure and nature of markets segments. The various steps in determin
ing a positioning plan include: i) ii) iii) iv) v) vi) vii) Define a market s se
gments Decide which segment to target Understand what the target consumers expec
t and value Develop a service which caters to these needs Evaluate consumer perc
eptions of competing services Select an image for the product matching the aspir
ation of the targeted consumers Communicate with the determined customers and ma
ke the product suitable available.
You will appreciate that service positioning involves three basic steps i.e. Seg
mentation, Targeting and Positioning . The market segmentation can be done on th
e basis of a number of variables like Geographic ( region, climate etc.), Demogr
aphic (age, family size, gender, income, occupation, education, social class etc
.), Psychographic (lifestyle, personality) and Behavioural (benefits, occasions
of use, usage rate etc.).
5.5 PRICING
In the case of products, the term price is used for all kinds of goods- fruits
, clothes, computers, building etc. but in the case of services, different terms
are used for different services. Table 5.5 represents the term used for some se
lected services. Table 5.5: Price Terminology for Selected Services Terminology
Admission Commission Fare Fee Interest Premium Rent Salary Tariff Tuition 12 Ser
vice Theatre entry Brokerage service Transport Legal service Use of money Insura
nce Property usage Employee services Utilities Education
Source: Donald Cowell, "The Marketing of Services" Heinemann, London
A) Pricing and Service Characteristics In determining the prices of services, th
e one characteristic which has great impact is their perishability and the fact
that fluctuations in demand cannot be met through inventory. Hotels and airlines
offering low rates in off-season are examples of how pricing strategy can be us
ed to offset the perishable characteristics of services. Another characteristic
of services that creates a problem in price determination is the high content of
the intangible component. The higher the intangibility, the more difficult it i
s to calculate cost and greater the tendency towards nonuniform services, such a
s fees of doctors, management consultants, lawyers. In such cases, the price may
sometimes be settled through negotiation between the buyer and seller. On the o
ther hand, in services such as dry cleaning, the tangible component is higher, a
nd the service provided is homogeneous. It is easier to calculate the cost on a
unit basis and have a uniform pricing policy. In general, the more unique a serv
ice the greater the freedom to fix the price at any level. Often the price may b
e fixed according to the customer s ability to pay. In such cases price may be u
sed as an indicator of quality. The third characteristic to be kept in mind whil
e determining prices is that in many services, the prices are subject to regulat
ions, either by the government or by trade associations. Bank charges, electrici
ty and water rates, fare for rail and air transport in India are controlled by t
he government. In many other cases, the trade or industry association may regula
te prices in order to avoid undercutting and to maintain quality standards. Inte
rnational air fares are regulated by international agreement of airlines, sea fr
eight fares may be regulated by shipping conferences. In all such cases, the pro
ducer has no freedom to determine his own price. The two methods which a service
organisation may use to determine prices are cost-based pricing and market-orie
nted pricing. In the former, the price may be regulated by the government or ind
ustry association on the basis of the cost incurred by the most efficient unit.
Such a pricing strategy is effective in restricting entry and aiming at minimum
profit targets. The market-oriented pricing may either be a result of the compet
ition or customer-oriented. In case of competition-oriented pricing, the price m
ay be fixed at the level which the competitor is charging, or fixed lower to inc
rease market share. Customeroriented pricing varies according the to customer s
ability to pay. B) Role of Non-monetary Costs Non-monetary costs refer to the sa
crifices perceived by the consumers, other than monetary costs, when buying and
using a service. Many a times the non monetary costs may become even more import
ant than monetary costs. The nonmonetary costs can be broadly divided into the f
ollowing categories. i) Time Costs: Because services are inseparable, most of th
em would require direct participation of the consumer i.e. they involve time. Th
e time required by a consumer would include actual time of interaction with the
service provider as well as the waiting time. Therefore, the consumer is not onl
y spending his money but also sacrificing his time. At times the consumer may be
required to travel to a service which may involve time as well as additional mo
netary cost. ii) Search Costs: These involve the efforts put in by the consumer
in searching information, finding out alternatives and evaluating them. Typicall
y search costs are far greater in case of services as compared to goods. There a
re a number of reasons for this. Services being rich in experience and credence
qualities are rarely displayed on shelves in service outlets for
13
customers to evaluate them. Also in many services it is difficult to know the pr
ice in advance. iii) Psychic Costs: These include fear of not understanding or f
ear of rejection or fear of uncertainty. For example, while applying for a bank
loan the customer has a fear of the loan application being rejected. At times, c
ustomer may find the service product difficult to understand like various option
s in life insurance or difficult to use like ATMs, on line trading etc. As marke
ters you should not concentrate just on monetary costs alone as consumer make de
cisions based on monetary as well as non-monetary costs. In fact by reducing non
-monetary costs, it may be possible for you to increase monetary price. C) Prici
ng Strategies The pricing strategies that may be used to sell services are: a) D
ifferential or flexible pricing; b) Discount pricing; c) Diversionary pricing; d
) Guaranteed pricing; e) High price maintenance pricing; f) Loss leader pricing;
g) Offset pricing; and h) Price bundling. a) Differential or Flexible Pricing i
s used to reduce the perishability characteristic of services and iron out the
fluctuations in demand. Differential price implies charging different prices ac
cording to: 1) 2) 3) customer s ability to pay differentials (as in professional
services of management consultant, lawyers); price time differentials (used in
hotels, airlines, telephones where there is the concept of season and off season
and peak hours); and place differential used in rent of property-theatre seat p
ricing (balcony tickets are more expensive than front row seats) and houses in b
etter located colonies command high rent.
b) Discount Pricing refers to the practice of offering a commission or discount
to intermediates such as advertising agencies, stock brokers, property dealers f
or rendering a service. It may also be used as a promotional device to encourage
use during low-demand time slots or to encourage customers to try a new service
(such as an introductory discount). c) Diversionary Pricing refers to a low pri
ce which is quoted for a basic service to attract customers. A restaurant may of
fer a basic meal at a low price but one which includes no soft drink or sweet di
sh. Once the customer is attracted because of the initial low price he may be te
mpted to buy a drink or an ice-cream or an additional dish. Thus he may end up b
uying more than just the basic meal. d) Guaranteed Pricing refers to pricing str
ategy in which payment is to be made only after the results are achieved. Employ
ment agencies charge their fee only when a person actually gets a job, a propert
y dealer charges his commission only after the deal is actually transacted. e) H
igh Price Maintenance Pricing strategy is used when the high price is associated
with the quality of the service. Many doctors, lawyers and other
14
professionals follow this pricing strategy. f) Loss Leader Pricing is one in whi
ch an initial low price is charged in the hope of getting more business at subse
quently better prices. The danger is that the initial low price may become the p
rice for all times to come. g) Offset Pricing is quite similar to diversionary p
ricing in which a basic low price is quoted but the extra services are rather hi
ghly priced. A gynecologist may charge a low fee for the nine months of pregnanc
y through which she regularly checks her patient, but many charge extra for perf
orming the actual delivery and post-delivery visits. h) Price Bundling: Some ser
vices are consumed more effectively in combination with other services. When cus
tomer perceive value in package of services that are interrelated, price bundlin
g is an appropriate strategy. It basically means pricing and selling services as
a group rather than individually. In addition to deciding on what to charge, th
e pricing strategy of a service firm should also address the following issues: W
ho should collect payment? (Organisation or a specialist intermediary) Where sho
uld payment be made? (Location of service delivery or a convenient outlet or cus
tomer s home) Where should payment be made? (Before or after delivery, timings)
How should payment be made ? (Cash, credit card , third party payment etc.) How
should prices be communicated to the target market? (Communication medium, messa
ge content etc.)
5.6 SUMMARY
This unit covered two elements of the seven marketing mix elements for service -
Product and Price. Service Product was explained to you with the help of Kotler
s five product level concept and Gronroos s three level concept. The steps in d
eveloping a new service were identified and discussed. These include developing
a consumer benefit concept which should be translated into service concept. Serv
ice concept then helps the organisation in detailed designing of the service off
er which is to be translated into the service delivery system. The unit also exp
lained the issues related to service branding and positioning While determining
the prices of services it is important to consider the perishability and intangi
bility aspects. Also, a number of services are subject to price regulations by t
he government. A number of pricing strategies can be used by services marketers.
These include differential pricing, discount pricing, loss leader pricing etc.
In addition a number of other decisions related to pricing have to be undertaken
like who should collect the payment, where, when and how.
1. Differentiate between core, facilitating and supporting services, giving suit
able examples. 2. Discuss the various stages in the development of a new service
offering. 3. What are the basic differences between pricing of goods and pricin
g of services? Does characteristics of services influence their pricing? Discuss
, taking each service characteristic, one by one.
15
4. Think about some of the services that you use frequently, for example restaur
ant or out-door catering. From the lowest end eating out joint to a most exclusi
ve restaurant you visited, identify how the price of these services are expresse
d? How does the price reflect the other elements of the total service offer? 5.
Enlist those services, in which there is a price competition. Also enlist some o
f those services in which there is non-price competition. Identify reasons, ther
eafter, for suchpricing strategies in these two categories of services. 6. Read
the case on "Dosa King" given in the last unit (Unit 19) of this course and answ
er the questions asked in the case.
5.8 REFERENCES
1. Neil H.Borden, "The Concept of Marketing Mix", Journal of Advertising Researc
h, June 1964, pp. 2-7. 2. James W.Culliton, The Management of Marketing Costs, (
Boston : Graduate School of Business Administration, Harvard University), 1948.
3. Philip Kolter, Marketing Management : Millenium Edition, (New Delhi : Practic
e Hall of India, 2000). 4. Christian Gronross, "Developing the Service Offering
- A Source of Competitive Advantage," in C.Susprenant (ed), Add Value to Your Se
rvices, (Chicago : American Marketing Association), p.83, 1987.
16
UNIT 6 PLACE AND PROMOTION DECISIONS
Objectives
The objectives of this unit are: To examine how service characteristics influenc
e distribution decisions. To identify the methods of distribution for service in
dustries. To propose guidelines for advertising, sales promotion and other promo
tional methods for service industries.
Structure
6.1 6.2 6.3 6.4 6.5 6.6 6.7 Introduction Place or Distribution Methods of Distri
bution in Services Promotion Summary Self-Assessment Questions References and Fu
rther Readings
6.1
INTRODUCTION
Distribution means PLACE decisions and like manufactured goods such decisions
are important in service industries as these decisions relate to Location, Deliv
ery and Coverage. Though it might be easy to understand these concepts for phys
ical items , however we have examples of unsold or spare seats in Airlines secto
rs, unsold rooms in hotels and unsold table covers in restaurants. The service c
haracteristics have direct impact on distribution decisions and in this unit we
shell examine the same. We will also be taking up another marketing mix element
- Promotion. The various components of promotion mix viz. - advertising, sales
promotion, publicity and public relations will be discussed in relation to serv
ices.
6.2 PLACE OR DISTRIBUTION
The most important decision element in the distribution strategy relates to the
issue of location of the service so as to attract the maximum number of consumer
s. The inseparability characteristic of service such as those of doctors, teache
rs, consultants, mechanics etc. poses a distribution constraint since they are a
ble to serve only a limited, localised market. The other characteristic of servi
ces which affects the distribution strategy is the fixed location of services su
ch as universities, restaurants, and hospitals which necessitates the customer t
o go to the service location rather than vice-versa. The first decision variable
in planning the distribution strategy relates to the location of the service. I
n deciding where to locate your service, you should raise the following question
s as they would help you arrive at the right decision. i) How important is the l
ocation of the service to the customers? Will an inconvenient location lead to p
urchase being postponed or being taken over by a competitor? The answer is yes
in case of services such as dry cleaning, fast food outlets where convenience i
s the most critical factor. The
17
answer is no in case of services provided by doctors and beauty parlors, where t
he customer s involvement with the provider of the service is very high and the
decision is made on the basis of reputation, competence and past experience. ii)
Is the service, technology-based or people-based? How flexible is the service?
Can the equipment and people be moved to another location without any loss in qu
ality? iii) How important are complementary services to the location decision? C
an the clientele be increased by locating services where complementary products
or services already exist? Garages and mechanic shops located next to petrol sta
tions are examples of complementary location decision. The second decision varia
ble in the distribution strategy is whether to sell directly to the customers or
through intermediaries. In case of services which are inseparable form the perf
ormer, direct sale is the only possible way of reaching the consumer. In case of
other services such as hotels, airlines, property, life insurance, they may ope
rate through middlemen. The third decision variable in the distribution strategy
is how to provide the service to a maximum number of customers in the most cost
-effective manner (if the service is not of the kind that is inseparable). Some
of the recent innovations in the area are rental or leasing, franchising and ser
vice integration.
6.3 METHODS OF DISTRIBUTION IN SERVICES
Distribution in services can be broadly classified into two categories- direct s
ales and sales via intermediaries. The following table provides examples of both
of these categories. Direct Sales Electronic channels e.g., ATMs, Online course
s Franchisees e.g., McDonald s Quasi Retailing 1) Direct Sales Direct sales has
specific marketing advantages as they help in maintaining better control over ho
w the service is provided or performed and also in obtaining direct feedback fro
m customers. There are obvious problems also in direct sales, like; problems of
expanding the business and coping with high workloads where the services of a pa
rticular individual may be in demand or direct sale means limited geographic mar
ket coverage. a) Direct Sales Through Electronic Channel To overcome such proble
ms companies are exploring possibilities of direct sales through electronic chan
nels. The typical benefits the companies see in electronic distribution of servi
ces are: Consistent delivery for standardized services Low cost Customer conveni
ence Wide distribution 18 Sales via Intermediaries Agents & Brokers e.g., travel
/ insurance agents
Customer choice and ability to customize Quick customer feedback Activity 1 Comp
are the advantages (or disadvantages) of online railway reservation system with
conventional reservation window system. ........................................
................................................................................
... ............................................................................
............................................... ................................
................................................................................
........... ....................................................................
....................................................... b) Franchising The other
recent trend in distribution of services is that of franchising. Franchising is
the granting of rights to another person or institution to exploit a trade name
, trade mark or product in return for a lump-sum payment or a royalty. Franchise
is characteristed by the following features: a) Ownership by one person of a na
me, an idea, a secret process or specialised piece of equipment and the goodwill
associated with it. b) The grant of a licence by that person to another permitt
ing the exploitation of such name, idea process or equipment and the goodwill as
sociated his rights. c) The inclusion in the licence agreement of regulations re
lating to operation of the business in the conduct of which the licencee exploit
s his rights. d) The payment by the licencee of a royalty or some other consider
ation for the rights that are obtained. In service Industries franchises operate
in the area of hotels, restaurants, car rentals, fast food outlets, beauty parl
ours, pest control, travel agencies, office services, packers and movers, courie
rs, business centres, etc. The advantages provided by a franchising arrangement
are as follows: 1. There are usually training materials already developed, for b
oth franchisees and their workers. 2. Expansion through franching can proceed qu
ickly. 3. The franchiser need apply only minimal controls; it does not have to d
evelop as large a bureaucracy to govern the business. 4. A franchiser s overhead
is lower because the franchisee does hiring, collections, local promotions, etc
. 5. There are economies of scale to advertising and promotion. 6. The franchise
e is responsible for most of the cost control. 7. There is often less risk attac
hed to franchise expansion than with the creation of new service ventures that m
ay not have been tested as well. 8. Franchises usually have a better record for
staying viable business than the typical service business startup. 9. Local oper
ators are committed because they have their own capital at risk. 10. The service
tasks, service standards, and service delivery systems are usually well defined
and structured, and thus they work well. They have been prototyped, and many of
the potential problems with the operations have already been identified and iro
ned out. c) Quasi Retailing The quasi-retail outlets, sell services rather than
goods, like-
Place and Promotion Decisions
19
– – – –
Hairdressers Travel Agents Car hire agencies Restaurants
– – – –
Amusement arcades Employment agencies Hotels Driving Schools
Arguments against Quasi-Retailing are that they can push up property values. Als
o they may create dead frontages which discourage window shopping. Some service
outlets may be closed on peak shopping days (e.g. banks on Saturday) and too man
y quasi-retail outlets in a centre can reduce the range of conventional retail s
tore choice, if the quasi retail establishments are closed or otherwise. Argumen
ts for Quasi-Retail are that many complement other retail businesses. For exampl
e users of facilities like banks and building societies may use shops selling go
ods on the same shopping trip. Service outlets can have imaginative window displ
ays to encourage window shopping. There are some suggestions for quasi retail es
tablishments to succeed. Firstly, they should encourage customers to travel long
er distances, as the retail radius of the outlet might otherwise remain small. T
his can be done by special promotions and displays. The Golden arch of McDonald
s can be seen from a distance and can help the people to identify it. The second
suggestion is to locate service outlets near complementary facilities, like: mu
ltiple theatre complexes and entertainment centers. The third suggestion which c
an be considered is to centralize service production facilities but decentralize
customer contact facilities (e.g. photograph processing, pathological labs, etc
.), which will help in expansion of the market and reduction in service producti
on cost. The fourth suggestion is to reduce the range of service offer at indivi
dual service outlets to match the market requirements and also to reduce the ove
rheads. For example the Apollo Clinics are not the full service hospitals but th
ey help in market coverage and delivery of services. There could be many more su
ggestions and therefore each service organization must evaluate how it can be be
nefited from quasi retailing. Activity 2 Do you think that a specialty hospital
like Escorts or Apollo can cater to the requirements of the public through one m
ain hospital in a particular region of the country? If no, then what relative ad
vantages you see in "Quasi Retail Outlets" of the health care organization? ....
................................................................................
....................................... ........................................
................................................................................
... ............................................................................
............................................... ................................
................................................................................
........... 2) Sales via Intermediaries To the extent the middlemen exist in a s
ervice channel, they are typically sales agents, brokers since there are no inve
ntories to be purchased or distributed. Service Channel tends to be direct. Ther
efore, this Production/Distribution house should be located, to sell whatever
you have in the inventory where it is possible. Place decisions are therefore, a
ll extra-corporate entities between producer and prospective users that is utili
zed to make the service available and/or convenient. A Distribution Channel for
a service organization is, therefore, is a sequence of firms (or units) involved
is moving a service from producer to consumer. 20
Key Issues Involving Intermediaries The following are the major issues which sho
uld be addressed before hand in deciding the distribution strategy involving int
ermediaries: conflict over objectives and performance conflict over costs and re
wards control of service quality empowerment versus control channel ambiguity A
service organization can develop an effective channel system if it helps the int
ermediary to develop customer-based service processes by providing the required
support. Also through training it may develop the intermediary to deliver servic
e quality and gradually move to a cooperative management system and controls. Ke
eping in view the characteristics of services and the potential management probl
ems in retailing of services, as shown in Fig 6.1, there are distinct channel co
nfigurations, which one can notice in service sector. Rathmell has suggested the
dominant channel configuration in the service sector where agents and brokers p
lay the key role in distribution of services. Figure 6.1: Channel Configurations
of Services
Product or Creator of Service
Agent or Broker (Selling) Agent or Broker Agent or Broker (Buying)
Customer or Industrial Customer
Agent: An agent is an independent intermediary, who may act in the name of, or f
or a principal. His contract will define these provisions along with territorial
rights, exclusivity and sales commissions. Broker: A broker is an independent i
ntermediary between buyer and seller who bring parties together to facilitate th
e conclusion of sales contract. A broker may have continuing relationship for hi
s client under a contract period; for which he may charge fee for assistance. Al
ternately, a broker may be for a special job to be undertaken. There are obvious
benefits in distributing services through Agents and Brokers. Firstly, they hel
p in reducing the selling and distribution costs besides a wider representation
in the market. Secondly, such intermediary s possess special skills 21
and expertise and also the knowledge of local markets. However these agents and
brokers also pose some challenges also. For example representation of multiple s
ervice principals may lead to poaching in territories of others resulting in los
s of control over pricing and other aspects of marketing. Activity 3 What servic
es a travel agent can provide to a customer? List them out by taking the example
of any travel agency about which you are familiar: ............................
................................................................................
............... ................................................................
........................................................... ....................
................................................................................
....................... ........................................................
................................................................... Functions of
Agents and Brokers The major function of these agents and brokers is, like any
other intermediary, to bring the producer of service and the user or consumer to
gether. For certain services, agents can be identified and deployed with selling
as the chief function to be performed by them. These agents can be compared wit
h the agents for goods and they are classified as brokers or sales agents. The e
xample of this kind of channel is transportation (travel agents) and office or f
actory workers (employment agencies). However in some cases the agents may be tr
ained in the creation and production of service and then franchised to sell it (
eg, Shahnaz Hussain Beauty Parlors). In case of certain services, actual product
is not transferable and therefore tangible representations are created and tran
sferred. This type of channel is used for marketing insurance services, where a
contact document exists as a physical and tangible representation of the service
s. Another characteristic of services is that the services are generally not del
ivered to the buyer and the creation of time and place utilities is a vital func
tion in the services marketing. Irrespective of whether one uses agents or middl
emen or direct sales channel the factor of location keeping in view the potentia
l markets will be the most significant factor in channel selection decision. Dua
ne David et.al, are of the view that location considerations along with personal
sources of information are two of the critical factors in final purchase decisi
on of many services. The problem of standardization and uniformity restrains the
service organization to use middlemen to any great extent and limit the geograp
hical area which the service organisations propose to reach and cover. This lays
emphasis on the significance of good selection to attain maximum coverage at th
e market place. Banking organizations have started reliving this fact and introd
uced extension counters, mobile banking apart from opening branches in rural are
as. Logistics in Services The field of logistics has not been recognized as an a
rea of consideration for effective distribution of services, it could be the iss
ue of locating a site for the new branch of a bank or delivering health care fac
ilities or location of educational institutions, etc. In India these logistical
problems are always overshadowed by the Government policy or interventions. Ther
e are guidelines suggesting that to open a single branch in any urban area, a na
tionalized bank has to first open a fixed number of branches in rural areas. For
promoting the concept of smaller family and immunization a number of Primary He
alth Centers have been opened but neither have they had the required staff nor t
he
22
infrastructure. The significance of logistics is increasingly felt in the servic
es sector as the field of logistic is gaining importance in the manufacturing in
dustries.
6.4 PROMOTION
It is now established that there are clear differences in information usages bet
ween goods and services. First, the difference is that consumers of services are
less likely to purchase without information than those of buying goods. Secondl
y, the consumer of services will prefer personal sources over impersonal sources
of information. And thirdly, the basic characteristics of services have implica
tions for communication strategy. For example, in hospitality industry the intan
gible service offer is tangibalized and represented in the promotional material
and customers decide to buy or not to buy on the strengths of the descriptions a
nd representations of the service offer in the promotional material. Therefore,
the above three differences influence the decisions with regard to with regard t
o (a) the communications objectives (b) target audiences and (c) planning of eac
h of the sub elements of the promotion mix. Promotion Objectives Although there
could be a variety of objectives to promote, but the basic objectives of the pro
motion mix for services may fall under one of the following: 1. Develop personal
relations with client (personal relations might result in satisfaction, more th
an their service offer). 2. Make a strong impression of competency, honesty and
sincerity (professional orientation to service transaction so as to win buyers c
onfidence in sellers abilities to deliver the services). 3. Should be able to us
e indirect selling techniques (creating derived demand or act as a buying consul
tant). 4. Manage to maintain a fine image by positive word of mouth. 5. Packagin
g and customization. Activity 4 SBI has recently launched Credit Cards and Insur
ance services. What would be the possible advertising objectives for there servi
ces? ...........................................................................
................................................ ...............................
................................................................................
............ ...................................................................
........................................................ .......................
................................................................................
.................... Target Audience While you are defining the objectives of yo
ur communication campaign, you should also be clear about the target audience. I
n service sectors there is a direct contact between the person who provides the
service and the customers. Therefore, some amount of promotion should be targete
d at the employees so as to motivate them to serve the customer better. In such
communications the objective can also be to educate the employees about how to h
andle operational problems so as to increase their performance level. The other
set of target audience are similar to that of goods where the target audience ma
y not necessarily be the buyer or user but also the influencer, decider or user
of the buying cycle.
23
Planning the Promotion Mix i) Advertising: Advertising is any kind of paid, non-
personal method of promoting by an identified organisation or individual. Certai
n services such as entertainment (cinema, theatre), passenger and freight transp
ort (roadways, airlines, trains), hotel, tourism and travel, insurance have been
advertising heavily in newspaper, magazines, radio, TV to promote greater usage
and attract more customers. However, certain service professionals such as doct
ors, accountants, and lawyers, have rarely used advertising as a means of increa
sing their clientele. These groups have traditionally relied on word-ofmouth for
attracting new customers. But this situation is changing and you can see advert
isements in the daily newspapers giving information about the location and timin
gs that a particular doctor is available for consultation. These advertisements
may also carry the message Honorary doctor to the President of India s or ex-di
rector of a prestigious medical college or institution. Such messages help creat
e a positive image and credibility. The Guidelines which can be kept in mind whi
le promoting services are as follows: a) use simple, clear messages; b) emphasis
e the benefits of service; c) promise only that which can be delivered and do no
t exaggerate claims; d) build on word-of-mouth communication by using testimony
of actual consumers in advertisements; and e) provide tangible clues to services
by using well-known personalities or objects to help customers identify the ser
vice. One other aspect which is of importance in designing an appropriate advert
ising strategy is the high level of consumer-organisation interaction required i
n certain types of services (beauty saloons, management consultant, doctor). In
these types of services, the objectives of advertising have been identified as:
a) creating an understanding of the company in the customers minds by describin
g the company s services, activities and its areas of expertise b) creating a po
sitive image for the company c) building a strong sense of identification with t
he customer by turning his needs, values and attitudes d) creating a positive ba
ckground for the sales people to sell the services by providing all relevant inf
ormation about the company. George and Berry, keeping in view the intangibility
of services, proposed that in the case of services a customers is buying the per
formance of the service personnel and therefore the advertising in service indus
tries should not only restrict itself to encouraging consumption, but also it sh
ould encourage employees to perform well. They proposed the following six basic
guidelines to help design effective advertising programmes. – The advertising shou
ld have positive effects on contact personnel. – The advertising should capitalize
on the word of mouth. – The advertising should provide tangible clues to the cust
omers. – The advertising should make the service offering easily understood. – The a
dvertising should contribute to the continuity. – The advertising should promise w
hat is possible. ii) Consumer Promotions: Lovelock and Quelch, while listing the
various objectives of promotion and types of promotions which a service provide
r can
24
use, emphasized that in execution of any type of consumer promotion scheme, one
should carefully consider the six basic elements, namely, product scope, market
scope, value, timing, identification of the beneficiary and protection against c
ompetition. They further suggested that unlike physical goods the varieties of s
chemes available as consumer sales promotion schemes are highly limited. For exa
mple, – Sampling cannot be used frequently because of the cost of service. – Premium
s are frequently used to give an element of tangibility. – Price/quantity promotio
n can help generating long term commitment from consumers e.g. group rates for h
otels. – Coupons are lesser in use. – Refunds and future discounts not much in pract
ice. – Prize Promotions can be used effectively and add excitement and involvement
. Activity 5 Identify promotions which you have recently seen offered by a. Comm
ercial Banks b. Hospitals c. Retail Chains d. Multiplex Cinema Houses ..........
................................................................................
.................................. .............................................
...............................................................................
................................................................................
............................................ ...................................
................................................................................
......... iii) Guidelines for Selling Services: Much has been written on the sal
es management, primarily in the context of product marketing. Johnson observed t
hat for a service sales personnel the following do s and don ts should be follow
ed. First, the service sales person should develop a personal relationship with
the client. Quite often it is the personal relationship rather than the service
itself that results in satisfaction or dissatisfaction with the service. If ther
e is a distinct need for a high quality personalized service, then one must pay
more attention to its organizational structure. Secondly, it is suggested that o
ne must adopt a professional orientation as the key to most service transactions
is the buyer s confidence in the seller s ability to deliver the desired result
s. It is therefore important that a service sales person must make a strong impr
ession of competency, honesty and sincerity. Thirdly, a service sales personnel
has to use indirect selling techniques, as what he/she is promoting is an intang
ible. This can be done either by creating a derived demand or by playing the rol
e of buying consultant. Most hotels first sell the location and then their hotel
to the customer. Fourthly, they have to build and maintain a favourable image.
The public opinion plays a greater role in marketing a service; therefore managi
ng wordof-mouth publicity is important. We will specifically take up this issue
at the end of this section. And lastly, a service seller sells services and not
a service. At any given point
25
of time, a service seller is dealing with a host of services rather than one. Th
eir thoroughness on each and ability to package them to suit each customer s nee
ds would determine the success. In other words the ability of seller to customiz
e the service offering is very important. Exhibit 6.1 Role of Non Verbal Communi
cation in Service Encounters
The delivery of most services involves considerable interpersonal contact betwee
n service provider and customer. Interpersonal communication is especially impor
tant in the so-called "pure" services, where delivering the service involves a h
igh degree of person-to- person interaction and no exchange of tangible objects.
The nonverbal aspects of interpersonal communication - the form of communicatin
g thoughts and emotions without using words- are at least as important as the ve
rbal components in shaping the way a customer feels about his or her dealing wit
h an employee. Customers who are complaining or seeking retribution are likely t
o pay particularly close attention to an employee s nonverbal communication. Non
verbal communication is also particularly important when customers attempt to ev
aluate services such as health-care and legal services, where quality is especia
lly difficult for the average consumer to assess. The authors suggest that servi
ce managers should: 1) 2) 3) 4) 5) Ensure that service employees understand that
nonverbal communication is at least as important as verbal communication. Train
service employees to be sensitive to nonverbal cues through, for example, role
playing and showing videotapes of actual service delivery. Provide continuous fe
edback and periodic reminders to staff about the importance of nonverbal communi
cation. Offer voice training to employees who need it, so they speak with a voic
e which displays warmth and trust. Attempt to match employees manner of dress w
ith customers expectations. For example, cool colours might be used when wantin
g to project an image of friendliness, poise and warmth, and warm colours to pro
ject an image of activity and excitement. Employees should normally dress formal
ly in professional services and when interacting with upper-class customers. The
y may dress more causally when interacting with a lower-class clientele. Conduct
periodic surveys to assess customers perceptions of service employees nonverb
al behaviour. Consider using mystery shoppers to achieve a similar end. Provide
incentives to encourage employees to adopt the recommended changes in nonverbal
behaviour.
6)
7)
Source: Sundaram and Webster, "The Role of Nonverbal Communication in Service En
counters", Journal of Services Marketing, Vol. 14, No.5, 2000
iv) Public Relations and Publicity: In certain service industries it is not poss
ible to use the conventional promotion tools with success. For example in advert
ising industry mass media advertising is really rare. There are some services wh
ere the size of the operation is not large enough that one can afford heavy prom
otional budgets. There are other who cannot afford to cope up with their existin
g workload. There are still others who find it difficult to advertise or promote
as it might lead to a bad taste. For example, a hospital might find it very dif
ficult to promote abortion services. Similar could be the case for open-heart su
rgery or other services. Arising out of these reasons the conventional promotion
al tools have a limited use. Duncan suggested that the services sector industrie
s have to think about other promotional tools like public relations and publicit
y.
26
There are very successful examples like a medical doctor specializing in eye car
e running his own clinic-cum-nursing home and organizing free eye camps in all o
ver the region. This community service not only spread his name but also proved
his competence. The local newspapers might carry stories about such camps to giv
e further boost to the promotion. Therefore promotional activities like communit
y relations, event management, media blitz, corporate identity programmes have r
elevance and they should be used innovatively and effectively. v) Word of Mouth:
Services being rich in experience qualities, word of mouth plays an important r
ole in promoting services. Services are adopted, if not more, as much because of
word of mouth communications as because of active promotion by marketers. Howev
er, people seldom pass on information about a product or service without some re
asons. Managers who want to take advantage of word of mouth communication should
make specific efforts in this direction. Given below are some suggestions for s
timulating a positive word of mouth (apart from providing excellent service qual
ity) Offering a gift, discount or other reward to customers who bring in new cus
tomers. Asking customers who express satisfaction, to tell their friends. Runnin
g a newsletter and asking customers to contribute. Contribution may be in terms
of letters, stories or ideas. This can also be done through website. Reward your
regular customers with some freebies. Target opinion formers. Activity 6 Identi
fy the role of PR for Delhi Police. Do you think any other communication tool ca
n be more effective: ...........................................................
................................................................ ...............
................................................................................
............................ ...................................................
........................................................................ .......
................................................................................
....................................
6.5 SUMMARY
When it comes to distribution of services the channels are direct or short, with
maximum of one-to-two level. Direct distribution of services can be through ele
ctronic channels, franchising or retailing. Services can also be distributed thr
ough intermediaries like agents or brokers. Promotional issues are also unique i
n service industries and typically public relations takes a front seat, while ad
vertising is more of corporate advertising. The unit provides you guidelines o
n different elements of promotional mix.
6.6 SELF-ASSESSMENT QUESTIONS
1. Differentiate between the channels of distribution and distribution logistics
, as applicable in the Services Sector. Explain both these concepts in the conte
xt of a courier company. 2. What are the relative advantages (or disadvantages)
of direct sales vs. sales via intermediaries? Give specific examples in support.
27
3. You may be aware that NIIT decided to go for an extensive franchise network.
Discuss how franchise operations are beneficial to a service organization, rathe
r than theirs own outlets? 4. What is the concept of Quasi Retailing? Identify a
t least three organizations where Quasi retailing is a must, Also enumerate the
advantages of Quasi Retailing for these organizations. 5. Differentiate between
agents and brokers. Suggest marketing situations where such members of intermedi
aries are important. 6. What guidelines you would follow for developing an adver
tising campaign for a service organization? Discuss by taking the example of a c
ommercial bank or an insurance company. 7. It is been said that PR Tools are mor
e relevant in service organizations. Discuss.
6.7 REFERENCES AND FURTHER READINGS
1. John M.Rathmell, Marketing in Service Sector (Cambridge Mass: Winthrop publis
hers), 1974, p.110. 2. Duane L.David, Joseph P.Guiltinan and Wesley H.Jones, “Serv
ice Characteristics, Consumer Research, and the Classification of Retail Service
s”, Journal of Retailing, Fall 1979, pp. 3-23. 3. Ravi Shanker, “Distribution of Ser
vices”, Managing Distribution, (New Delhi : Manas Publication), 1992, p.125 4. Wil
liam R. George and Leonard L Berry :”Guidelines for the Advertising of Services”, Bu
siness Horizons, July-August, 1981. 5. Christopher H.Lovelock and John A. Quelch
, “Consumer Promotions in Service Marketing,” Business Horizons, May-June, 1983. 6.
Eugene M.Johnson, “The Selling of Services” In :Victor P.Nuell, eds; Handbook of Mod
ern Marketing, (New York : Mc Graw Hills), 1987. 7. Tom Duncan, A Study of How M
anufacturers and Service Companies Perceive and Use Marketing Public Relations,
(muncie, Ind :Ball State University), December 1985. 8. Philip Kotler, “Megamarket
ing”, Harvard Business Review, March-April, 1986, pp. 117-124.
28
UNIT 7 EXTENDED MARKETING MIX FOR SERVICES
Objectives
The objectives of this unit are: To introduce the extended marketing mix for ser
vices To describe the fifth ‘P’ of the marketing mix called ‘People’ and emphasize on th
e need for internal marketing in a service organization To discuss the relevance
and roles of ‘Physical Evidence’ in service marketing To explain the meaning and si
gnificance of ‘Process Management’ in marketing of services and the issues involved
therein.
Structure
7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 Introduction People Internal Marketing Physical
Evidence Process Summary Self Assessment-Questions References and Further Readin
gs
7.1 INTRODUCTION
For service industries, it was observed that the traditional marketing mix was i
nadequate because of three main reasons. The first reason was that the original
marketing mix was developed for manufacturing industries, which implies that the
services offered by service companies ought to be changed in a more product lik
e manner so that the existing marketing tools can be applied. This was practical
ly difficult. The second reason was that the marketing practitioners in the serv
ice sector found that the marketing mix does not address to their needs. They ob
served that the services have certain basic characteristics, which in turn have
marketing implications (as discussed in Unit 1). For example there is a problem
as regard to maintaining the quality due to lack of standardization or services
can’t be inventoried, patented or transferred. The third reason was that since ser
vices are basically different in comparison to physical products the marketing m
odels and concepts have, therefore, to be developed in direction of the service
sector. The above three criticisms suggest that a revised framework for service
marketing mix is required and dimension of each of the mix elements should be re
defined. The marketing mix has extended beyond 4Ps for marketing of services. Th
ese additional Ps are added to meet the marketing challenges posed by the charac
teristics of services. Booms and Bitner though without any empirical work sugges
ted a ‘7 P’ marketing mix model arising out of the above three observations. McGrath
and
29
others endorsed such an approach, and a number of marketing research studies sup
plement the relevance of each of the ‘7 Ps’. A detailed account of each of the addit
ional ‘P’ of the services marketing mix is as follows:
7.2 PEOPLE
People constitute an important dimension in the management of services in their
role both as performers of services and as customers. People as performers of se
rvices are important because, “A customer sees a company through its employees. Th
e employees represent the first line of contact with the customer. They must, th
erefore, be well informed and provide the kind of service that wins customer app
roval. The firm must recognise that each employee is a salesman for the company’s
service”. The importance of customers in services stems from the fact that most se
rvices imply active and involved customerorganisation interface. a) Service Pers
onnel: Service personnel are important in all organisations but more so in an or
ganisation involved in providing services. The behaviour and attitude of the per
sonnel providing the service is an important influence on the customer’s overall p
erception of the service and he can rarely distinguish between the actual servic
e rendered and the human element involved in it. How often have you had the expe
rience of holding onto a telephone receiver after dialing for Assistance or Trun
k Booking and receiving no response? What do you think has been the role/contrib
ution of the telephone operators towards giving our telephone system the image w
hich it has today? The case of telephone operators is still controllable because
the telephone system presents a low contact organisation. High or low contact i
s defined on the basis of percentage of total time the customer has to spend in
the system compared with the relative time it takes to service him. By this defi
nition, restaurants, hospitals, schools represent a high contact organisation. T
he other important distinction of service personnel is between those that are vi
sible to the customer and those that are not. In a restaurant, the waiters are v
isible while the cook in the kitchen is not. As a marketing manager you have to
devote more time training the visible personnel, since they have greater respons
ibility in maintaining relations with the customer. The rice dish which is not c
ooked properly is the cook’s fault but it is the waiter who will have to bear the
brunt of the customers’ anger. The manner in which the waiter behaves with the cus
tomer will be an important determinant in the restaurant losing that customer fo
rever or retaining him as a regular client. As a marketing manager your primary
concern is the visible service personnel and especially so if yours is a high co
ntact organisation. You have to be concerned with ways in which you can improve
the quality and performance of your service personnel. This can be done through:
a) careful selection and training of personnel; b) laying down norms, rules and
procedures to ensure consistent behaviour; c) ensuring consistent appearance; a
nd d) reducing the importance of personal contact by introducing automation and
computerisation wherever possible. We will discuss these aspects in the next sec
tion on Internal Marketing (Section 7.3) 30
b) Customers: Customers are important because they are a source of influencing o
ther customers. In the case of doctors, lawyers, consultants one satisfied custo
mer will lead to a chain reaction, bringing in his wake a number of other custom
ers. Thus as a marketing manager, your first task should be to ensure complete s
atisfaction of the existing customers. The kind of customers that you attract ex
erts an important influence on prospective customers. The prospective customer m
ay feel attracted towards the organisation (it may be a restaurant, club, school
, college) because it has his ‘type’ of customer or the customer may turn away if he
perceives the existing customers to be of a kind with whom he would not like to
associate. You have to decide about the class of customers you would like to ha
ve and work towards providing your service organisation an image which will fetc
h you your future customers.
Extended Marketing Mix for Services
7.3 INTERNAL MARKETING
Although the discussion on significance of employees in the business activity st
arted in mid-seventies the concept of internal marketing was introduced only aft
erwards. One school of advocates of this concept initially suggested that the em
ployer should apply market research, market segmentation and traditional marketi
ng activities like advertising in order to attract employees and make them perfo
rm in the desired way. Such traditional marketing efforts should be used interna
lly. It was Gronross who suggested that internal marketing should be broader tha
n the traditional marketing. He suggested that internal marketing should be view
ed as a managerial philosophy. According to him, “The internal marketing concept s
tates that the internal market of employees is best motivated for service-minded
ness and customer-oriented performance by an active marketing like approach, whe
re a variety of activities are used internally in an active, marketing like and
coordinated way.” The starting point in internal marketing is that the employees a
re the first internal market for the organization. a) Strategic and Tactical Obj
ectives of Internal Marketing Gronrooss clarified that the basic objective of in
ternal marketing is to develop motivated and customer conscious employees. If th
is is the case, then it has strategic as well tactical implications. His point o
f view has been summarized in Table 7.1.
Table 7.1: Strategic and Tactical Objectives of Internal Marketing Overall Objec
tive Strategic Level Objective To develop motivated and customer-conscious perso
nnel. To create an internal environment that supports customerconsciousness and
sales-mindedness among the personnel through supportive: Management methods;· Pers
onnel policy; Planning and control procedures. Tactical Level Objective To sell
services, supporting services (used as means of competition), campaigns, and mar
keting efforts to the employees based on these principles: the personnel are the
first market of the service company; the employees must understand why they are
expected to perform in a certain manner, or in a certain situation, actively su
pport a given
31
service or supporting service; the employees must accept the services and other
activities of the company in order to support the service in their contact with
the consumers; a service must be fully developed and internally accepted before
it is launched; and the internal information channels must work; personnel selli
ng is needed internally, too.
Source: Christian Gronross, “Internal Marketing: An Integral Part of Marketing The
ory.” In: J.H. Donnelly and W.R. George, Eds., Marketing of Services, (Chicago: Am
erican Marketing Association), 1981.
Parsuraman and Berry suggested that a service company can only be as good as its
people. A service is a performance, and it is usually difficult to separate the
performance from the people. If the people don’t meet customers’ expectations, then
neither does the service. Investing in people quality in a service business mea
ns investing in product quality. b) Elements of Internal Marketing To realize it
s potential in services marketing, a firm must realise its potential in internal
marketing-the attraction, development, motivation, and retention of qualified e
mployees. Internal marketing paves the way for external marketing of services. T
he companies that practice internal marketing most effectively will: 1. Compete
aggressively for talent market share; 2. offer a vision that brings purpose and
meaning to the workplace; 3. equip people with the skills and knowledge to perfo
rm their service roles excellently; 4. bring people together to benefit from the
fruits of team play; 5. leverage the freedom factor; 6. nurture achievement thr
ough measurement and rewards; and 7. base job-product design decisions on resear
ch. The seven components of internal marketing practice, as indicated above lend
us to an action checklist, which is given in Table 7.2.
Table 7.2: Action checklist on Internal Marketing
1. Do we compete as hard for employees as we do for end-customers? Are we imagin
ative in how we compete for talent? Are we bold? Do we experiment and try new st
rategies? Do we use a variety of media? Do we use the right people to recruit an
d interview- people who will make a strong impression, people who can sell? Does
our company stand for something worthwhile? Do we offer our employees vision th
at they can grab hold of and believe in? Do we have a reason for being that make
s our company as special place to work? Do we communicate our vision well? Do we
weave it into our company culture at every opportunity? Do we prepare our peopl
e to perform excellently? Do we view skill and knowledge development as an inves
tment rather than an expense? Do we view it as an ongoing process rather than an
event? Do we view it as a confidence builder and a motivator? Do we teach our p
eople “why” and not just “how?” Do we go beyond training and educate as well? Do we stre
ss team play? Do our organizational structure, physical work environment, traini
ng and educational efforts foster teamwork? Do our
2.
3.
4.
32
employees understand where they fit in the company team? Do they understand the
big picture? 5. Do we allow our employees the freedom to come through for their
customers? Do we make rules that fit the aspirations of our best employees rathe
r than protect us from our worst employees? Do we work at keeping our policy and
procedure manuals thin? Do we work at building empowerment into our culture? Do
we measure and reward that which is important? Do we measure and reward employe
e performance that contributes most to our vision? Do we use multiple methods to
measure and to reward? Do we emphasize fairness in the methods we use? Do we gi
ve all employees the opportunity to be recognized for their excellence? Do we li
sten to our employees? Do we use formal and informal research techniques to inve
stigate their attitudes, concerns, and needs? Do we proactively solicit their in
put? Do we act on what we learn? Do we use the data to improve the job-product?
6.
7.
Source: Adapted from Leonard L. Berry and A. Parsuraman, Marketing Services: Com
peting Through Quality, Free Press, 1991, pp. 171-172.
Activity 1 From the table 7.2, identify those activities which are important in
a commercial bank, where you operate your Savings Account. .....................
................................................................................
...................... .........................................................
.................................................................. .............
................................................................................
.............................. c) Importance of Internal Marketing in Organizati
onal Success or Failure A successful service firm implies a significant level of
internal marketing also. The employees of a service firm have to share the same
concern as the conceptualizer of the service. In fact, the service has to be ma
rketed first to the intermediate customers who are the employees of the firm, mo
re specifically, the front line employees or the contact persons. In such a case
, a service strategy has to be focused internally also. A complete strategic vis
ion, when due importance is not given to caring of employees, traps the service
into a cycle of failure. Figure 7.1 and 7.2 show the cycles of failure and succe
ss.
Figure 7.1: Cycle of Failure
High customer turnover
Repeat emphasis on attracting new customers
Failure to develop customer loyalty
Low profit margins
High employee turnover; poor service quality No continuity in relationship for E
mployee dissatisfaction; customer poor service attitude
Narrow design of jobs to accommodate low skill level
Customer dissatisfaction
Employees become bored
Employees can’t respond to customer problems
Minimization of pl Em selection effort Minimization of training
le yc rC er m me sto so Cut
oy ee C yc le
Use of technology Emphasis on to control quality rules rather than service Payme
nt of low wages
C
yc le
Cu
Source:
Source: Schlesinger and Heskett
33
Figure 7.2: Cycle of Success
Low customer turnover
Repeat emphasis on customer loyalty and retention
Customer loyalty
Higher profit margins Broadened job designs
Lowered turnover, high service quality Continuity in relationship with customer
Employee satisfaction, positive service attitude
Train, empower frontline personnel to control quality
ee Cy cle
Cu
High customer satisfaction
Extensive training
y Above average wages plo Em
Intensified selection effort
le yc rC me er m sto Custo
Cy cle
Source: Schle
Source: Schlesinger and Heskett
It is clear from these cycles that proper selection, training and the developmen
t of employees ensures success (Schlesinger & Heskett, 1991). Implementation of
such a strategy is fairly difficult task. It requires a service orientation whic
h is more of a software to excellence. For service industries, personnel hold th
e key to success and the process needs sharing of values by every employee in th
e organisation. An implementation process for a hospital for example could invol
ve the following six steps: 1. Overcome differences: CEOs need to create a compe
lling vision of the future for the board, medical staff, management team and sup
port staff. 2. Identifying key strategic initiatives like realising physician an
d hospital financial incentives: Focusing on the complete range of health care,
including prevention, diagnosis and recovery, making the hospital campus more us
er-friendly and tailoring ambulatory care program to consumer needs. 3. Remove t
he barriers: Once the CEOs have a strategic plan, they need to tackle organisati
onal elements that will inhibit its success. For example, are there too many lay
ers of management? Do incentives and compensation plans mesh with the strategic
goal? 4. Identify information needs for decision making: Make sure that informat
ion needs are met at all levels of the hospital-from CEO to clerk. 5. Develop a
process of continual improvement: Once you have translated your strategy into ac
tion, constantly assess its performance and ways that performance can be improve
d. 6. Empower and motivate your staff: This is the only way that total quality m
anagement can be fully integrated into every aspect of the hospital.
7.4 PHYSICAL EVIDENCE
Cleanliness in a doctor’s clinic, the exterior appearance and interior decor of a
restaurant, the comfort of the seating arrangement in a cinema hall, adequate 34
facility for personal needs at the airport all contribute towards the image of t
he service (organisation) as perceived by the customer. The common element in th
ese is that they all physical, tangible and controllable aspects of a service or
ganisation. They constitute the physical evidence of the service. There may be t
wo kinds of physical evidence: a) peripheral evidence b) essential evidence Peri
pheral evidence is actually possessed as a part of the purchase of service but b
y itself is of no value. An airline ticket, a cheque book, or receipts for a con
firmed reservation in a hotel are examples of peripheral evidence. A cheque book
is of value only if you have money in the bank-without that is of no significan
ce. Peripheral evidence adds on to the value of essential evidence. In a hotel y
ou may find a matchbox, writing pad, pen, complimentary flowers and drinks, whic
h you may take away. These are representations of peripheral evidence. Such evid
ence must be designed keeping in mind the overall image which the organisation w
ishes to project and the reminder value of the evidence in its ability to remind
the customer about the organisation. Whereas peripheral evidence is possessed a
nd taken away by the customer, the essential evidence cannot be possessed by the
customer; the building, its size and design, interior layout and decor, logo an
d equipments etc. are constituents of the essential evidence. The essential evid
ence is a very critical input in determining the atmosphere and environment of t
he service organisation. Contrast the essential evidence of a five-star hotel (i
ts long driveway, grand entrance manned by a liveried doorman, sophisticated dec
or of lobby) with that of a fast food outlet (with bright colours, loud music, a
nd bright lights) and judge the kind of rich and formal atmosphere of the former
with the relaxed and casual atmosphere of the latter. You can use physical evid
ence to build a strong association in the customers’ mind and also to differentiat
e your service from the competition. As a marketing manager it is your responsib
ility to manage the physical evidence in order to create the ideal environment f
or your service. You can do this in two ways: one by making the service more tan
gible, and two, by making it easier for the customer to grasp the concept of the
service. One obvious way of making the service more tangible is by developing a
tangible representation of the service as is done in the case of credit cards.
Credit cards have a physical entity and are identifiable by their brand name (Am
erican Express, Diners, Visa, BOB, i.e., Bank of Baroda) and distinct looks of t
he card. Other ways by which a service can be made more tangible is by standaris
ing the physical attributes such as location, interior decor, colour scheme etc.
Most airlines use a uniform for all their staff to help create a sense of ident
ification. Similarly, Indian Airline’s white and orange colour combination is well
-recognised. The second way is to make it easier for the consumer to understand
the concept of the service which you are offering, with easily perceived objects
and ideas. Promoters of package tours may provide detailed information about th
e hotel, food and transport facility they would be using to help the customers u
nderstand the concrete dimensions of the tour and thus reduce their anxiety aris
ing out of uncertainty. Specific information about the various dimensions of the
service should be provided to prospective customers . As a marketing manager yo
u can help the customers to understand the service you are offering by stressing
the organisation and customer relationship. Advertising agencies assign one acc
ount executive or a team to a particular client to help him identify with the ag
ency.
35
Activity 2 What are the components of physical evidence in case of a) Railways b
) Banks c) Theatre performances? ...............................................
............................................................................ ...
................................................................................
........................................ .......................................
................................................................................
.... ...........................................................................
................................................
Julie Baker in her doctoral work theorized that the physical environment is a co
mposite impression of ambience, design and social relationships. She accordingly
termed these three factors as ambient factors, design factors and social factor
s. As summarized in Figure 7.3 the ambient factors relate to the background cond
itions below the level of a customers immediate awareness. The design factors on
the contrary are those visual stimuli that exist at the forefront of a customer’s
awareness. The social factors relate to interactive environment comprising of p
eople.
Figure 7.3: Ambient, Design and Social Factors of Physical Environment
PHYSICAL ENVIRONMENT
(
,
, ) .

, , ,
, .

. .

.
Activity 3 For a specialty restaurant identify the ambient, design and social fa
ctors which are important from the customer’s point of view: .....................
................................................................................
...................... .........................................................
.................................................................. .............
................................................................................
.............................. .................................................
.......................................................................... Roles
of Physical Evidence The primary role of evidence management is to support the
organisation’s marketing programme by making it possible to manage both intended a
nd unintended cues which can give adequate evidences to customers and thereby in
fluence perceptions. Interestingly, the physical evidences also influence employ
ees who interact with customers during the service delivery. Parsuraman et. al.
identified six specific roles of evidence as represented in Figure 7.4.
36
Figure 7.4: Role of Evidence in Services Marketing
Shaping first impression
Socializing employees Managing trust ROLE OF EVIDENCE
Providing sensory stimuli
Changing the image
Facilitating quality of service
Depending on the competitive situation, marketing objective and the resources, a
n organization can use evidence for some or all of the above roles, though these
roles are not mutually exclusive. Arising out of the above reasons the services
organization are expected to use a two prong marketing communication strategy a
imed at not only tangibalizing the message but also the service. Tangibalizing t
he service implies that tangibles associated with the service are emphasized in
communication as if they themselves form the service. For example, DHL courier s
ervice is advertised with a visual of an airport showing a fleet of their aircra
fts and Benz trucks. Alternately, you create tangible representations of the ser
vice to symbolize. For example, ‘comfort’ in air travel can be tangiblized using com
fortable seats with extra leg-space. This can also be emphasized in advertising.
The second step of marketing communication, tools aim at tangibalizing the mess
age by creative use of evidence in messages, by guaranteeing the service and by
encouraging positive word of mouth. By tangibalizing the message the service org
anization makes the advertising message less abstract and more credible through
the use of physical evidence. For example, “Personal Point” is giving physical evide
nces as regard to the weight loss of their customers. The other method of tangib
alizing the message is to guarantee the service. For example, some of the privat
e airlines emphasize on a higher percentage of on time arrivals and departures.
Hart suggested that though warranties are effectively used in manufacturing good
s quite successfully, they can equally be applicable in service industries. If t
he quality of the service and the service delivery of an organization are excell
ent, a service organization then can possibly guarantee it to gain competitive a
dvantage. We will discuss the issues related to service guarantees in the next b
lock. 37
The third method of tangibalizing the message is to create and encourage a favou
rable word of mouth. In service sector the consequences of selecting a wrong ser
vice supplier are invariably higher and as a result the customers invariably see
k the opinion of others. It is in this context the word of mouth is important in
giving tangible clues to customers.
7.5 PROCESS
In a service organisation, the system by which you receive delivery of the servi
ce constitutes the process. In fast food outlets the process comprises buying th
e coupons at one counter and picking up the food against that at another counter
. The process of a delivery function which can be compared with that of operatio
ns management implies the conversion of input into the finished product. But in
a service organisation there is no clear cut input or output. Rather it is the p
rocess of adding ‘value’ or ‘utility’ to system inputs to create outputs which are usefu
l for the customers. Services can be described on the basis of the types of proc
esses used in the delivery of the services. The three kinds of delivery processe
s that are applicable in case of service products are line operations, job shop
operations and intermittent operations. Self-service restaurants and shops are e
xamples of line operations. The consumer moves through logically arranged operat
ions which are arranged in a sequence. In a self-service departmental store, the
consumer starts picking up the items he needs and pays for them near the exit.
This kind of delivery process is relevant when the service you are providing is
fairly standard and the consumers’ requirement is of a routine nature. When the co
nsumers require a combination of services using different sequences, the job sho
p type of operation is more useful. Hospitals, restaurants and educational insti
tutions usually have this type of delivery process. In a hospital, some patients
need only consultation in the Out Patient Department, some others may need cons
ultation as well as medication or X-ray, some patients require hospitalisation f
or surgery, medication or investigations. All these categories of consumers requ
ire a different combination of dishes. A college may offer courses for full-time
students as well as for working people through correspondence. Intermittent ope
rations are useful when the type of service is rarely repeated. Firms offering c
onsultancy for projects use this kind of delivery system. Advertising agencies a
lso use the intermittent delivery system since each advertising campaign require
s a unique set of input factors. As a manager you are interested in optimising t
he efficiency of your organisation without sacrificing the qualitative aspect. S
ome of the critical questions you need to focus upon are: a) What are the steps
involved in delivering the service to the consumer? b) Are they arranged in the
most logical sequence? c) If not, can some steps be eliminated, combined or rear
ranged to form a smoother sequence? d) What are the steps in which the consumer
is involved? e) Can the consumers’ contact be reduced or totally eliminated? f) Ca
n we introduce automation to speed up the delivery process? 38
You will appreciate that the importance of process management is that it assures
service availability and consistent quality. Without sound process management,
balancing service demand with service supply is extremely difficult. Service can
not be inventoried; therefore, it becomes essential to find out ways and means t
o handle peak load to optimize different customer needs with varied expertise le
vels within the service organization. In marketing management, operations manage
ment has been recognized as an integral function. In manufacturing sector, for e
xample, logistics in distribution are vital to satisfy the customer needs. Simil
arly in services sector, where there is no tangible product, the operations mana
gement is vital to deliver satisfaction because here the operations management w
ould decide how the process of service delivery would function, or in other word
s, the interactive experience that would deliver the service benefits to the con
sumers. Cowell identified that the issues in operations management or process ma
nagement are many, as summarized in Table 7.3. However, the degree to which thes
e issues are successfully managed would decide or determine not only the satisfa
ction but it might also give a competitive edge to an organization.
Table 7.3: Issues in Process Management
S.No. 1. Area of Operations Process Planning and Control Explanation Operation s
pecifications to achieve service output in terms of quantity, quality, delivery
and costs. Detailed specification of each sub system. Design, layout, locations,
materials handling and maintenance. Detailing the timings at which service oper
ations should be completed by agreed delivery promises within available resource
s and with their economic utilization. Planning and controlling the inventory of
people and capacity. Quality standards are attained in each service system. Inf
ormation flows into and out of service systems and ensures that operations are u
ndertaken at specific tunes as per schedule. Anticipating demands and forecastin
g capabilities that need to be inducted in the system.
2. 3. 4.
Operations Planning Facilities Design Scheduling
5. 6. 7.
Inventory Planning and Control Quality Control Operations Control
8.
Forecasting and Long Term Planning
Shostack gave a much-simplified version and described the ‘process’ in three stages.
First, a process can be broken down in logical steps to facilitate analysis and
control. Secondly, there are more than one available options of processes in wh
ich output may differ. Finally, each system includes the concept of deviation or
tolerance standards in recognition that the processes are ‘real time’ phenomena tha
t do not conform perfectly to any model or description, but functions within a n
orm. Shostack further observed that in marketing literature no description on pr
ocess is found although concepts, which relate to process like ‘standardization’ and
‘customization’, are frequently mentioned. In her article Shostack described proces
ses in two ways. 39
The first way is according to the steps and sequences that constitute the proces
s and she termed it as ‘complexity of process’. The second is according to the excep
tional latitude or variability of those steps and sequences, which she called ‘div
ergence’. Any service process is a combination of bothcomplexity and divergence. A
nalyzing the number can identify a service’s complexity and intricacy of the steps
required and the degree of freedom inherent or allowed in a process step or seq
uence can be called its divergence. In reality there could be services where pro
cess can be of high complexity and low divergence. Such services are called stan
dardized services. For example, housing loan from any financial institution. On
the other hand, there could be services with low complexity and high divergence.
Such services can be called customized services. When we are developing clarity
on understanding of process management, an understanding of above described phe
nomenon is essential as complexity and divergence are not fixed rather they are
factors that can be changed or adjusted for efficiency in the process. A change
in overall complexity or divergence generally indicates one of the four overall
strategic directions, each with positive consequences and also the risks, as sum
marized in Table 7.4
Table 7.4: Alternative Directions of Structural Changes
Strategic Options Reduced Divergence Advantages – Uniformity would reduce cost, im
prove productivity and make distribution easier. – Increase perceived reliability,
uniform service quality and greater service availability. Disadvantages – Inflexi
bility in operating procedures. – Lower customization and thus consumer rejection
inspite of low cost.
Increased Divergence
– Greater customization and thus – Difficult to manage, niche positioning strategy.
control and distribute. – Less dependence on volume. – Limited number of – More margin
s as market may customers may be respond positively to available who are willing
personalization and thus to pay the price that prestige. customization demands.
– – Reduced complexity indicates a specialization strategy. Narrowing the service o
ffering makes distribution and control easier. Perceived positively in the marke
t provided it stands out. Higher complexity usually indicates a strategy to gain
greater penetration in the market by adding more services. Increasing complexit
y can increase efficiency by maximizing the revenue generated from each customer
. Reduced complexity can also be perceived as stripped down service. – It can be c
ompetitively risky if other providers continue to offer a broader, more extensiv
e full-service alternative. Too much complexity can be confusing as a result ove
rall quality may fall. – Highly complex service system may be vulnerable to inroad
s by competitors who specialize. – –
Reduced Complexity
–
Increased Complexity
–
–
One can observe that how changes in complexity and divergence influenced their m
arket position. For managers in service industries, taking a structural approach
can help increase their control over some of the critical elements of the servi
ce system management. Therefore, for marketers in service industries, process de
sign may be a tool that can substantially increase their impact and role in mark
eting their services. 40
Activity 4 Compare the relative advantages and disadvantages of “Conventional toke
n system in retail banking with the teller system and ATM system.” ...............
................................................................................
............................. ..................................................
.......................................................................... .....
................................................................................
....................................... ........................................
................................................................................
.... ...........................................................................
................................................. ..............................
................................................................................
..............
7.6 SUMMARY
Service industries have typically lagged behind manufacturing firms in adopting
and using marketing concepts. But this is now changing. It is said that services
marketing strategy calls not for external marketing but also for internal marke
ting to motivate the employees and interactive marketing to create skills in the
service provides. The unit provided you an action checklist on internal marketi
ng. The importance of internal marketing was highlighted using cycle of success
and cycle of failure. The next element of extended marketing mix discussed in th
e unit is Physical Evidence, which includes both peripheral as well as essential
evidence. The various elements of physical evidence are ambient factors, design
factors and social factors. The unit outlines the role of physical evidence as
well. The last part of the unit was devoted on ‘process management’. The various asp
ects involved in process management were outlined. These include process plannin
g and control, operations planning, facilities design, scheduling inventory plan
ning and control, quality control, operations control and forecasting.
1. What do you think are the main reasons for including the element of people in
the marketing mix for services? 2. Do you think that physical evidence really m
atters in marketing of services? Discuss with the help of examples. 3. Can varie
d process management be followed in marketing the same service? Discuss by takin
g an example. 4. Write short notes on the following: a) Physical evidence as an
element of Marketing Mix. b) Significance of Internal Marketing.. 5. Compare and
contrast the employee’s attitude and behavior towards customers amongst the follo
wing organization. Do you see the significance of employees in servicing the cus
tomers better? Identity how a motivated employee can provide higher customer sat
isfaction in these organizations. a) Nationalized bank and a foreign bank operat
ing in India. b) Indian Airlines and any private airlines. c) Super bazaar and a
private department store. 6. In the above organizations identify the various ph
ysical evidences and suggest ways to improve upon them. 41
1. B.H.Booms and M.J.Bitner, “Marketing Strategies and Organisation Structure for
Service Firms,” in J.Donnelly and W.R.George (eds.), Marketing of Services, (Chica
go :American Marketing Association), 1981. Christian Gronross, “The Internal Marke
ting Function,”Strategic Management and Marketing in The Service Sector, Report No
. 83104, (Cambridge : Marketing Science Institute), 1983. Christian Gronross, “Int
ernal Marketing : An Integral Part of Marketing Theory,” In, J.H.Donnelly and W.R.
George, eds, Marketing of Services, (Chicago : American Marketing Association),
1981. V.C.Judd “Differentiate with the 5th P:People”, Industrial Marketing Manageme
nt, No 16, p.241-247. Leonard L.Berry and A.Parsuraman, Marketing Services : Com
peting Through Quality, (New York : Free Press), 1991, pp.152, 171-172. G.Lyan S
hostack, “Service Positioning Through Structural Changes, Journal of Marketing, Vo
l 51, Jan. 1987, pp 34-43) A. J. Mcgrath, “When Marketing Services 4Ps Are Not Eno
ugh”, Business Horizons, May-June, 1986, pp.44-50. Leonard L.Berry and A.Parsurama
n, Marketing Services : Competing Through Quality, (New York : The Free Press) p
.94,1991. S.Majaro, Marketing in Perspective, (London : George Allen), 1982. Jul
ie Baker, “The Role of the Environment in Marketing Services: The Customer Perspec
tive, in John A.Crepiel, Carole Congram and James Shanahan (eds), The Service Ch
allenge: Integrity for Competitive Advantage, (Chicago : American Marketing Asso
ciation), 1987, p.80. R.Doswell and Paul Gamble, Marketing and Planning Hotel an
d Tourism Projects, (London : Hutchinson), 1979. Christopher W.L.Hart, “The Power
of Unconditional Service Guarantees,” Harvard Business Review, July-Aug, 1988 pp-5
4-62. Donald W. Cowell, The Marketing of Services, (London : Heinemann), 1984, p
.243. G.Lynn Shostack, “Service Positioning through Structural Changes”, Journal of
Marketing, Vol 51, Jan 1987 p.34-43.
2.
3.
4. 5. 6. 7. 8. 9. 10.
11. 12. 13. 14.
42
FURTHER READINGS : BOOKS ON SERVICES MARKETING
Given below is a list of books on “Marketing of Services” which you may find useful
for further reading for this course. S. Baron and K. Harris, Services Marketing –
Text and Cases , Palgrave, 2003 J. Bateson, Managing Services Marketing: Text an
d Readings, Dryden, 1995 L.L. Berry and A. Parasuraman, Marketing Services : Com
peting Through Quality, The Free Press, 1991 D. Carson and A. Gilmore (eds.), Se
rvice Marketing- Text and Readings, Mercury Publications, 1996 D. Cowell, The Ma
rketing of Services, Heinemann, 1996 W.J. Glynn and J.G. Barnes (eds.), Understa
nding Service Management, John Wiley and Sons, 1995 C. Groonross, Service Manage
ment and Marketing, Lexington Books, 1990 J.L. Heskett, W.E. Sasser, Jr. and C.W
.L. Hart, Service Breakthroughs Changing the Rules of the Game, The Free Press,
1990 D.L. Kurtz and K.E. Clow, Service Marketing, John Wiley, 2002 C. H. Loveloc
k, Services Marketing, Prentice Hall A. Payne, Essence of Services Marketing, Pr
entice Hall of India, 1996 R.T. Rust, A.J. Zahorik and T.L. Keiningham, Service
Marketing, Harper Collins, 1996 Ravi Shanker, Services Marketing- The Indian Per
spective, Excel Books, 2002 T.A. Swartz, and D. Iacobucci (eds.), Handbook of Se
rvices Marketing and Management, Sage Publications, 2000 H. Woodruffe, Services
Marketing, Macmillan India, 1997 V.A. Zeithaml , A. Parasuraman and L.L. Berry,
Delivering Quality Service – Balancing Customer Perceptions and Expectations, The
Free Press, 1990 V.A. Zeithaml and M.J. Bitner, Services Marketing, , Tata McGra
w-Hill, New Delhi, 2003
43
MS-65
Block
3
STRATEGIC ISSUES
UNIT 8 Service Quality UNIT 9 Managing Demand and Capacity UNIT 10 Customer Rete
ntion 5 24 38
1
Strategic Issues
GNOU, New Delhi
Print Production
2
Printed at:
BLOCK 3 STRATEGIC ISSUES
Block 3 of this course deals with strategic issues concerning services marketers
. The block consists of three units. The first unit (Unit 8) deals with Service
Quality. In the last two decades interest in the issues related to service quali
ty has increased tremendously and a number of researchers have been working on i
t. In this unit you will be acquainted with a wide range of topics on Service Qu
ality including service quality models and measurement of service quality. Unit
9, the second unit of this block, discusses management of demand and capacity. B
ecause of the perishability aspect of services, services marketers face a major
challenge in matching demand and capacity. In this unit strategies for matching
capacity and demand and for managing customer waiting have been discussed. The l
ast unit of the block titled ‘Customer Retention’ highlights the importance of retai
ning customers for service firms and outlines issues related to customer retenti
on and loyalty including service recovery and service guarantees.
3
Strategic Issues
BLOCK UNIT NOS. UNIT TITLE AUDIO PROGRAMME VIDEO PROGRAMME
1.
rvices
2.
5. 6. 7.
ix for Services
3.
8. 9. 10.
STRATEGIC ISSUES
4.
11. 12. 13. 14.
of Health
5.
15. 16. 17. 18. 19.
4
UNIT 8 SERVICE QUALITY
Objectives
After studying this unit you should be able to: define service quality, identify
the reasons for a different approach to service quality, explain the determinan
ts of service quality, understand service quality models and their application,
understand the linkage between service quality and profitability, and measure se
rvice quality.
Structure
8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 Introduction Reasons for Different Appr
oach to Service Quality Service Quality Models Benefits of Service Quality to th
e Organisation Measuring Service Quality Communicating with Customers about Serv
ice Quality Case Study Summary Self Assessment Questions Further Readings
8.1 INTRODUCTION
Quality came to the service literature at the beginning of the 1980’s. This is qui
te in contrast to the manufacturing sector wherein quality management has a long
and rich history. In the twentieth century, especially the second half, increas
ing global competition forced many manufacturing companies to develop and adopt
quality management practices aimed at increasing competitiveness by eliminating
waste, increasing efficiencies, reducing costs, improving customer satisfaction
and involving every member of the organisation in doing so. However, from 1980’s t
he interest in service quality has increased tremendously. One reason why servic
e quality is becoming an important issue is that all the developed countries as
well as a number of developing countries have become service economies. As expla
ined in Block 1, in India also service sector is the largest contributor to GDP,
ahead of agriculture as well as industry sector. Another reason for the rising
importance of service quality is that it is proving to be a winning competitive
strategy. More and more companies are emphasizing on providing excellent service
quality in order to have a distinctive competitive advantage over their competi
tors in a world where establishing a long term technology based competitive adva
ntage is becoming increasingly difficult. The conceptualization and measurement
of service quality perceptions have been one of the most debated and controversi
al topics in the service marketing literature. The term ‘Service Quality’ has been d
efined in different ways. Given below are some of the definitions : 5
Strategic Issues
Service quality as perceived by customers, can be defined as ‘the extent of discre
pancy between customers’ expectations or desires and their perceptions’ (Zeithaml, P
arasuraman and Berry,1990) Quality is whatever customers say it is, and the qual
ity of particular product or service is whatever the customer perceives it to be
(Buzzel and Gale, 1987) Service quality is the delivery of excellent or superio
r service relative to customer expectations (Zeithaml and Bitner, 1996) Quality
of a service, as perceived by the customer is the result of a comparison between
the expectations of the customer and his real-life experiences (Gronroos, 1982)
You will notice that all these definitions revolve around the fact that service
quality is essentially what customers perceive. Only customers judge quality an
d all other judgments are irrelevant. Therefore, the ultimate aim of an excellen
t service quality system is to satisfy the customer’s need and go beyond to deligh
t the customers. The principles and practices as applied to goods quality, are n
ot sufficient for ‘Service Quality’. This is because of some basic differences betwe
en goods and services with regards to how they are produced, consumed and evalua
ted.
8.2 REASONS FOR DIFFERENT APPROACH TO SERVICE QUALITY
You may recollect the characteristics of services that distinguish them from goo
ds, as explained in Unit 1. This would help you in understanding the reasons for
different approach to service quality, as explained below: i) Services are pred
ominantly intangible in nature. Since services are performances, acts and experi
ences, it is not possible to have exact specifications for them, unlike physical
objects like automobile, machine tools, television set etc. for which exact spe
cifications can be set and communicated. Further, services can’t be tested prior t
o sale to determine its quality. That means services are low in ‘search qualities’-
attributes that a consumer can determine before purchasing a product and stronge
r in ‘experience qualities’ - attributes that can only be discerned after purchase o
r during consumption. Also, there are certain services which consumers find diff
icult to evaluate even after purchase and consumption i.e. ‘credence qualities’. (Pl
ease refer Unit 4 giving the continuum of goods and services high in search, exp
erience and credence quality). Therefore, the criteria customers use to evaluate
services is more complex, thereby increasing the difficulties of marketers. Ano
ther very important aspect requiring separate treatment of service quality is th
e ‘inseparability’ aspect of services. The inseparability of production and consumpt
ion in services reflect the more active part required from the service provider
as well as the consumer. It is in this interaction where usually the quality is
judged by the customer.
ii)
6
The interaction between production and consumption in services as shown in Figur
e 8.1 may be broad e.g. restaurants or air travel or it may be thin e.g. trunk c
all through telephone exchange. This nature of services whereby customer often h
as to be in service factory makes it difficult for service providers to ensure q
uality before service is rendered to the customers. This is quite opposite to go
ods where they are engineered, produced and quality
8.1:
Interaction of buyer and seller ‘Service Encounter’
Service Quality
Production GOODS
Consumption
Production
SERVICES
controlled prior to sending them to customer for consumption. iii) Services are ‘h
eterogeneous’ in nature. The service performance may vary from producer to produce
r for the same service from customer to customer even with the same producer fro
m day to day for the same producer Therefore, ensuring consistent service qualit
y is a big challenge to organizations. Based on what you have studied so far in
this unit you will appreciate the following underlying themes about service qual
ity as highlighted by Pasasuraman, Zeithaml & Berry (1985): Service quality is m
ore difficult for the consumer to evaluate than goods quality. Service quality e
valuations are not made solely on the basis of the outcome of service, they also
involve evaluation of the process of service delivery. Service quality percepti
ons result from a comparison of consumer expectations with actual service perfor
mance.
8.3 SERVICE QUALITY MODELS
Considering the complex nature of how customers judge service quality, number of
researches have been done in the area and models have been developed to explain
the nature of service quality evaluation. However, two major works have receive
d widespread attention and acceptance. The first is the ‘Nordic’ perspective (Gronro
os) which defines the dimensions of service quality in broad terms consisting of
functional and technical quality. The second, the ‘American’ perspective (Parasuram
an, Zeithaml and Berry) uses five service quality dimensions. The two models are
discussed in detail here below: Gronroos Model This model suggests that the qua
lity of a service as it is perceived by customers has two dimensions, namely, a
technical or outcome dimension i.e. what the customers get and a functional or p
rocess related dimension i.e. how the process and service encounter are perceive
d. These two have been termed as ‘technical quality’ and ‘functional quality’. For examp
le, a restaurant customer will judge the service on the basis of his perception
of the food (what is being delivered-technical quality) as well as how the food
was served (functional quality). A patient will judge the services of a hospital
not only on the basis of cure element (technical quality) but on care element (
functional quality) as well. Gronroos postulated that as long as the outcome or
the
210987654321 210987654321 210987654321 210987654321 210987654321 210987654321
Consumption
7
Strategic Issues
technical quality is acceptable, the process dimension, or functional quality, f
requently may be more critical to consumer’s overall quality perception. Also, in
certain cases the technical quality or the outcome may be difficult for the cust
omers to judge (remember credence quality discussed in the Block 1 and referred
earlier in this unit) and in such cases the quality perceptions will be based to
a large extent on functional quality. The quality perception process includes m
uch more than just the two dimensions of service quality. Good perceived quality
is obtained when the experienced quality meets or exceeds the expectations of t
he customer, that is, the expected quality. This means that even if the experien
ced quality is good, the total perceived quality may still be low, if the expect
ations of the customers are very high or unrealistic. Conversely, the total perc
eived quality may be high even if experienced quality is not very good, if the c
ustomer has very low expectation. Fig 8.2 brings about the perceived service qua
lity model.
8.2:
Expected Quality
Total Perceived Quality
Experienced Quality
Image Market Communication Image Word-of-Mouth Customer Needs Technical Quality:
What Functional Quality: How
Source: Gronroos, C. (1988) : Service Quality : The Six Criteria of Good Service
Quality, Review of Business 3, p. 12.
The image of the company doesn’t only have an impact on the expected quality but a
lso on perception of the quality experienced. It works as a filter i.e. if the i
mage of the service provider is good in the minds of the customer, minor errors
or mistakes are likely to be overlooked and conversely if the image is negative
the impact of a mistake is likely to be greater than it otherwise would be. The
model suggests that the total perceived quality is not determined by the level o
f the technical and functional quality dimensions only, but rather by the gap be
tween the expected and experienced quality. The expected quality depends on a nu
mber of factors like market communication, image, word of mouth communication, c
orporate image and customer needs, few of which are directly under firm’s control
and others only indirectly controlled. Factors under firm’s direct control include
advertising, direct mail, public relations, sales campaign etc. (i.e. market co
mmunication) whereas factors like image, word-of-mouth and customer needs are no
t directly under firm’s control but can be influenced. The marketers should unders
tand from this not to overpromise. Delivering on promises is an important aspect
of
8
perceived service quality. Also, it should be appreciated that customer expectat
ions are not static but keep on changing over period of time. Activity 1 Conside
r the following services and identify the Technical Quality and Functional Quali
ty elements a) Airlines b) Retail Banking – savings account c) Hotels d) Health Ca
re .............................................................................
.............................................. .................................
................................................................................
.......... .....................................................................
...................................................... .........................
................................................................................
.................. .............................................................
.............................................................. Gaps Model of Ser
vice Quality Parasuraman, Zeithaml and Berry (PZB) have done extensive work in t
he area of service quality. According to them Perceived Service Quality can be d
efined as ‘the extent of discrepancy between customers’ expectations or desires and
their perceptions. Put simply, Perceived Service Quality = Perceived Service – Exp
ected Service.Based on their research work, they identified that customers consi
der five dimensions in their assessment of service quality, as given below: Reli
ability: Ability to perform the promised service dependably and accurately (exam
ple: flights depart and arrive on schedule). Willingness to help customers and p
rovide prompt service (example : no waitings at the hospital). Employee’s knowledg
e and courtesy and their ability to inspire trust and confidence. (example : kno
wledgeable mechanics at auto service centre). Caring, individualized attention g
iven to customers (example: specific type of room provided to the guest based on
his previous stay, acknowledges customer by name). Appearance of physical facil
ities, equipment, personnel and written materials (example: seating and air cond
itioning in a theatre).
Service Quality
Responsiveness:
Assurance:
Empathy:
Tangibles:
Of the five dimensions, reliability is considered to be the most important one.
It refers to the company delivering on its promises. In a competitive market pla
ce it is absolutely essential for a firm to be reliable in order to attract cust
omer loyalty. Assurance dimension is likely to be of great importance in case of
services perceived to be of high risk by the customers or services which are ri
ch in credence qualities e.g. health services. Tangibles may be given great impo
rtance by new customers to judge service quality especially when other cues may
not be available. By focusing on empathy a service company can make the customer
feel unique and special whereas responsiveness dimension emphasizes promptness
in dealing with customer’s requests, complaints or problems. PZB further focused o
n finding the deficiencies within companies that result in poor quality percepti
ons by customers. The reasons for gap between customers’ perceptions and expectati
ons (Gap5 – Customer Gap) were identified as :
9
Strategic Issues
Provider Provider Provider Provider
Gap Gap Gap Gap
1 2 3 4
: : : :
Not Not Not Not
knowing what customers expect selecting the right service designs and standards
delivering the service standards matching performance to promises
Based on the above, a gap analysis model was developed as shown in Figure 8.3.
8.3:
Word – Of - Mouth Communication
(
)
Personal needs
Past Experience
CUSTOMER
Expected Service GAP 5 Perceived Service GAP 4 External Communications to Custom
ers (Customer Gap)
COMPANY GAP 1 GAP 3
Service Delivery
Translation of Perceptions into Service Quality Specifications GAP 2 Perception
of Customer Expectations
1. Provider Gap1 : Not knowing what customers expect: This gap is the difference
between customer expectations of service and company understanding of these exp
ectations. Service firms executive may not always understand what features conno
te high quality to consumers in advance, what features a service must have in or
der to meet customer needs and what levels of performance on those features are
needed to deliver high quality service. 2. Provide Gap 2 : Not selecting the rig
ht service designs and standards: A company might correctly perceive the custome
rs’ needs but may not set a specificied performance standard. This may occur becau
se management sometimes believes that customer expectations are unreasonable or
unrealistic. Also availing of other factors like resources constraints, market c
onditions and/or management indifference – may result in discrepancy between compa
ny perception of consumer expectation and the actual specification established f
or a service. 3. Provider Gap 3: Not delivering the service standards: This is t
he gap between service quality specifications and actual service delivery. Even
if there are customer driven service standards, a high quality service delivery
is not a certainty. The main reason for this gap is involvement of human beings
in the service delivery – especially the role of contact personnel. The variabilit
y in employee performances makes it hard to maintain standardized quality. Failu
re to match demand and supply, customers not fulfilling their roles and problem
with service intermediaries may also result in creating this gap.
10
4. Provider Gap 4: Not matching performance to promises: This is essentially a g
ap between what you deliver and your external communication. Media advertising a
nd other communication by a firm can affect consumer expectations. Therefore, a
company must be certain not to promise more in communication that it can deliver
in reality. Promising more than what can be delivered will raise initial expect
ations but lower perception of quality when the promises are not fulfilled. In o
rder to bridge the gap between customers’ perceptions and expectations, the provid
er gaps 1 to 4 are required to be filled. The key contributing factors leading t
o Provider Gaps and strategies to reduce the gaps have been highlighted below.
GAP Gap 1 CAUSES OF GAP Lack of marketing research orientation Inadequate upward
communication Too many levels of management Inadequate management commitment to
service quality Perception of infeasibility Absence of goal setting Absence of
customer-driven standards Resource constraints Deficiencies in human resource po
licies Failure to match supply and demand Customers not fulfilling roles Overpro
mising Ineffective management of customer expectations Inadequate horizontal com
munication STRATEGIES TO REDUCE GAP Communication with customers Conduct marketi
ng research Encourage upward communication
Service Quality
Gap 2
Top management commitment Develop Service Quality goals Standardization of tasks
Address feasibility of customer expectations
Gap 3
Teamwork, Empowerment, Role clarity, Training Synchronize demand & capacity Comm
unicating with customers
Gap 4
Avoid propensity to overpromise Increase horizontal communication Managing custo
mer expectations
The Gaps Model thus helps in finding out the reasons for the quality problems an
d the ways to close the gaps. Activity 2 Choose any service organization you are
familiar with and using the gaps model of service quality identify the gaps the
organisation suffers from and the possible reasons for these gaps. ............
................................................................................
............................... ................................................
........................................................................... ....
................................................................................
....................................... ........................................
................................................................................
...
8.4 BENEFITS OF SERVICE QUALITY TO THE ORGANIZATION
A good or excellent service quality would result in customer satisfaction or cus
tomer delight. But how does it have a positive impact on the bottom lines of 11
Strategic Issues
the companies. Broadly, this may be categorized into two parts. One is the impro
ved ability of the firm to attract new customers - either through positive word
of mouth or due to advertising of its superior quality offering. Secondly, its a
bility to retain existing customers, who feel satisfied with the service offerin
g and become repeat customers. This would ultimately help in greater revenues an
d profits. In fact, the positive relationship between perceived quality and prof
itability has been documented empirically. Buzzell and Gale in ‘The PIMS (Profit I
mpact of Marketing Strategies) Principles’ (Free Press, NY, 1987), have mentioned
that in the long run, the most important single factor affecting a business unit’s
performance is the quality of its products and services relative to those of co
mpetitors.’ A quality edge boosts performance in two ways; in the short run, super
ior quality yields increased profits via premium prices and in the longer run, i
t is the more effective way for business to grow. Quality leads to both market e
xpansion and gains in market share. PZB in their research have found out relatio
nship between customers’ perception of the quality of service rendered by a compan
y and their willingness to recommend the company to their friends. There was a d
ramatic difference between the quality perception of customers who would and tho
se who would not recommend their service companies to their friends. The custome
rs who showed their intention to recommend had a significantly high score of per
ceived service quality than those who mentioned that they wouldn’t recommend (scor
es of - 0.5 and - 2.3 respectively). A summary of results of some of the researc
hes which prove a positive relationship between service quality and profitabilit
y is given below. (Extracted from Zeithaml, Berry and Parasuraman, “The Behavioura
l Consequences of Service Quality”, Journal of Marketing, Vol. 60, April 1996, pp
31-46) Companies offering superior service achieve higher than normal market sha
re Mechanism by which quality influences profits include increased market share
and premium prices. Business in the top quintile of relative service quality on
average realize an 8% higher price than their competition. The Hospital Corporat
ion of America found a strong link between perceived quality of patient care and
profitability across its many hospitals. Improved service quality increases fav
ourable behaviour intention and decreases unfavourable intention of customers. B
ehavioural intention can be viewed as indication that signal whether customer wi
ll remain with or defect from the Company. Ford Motor Company has demonstrated t
hat dealers with high service quality scores have higher than normal profit, ret
urn on investment and profit per new vehicle sold. Positive and significant rela
tion exists between customers perception of service quality and their willingnes
s to recommend the company. Positive co-relation exists between service quality
and repurchase intention and willingness to recommend. Rust, Zahorik and Keining
ham have developed a model showing relationship between service quality improvem
ent and profitability as shown in Figure 8.4. The model shows relationship betwe
en the two as a chain of effects. A successful improvement effort results in an
improvement in service quality which in turn results in increased perceived qual
ity and customer satisfaction and probably reduced costs. Increased customer sat
isfaction in turn leads to
12
8.4:
Improvement Effort Improvement Effort
Service Quality
Service Quality Improvement Service Quality Improvement
Perceived Service Quality and Perceived Service Quality and Customer Satisfactio
n Customer Satisfaction
Word-of-Mouth Word - of - Mouth
Customer Retention Customer Retention Attraction of New Attraction of New Custom
ers Customer Revenues and Market Share Revenues and Market Share
Cost Reduction Cost Reduction
Profitability Profitability
Source: Return on Quality : Making Service Quality Financially Accountable, Rust
, Zahorik and Keiningham, Journal of Marketing, April, 1995, p-60
higher level of customer retention and also positive word of mouth. New customer
s attracted by positive word of mouth coupled with retention of existing custome
rs result in higher revenues and market share. The increased revenues combined w
ith the decreased costs, lead to greater profitability. The effect of word of mo
uth, which is difficult to measure in practical business situation, is thus show
n in dotted lines. The biggest responsibility for a good service quality system
rests with the management of the organization. It should establish a policy for
service quality and customer satisfaction. Successful implementation of this pol
icy depends upon management commitment to the development and effective operatio
n of a quality system. It should also provide sufficient and appropriate resourc
es to implement the quality system and achieve the quality objectives. The resou
rces include personnel as well as material resources. Human resources play an ex
tremely critical role in service firms and therefore proper attention has to be
given to employee motivation, training and development. Regular communication wi
thin the service organization should be a feature at all levels of management. T
he service organization should develop, establish, document, implement a quality
system as a means by which stated policies and objectives for service quality m
ay be accomplished. The quality system elements should be structured to establis
h adequate control and assurance over all operational processes affecting servic
e quality. The quality system should emphasize preventive action that avoid the
occurrence of problems while not sacrificing the ability to respond to and corre
ct failures, should they occur. Services companies can also benefit by benchmark
ing which is defined as the ‘continuous process of measuring products, services an
d practices against the toughest competitors or those companies recognized as in
dustry leaders’. This concept was originally developed in the manufacturing sector
, but is now being used successfully in service sector as well.
13
Strategic Issues
CEOs’ Views on Benefits of Service Quality OBEROI HOTEL CHAIN It you want to be ah
ead of your competitors, your quality has to be monitored all the time. In today’s
competitive scenario, maintenance of quality is not enough, you have to improve
it. If you have quality not only will your customer not leave you, you can char
ge a higher price because customers are willing to pay. The main objectives of t
he TQM drive is to achieve maximum possible customer satisfaction and employee s
atisfaction because only a happy staff member will go out of his way to offer sa
tisfying services to the customer and improving the bottom line. The nature and
quality of our service will determine our reputation in the market.
VYSYA BANK
HDFC
Source: Business Today, 3rd Anniversary Issue, Jan 7-21, 1995 p. 238, 259 & 268
8.5 MEASURING SERVICE QUALITY
The most widely-used measure for service quality has been the ‘SERVQUAL’ measure of
Parasuraman, Zeithaml and Berry, according to which customer assessment of servi
ce quality results from a comparison of service expectations and actual performa
nce. The SERVQUAL scale was first published in 1988 and has undergone numerous i
mprovements and revisions since then. This scale was developed and validated usi
ng service providers in four service sectors : retail banking, credit cards, sec
urities brokerage and product repair and maintenance. The developers of the scal
e acknowledge that the five service quality dimensions are general dimensions th
at relate to most of the services. It measures the service quality on the five s
ervice quality dimensions discussed earlier in this unit viz. Reliability, Respo
nsiveness, Assurance, Empathy and Tangibles. Reliability largely concerns whethe
r the outcome of service delivery was as promised. The other four dimensions rel
ate to the process of service delivery or how the service was delivered. Servqua
l scores are expressed as the difference between expectations and perceptions i.
e. it measures the gap between the service that consumer think should be provide
d and what they think actually has been provided. Respondents complete a series
of scale, which measure their expectations on five service quality dimensions an
d subsequently, they are asked to record their perceptions of that company’s perfo
rmance on those same dimension. When perceived performance ratings are lower tha
n expectations this is sign of poor quality; the reverse indicates good quality.
Example: A) Expectation Statements (E) Strongly Disagree The physical facilitie
s at banks should be visually appealing Banks should give customers individual a
ttention 14 1 1 2 2 3 3 4 4 5 5 Strongly Agree 6 6 7 7
B)
Corresponding Perception Statements (P) Strongly Disagree The physical facilitie
s at XYZ Bank are visually appealing XYZ bank gives customers individual attenti
on 1 1 2 2 3 3 4 4 5 5 6 6 Strongly Agree 7 7
Service Quality
Service quality scores would be expressed as P-E The original SERVQUAL instrumen
t consisted of 22 statements covering the five service quality dimensions (4 que
stions on tangibles, 5 on reliability, 4 on responsiveness, 4 on assurance and 5
on empathy) – i.e. a set of 22 statements covering expectations and a set of 22 c
orresponding statements covering perceptions. Expectations and perceptions state
ments includes aspects like (i) equipments, physical facilities, appearance of e
mployees, materials associated with the service like pamphlets or statements (ta
ngibles) ii) timely provision of service, performing the service right the first
time, meeting the promises, sincere interest in solving the problems (reliabili
ty), (iii) prompt service, willingness to help, employees never too busy to resp
ond to customer requests (responsiveness), (iv) behaviour of employees instillin
g confidence, feeling of safety in transactions, employees having knowledge to a
nswer the questions (assurance) and (v) individual attention to customers, emplo
yees understanding specific needs of customers (empathy). In addition to expecta
tions and perceptions section the SERVQUAL contained a “point allocating question” w
hich was used to ascertain the relative importance of the five dimensions by ask
ing respondents to allocate a total of 100 points among the dimensions. The serv
qual instrument has been used extensively, with or without some modifications. S
tevens, Knutson and Patton, based in the servqual instrument developed an interv
iew schedule – ‘Dineserv.per” for continual assessment of customers’ perceptions regardi
ng service quality of restaurants and suggested that it could be administered ev
ery two to three months to 50 to 100 recent customers, selected at random. Exhib
it 8.1 gives the details of the Dineserv.per interview. The SERVQUAL scale can b
e used i) ii) iii) iv) v) To determine a company’s service quality along each of t
he five service quality dimensions. To find out relative importance of service q
uality dimensions as considered by the customer. To compute overall weighted SER
VQUAL score, which takes into account the relative importance of each dimension
as well. To track customers’ expectations and perceptions over time To compare a c
ompany’s SERVQUAL score against those of competitors.
As mentioned earlier the SERVQUAL instrument has been used with modifications in
a number of studies. Though it is a widely used instrument, some researchers ha
ve also identified problems in using the instrument as well as the gap theory me
thodology. Cronin & Taylor suggest that instead of measuring expectations and pe
rceptions, measurement of performance alone would be enough for measuring servic
e quality. They have suggested that the performance based scale developed (SERVP
ERF) is efficient in comparison with the SERVQUAL scale as it reduces by 50% the
number of items that must be measured. 15
Strategic Issues
Exhibit 8.1 The “DINESERV.PER” Interview
Introduce yourself, say that you’re trying to measure the quality of the service a
t your restaurant, since you’re always trying to improve, and that this will take
only about ten minutes. Ask if you may have their time and cooperation. If they
agree, ask them to indicate their position on each of the 29 statements by assig
ning a number from seven (strongly agree) to one (strongly disagree). If their f
eeling is between those extremes, they should assign an intermediate number. The
restaurant….. 1) has visually attractive parking areas and building exteriors. 2)
has a visually attractive dining area. 3) has staff members who are clean, neat
, and appropriately dressed. 4) has a décor in keeping with its image and price ra
nge. 5) has a menu that is easily readable. 6) has a visually attractive menu th
at reflects the restaurant’s image. 7) has a dinning area that is comfortable and
easy to move around in. 8) has rest rooms that are thoroughly clean. 9) has dini
ng areas that are thoroughly clean. 10) has comfortable seats in the dining room
. 11) serves you in time in the dining room. 12) quickly corrects anything that
is wrong. 13) is dependable and consistent. 14) provides an accurate guest check
. 15) serves your food exactly as you ordered it. 16) during busy times has empl
oyees shift to help each other maintain speed and quality of service. 17) provid
es prompt and quick service. 18) gives extra effort to handle your special reque
sts. 19) has employees who can answer your questions completely. 20) makes you f
eel comfortable and confident in your dealings with them. 21) has personnel who
are both able and willing to give you information about menu items, their ingred
ients, and methods of preparation. 22) makes you feel personally safe. 23) has p
ersonnel who seem well-trained, competent, and experienced. 24) seems to give em
ployees support so that they can do their jobs well. 25) has employees who are s
ensitive to your individual needs and wants, rather than always relying on polic
ies and procedures. 26) makes you feel special. 27) anticipates your individual
needs and wants. 28) has employees who are sympathetic and reassuring if somethi
ng is wrong. 29) seems to have the customer’s best interest at heart. The first te
n items are about tangibles; items 11-15, about reliability, items 16-18, about
responsiveness; items 19-24, about assurance; and items 25-29, about empathy Sou
rce: Steven, Knutson and Patton, “Dineserv: A tool for measuring Service Quality i
n Restaurants, Cornell Hotel and Administration Quarterly”, April 1995, p.59
While conducting surveys to assess the service quality it will always be benefic
ial to ask some additional questions on customer satisfaction and loyalty with r
egards to the service provider. The loyalty issue can be addressed by asking que
stions on the customer’s repurchase intention and also his likelihood or willingne
ss to recommend the company and brand to other people (a positive word-of-mouth)
. We will discuss more about issues related to customer loyalty in the last unit
of this block. Apart from conducting customer surveys like the one using SERVQU
AL as described above, some of the other methods which service organizations use
to obtain information about their service quality are briefly explained below:
a) Transaction Surveys: This type of research involves tracking the information
about one or all of the key service encounters with the customer. These surveys
are also called ‘trailer calls’ or ‘post transaction surveys’. This is usually done with
the help of a small questionnaire
16
immediately after a service transaction has taken place e.g. survey of airlines
passengers while disembarking or that of a hotel guest while checking out. These
surveys also provide the management a tool for monitoring the performance of in
dividual service contact personnel. b) Complaint Solicitation and Analysis: Cust
omers tend to voice their dissatisfaction through complaints. An analysis of the
complaints can help in identifying quality failure points. We will discuss the
issue of complaint management in detail in the last unit of this block. c) Myste
ry Shopping: In this method outside research companies are used by the service o
rganization who send people posing as customers in order to judge the service qu
ality. The mystery shopper is unknown to the service provider. This is a popular
method in the retail sector. Mystery shopping, also termed as Ghost Shopping, c
an be a very effective way of reinforcing service quality standards. d) Asking C
ustomers: This involves asking customers directly what they would like to be don
e to increase the quality of service and their satisfaction. This can be very ef
fective in business – to – business situation. This primarily concerns with the expe
ctation aspect. A slight variation of this, which includes perceptions about the
service quality as well is to form customer panels i.e. ongoing groups of custo
mers who are assembled to provide perceptions about a service over a period of t
ime. e ) Intermediary Research: This form of research is useful in services wher
e intermediaries form an important part of the service delivery process and have
a major direct contact with customers. In such situation intermediaries can pro
vide valuable feedback to the service firm regarding quality of service as perce
ived by the customers.
Service Quality
8.6 COMMUNICATING WITH CUSTOMERS ABOUT SERVICE QUALITY
Communication with customers involves listening to them and keeping them informe
d. The ISO standard brings about the various elements of an effective communicat
ion with customers. This involves : Describing the service, its scope, its avail
ability and timeliness of delivery. Stating how much the service will cost. Expl
aining the inter-relationship between service delivery and cost. Explaining to c
ustomers the effect of any problems, and how they will be resolved, should they
arise. Ensuring that customers are aware of the contributions they can make to s
ervice quality. Providing adequate and readily accessible facilities for effecti
ve communication. Determining the relationship between the service offered and t
he real needs of the customer. The need for proper communication is highlighted
by the fact that the customers’ perceptions of service quality are acquired often
through communication with the service organization’s personnel and facilities. Al
so advertisements of the service should reflect the service specification and ta
ke account of the customer perception of the quality of service provided. The ma
rketing function should recognize the liability, risks and financial implication
of offering exaggerated or unsubstantiated claims for a service. It is here tha
t importance of linkages between operations and marketing come into picture.
17
Strategic Issues
Valarie Zeithaml suggests that communicating service quality begins with an unde
rstanding of the importance to customers of the various aspects of service quali
ty. Isolating quality dimensions that are most important to customer provides a
focus for advertising efforts. Some of the propositions developed by him regardi
ng advertising for services include : Focusing on the most important dimension o
f service quality will result in more effective communication than focusing on o
ther dimensions. When marketing and operations interact to create external commu
nications, customer expectations are more realistic than when these functioning
do not interact. The more vivid the advertisement, the stronger the effect in in
fluencing customer expectations about quality. Advertising that features actual
employees doing their jobs is more effective in communicating excellence than ad
vertising that uses professional talent. The more positive employees feel about
the advertising that the company runs, the more willing they will be to provide
service. Activity 3 Collect a few print advertisements of different service comp
anies and identify the service quality dimensions(s) being emphasized in them. .
................................................................................
.......................................... .....................................
................................................................................
...... .........................................................................
.................................................. .............................
................................................................................
.............. A case study, titled “Turnaround through Service Quality — British Ai
rways” has been presented below to demonstrate as to how service quality can be a
real winner in transforming an ailing organization into industry leader and the
way British Airways succeeded in achieving it.
8.7 CASE STUDY: TURNAROUND THROUGH SERVICE QUALITY — BRITISH AIRWAYS
Introduction This illustrative case study has been developed to highlight the im
portance of service quality in achieving success for an airline and to determine
the ways and means by which this could be achieved by British Airways (BA). The
transformation of BA from a state owned airlines making huge losses in early 80’s
and known for its indifference to passengers to the highest profit making airli
ne in the world in 90’s and famous for its excellent quality of service, was truly
remarkable and spectacular. During this period (80’s & 90’s) the airlines was priva
tized, the load factor consistently improved and the shareholders’ worth increased
multifold. In a number of passenger surveys, BA was rated as the world’s best air
line. So, what were the reasons for this extraordinary turnaround of an ailing a
irline into an industry leader and how this was achieved? After deregulation of
airline industry in the west, a number of carriers became too focused on prices
and lowering them that they simply overlooked the fact that the industry was bas
ically built on service. Some airlines made the mistake of thinking themselves a
s simply transportation companies which took people from one airport to another.
However, to succeed airlines have to think themselves as service companies that
happen to fly airplanes. Since most of
18
the airlines operate same planes, charge quite similar prices, to distinguish it
has to be done through quality of service. Good service, delivered on a continu
ous and consistent basis is definitely a competitive advantage for any business
and surely so for airlines. The Road to success Much of the success of BA is att
ributed to the policies and strategies initiated by Sir Colin Marshall, Chief Ex
ecutive, who was appointed in 1983. The turnaround strategy revolved around a fo
cus on its customers and an obsession with improving service quality. The airlin
e recognized that instead of being in the business of flying airplanes, it was i
n fact in the business of satisfying passenger requirements. To be a truly custo
mer oriented company required a lot of changes and initiatives to be taken rangi
ng from restructuring to empowerment of employees. Airline industry is a service
industry in which the quality of the offering is not just dependent on the outc
ome (safe and timely arrival) but also on the way in which the service is delive
red i.e. the functional quality. BA’s researches confirmed this, finding that a cu
stomer’s view of the airline depended not solely on product, bur their reaction to
the ambience, environment and culture they experienced with the airlines. Since
this involves a lot of interaction between employees and customers - ‘the moments
of truth’ - the quality of these interactions have a great impact on overall perc
eption of quality judged by the customers. BA recognized the important role whic
h the employees play in overall success of the airline and major initiatives wer
e taken for training, motivating the employees, to expose them to think about cu
stomer service and the critical role they play in achieving the goal of being a
service oriented organization. Programmes undertaken The first major initiative
taken in early 80’s was the “PUTTING PEOPLE FIRST” programme which was gigantic in sco
pe. The aim of this programme was to involve each of the 30,000 employees (The n
umber was reduced from 59,000 in 1979 to reduce the costs) of BA and it actually
did so. Their was absolute commitment from the top management to make the effor
t a success and this can be gauged by the fact that Sir Colin Marshall himself a
ttended ninety seven per cent of the courses. This course was aimed to help the
employees in improving their skills as service providers. It was emphasized that
it takes the dedication of each employee to succeed in delivering quality. To a
chieve consistent quality, every individual in the organization must believe tha
t success depends on how well he or she serves the customer. This programme was
just the starting point and was followed by number of the quality initiatives. “CU
STOMER FIRST TEAMS” were established whereby employees in small groups were encour
aged to give their ideas for improving customer service. More than a hundred tea
ms were set up and out of thousands of ideas generated, over 700 were followed t
hrough and implemented. BA, realizing the importance of internal marketing and t
he internal customers, organized a programme called “A DAY IN THE LIFE” in which emp
loyees from different departments appraised each other of their activities and f
unctions. This gave a good opportunity to the employees to understand the workin
g of each department and knowing each other better. Since services management re
quires a great deal of co-ordination between marketing and operations, this effo
rt helped in achieving a finer fit between the two. Further a training course “MAN
AGING PEOPLE FIRST “ was introduced for all managers. They were shown how to train
and support their sub-ordinates and be good leaders. In April 1992, BA launched
another customer initiative entitled “WINNING FOR CUSTOMERS”. Through all these pro
grammes, it was
Service Quality
19
Strategic Issues
successful in dismantling the bureaucratic style of working and moving towards b
eing a customer friendly airline. Simultaneously, BA put emphasis on building th
e infrastructure and tangible elements of service as well. This, together with i
nitiatives on employee improvement, provided the customers a world class service
. The marketing mix and market segmentation were carefully developed and number
of new brands were created, which are quite famous now. Adequate importance was
placed on customer retention through programmes like ‘Air Miles and Latitude’ (Frequ
ent Flyer Programme). Providing world class service went simultaneously with cos
t savings through increased efficiency. This was one area which helped to raise
its total productivity by fifteen per cent in three years during the beginning o
f 90s. The airline remained profitable when others were making losses (including
the year of the first Gulf War) and the industry was in recession in early 90s.
Benchmarking with the best service in the industry and customer feedback were a
lso vigorously taken. In order to provide the customer a choice of schedules and
networks, foundation was laid for a world network through a web of stakes, mark
eting alliances and code share deals. Growth, expansion and use of technological
developments were undertaken. All these were properly communicated to the custo
mer. Saatchi and Saatchi developed a series of outstanding global TV commercials
aimed at relationship marketing which helped in building BA’s image as world’s favo
urite airline. The significant aspect of all its communication was the credibili
ty. BA delivered what it promised to the customers. Conclusion BA’s efforts in emp
loyee training, focus on internal marketing, business efficiency programme, cust
omer feedback initiatives etc. all helped the airline in not only increasing pro
fits but also improvement in all major areas - more on time arrivals and departu
res, fewer complaints, better inflight and ground services, better reservation a
nd information services - i.e. an overall improvement in service quality. In fac
t, improvement in service quality was the focus of all the initiatives. The cust
omer service orientation of the airline is rightly highlighted in the following
statement of a cabin services manager of BA. “We like passengers to feel, when the
y finish their journey on one of our aircrafts, that we have gone that extra mil
e for them, that we have delivered that extra drink, that extra smile, that extr
a piece of information.”
8.8 SUMMARY
The unit described the concept of service quality to you. The term service quali
ty can be described as the delivery of excellent or superior service relative to
customer expectations. Because of some basic differences between goods and serv
ices with regards how they are produced, consumed and evaluated, service quality
requires a different approach as compared to goods quality. You have also learn
t the underlying themes of service quality that it is more difficult for the con
sumers to evaluate than goods quality, that service quality evaluations are made
on the basis of outcome as well as process of service delivery and that service
quality perceptions result from a comparison of consumer expectations with actu
al service performance. Two specific models of service quality, Gronroos Model a
nd Gaps Model developed by Parasuraman, 20
Zeithaml and Berry have been discussed. Gronroos models suggests that the qualit
y of a service as it is perceived by the customer has two dimensions, namely a t
echnical or outcome dimension and a functional or process related dimension. The
gaps model identifies the four provider gaps which are responsible for the gap
between customer’s perceptions and expectations (customer gap). The five dimension
s of service quality - Reliability, Responsiveness, Assurance, Empathy and Tangi
bles were also explained to you. This unit also explained to you the linkage bet
ween service quality and profitability. Servqual – a scale to measure service qual
ity has been discussed along with its possible applications. The final section o
f the unit give an illustrative case study of British Airways to demonstrate the
importance of service quality in achieving success for an organization and high
lights the ways and means by which it was achieved.
Service Quality
A) Objectives Type Questions i) Multiple Choice Questions 1) According to Gronro
os, Service quality can be broken into a) b) c) d) Internal and External Quality
Technical and Functional Quality Goods and service quality None of the above
2) The knowledge and courtesy of employees and their ability to convey trust des
cribes which of the service quality dimensions? a) b) c) d) Assurance Empathy Re
liability Responsiveness
3) The gap between expected service and company perception of consumer expectati
ons can be because of a) b) c) d) poor service design failure to match demand an
d supply inadequate marketing research orientation overpromising
4) Which of the four service provider gaps can be closed in the marketing functi
on alone? a) b) c) d) ii) Gap 1 Gap 2 Gap 3 Gap 4
True or False 5) Technical quality refers to the outcome whereas functional qual
ity refers to the process. 6) Customer’s expectations are influenced by word-of-mo
uth, personal needs, past experience and external communication 21
Strategic Issues
iii)
Directions for questions 7-10. Given below are examples of specific questions ra
ised by customers regarding different dimensions of service quality. Identify th
e service quality dimensions. 7) Do the tools used by the service engineer look
modern? 8) Is my bank statement free of errors? 9) Does some one in the bank rec
ognize me as a regular customer? 10) When there is a problem with my bank statem
ent, does the bank resolve them quickly?
Answers 1) 5) 9) b True Empathy 2) a 6) True 10) Responsiveness 3) c 7) Tangible
s 4) a 8) Reliability
B) Discussion Questions 1) 2) 3) 4) 5) 6) What do you understand by the term Ser
vice Quality? What are the underlying themes of service quality? Define the five
dimensions of service quality. Give suitable examples of each dimension. Briefl
y describe the gaps model and explain the significance of the five gaps that the
model identifies. In the gaps model of service quality which of the four servic
e provider gaps do you believe in the most difficult to close and why? Is good s
ervice quality a cost or a revenue producer? Discuss with the help of examples.
Using SERVQUAL scale, create a questionnaire for a service firm that you patroni
ze or are familiar with.
8.10
1. 2.
FURTHER READINGS
Cronin and Taylor ,” Measuring Service Quality: A Reexamination and Extension”, Jour
nal of Marketing, July 1992. Gronroos, “Strategic Management and Marketing in the
Service Sector”, Swedish School of Economics and Business Administration, Finland,
1982. Kurtz & Clow, Service Marketing, John Wily & Sons, 2002. Parasuraman, Zei
thaml and Berry, “A Conceptual model of Service Quality and its Implications for F
uture Research” Journal of Marketing, Vol. 49, 1995, pp 41-50 R.D. Buzzell and B.T
. Gale, “The PIMS Principles”, Free Press NY, 1987. Rust, Zahorik and Keningham, “Retu
rn on Quality - Making Service Quality Financially Accountable”, Journal of Market
ing, April, 1995, pp.58-70 Zeithaml, Berry and Parasuraman, “The Behavioural Conse
quences of Service Quality,” Journal of Marketing, Vol.60, April 1996, pp.31-46. Z
eithaml and Bitner, “Service Marketing”, Tata McGraw Hill, 2nd Edn. 2000, New Delhi.
3. 4.
5. 6.
7. 8. 22
9.
Zeithaml, Parasuraman and Berry, “Delivering Quality Service Balancing Customer Pe
rceptions and Expectations,” Free Press, NY, 1990. Zeithaml V, “Communicating with C
ustomer about Service Quality in Service Management Effectiveness”, Ed. Bowen, Cha
se and Cummings, Jossey Bass, San Francisco, 1990, pp. 369-383.
Service Quality
10.
23
Strategic Issues
UNIT 9 MANAGING DEMAND AND CAPACITY
Objectives
After studying this unit, you should be able to Explain the importance of managi
ng demand and capacity for service organizations. Identify the demand patterns a
nd their underlying reasons. Develop strategies for matching demand and capacity
. Understand the concept of yield management. Provide strategies for managing cu
stomer waiting.
Structure
9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 Introduction Understanding Demand Patterns S
trategies for Matching Capacity and Demand Yield Management Managing Customer Wa
iting Managing Demand and Waiting Lines : Case of an Amusement Park Summary Self
Assessment Questions Further Readings
9.1 INTRODUCTION
In the first unit of this course you have studied the characteristics of service
s which distinguish them from goods. One of the characteristics is perishablity
which means that services cannot be saved or stored. While marketers of physical
goods hold inventories to buffer fluctuations in demand and supply, it is diffi
cult or impossible for services marketers to do so. Therefore, many service busi
nesses frequently find it difficult to match supply (capacity) and demand. At ti
mes there may be too much of demand (movie halls or restaurants on weekend eveni
ngs) and sometimes too little demand may exist (low weekend occupancies in busin
ess hotels). However, a theater owner or a restaurant cannot take an empty seat
from Thursday night and add it to the capacity on Friday or Saturday night. A lo
w occupation for a business hotel on weekends is an irretrievable loss. Similarl
y a hospital bed or an airline seat left vacant is a loss for ever. Inability to
synchronize supply and demand has a significant impact on the service organizat
ion’s bottom line through lost opportunity (when demand is greater than capacity)
and through high costs (when demand is low in relation to fixed capacity resulti
ng in under utilization of capacity) Zeithaml, Parasuraman and Berry conducted a
n exhaustive survey in U.S.A (in 1980’s) covering 1,000 service firms to find out
the extent to which problems reported to be associated with services actually pr
esented problems for the sample firms. Out of the eight commonly cited difficult
ies unique to services, only one problem area – ‘The demand for services fluctuates’ -
received a mean score exceeding the mid-point on the 5 point scale (1 indicatin
g no problem at all to 5 indicating a major problem). This problem received a sc
ore of 3.27 and another important finding was the absence of any significant dif
ference across different types of services firms with regard to this problem.
24
Perception of demand fluctuation as a somewhat serious problem appeared to be un
iversal. A similar study conducted in India in 1996-97 with reference to passeng
er airline industry covering more than a dozen airlines operating in India revea
led similar results. The problem area that the demand fluctuates, received a mea
n score of 3.66 with 60 percent of the airlines indicating a score of 4 to 5. Th
e next highest score was 2.94 with regard to problem area that service quality i
s difficult to control. In this unit we will discuss various issued related to m
anaging demand/capacity (supply) imbalances. Activity 1 Compare a service organi
zation with a manufacturing firm in terms of inventory capacity (e.g. car repair
and maintenance service with an automobile manufacturer). Can you identify the
implications for the service organization? .....................................
................................................................................
...... .........................................................................
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..........................................................
Managing Demand and Capacity
9.2 UNDERSTANDING DEMAND PATTERNS
A service organization with a fixed capacity may be faced with one of the follow
ing four conditions: 1. Excess demand: The demand exceeds the maximum available
capacity. This results in some customers being turned away. Also, even for the c
ustomers receiving the service, the quality of service may get affected (refer s
ervice delivery gap in the gaps model discussed in the previous unit). This may
happen because of overcrowding and/or overstretching of resources. 2. Demand exc
eeds the optimum capacity level: Optimum capacity refers to the best use of capa
city from the perspective of both, customers and the company. In most of the cas
es it is less than the maximum capacity. For example, in the counseling session
at your study centre, while the maximum capacity of the rooms may be 60-70, the
optimum capacity for conducting the session may be 30-40 only for ensuring prope
r interaction. In the situation when demand exceeds optimum capacity, while no o
ne is turned away, customers may perceive deterioration in the quality of servic
e delivered. 3. Demand and supply are balanced at the optimum capacity: This is
the ideal situation. No one is turned away, no one is overworked in the staff an
d customers receives quality service. 4. Excess capacity : Demand is less than o
ptimum capacity and therefore resources are underutilized. In certain cases this
may also pose the risk that customers may have doubts about the service provide
r. All the above four possibilities have been given in Fig. 9.1. The capacity of
the service organization includes physical facilities, equipments and human res
ources. The first step in finding out ways to manage demand and capacity is to u
nderstand the demand patterns and the factors which affect it. Better knowledge
of demand patterns leads to better managerial decision making. The demand patter
ns may have a regular and predictable cycle or in some cases it may be largely r
andom in nature and difficult to predict.
25
Strategic Issues
9.1:
Maximum Available capacity
Demand Exceeds Capacity (business lost)
Demand Exceeds Optimum Capacity (Service quality declines) Optimum capacity Idea
l Use Excess Capacity (wasted resources, may send bad signals)
TIME (Source: Christopher Lovelock, Managing Services- Marketing Operations and
Human Resources, 2nd Edn. Prentice Hall, p.155)
a) Predictable Demand Variations: Many businesses are subject to periodic cycles
. These cycles may be daily (variations by hour), weekly (variation by day), mon
thly, seasonal and/or yearly. Try to identify services which may exhibit these t
ypes of predictable demand variations. For example, in case of a hotel there may
be variation in demand on different days with business travelers going back on
weekends, thereby reducing the demand. A hotel may also witness seasonal variati
on with high demand during a particular season due to large inflow of tourists.
A restaurant faces hourly variations with low demand during 3.00 – 7.00 pm. (happy
hours being offered by many restaurants during these times, with large price di
scounts). Amusement parks have greater demand during weekends as compared to wee
kdays and also greater demand is witnessed during school vacations. As marketers
you must find out if such predictable cycles exist in your business. If it is s
o, then you must find out and analyze the causes of these cyclical demand variat
ions. Do these happen because of seasonal change, employment schedule, salary da
tes, school vacations, public or regional holidays etc? A proper analysis of the
se causes will help you in devising suitable strategy for managing the demand fl
uctuations. b) Random Demand Fluctuations: At times the demand pattern may appea
r to be random with no apparently predictable cycle. Some degree of random varia
tion in demand is faced by virtually all service firms. Although such variations
cannot be predicted, marketers should nevertheless understand the underlying ca
uses that typically cause them. For example bad weather may result in an unexpec
tedly low customer turnout at a movie hall or an amusement park. A disaster like
accident, floods etc. may result in higher demand for health services and telec
ommunication services. A proper understanding of the underlying causes will prep
are you to deal with such random demand fluctuations. In order to understand the
demand patterns and underlying causes, it may be useful to do a segmentation an
alysis. Different segments of customers may reveal different patterns as well as
causes. Such an analysis will help you in pinpointing underlying causes of dema
nd fluctuations and in identifying certain
26
peaks of specific customer categories. This may help you in identifying certain
segments which could be easily diverted to off-peak periods. You may also discou
rage segments that are not profitable or are inconsistent with the service image
, at least during peak periods. Once you properly understand the above issues yo
u can suitably device strategies for matching demand and capacity. Activity 2 Se
lect a restaurant in your neighborhood and find out its demand patterns and also
identify the underlying reasons. ..............................................
.............................................................................. .
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.....................................................
9.3 STRATEGIES FOR MATCHING CAPACITY AND DEMAND
Managers can use a wide variety of strategies for matching capacity and demand.
This requires a clear understanding of demand patterns as well as the organizati
on’s capacity constraints. The strategies to be adopted can be broadly divided int
o two categories : 1) 2) Changing demand to fit supply (capacity) – marketing mix
strategies Changing supply (capacity) to fit demand – input scheduling strategies
Let us discuss the above two strategies in detail. 1) Strategies for Managing De
mand The organization should determine the optimum level of demand for its given
capacity. Once this has been determined, it can vary its marketing mix elements
of product, price, place and promotion to change demand in line with the capaci
ty. a) Product: As a service provider you can alter the service offering to even
the demand. The changes in service offering may be seasonal or based on days of
the week or time of the day depending on the nature of demand fluctuations. A h
otel for example may focus on weekend family entertainment and recreation packag
e to cope up with low demand from business executives during weekends. A managem
ent institute may offer more management development programmes during the vacati
on period of its regular management programme students. However, as marketers yo
u must ensure that by offering different types of services the image or position
ing of the service firm is not diluted or confused. Increasing demand during sla
ck period doesn’t mean that you should take business from any segment that is avai
lable. Pricing: The demand curve suggests that quantity of product demanded vari
es with the price. Many service marketers reduce price during the periods of low
demand to increase the demand. Airlines offer low fares during odd hours like l
ate night flights, movie theaters offer a lower price ticket for the morning sho
w, hotels offer large discounts during off seasons and also higher than normal p
rices during say Christmas or New year, restaurants and many retail outlets offe
r happy hours wherein discounts are offered. Using price as an effective tool fo
r managing
b)
27
Strategic Issues
demand would require a proper understanding of the demand curve – its shape, slope
etc. Also, you should appreciate the existence of different demand curves for d
ifferent segments during the same time period. As marketers you may also face an
additional challenge when multiple segments are served at the same time and the
se segments have paid different prices. This requires putting in certain usage c
onditions (for example for availing low priced fares in airlines customers have
to book in advance and there are higher cancellation charges) and/or providing v
alue enhancement to higher paying customers. c) Place (Distribution): Many servi
ce firms modify their time and place of delivery as a strategy to match demand a
nd capacity. Bank may change its timings on specific days or during specific per
iod, finance companies use mobile vans for distribution and collection of forms,
hospitals like Apollo have created satellite clinics to deal with routine consu
ltations, tests and medical services. Promotion: You can also shift the demand b
y properly communicating with your customers. The customers should be made aware
of the peak timings of the demand and also the benefits they can get in availin
g the service during non-peak timings. They should also be properly informed abo
ut changes in product, pricing and distribution. This can be done by putting sig
nages at the service outlets (like banks) or advertising. Service firms can also
use sales promotion to manage demand. Many airlines offer free ticket for compa
nion in the business class, some business hotels offer free stay for spouse duri
ng the weekend stay. Proper promotional strategy can help the service organizati
on in shifting demand from high to low period as well as stimulating demand duri
ng low periods.
d)
Activity 3 Select any service organization and analyze how it uses it marketing
mix elements to influence demand. ..............................................
.............................................................................. .
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........................................... ....................................
................................................................................
........ .......................................................................
..................................................... 2) Strategies for Managing
Capacity Managing capacity involves changes in different components of the reso
urces of a firm like people, facilities, equipments, time etc. By making changes
in these components you can achieve a better match between demand and capacity.
a) Using Part-time Employees: During periods of peak demand, service firm may h
ire additional part-time employees. This helps in increasing capacity as well as
reducing costs. However, issues like attitude of part time employees, training
concerns, higher turnover etc have to be properly addressed. Employees Working O
vertime: Some of the concerns raised above regarding part time employees can be
eliminated by having employees work over time. However, working for longer hours
may have adverse impact on service quality and also involves higher costs as ov
ertime charges are generally at higher rates. Cross Training Employees: Cross tr
aining of employees results in a flexible capacity, wherein employees can perfor
m several different jobs. Southwest Airlines strongly believes in this philosoph
y. The same
b)
c)
28
employee may move from ticketing to gate counters. This helps in avoiding underu
tilization of resources and also increasing the efficiency of the employees. d)
Scheduling: During peak demand periods people, facilities, and equipments are us
ed at full capacity. However, facilities and equipments also require proper main
tenance. This can be scheduled during periods of low demand. Similarly, for huma
n resources, off-peak periods can be used for training purposes as well as for g
ranting vacations.
In addition to the above, service firms can also meaningfully manage its capacit
y by increasing customer participation (customers can be used as productive reso
urces e.g. self-service in restaurants), outsourcing, modifying the capacity (e.
g. reconfiguring hotel rooms), renting facilities or equipments, and taking a su
bcontract work. The strategies discussed above for managing demand and capacity
have been summarized in Table 9.1
9.1:
High Demand/Slack Supply Managing Demand (Changing demand to fit capacity) Educa
te customers to curtain usage during peak periods (through signages or advertisi
ng) Offer incentives for usage during non-peak periods Charge full price–no discou
nts or premium pricing Take care of regular customers first Hire part-time emplo
yees Keep employees overtime Cross train employees Outsource, rent facilities/ e
quipments Slack Demand/Over Supply Modify service offerings Offer discounts, sal
es promotion schemes Modify hours of operations Bring service to the customers
Managing Capacity (Changing capacity to match demand)
Schedule training of employees Maintenance, repairs, renovations Schedule employ
ee vacations Take on subcontract work
9.4 YIELD MANAGEMENT
Yield management is a method for managing demand and capacity profitably by serv
ice organizations. It extensively uses computer based technology to study patter
ns in consumer behaviour in order to manage differential pricing. Yield manageme
nt has gained widespread acceptance in airline and hotel industry. It helps a fi
rm sell the right capacity to the right type of customer, at the right time for
the right price. Put in simple terms,
Yield = Actual revenue Potential revenue = Actual capacity used X Average actual
price . Total capacity X Maximum Price
It is a measure of the extent to which an organization’s resources are being used
to their full revenue generation potential. Yield can be increased by an organiz
ation by a properly planned differential pricing strategy. Yield management tech
niques are useful and appropriate: i) when a firm is operating with a relatively
fixed capacity, ii) when demand can be segmented, iii) when inventory is perish
able, iv) when the product is sold in advance, v) when demand 29
Strategic Issues
fluctuates substantially, and vi) where marginal sales cost is low, but capacity
change costs are high (Sherly Kimes, 1989). Yield management may require a lot
of mathematical programming, economic models and expert systems. Take the exampl
e of an airline. It may not be in a position to sell all its seats at full price
s. This may result in a number of seats remaining vacant. Once an aircraft takes
off with vacant seats, that capacity is lost for ever. Considering that increme
ntal cost of taking additional passengers is low, airlines offer discounted / ap
ex fares with certain conditions, in order to bring in more revenues and increas
e the yield. Same is the case with hotels.
Yield in case of hotel would be = room – nights sold X actual average room rate ro
om – nights available X published room rate
Take a hypothetical example of a 100 room hotel with a rate of Rs. 2,000 per nig
ht i.e. potential revenue is Rs. 2 lakh per night. However, it doesn’t get full oc
cupancy at these rates and attract only 50% occupancy, resulting in a yield of 5
0 percent. On the other hand if the room rates are reduced by 40% i.e. to Rs. 1,
200 per night, it attracts 100% occupancy. In this case the yield
⎛ 1200 × 100 ⎞ becomes 60% ⎜ 2000 × 100 ⎟ ⎜ ⎟ ⎝ ⎠
However, a combination of the two can be a better alternative for the hotel. Sel
ling 50% of the rooms at full tariff and remaining 50% at reduced tariff of
⎛ 160,000 ⎞ Rs. 1,200 would result in higher yield ⎜ 200,000 ⎟ of 80 percent. ⎜ ⎟ ⎝ ⎠
In order to make yield management successful, the marketers should identify the
main market segments being served / those can be served. The next step would be
to do a proper sales forecast for each segment at particular price levels. Based
on this forecast a proper mix of different customer segments at different times
can be suggested for maximizing the yield. These steps should be done on a cont
inuous basis so as to adjust to the changing market conditions as well as making
use of greater information available about segment wise demand patterns. Manage
rial Implications Sherly Kimes in her widely quoted article “Yield management – A to
ol for capacity constrained service firms (Journal of Operations Management, Oct
. 1989) has identified a number of management issues to be taken into account wh
ile implementing a yield management system. While yield management may give a fi
rm competitive advantage, it could also result in the following : Loss of compet
itive focus : As most yield management systems focus on maximizing revenue or yi
eld, it may result in neglecting important issues like service quality. That is
to say, short term profit maximization may over shadow long term competitive adv
antages. Customer Alienation : A customer who pays a higher price for a service
than other customers may feel alienated and dissatisfied. He may consider it to
be unfair to him. Therefore proper customer education should be an integral part
of any yield management system to be effective. Employee Morale Problem: Yield
Management seems to take away discretion from sales and reservation people. Ther
efore, it should be properly structured to allow for some judgment on the part o
f the employees. Lack of Employee Training : A yield management system will requ
ire extensive training of all employees. They should understand its objectives a
s well as its operation and how its affects their jobs.
30
Also in order to make the yield management successful a strong information syste
m within the organization as well as commitment from the top management is essen
tial.
9.5 MANAGING CUSTOMER WAITING
In the previous sections you have learnt about demand patterns and strategies to
match demand and capacity. However sometimes it is not possible to match demand
and capacity and waiting by customers become inevitable. Waiting is a common ph
enomenon at hospitals, restaurants, banks, hair cutting saloons etc. In such sit
uations waiting time becomes one of the key factors in consumer’s evaluation of se
rvice. While reducing waiting time is important for marketers, it is equally if
not more, important to reduce the customer’s perceived waiting time. If a customer
s perceived waiting time is less, he will be more satisfied with the service. Th
us service waits can be controlled by two broad techniques viz. Operations Manag
ement and Perception Management. 1) Operations Management : It involves reducing
the amount of time customers have to wait. This can be done in a number of ways
. Firstly the firm should analyze its operational processes in order to identify
and remove inefficiencies or bottlenecks, if any. Secondly, in case waiting can
not be avoided, a reservation system can be used. This will help in getting the
customer out of a queue. Thirdly, customers can be encouraged to use the facilit
ies during non-peak hours. Fourthly, greater use of information technology can b
e made wherein customers can use telephone, computers, etc to conduct business.
For example, banks can deploy ATMs, provide phone banking and internet banking t
o reduce pressure at the branches. Lastly, as marketers you can also differentia
te waiting customers wherein some customers may wait for more time while others
receive a quicker service. The differentiation can be done on the basis of a num
ber of factors like importance of the customer, urgency of the job, duration of
the service transaction and payment of a premium price. In case queues cannot be
avoided, the organization has to decide on the type of queuing system to be ado
pted. There are number of possibilities in this regard. Take for example the com
puterized railway reservation centres wherein there are multiplequeues and the c
ustomer has the option to join whichever queue he wants to and can also switch o
ver to other queue if the wait appears to be shorter in that. Another option is
to have a single queue system wherein first cum first serve rule applies to ever
yone. A slight variation of single queue system can be that each customer on arr
ival is given a number and waits at the reception area enabling the customer to
sit, relax and mix up with other customers.
Exhibit 9.1. Managing Waiting Lines at Sri Venkateswara Temple, Tirupati More th
an fifty thousand pilgrims visit the Sri Venkateswara Temple every day. ‘Sarvadars
anam’ (darshan for all) timings are different on different days of week. On normal
days, about 18 hours are allotted for Sarvadarsanam and on peak days it is open
for 20 hours. There is also a provision of ‘Special Darshan’ on purchase of tickets
. Pilgrims who use the queue for Special Darshan have a shorter waiting time. Th
is queue merges with the Sarvadarsanam queue at a fixed point and the darshan ti
mings are the same as that for Sarvadarsanam. The Sudarsanam token system was in
troduced to minimize the waiting time for Sarvadarsanam, Special Darshan and oth
er paid darshan/sevas. Some of its features: The tokens are available free of co
st at a number of convenient places in the town. The time for darshan is indicat
ed on the token. Pilgrims can enter the Vaikuntam Queue Complex at Tirumala at t
he time indicated on
31
Strategic Issues
the tokens. They can have darshan within two hours of entering the Queue Complex
. As this system saves on waiting time, it provides pilgrims with enough time to
visit temples in the vicinity. In order to keep a track of the number of pilgri
ms and ensure their smooth flow, one token is issued per head. Collective tokens
for groups are not issued. Source: www.tirumala.org
2) Perception Management: Limited success of operations management in waiting li
ne management has led to increased interest in managing the perceptions of wait
experience. If you cannot control the actual wait duration, then control the cus
tomer’s perception of it. Maister has proposed following eight principles that you
can use as service marketers to influence customer’s perception of waits and thei
r satisfaction with waiting lines Unoccupied time feels longer than occupied tim
e. Preprocess waits feel longer than in-process waits. Anxiety makes waits seem
longer. Uncertain waits are longer than known, finite waits. Unexplained waits a
re longer than explained waits. Unfair waits are longer than equitable waits The
more valuable the service, the longer the people will wait. Solo waiting feels
longer than group waiting. Therefore, you should appreciate that though operatio
ns management techniques are important, however, while developing strategies for
waiting lines you should never overlook the effects of perceptions management.
The following suggestions can be used in order to make waiting fun or at least t
olerable. 1) Determine the acceptable waiting time for your customers. 2) Since
unoccupied time feels longer than occupied time, keep customers occupied by inst
alling distractions that entertain and physically involve them. For example, tel
evision sets can be installed in the waiting areas, magazines or reading materia
ls related to the service can be provided. Exhibit 9.2 provides an interesting i
llustration in this regard. 3) Provide ‘waiting duration information’ i.e. informati
on about the expected length of a wait and/or ‘queuing information’ i.e. a consumer’s
position in the queue, with continuous updates. Michael Hue & David Tse suggest
that in short waits, no information is needed. In case of intermediate waits, wa
iting duration information appears to be a better choice than queuing informatio
n. However, in case of long waits, waiting duration information may be less effe
ctive then queuing information. Also providing queuing information is more impor
tant as compared to waiting duration information when service organization has d
ifficulty in accurately estimating the length of wait or when the waiting line i
s not visible to customers. 4) If unexpected delays occur, explanation should be
given to the customers. This helps in reducing uncertainty and customer irritat
ion. The key is to impress upon the customer that he has not been forgotten. Sim
ple things like providing a glass of water or a cup of tea to the waiting custom
er can help. 5) Try to modify customer arrival behaviour. 6) Keep resources not
serving customers out of sight. This can be done by keeping idle employees out o
f view and conducting activities that do not involve customer interactions out o
f the customer’s sight. 32 7) Try to reduce pre-service waiting by transferring so
me of the pre-service waiting to the service encounter phase. For example, menu
cards may be
provided to the customers while waiting, to decide on their orders, medical info
rmation may be collected from the patient prior to actually meeting the doctor.
8) A smiling service person who knows his job well can be very helpful in overco
ming many negative effects of waiting. Therefore, training and incentives / rewa
rds for providing good service should be made.
Exhibit 9.2. “Waiting in line : Experiment by Bank of America” Bank of America throu
gh their review of data realized that there might be opportunities to reduce per
ceived wait times without reducing actual wait times. An earlier study by market
researchers had also revealed (the study was conducted by intercepting some 100
0 customers standing in bank lines) that after a person stands in line for more
than three minutes, a wide gap opens between actual and perceived times. While a
two-minute wait may usually feel like a two-minute wait, a five minute wait may
feel like a ten-minute wait. Also, psychological studies have revealed that if
you distract a person from a boring chore, time seems to pass much faster. In th
e summer of 2001 the bank installed television sets over the teller booths at on
e of its branches to test its hypothesis that “if you entertain people in line by
putting television sets in the transaction zone – above the row of tellers in a br
anch lobby – you will reduce perceived wait times by at least 15%”. The results obta
ined were significant. After the installation of the T.V. sets the degree of ove
restimation of wait times dropped from 32% to 15% at the test branch. Before the
implementation of this experiment, customers who waited longer than five minute
s, significantly overestimated their waiting time by 32%. (Average actual time :
6.17 minute, Average perceived time : 8.16 min). After the installation of moni
tors in the bank lobby these overestimates for the same customer groups dropped
to 15% (Average actual time : 6.14 minutes, Average perceived time : 7.04 min).
Considering that long waits have direct impact on customer satisfaction, the ban
k through a research also concluded that a branch with more than a thousand hous
eholds in its customer base would be able to recoup up the cost of installing T.
V. sets in less than a year because of increased customer purchases and retentio
n due to higher customer satisfaction. (Based on the study analysis that every o
ne point improvement in bank’s customer satisfaction index added $1.40 in annual r
evenue per household and that the reduction in perceived wait times would transl
ate into a 5.9 point increase in overall banking-centre customer satisfaction) S
ource: Stefan Thomke, “R&D Comes to Service: Bank of America’s Path breaking Experim
ents,” Harvard Business Review, April 2003, p.76-77.
9.6 MANAGING DEMAND AND WAITING LINES: CASE OF AN AMUSEMENT PARK
Introduction: In this section we are giving you a brief case situation concernin
g an amusement park. Also given are the comments and possible solutions to the p
roblems raised, given by top executives of service companies (The case situation
and the comments / solutions have been excerpted from a Harvard Business Review
Case Study – details given in sources at the bottom of this section). In the last
part of this section we have also brought out some of the innovative practices
adopted by successful amusement parks with regards to managing demand and waitin
g lines. Before we move over to the case situation, let us fist take a brief loo
k at the amusement park industry as such. The industry has it origin about 400 y
ears ago in the Danish capital Copenhagen. In India the industry is in the growt
h stage with around 1000 crore said to have been invested in the last few years.
This growth is primarily a result of higher disposable incomes and an increasin
g willingness on the part of the customers to consider new forms of entertainmen
t. Foreign companies like Universal Studio, Time Warner and Disney are eyeing th
e Indian market. Presently the leading players in the Indian market include Appu
Ghar in Delhi and Essel World near Mumbai with a lot of new players like Sammy’s
Dreamland in Bangalore also coming up.
33
Strategic Issues
Case Situation: The amusement park with a successful history was now facing prob
lems. It had its first money losing year last year followed by another one now.
The park had three ways to bring in more revenues: increase visit per customer,
increase average spending per visit or attract new customers. Because of a matur
e industry (U.S.A) all three were hard to do. As pulling in people from broader
geographical areas seemed an unlikely proposition due to the wide availability o
f such parks, attracting new customers required new value proposition. With this
background, it was proposed to offer a “preferred guest card” to win more business
from moneyed and time pressed group of people. Under this plan, visitors could p
ay an additional fee to get free rein of the park: Card Holders would enter the
ride through separate lines which would give them first crack and they would be
seated immediately at any in-park restaurant. It was hoped that this plan will h
elp to up-sell the people who are already coming to the park. And by making it p
ossible to spend less time in queues, the guest card will also attract a differe
nt type of customer – time starved, high-income professionals and their families,
who might otherwise avoid the whole experience. However, certain objections were
raised against such a scheme. “I don’t even think it’s a great experience for the pre
ferred guests. Who want to feel all that animosity diverted at them? The key to
this business is the customers feeling good while they are here. With this schem
e neither side’s coming back” commented an executive. A possible solution given to t
his was to separate the lines and limiting the percentage of special tickets iss
ued on any given day. If the ‘preferred guest card’ scheme was not implemented the p
ark might be forced to raise price across the board. Before moving on to the nex
t part, analyze the above situation and identify possible solutions. What Expert
s Say : In this part comments of three senior executives from different service
industries have been briefly given i) A cofounder of a premium health care servi
ce: Creating two types of service at different prices will create problem for th
e park. Raise the admission price instead ii) Chief Marketing office of a leadin
g bank: It makes good business sense to segment customers and to offer a differe
nt level of service-at a higher price-to those at the upper end of the market. T
he key is to do it discreetly and in a way that does not degrade the quality of
service to the basic customer. The expedited line should be hidden from the view
of those waiting in longer one. iii) A former CEO of large Airlines: Service di
fferentiation at an amusement park must be subtler than what has been proposed.
The park can offer all its guests the opportunity to reserve a time slot for a p
articular ride. A fixed number of seats may be allocated to reservation (say a t
hird or a half) and then give the customers lining up an option to wait or to ma
ke ride reservation for later in the day. Some Practices in Successful Amusement
s Parks: Disney lands offer a form of reservation – Fastpass – by which guests may g
o up to one of the rides offering the Fastpass service and obtain reservation to
come at a certain
34
time. At the specified time they come back and bypass the waiting line saving an
hour or more in waiting. However, the customers are limited to one Fastpass eve
ry four hours in order to ensure that the rides are able to accommodate both Fas
tpass and regular customers. Further, line management at Disney also involves co
ntinuously entertaining waiting customers and providing them with the informatio
n regarding the duration of their waits. Signs are posted at intervals in the qu
eue, stating the expected time until service commencement. Because of Fastpass,
rather than waiting in line, customers spend more money in the restaurant and sh
ops. Dreamworld in Australia caters to both international as well as local custo
mers. Considering different price sensitivities of local and international custo
mers (while a Japanese couple will pay $78 - $39 per person entrance fees – withou
t hesitation as this is a small portion of their vacations, a local family of fo
ur looking for weekend entertainment may view $136- $39 adult charge and $ 29 ch
arge for children — amounts to a large portion of their entertainment expenses). D
reamworld offers a separate package to local customers involving yearly passes a
t much lower prices. It is a common practice for tourist attractions such as Dre
amworld to offer special rates for local residents. It is however very important
for the parks to know its customer mix. Sources
i) ii) iii) iv) Economic Times, New Delhi – Dec 16, 2003 – “Foreign majors eye amuseme
nt park industry” by Rahul Sachitanand. Harvard Business Review, Nov. 2001, HBR Ca
se Study “ Are Some Customers More Equal Than Others ?” by Nunes and Johnson, pp 37-
50. “Marketing for Hospitality and Tourism”, 3rd edn., by Kotler, Bowen and Makens,
Prentice Hall, 2003 – page 418, 459-460. “Waiting for Services : The Relationship be
tween Delays and Evaluations of Service,” by Shirley Taylor, Journal of Marketing,
April 1994, p.66.
Activity 4 Visit any amusement park and/or talk to your friends about their expe
rience at amusement parks. Identify strategies adopted by the parks to manage de
mand (e.g. on weekdays vs. weekends, special package for specific customers grou
ps etc.) and waiting lines. ....................................................
....................................................................... ........
................................................................................
................................... ............................................
...............................................................................
................................................................................
...........................................
9.7 SUMMARY
This unit deals with issues related to managing demand and capacity in service o
rganizations. Considering the fact that services are perishable, demand fluctuat
ion is considered to be a somewhat serious problem for services marketers. A ser
vice organization with a fixed capacity may be faced with four different situati
ons viz. excess demand, demand exceeding the optimum capacity level, demand and
supply being balanced at the optimum capacity and excess capacity. The first ste
p towards developing strategies for matching demand and capacity is to study the
demand patterns and the underlying causes. The strategies for matching demand a
nd capacity can be broadly divided into two categories – changing demand to fit su
pply and changing supply to fit demand. These two strategies have been discussed
in detail in this unit. Subsequently yield management technique for managing de
mand and 35
Strategic Issues
capacity profitably has been explained. Despite strategies for matching demand a
nd capacity being in place, waiting by customers becomes inevitable in a number
of service industries. Service waits can be controlled by operations management
and perceptions management. This unit outlines certain suggestions which can hel
p you in better management of waiting lines. The last section of the unit gives
you a brief case situation concerning demand management and waiting lines issues
in an amusement park.
A) Objective Types Questions 1. Which of the following strategies would you reco
mmend to manage demand when it is too high? a. offer discounts b. bring the serv
ice to the customers c. offer incentive to customers for usage during non-peak t
imes d. all of the above 2. Providing separate check-in lines for first class pa
ssengers by an airlines is an example of differentiating waiting customers on th
e basis of a. urgency of the job b. payment of premium price c. duration of serv
ice transaction d. none of the above 3. Which of the following is not true regar
ding waiting by customers? a. uncertain waits are longer than known waits b. une
xplained waits are longer than explained waits c. in-process waits feels longer
than the pre-process waits d. unoccupied time feels longer than occupied time. 4
. In which of the following demand conditions would you witness the situation in
which no customer is being turned away but the quality of service may still suf
fer due to crowding or staffing being pushed beyond their abilities to deliver c
onsistent quality? a. excess demand b. demand exceeds optimum capacity c. demand
and supply are balanced at the level of optimum capacity d. excess capacity 5.
Appropriate situation for effective yield management application includes: a. ab
ility to segment markets b. product sold in advance c. fluctuating demand d. all
of the above 6. Which of the following strategies for flexing capacity to match
demand would be appropriate when demand is too low? a. perform maintenance, rep
airs b. schedule vacations c. schedule employee training 36 d. all of the above
7. Several major restaurant chains offer discounts on days when business is norm
ally slow. This strategy is employed because service are a. perishable b. variab
le c. inseparable d. intangible Answers 1. c 6. d 2. b 7. a 3. c 4. b 5. d
B. Discussion Questions 1. Explain why is it important for service organizations
to match demand and capacity. What are the implications of a mismatch between t
he two? 2. Explain the significance of determining the demand patterns. Select a
ny service organization of your choice and describe its demand patterns and its
underlying causes. 3. Describe the strategies for matching supply and demand giv
ing suitable examples. 4. Explain the term ‘Yield Management’. Identify some of the
managerial issues to be taken into account while implementing a yield management
system. 5. Select a service organization you are familiar with, where customers
have to wait in line for service. Develop a waiting line strategy for the organ
ization.
Donald J Shemwell, Jr. And J. Joseph Cronin, Jr. “Services Marketing Strategies fo
r coping with demand/supply imbalances” Journal for Services Marketing, Vol. 8, No
. 4, 1994. Shirley Taylor, “Waiting for Service: The relationship between delays a
nd evaluation of services” Journal of Marketing, April 1994. Sherlyl E. Kimes, “Yiel
d Management: A Tool for Capacity-Constrained Service Firms” Journal of Operations
Management, Vol. 8 No. 4, 1989. Karen Katz, Blaire Larson, Richard Larson, “Perce
ptions for the waiting-in line blues: Entertain, Enlighten and Engage” Sloan Manag
ement Review, Winter 1991. Paul F. Nunes and Brain A. Johnson, HBR Case Study “Are
Some Customers More Equal Than Others”, Harvard Business Review, Nov. 2001. Stefe
n Thomke, “R & D Comes to Services: Bank of America’s Pathbreaking Experiments”, Harva
rd Business Review, April 2003. Valarie Zeithaml, A. Parasuraman & Leonard Berry
“Problems and Strategies in Services Marketing”, Journal of Marketing, Spring 1985.
Micheal Hui and David Tse, “What to tell customer in waits of Different Lengths:
An Integrative Model of Service Evaluation”, Journal of Marketing, Vol. 60, April
1996.
37
Strategic Issues
UNIT 10 CUSTOMER RETENTION
Objectives After studying this unit you should be able to: explain significance
of retaining customers for service companies, identify the reasons of customer s
witching and ways of managing it, understand the need and importance of complain
ts handling, discuss strategies for effective service recovery after a service f
ailure, explain the significance of service guarantees, list the components of a
good service guarantee. Structure 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9
Introduction Importance of Customer Retention Customer Switching Complaining and
Service Recovery Service Recovery Strategies Service Guarantees Summary Self As
sessment Questions Further Readings
10.1 INTRODUCTION
Ramesh walks into an empty PCO to make a phone call. He pulls out a crumpled pie
ce of paper from his pocket and dials the number on it. The PCO owner can’t help b
ut listen in . “Hello, is that Mrs. Gupta, I offer A.C. maintenance services and w
as wondering if you need someone to provide you the services this year. Oh, you’ve
got someone who does that every year and you’re happy with them. I see,” says Rames
h solemnly. “There’s nothing else needs doing that they don’t do? OK, Well, maybe I’ll c
all again next summer to see if you’re still happy with them. Thanks, Mrs. Gupta” sa
ys Ramesh, and puts the crumpled paper pack in his pocket. Ramesh walks out of t
he booth and heads for the door. The PCO owner stops wiping and says :”My Dear Fri
end, I can’t let you walk out without saying something. I was a salesman for twent
y years and a good one.” “And I tell you, you’ll get nowhere making one call and givin
g up. You need a list of numbers and you work your way through them. You’ll never
get the work of Mrs. Gupta house or anyone else’s with the attitude you’ve got.” “Thanks
for the advise” says Ramesh to PCO owner. “But, it’s OK. Really. You see, I already d
o A.C. maintenance services at Mrs. Gupta’s house”. (Based on an anecdote of Don Pep
pers at ecustomerserviceworld.com) Services marketers understand that having cus
tomers, not merely acquiring customers is crucial for service companies. There i
s a direct link between customer retention over a period of time and profitabili
ty and growth. Further,
38
customer retention to a great extent depends on service quality and customer sat
isfaction. It also depends on the ability of the firms to encourage customers to
complain and then recover when things go wrong. Complaints are a natural part o
f any service activity as mistakes are an unavoidable feature of all human endea
vour and thus also of service delivery. Service recovery is the process of putti
ng things right after something goes wrong in service delivery. Service marketin
g literature also suggests that offering well designed service guarantees help i
n attracting and retaining customers. This unit begins with a discussion on the
importance of retaining customers for service firms. The unit further explains t
he details of a complaint management system and service recovery process. The la
st part of the unit deals with service guarantees.
Customer Retention
10.2
IMPORTANCE OF CUSTOMER RETENTION
The importance of retaining customers should be properly understood by the servi
ces marketers. It is the cornerstone of a successful service. Generally, the lon
ger a customer stays with a company the more that customer is worth. It influenc
es employee and supplier loyalty as well, as people like to work for companies w
here customers are loyal. It also produces profits that influence share holder l
oyalty. In fact this all results in a positive spiral. Employee retention and lo
yalty results in high quality of services which leads to customer satisfaction a
nd delight which makes the customer stay with the organization and increases its
profitability which in turn brings employee loyalty. This sequence is shown dia
grammatically in Figure 10.1.
10.1:
Customer Satisfaction
Customer Retention and Increased Profits
Quality Services
Employee Loyalty
Source: Zeithaml and Bitner, Services Marketing, Tata McGraw Hill, 2nd Edn. 2000
, p. 143)
Why are customers more profitable for service firms over period of time? There a
re a number of reasons for this. To begin with, to acquire a customer a company
incurs promotional costs like advertising, sales promotion, personal selling etc
. It is said that it costs five times more to attract a new customer then retain
ing one. The operating costs decrease when a customer stays. Services being rich
in experience and credence qualities, it takes some time for customers to get a
ccustomed to it and once they are used to the service and are satisfied with a s
ervice provider, they tend to purchase more over a period of time. As they remai
n satisfied with a service provider they will spread a positive word of mouth, w
hich is extremely effective in case of services for attracting new customers. Lo
nger the customer stays with an organization, more the organization knows about
him, which enables it to offer customized services which makes it difficult for
the customer to defect. This may even provide opportunities to the organization
to charge price premium by offering
39
Strategic Issues
individualized services which may be difficult for the competitors to offer. Ind
ian service companies are increasingly recognizing the importance of retaining e
xisting customers. “We believe that if we are able to satisfy existing customers;
it will enable us to gain new customers through word-of-mouth” says ICICI Bank Gen
eral Manager (Business World, 4 Nov. 2002). Considering the importance of retain
ing customers in service business, Reichheld & Sasser coined a term ‘Zero defectio
n’. They highlighted that companies can boost profits by almost 100% by retaining
just 5% more of their customers. In their pathbreaking article “Zero Deflections:
Quality comes to services” (Harvard Business Review, Sept. – Oct., 1990) they conclu
de that “Just as the quality revolution in manufacturing had a profound impact on
the competitiveness of companies, the quality revolution in services will create
a new set of winners and losers. The winners will be those who lead the way in
managing towards zero defection”. You should appreciate as services marketers that
when you lose a single customer you do not lose a single order but a lifetime o
pportunity of profitability with that individual. You must therefore understand
the lifetime value of a customer. Consider a simple example of a telephone compa
ny. For example, if on an average customer pays Rs. 500 a month and stays with t
he company for 20 years, his average life time value for the company will be Rs.
500 X 12 X 20= Rs. 1,20,000. Further, if by a positive word-of-mouth, he brings
just one more customer to the organization his value to the organization double
s. Therefore, it is important for all the employees within an organization to un
derstand the lifetime value of their customers. Once they understand it, they wi
ll treat the customer accordingly and will focus on building relationship with t
he very people who keep them in business. The following is an interesting illust
ration of Southwest Airlines of U.S.A. Southwest Airlines is amongst the most pr
ofitable US airlines and have made profits all through its existence. It is well
known in the industry for its service quality and customer focus. As part of it
s effort to keep employees informed, Southwest Airlines communicates the importa
nce of every single customer by educating employees about how many customers the
company actually need to make a profit. By demonstrating to employees how just
a few people can make the critical difference, the company encourages them to th
ink about how their individual behaviours influence customer service. The compan
y newsletter, LUV lines, put customer service in perspective with the following
piece on profitability: “How important is every Customer to our future? The break-
even customers per flight was 74.5, which means that, on average, only when cust
omer #75 came on board did a flight become profitable. The data on our annual pr
ofit and total flights flown to clearly illustrate how vital each customer is to
our profitability and our very existence. When you divide last year’s annual prof
it by total flights flown, you get profit per flight : $179,310,000 (annual prof
its) divided by 624,476 (total flights flown) = $287 (profit per flight) Then, d
ivide profit per flight by Southwest’s systemwide average one-way fare of $58 :
40
$287 (profit per flight) divided by $58 (average one-way fare) = 5 (one-way fare
s – Customers!) The bottom-line: only five Customers per flight accounted for our
total profit last year. So, only 3 million of the 40 million Customers we carrie
d meant the difference between profit and loss of our airline. To take a step fu
rther, to have lost the business of only one Customer per flight would have mean
t a 20 per cent reduction in profit on that flight. That’s how valuable each Custo
mer is to Southwest and you!”
Source: www.ecustomerserviceworld.com and Kevin Freiberg & Jackie Freiberg, “NUTS!
Southwest Airlines’ Crazy Recipe for Business and Personal Success”)
Customer Retention
10.3
CUSTOMER SWITCHING
By now, you will have well appreciated that in service business having customers
, not merely acquiring them is crucial. Therefore, it becomes important to under
stand what actions of service companies or their employees make customers switch
from one service provided to another. Customers leave a provider for a wide var
iety of reasons. Consider when you were last dissatisfied with a service provide
r or changed a service provider. What were the specific reasons for your reactio
n? Was it because of perception of poor quality or failure of a service encounte
r? Susan Keavenly identified following reasons for customer switching in service
industries. a) Pricing (high price, price increase, unfair pricing , deceptive
pricing) b) Inconvenience (location /hours, wait for appointment, wait for servi
ce) c) Core service failure (service mistakes, billing errors) d) Service encoun
ter failures (uncaring, impolite, unresponsive, unknowledgeable) e) Response to
service failures (negative response, no response, reluctant response) f) Competi
tion (found better service) g) Ethical problem (cheating, unsafe) h) Involuntary
switching (customer moved, provider closed) An important aspect of the above to
be understood by you is that six of the eight service switching factors are con
trollable from a service organization’s point of view. Some of the aspects to be e
xamined and action be taken to stop customer switching would include philosophy
to deliver a technically correct service every time (Recollect issues related to
providing quality services as discussed in Unit 8). However, in case some thing
goes wrong there should be strategies in place for effective service recovery.
We will discuss this aspect in detail in subsequent section. In order to reduce
inconvenience the organization should have effective queue management, waiting l
ine strategies and strategies for management of demand and capacity (discussed i
n detail in Unit 9). Customer defection caused by unsatisfactory service encount
ers – employee customer interactions can be reduced by proper training of employee
s, listening to customers and keeping the customers informed.
41
Strategic Issues
Activity 1 Discuss among your friends and colleagues the reasons why they have s
witched service provider(s). Analyze whether something could have been done by t
he organization to prevent them from switching. ................................
................................................................................
........... ....................................................................
....................................................... ........................
................................................................................
................... ............................................................
............................................................... For maintaining
customer relationship you have to deliver quality services including service rec
overy and continuously monitor the relationship to find out customer satisfactio
n and loyalty. Another important aspect of keeping customers is the market segme
ntation. This aspect has been touched upon in Unit 5 of this course. Unless you
properly segment your customers and understand their buying behaviour, expectati
ons and perceptions, you will not be able to meet their needs and can’t retain the
m. In an interview to Harvard Business Review , British Airways’ CEO Sir Collin Ma
rshall highlighted the importance of segmentation for service business (HBR, Nov
-Dec 1995). “Even in a mass market business, you don’t want to attract and retain ev
eryone. The key is first to identify and attract those who will value your servi
ce and then to retain them as customers and win the largest possible share of th
eir life time business. Using database marketing technique, we have focused more
of our marketing efforts on retaining those customers and increasing our share
of business. That is why our advertising spending is proportionately smaller tha
n that of our competitors”. Now-a-days the segments are becoming smaller and small
er to the extent that even for mass services we talk of segments of one i.e. ind
ividualized service. This is referred to as Mass Customization. Joe Pine in his
book Mass Customization has suggested different approaches towards mass customiz
ation. The important thing to understand is that it is not required to individua
lize services right from design to delivery in order to be differentiated, rathe
r it can be done in number of ways. For example, you can customize a standardize
d core by combining it with customized peripherals. A hotel while offering a sta
ndardized room may customize it to individual tastes by offering personalized st
ationary, providing room location based on customer choice , keeping the refrige
rator stuffed with eatables as per customer choice . (You have to have a good cu
stomer database in order to do so). Another way is to create customizable servic
es which can be customized by the customers themselves. This can be done when cu
stomers can combine different components or modules of a service product in uniq
ue ways suited to their individual requirements. Please note that service offeri
ngs themselves are standardized. The IGNOU management programme, for example, th
ough is a standardized offering yet you can customize it in terms of the courses
you want to opt and their timings. The service provider can also offer point of
delivery customization wherein the provider allows the customer to communicate
what they need at the point of service delivery e.g. professional services, heal
th care etc. Loyalty Programmes Loyalty programmes are often used in service ind
ustries like cellular companies, airlines, hotels, credit card companies, retail
outlets etc. in order to build customer loyalty. They aim at locking on the con
sumer by rewarding him for patronizing a particular service for a period of time
. In fact number of similar terms like relationship marketing programme, frequen
cy programme, continuity programme, points programme and loyalty programme are o
ften used interchangeably. One of the most visible form of loyalty programmes is
the
42
frequent flyer schemes offered by airlines which reward customers with a free fl
ight on accumulating a certain number of points. Similarly, hotels award regular
customers with points, which can be redeemed for free meals or stay. While loya
lty programmes are primarily aimed at ensuring that a customer stays loyal and b
uys more, they can also be used as a marketing tool to attract new customers and
maximize their use of the particular service. The First Citizen club (of retail
er Shopper’s Stop), Jet Privilege programme (of Jet Airways), Taj’s Inner Circle are
all examples of programmes which offer incentives for customer loyalty.
Customer Retention
10.4
COMPLAINING AND SERVICE RECOVERY
As highlighted in the introductory part of this unit, complaints are a natural c
onsequence of any service activity. Mistakes are critical part of every service.
Since services are generally performed in the presence of customers, errors are
bound to happen. While it may not be possible to prevent all the errors, compan
ies can learn to recover from them. ‘Service Recovery’ refers to the action taken by
the service provider in response to a service failure. Tad and Brown define Ser
vice recovery “as a process that identifies service failures, effectively resolves
customer problems, classify their root cause(s), and yields data that can be in
tegrated with other measures of performance to assess and improve the service sy
stem.” A good recovery can turn angry, frustrated customers into loyal ones. Furth
er more, customers who have been successfully recovered not only remain loyal bu
t can become advocates for the organisation spreading a positive word-of-mouth.
When an error or service failure occurs the customer may or may not complain. A
customer who doesn’t complain is less likely to come back to the service provider.
Therefore, service provider has to make specific efforts to encourage customers
to voice their concerns. Complaints provide feedback on how the service provide
r is performing in the market place. When customers complain, two potentially po
sitive things happen for a service provider. 1) The provider gets the chance to
fix the problem and retain the customer (service recovery) 2) Complaints can poi
nt to areas of the business that need improvement. A good complaint culture and
good complaint process may well lead a service provider to improved financial pe
rformance. Researches have shown that excellent complaint management service rec
overy can significantly influence customer satisfaction & loyalty. The service p
rovider in order to improve solicitation of complaints should make it easy for t
he customers to get in touch. This can be done by providing multiple means of co
ntact like toll free numbers, website, and customer contact point with service p
ersonnel. Further, these should be published on a continuous basis and the custo
mers should be made to feel that their feedback is invaluable and their opinions
are wanted. The company should treat a complaint as a gift and the one who comp
lains as a friend. Complaint Management Bill Dee (Convener of the ISO Technical
Committee ISO/TC 176 subcommittee 3 working group on complaint handling) opines
that any worthwhile complaints management system has to have certain basis featu
res : a) Visibility : b) Accessibility : Customers should know where to complain
Customer should know how to complain. As a rule of thumb, the more formal the s
ystem for
43
Strategic Issues
lodging complaints, the less accessible it is to customers. c) Responsiveness: C
omplains need to be dealt with quickly. The quicker the complains are dealt with
, the higher the customer satisfaction. A service provider who adopts customer f
ocused approach invites complaints and indicates commitment to resolving complai
nts by its words and actions in all fairness. Someone in the organization has to
take responsibility for complaint handling. This is about looking at the root c
auses and fixing them.
d) Customer-focused approach:
e) Accountability: f) Continuous improvement:
A good complaint management system must ensure that the complainant is kept info
rmed, the staff understands the complaint processes, complaints are taken seriou
sly, employees are empowered to deal with the situation and there are follow-up
procedures to check with customers after resolution. Activity 2 Send a complaint
letter to a service provider you are not satisfied with. Analyse the response t
o your letter (or no response) and its impact on you as a service customer. ....
................................................................................
....................................... ........................................
................................................................................
... ............................................................................
............................................... ................................
................................................................................
........... Robert Johnston has developed a conceptual model linking complaint m
anagement and financial performance as shown in Figure 10.2. The author, through
an empirical study, concluded that “It is not the complaint processes per se that
leads to financial benefit but how organizations manage
10.2 :
Customer satisfaction
Customer retention
Complaint culture
Complaint processes
Process improvement
Financial performance
Employee attitude
Employee retention
44
Source: Robert Johnson, “Linking Complaint Management to Profit,” International Jour
nal of Service Industry Management , Vol. 12, Nov. 2001
the intervening variables i.e. satisfying and retaining the customer /employee a
nd/or improving the product or bringing out process improvement. Financial benef
its accrue from satisfying and retaining dissatisfied customers through service
recovery, by using information from complaints to improve both operational and o
rganization-wide processes and by satisfying and retaining employees. All this i
s contingent upon the organization’s complaint culture.” Activity 3 Contact any serv
ice organization and find out the mechanism through which it encourages customer
feedback and complaints. ......................................................
..................................................................... ..........
................................................................................
................................. ..............................................
............................................................................. ..
................................................................................
.........................................
Customer Retention
10.5 SERVICE RECOVERY STRATEGIES
The above discussion gives you a fair idea of need for complaint management, its
components and the importance of service recovery. Let us now focus on strategi
es for service recovery. Consider the following incident regarding an airlines (
British Airways). “ An aircraft door was left open in a rainstorm before take off
and a passenger near the door unfortunately got showered”. Now imagine that you we
re a part of the airlines. What steps you would have taken in such a situation?
Now let us see what was actually done by the service provider. “The flight attenda
nt not only did everything that was routine – offered to have the customer’s garment
s cleaned or replaced and made sure that a customer relations representative con
tacted the customer later to demonstrate that we genuinely cared – but also made s
pecial gesture by offering the passenger a complimentary choice of certain tax-f
ree goods”. (Source: “Competiting on Customer Service: An Interview with British Air
ways’ Sir Colin Marshall, Harvard Business Review, Nov-Dec 1995) Hart, Heskett and
Sasser suggest that service companies must become gymnasts, able to regain thei
r balance instantly after a slipup and continue their routine. According to them
companies that want to build the capability of recovering from service problems
should do the following things. 1) Measure the costs of effective service recov
ery 2) Break customer silence and listen closely for complaints 3) Anticipate ne
eds for recovery 4) Act fast 5) Train and Empower employees 6) Close the custome
r feedback loop Let us briefly discuss the above strategies. Measure the costs:
As services marketers you should not underestimate the profits lost when a custo
mer departs unhappily. This has been highlighted in the earlier part of this uni
t as well. Once this is appreciated, it will get due attention as it is said tha
t what gets measured is truly what gets managed. The company should also keep in
mind the costs the customer has to incur when service failure occurs. Excellent
service companies will go that extra mile to cover the costs a failure incurs,
or if the inconvenience is so great that the company cannot completely compensat
e the customer , the tone of the response must signal the company regret.
45
Strategic Issues
Break the Silence: This refers to soliciting and encouraging complaints from the
customers. In the preceding pages we have discussed this issue in detail. Antic
ipate Needs for Recovery: Service providers can look for the weak links or the a
reas which tend to be problem prone and address them in their service recovery s
trategies. Act Fast: Customers who complain want quick responses. The urgent res
umption of service and an apology are often sufficient to make amends. (but not
always). Empathise with customers. Statements like “I can appreciate how you feel,”
You’re right”, “ It, shouldn’t have happened that way,” all convey empathy for the custome
r. Also, symbolic atonements should be made. It can be money, flowers, a ‘sorry’ not
e, free dessert by a restaurant, free upgrade in airlines etc. The speedy respon
se to complaints /service failures requires appropriate system and procedures as
well as trained and empowered employees. Train and Empower Employees: The organ
ization must train the front line people and empower them. Simulated real life s
ituations can be an effective way to develop recovery skills among employees. Th
e company should empower the front line employees to act and should give them th
e authority, responsibility and incentives to follow with customer. Close the Lo
op: If a customer complaint leads to corrective measure the company should tell
the customer about the improvement. Even if something can’t be fixed, the company
should explain it to the customer. Effective way of closing the loop include mak
ing timely telephone calls and letting the customer know that his suggestions mi
ght be implemented.
LEARN : Dissatisfied Customers Are Gold In every business, mistakes happen and c
ustomers get angry. But when a problem is fixed properly and stays fixed ….. custo
mers loyalty actually increases! Here are five steps you can take to not only re
solve the problem but actually build loyalty: LISTEN carefully to your customer.
You need to stop everything you are doing and give your customer 100% of your a
ttention. Active listening requires a lot of effort and cannot be accomplished w
hen we are distracted. EMPATHIZE with your customer’s concerns. Let him know that
you sincerely care about his problem even if you don’t agree with his comments. AP
OLOGIZE even if you are not the cause of problem. When said sincerely, the words
“I’m sorry” can diffuse as much as 95% of most people’s anger. RESOLVE the problem. Let
the customer know you are on his side and will do everything you can to help hi
m get the problem resolved. If only an employee in another department can fix it
, help make the transition smooth so the customer doesn’t have to tell his story m
ore than once. NOW is the time to address the problem. The faster a mistake is f
ixed, the more likely it is that the customer will give your company another cha
nce. The best way to handle a situation in which the customer is angry or upset
is to remember the acronym LEARN and apply the five steps listed above. Then fee
l great about the positive difference you made in that person’s day! Source: Debra
J. Schmidt; Spectrum Consulting Group (Also the author of the Loyalty Builder – a
free on-line monthly news letter)
Frederick Reichheld very beautifully brings about the importance of customer loy
alty, managing failures & defection in the concluding comments of his article “Lea
rning from Customer Defection (HBR, March – April 96). “The key to customer loyalty
is the creation of value. The key to value creation is organizational learning.
And the key to organizational learning is grasping the 46
value of failure. Customer defection is a unit of error containing nearly all th
e information a company needs to compete, profit and grow.” Activity 4 Given below
is a copy of a mail sent by an organization to M/s. ABC Car Rentals Ltd. Review
the communication and give a brief account of actions you would have taken if y
ou ever receive such a mail. Mr. S Mohan President ABC Car Rental Ltd. Dear Mr.
Mohan, I was contacted by Mr. Ajay Gupta in December 2003 regarding our requirem
ents for car rentals and how your company might be able to serve us. I find myse
lf needing to order for these services for a large international convention we a
re organizing in August 2004 and therefore decided to contact your company for i
nformation. Instead of obtaining information. I am totally frustrated. First 1 w
ent to your website. “Cool”, I thought,” I can click on the buttons and get informatio
n.” Wrong, no help there. So I tried to e-mail you from that site – didn’t work. Addit
ionally, there was no e-mail address on either letterhead or your website. My ne
xt step was a phone call. I called and got a menu. I pressed the number for the
sales department. Then I had a wait through another menu to get a sale person. A
jay was a good choice, I thought, wrong. He’s out of the office, so I followed his
instructions and pressed 222 for someone else-more voice mail. Okay, then I pre
ssed “O” for an operator. “All I want is talk to someone in sales,” I told the lady who
answered. I was transferred to someone who picked up the phone and hung up. So I’l
l go elsewhere for my requirements. A. Roy Vice- President .....................
................................................................................
...................... .........................................................
.................................................................. .............
................................................................................
.............................. .................................................
.......................................................................... .....
................................................................................
...................................... June 15, 2004
Customer Retention
10.6
SERVICE GUARANTEES
When you buy consumer durables like refrigerator, T.V., Washing machine etc., th
ey invariably came with a product warranty wherein the company agrees to replace
or repair the product if something goes wrong. But what about services? As comp
ared to manufactured products, guarantees in case of services are a more recent
phenomenon. Because of the intangible nature of services it was often thought as
to what can be guaranteed. Products being tangible, can be returned but can ser
vices be returned back if something goes wrong? However, now more and more servi
ce firms are offering service guarantees which may take the form of a satisfacti
on guarantee or guaranting specific aspect of service delivery. Try to recollect
any service guarantee that you have come across as a consumer of services. A ba
nk may offer a guarantee that an account will be opened or a credit card will be
issued within a specified number of working days otherwise it will pay
47
Strategic Issues
the customer a specified amount depending on the period of delay. A restaurant m
ay offer home delivery within a guaranteed time, say 30 minutes, failing which t
he customer may be given specified price-offs. A hotel may offer a unconditional
satisfaction guarantee. Why offer a Service Guarantee? More and more service fi
rms have started to realize that a good guarantee can act as a marketing tool fo
r attracting customers as well as help in retaining customers. It also helps in
cultivating and maintaining quality throughout an organization. Some of the bene
fits of an effective service guarantee are highlighted below. i) ii) Implementin
g a guarantee forces a company to focus on customers. Offering a guarantee provi
des employees with a service related goal and facilitates goal alignment between
employees and the organization. It can also increase employee morale and loyalt
y. It encourages customers to complain and provides the opportunity to the organ
ization to make amends, thereby retaining the customers. Invoking of guarantee b
y the customer guarantees important and immediate customer feedback. In the long
run, analyzing information collected about why guarantees were invoked by custo
mers can provide meaningful information for making improvements in service desig
n and delivery. A well designed service guarantee can lead to increased service
quality expectations, lower perceived risk and increased purchase intent. Servic
e companies have a greater opportunity than manufacturers to differentiate thems
elves through a guarantee .
iii) iv)
v) vi)
Rust, Zahorik & Keiningham have brought about that a guarantee can be very profi
table. The mechanism by which a guarantee is linked to profit is shown in Figure
10.3
10.3:
Guarantee
Advertising featuring the guarantee
People invoking the guarantee
+
Increased sales from advertising message Increased repurchase
Increased sales from positive word of mouth
+ + Market share and profitability improvement
+
Source: Rust, Zahorik and Keiningham, ‘Service Marketing’, Harper Collins, 1996, p.2
04
48
The above figure highlights that with a guarantee, advertising is more effective
, which attracts more customers. People invoking the guarantee come back which m
ay not have been the case in its absence. People who invoke guarantee resulting
in effective service recovery, will spread a positive word of mouth, thereby att
racting more customers. Features of a Good Service Guarantee A service guarantee
can take the form of an unconditional guarantee of satisfaction or specific out
come guarantees allowing a company to spell out exactly which elements of the se
rvice it wants to stand behind. Unconditional guarantees are powerful and a comp
any’s promise to meet all of its customer’s expectations. For example, a hotel guara
ntee states ‘if you are not completely satisfied, we don’t expect you to pay’. Specifi
c guarantees, on the other hand , though smaller in scope, can still be quite po
werful. For example a courier company offering a guaranteed delivery within 24 h
ours. Whatever may be the type of guarantee, there are certain features which ma
ke the guarantee effective. Hart summarizes them into following main characteris
tics. i) ii) Unconditional: A guarantee should not have “ifs” , “and”, or “buts”. It should
make the promise unconditionally. Easy to Understand and Communicate: It should
be easy to understand for the customers as to what to expect as well as for the
employees as to what to do. The message should be short and memorable and the st
andard clear. Meaningful: The guarantee should be meaningful in terms of what is
being promised (things that customers care about) as well as in terms of the pa
yout. Easy to Invoke and Collect: A good guarantee should be easy to invoke. Ser
vice marketers should understand that once poor service has been delivered, easy
and quick settlement should be ensured
Customer Retention
iii)
iv)
Activity 5 a) Identify a few service providers who offer a service guarantee. Ev
aluate these guarantees on the characteristics of an effective guarantee discuss
ed above. ......................................................................
................................................ ...............................
................................................................................
....... ........................................................................
.............................................. .................................
................................................................................
..... ..........................................................................
............................................ b) Critically evaluate the followin
g service guarantee offered by a Delhi based multiple chain restaurant for its h
ome delivery “30 MINUTES GUARANTEE 10% DISCOUNT ON DELAYED DELIVERY ORDERS* * DISC
OUNTS NOT APPLICABLE FOR ORDERS OVER RS.500/-” ...................................
................................................................................
... ............................................................................
.......................................... .....................................
................................................................................
. ..............................................................................
........................................ .......................................
...............................................................................
49
Strategic Issues
It is often feared that a service guarantee especially an unconditional service
guarantee may spell financial disaster for the company. However, it should be no
ted that a service guarantee is not a panacea and will not be beneficial for all
the service firms. To begin with, a low quality firm should not offer them. Als
o there are situations which involve uncontrollable variables which can’t be guara
nteed by a firm. Another big hurdle for many service managers in offering guaran
tee is customer cheating. However, it is generally believed that what inevitable
cheaters cost a company most often amounts to very little as compared to the be
nefits derived from a strong guarantee. It may also becomes less meaningful to o
ffer service guarantee if customers perceive little risk in the service or there
is very small perceived variability in service quality among competitors. The f
ollowing illustration highlights the benefits gained by M/s. Delta Dental (A Den
tal Insurance company from Massachusetts, U.S.A) through the implementation of a
n effective service guarantee program.
A Service Leader – DELTA DENTAL OF MASSACHUSETTS On April 1, 1990, Delta Dental of
Massachusetts, that sells dental insurance in USA, launched a Service Guarantee
. They had 15% market share and lots of competition. In 2003 they have 55 percen
t market share and NOT ONE competitor has copied their service guarantee. Delta
promises money if they fail on any of their seven guarantees, no questions asked
. They have three types of customers; the organization that selects their insura
nce and pays them, the employees of the organization, and the dentists. The guar
antees were put together after finding out in early 1990 from the organizations,
what was the most important thing Delta Dental needed to deliver. A sample : TH
E GUARANTEE: Accurate and quick turnaround of ID card. A complete and accurate i
dentification card for each subscriber will be mailed to the group or subscriber’s
home within 10 business days. THE REFUND : $25 paid to the group per ID card. T
his means if a firm signed up with 500 employees and someone got distracted and
did not send the ID card out until 11 business days, Delta Dental of Massachuset
ts would send the group a refund of $12,500. Instead of saying we are sorry, mak
ing excuses, Delta Dental send money instead. They track the refunds monthly and
yearly. They know exactly how many refunds they have paid out for each of the 7
guarantees. Total occurrence from April 1, 1990 – December 31, 2002 are 4,055 wit
h payouts of $1,359,668. On the I D cards they have had 2,543 occurrences and pa
youts of $89,925. They have added 570,000 new subscribers valued at $614 per sub
scriber since implementing the service guarantee. The value of these new subscri
bers is $350 million (570,000 x $614). Not a bad return on $1,359,668. Customer
retention had remained high at 96.5% (1995-2002). Compare that to the previous a
verage of 92% (1987-1989)! Source: www.customer-service.com
50
An interesting issue related to service guarantees is whether a firm with a repu
tation for outstanding quality offer a service guarantee? This is because with s
uch firms there is an implicit guarantee — an unsaid promise that the firm will do
whatever is necessary to satisfy a customer. Some researchers have even stated
that an explicit guarantee by such firms may even be interpreted as a signal for
potential quality problems. Wirtz, Kum & Lee, based on their research done in S
ingapore, have given the following findings in this regard.
Service provider with a good but not outstanding reputation for service quality
has much to gain from the introduction of a well-designed service guarantee. Ben
efits of a guarantee would also be positive, but less so for an already highly r
eputed firms. Therefore firms with a reputation for service excellence should ca
refully consider whether the costs of implementing a service guarantee are justi
fiable in terms of its market and/or operational impacts. Customer of even the b
est providers may prefer the certainty of an explicit guarantee over the uncerta
inty intrinsic in an implicit guarantee.
Customer Retention
10.7 SUMMARY
Retaining customers is of great significance for a service company’s growth and pr
ofitability. The units explains the importance of keeping customers. As the cust
omer stays with the organization he becomes profitable by increase in purchasing
, reduced operating costs, price-premium and through referrals. There are a numb
er of reasons why customers switch and most of these reasons are controllable fo
r company’s point of view. Providing excellent service quality, maintaining custom
er relationship and effective segmentation are key to building customer loyalty.
The unit further discusses the significance of complaint management and key com
ponents of a good complaint management system. On receiving complaints or otherw
ise finding out a service failure the company should strive for an effective ser
vice recovery. For this the company should anticipate need for recovery, act fas
t, train and empower employees and close the customer feedback loop. The last pa
rt of the units deals with Service Guarantees. A good service guarantee helps in
creating customer focus, increasing employee morale and loyalty, seeking custom
er feedback, creating differentiation, lowering customer perceived risk and incr
easing purchase intent. For a service guarantee to be effective, it should be un
conditional, easy to understand and communicate, meaningful and easy to invoke.
A) Objectives Type Questions 1. The service guarantee must be about things that
customers care about! This reflects which of the following characteristics of a
good service guarantee? a. Unconditional b. Easy to Understand c. Meaningful d.
Easy to Invoke 2. The example of self service salad bars wherein customers can c
reate salad as per their own individual need is an example of a. customizing the
service around an standardized core b. creating customizable service c. offerin
g point of delivery customization d. all of the above 3. Customers are more prof
itable over the time because of a. increased purchase b. reduced operating costs
c. referrals through positive word-of-mouth 51
Strategic Issues
d. all of the above True or False 4. Customers leave for a variety of reasons mo
st of which are not controllable from a company’s point of view 5. Service recover
y refers to the action taken by the service provider in response to a service fa
ilure. 6. Service Guarantee benefits all service organizations alike. Answers 1.
(c) 4. False 2. (b) 5. True 3.(d) 6. False
B) Discussion Questions 1) What are the benefits to a service organization in re
taining its customers? Discuss with the help of examples 2) Why do customers swi
tch service providers? Can you do anything as a marketers to prevent the custome
rs from switching? 3) What benefits do an organization derive in seeking custome
r complaints? Discuss the features of a good complaint management system. 4) Con
sider a service firm you are familiar with. Describe the importance of service r
ecovery to the firm and develop a service recovery strategy for it. 5) What are
the benefits derived by a service firm in offering a service guarantee? Discuss
the characteristics of a good service guarantee.
Bill Dee, “State-of-the-Art Complaint Handling,” ISO Management Systems – Jul-Aug 2002
. Hart, Christopher, “The Power of Unconditional Guarantees”, Harvard Business Revie
w, Jul-Aug 1988. Hart, Heskeet and Sasser , “ The Profitable Art of Service Recove
ry”, Harvard Business Review, Jul-Aug 1990. Robert Johnston, “Linking Complaint Mana
gement to Profit”, International Journal of Service Industry Management, Vol.12, N
o.1, 2001. Reichheld & Sasser, “ Zero defections: Quality comes to services”, HBR, S
ept-Oct 1990. Reichheld, “ Learning from Customer Defections” , HBR, Mar-Apr 1996. S
usan Keavenly, “Customer Switching Behaviour in Service Industries : An Explorator
y Study,” Journal of Marketing, Vol. 59, April 1995. Wirtz, Kum & Lee, “Should a Fir
m with a Reputation for Outstanding Service Quality offer a Service Guarantee”, Jo
urnal of Services Marketing, Vol. 14, No. 6. 2000.
52
MS-65
Block
4
SECTORAL APPLICATIONS-I
UNIT 11 Financial Services UNIT 12 Tourism and Hospitality Services UNIT 13 Heal
th Services UNIT 14 Case Study: Serving the Global Indian 5 23 46 62
1
Sectoral Applications-I
GNOU, New Delhi
Print Production
2
Printed at:
BLOCK 4 SECTORAL APPLICATIONS-I
In the first three blocks of the course we have covered the concepts and theoret
ical framework underlying services marketing. The remaining two blocks i.e. Bloc
k 4 and Block 5, are geared towards exposing you to the actual application of ma
rketing concepts in diverse service sectors. In this block three specific sector
s will be covered. Unit 11 is on Financial Services . In the last couple of dec
ades, India has witnessed a drastic change in the financial services sector. Thi
s unit explains application of various marketing issues in Banking and Insurance
services. Unit 12 covers Tourism and Hospitality Services . As you are aware,
marketing of tourism and hospitality services has special significance in terms
of its economic contribution to the economy of any society today. This unit expl
ains the reasons behind the rapid development of this sector and the variables a
ffecting the demand and supply of the tourism products. It also discusses the ma
rketing mix for hotels in detail. Unit 13 is concerned with the application of p
rinciples of services marketing to one of the most vital services sectors in any
society, the health sector . The last unit of the block is a case study on fin
ancial service marketing and relates to various issues concerning the banking in
dustry in India.
3
BLOCK
1.
rvices
2.
5. 6. 7.
ix for Services
3.
8. 9. 10.
STRATEGIC ISSUES
4.
11. 12. 13. 14.
of Health
5.
15. 16. 17. 18. 19.
4
UNIT 11 FINANCIAL SERVICES
Objectives
After studying this unit you should be able to : familiarise with the range of f
inancial services available in India, explain the consumer behaviour in the cont
ext of financial services, explain the product, brand and other elements of mark
eting mix for the banking services, and understand the marketing strategies for
the insurance services.
Structure
11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 11.9 Introduction Buyer Behaviour for Fi
nancial Services Branding of Financial Products Channels for Distribution for Ba
nking Pricing of Banking Products/Services Promotion of Banking Products/Service
s Insurance Summary Self Assessment Questions
11.1 INTRODUCTION
Financial services markets play a prominent role in the mobilization of savings
from all quarters of economy for useful inputs and for necessary formulation and
implementation of various policies. This facilitates liquidity management in co
nsonance with the macro economic environment. Regulators like SEBI, RBI and the
Government of India monitor for the suitable sustained economic growth in the ec
onomy. In the Indian financial system funds flow into the main economy for growt
h, from financial institutions, commercial banks, insurance companies, mutual fu
nds, provident funds, and from non banking finance companies. Of course the depo
sits and shares are mobilized from supplier of funds like individuals, businesse
s and governments. Till early eighties, no one in the highly regulated banking/f
inance industry showed any inclination to innovate or market new financial produ
cts, given their respective roles as bankers or finance companies all offered ab
solutely the same products. Product development or innovation of financial produ
cts interestingly requires very little or no additional investment. But the down
side is that no brand can boast of a Unique Selling Proposition (USP) for long,
as it can be copied immediately. Of course, the safeguard to some extent here is
the very branding of the product. Following is the list of some typical financi
al products available in the market: Savings and Recurring Account Current Accou
nt Fixed Deposits Retail Loan Products 5
Commercial Loans Leasing and Hire Purchase Credit Cards Insurance Mutual Funds B
eside these, banks and finance companies provide a number of fee-based services
such as merchant banking, issue management for raising equity from the market, f
oreign exchange advisory services etc. In this unit we will be focusing on marke
ting issues related to banking and insurance. Activity 1 Visit a commercial bank
in your city and enlist the financial services offered by it. .................
................................................................................
.......................... .....................................................
...................................................................... .........
................................................................................
..................................
11.2 BUYER BEHAVIOUR FOR FINANCIAL SERVICES
While making even the simplest purchase, consumers go through a complicated ment
al process. For us to appreciate the complexity of the consumer s buying decisio
n, we need to understand the variety of individual influences on consumer behavi
our; the impact of environmental factors such as family, social, and cultural in
fluences on the consumer; and how these components are integrated in the consume
r s mind. A firm s marketing efforts interacts with non-commercial sources of in
formation to stimulate the purchase decision process. This process is tempered b
y the individual influences on consumer behaviour, including motivation, persona
lity, learning and perception. The process stops when the consumers lose interes
t or evaluates the product and decides not to make a purchase. If the purchase i
s made, the consumer has an opportunity to see whether the product satisfies his
or her needs. If not, the consumer will discontinue the use of the product.
1. Individual Influences on Consumer Behaviour
The effort of the all marketing is to influences people s buying behaviour, but
it is difficult to foresee the success of planned marketing programs because hum
an beings are all individuals. Each behaves differently, thereby making mass con
sumer behaviour patterns we see everyday: People vary in their persuability. Som
e are easily persuaded to do something; others are skeptical and difficult to co
nvince. Some people have very cool heads and control their emotions. Others ar
e hot heads and get angry easily. Some people are loner, whereas others need t
he security of a crowd. Many people are oriented towards the acquisition of mate
rial things while some people are motivated mainly by spiritual matters. Some pe
ople spend their money cautiously while others spend their money extravagantly.
6
Many other contrasts in the behaviour of people could be noted such as interests
in sports and hobbies, goal orientation, colour preference. All these affect co
nsumers s buying decisions. To further complicate the marketer s goal of influen
cing consumer behaviour, consider these observations. First, people s attitudes,
beliefs and preferences change. What we have liked as children we may not like
as adult. That includes products, activities and living conditions. Second, indi
vidual behaviour is inconsistent and difficult to predict from one day to the ne
xt. An individual may like to go out and have diner today, but he may prefer to
stay home tomorrow. Third, people are often unable to explain their own behaviou
r. A man may say he brought a shirt because he needed it and it was at a discoun
t of 30%. The real reason may be different. People often do not understand why t
hey behave as they do. And if they do understand their true motivations, they ma
y fear expressing them. For example, a businessman who purchases a new Mercedes
probably would be reluctant to admit it if the reasons for the purchase was his
insecurity amongst his peer group. Activity 2 Talk to your colleagues about some
of the purchases of financial services that they have been making. Ascertain ho
w over a period of time. i) ii) Their preferences have been changed. Their buyin
g patterns have changed.
Financial Services
Can you furnish some explanation for these changes? ............................
................................................................................
................ ...............................................................
............................................................. ..................
................................................................................
.......................... .....................................................
.......................................................................
2. Family Influences on Buying Behaviour
We are aware as to how our needs and expectations change over different stages o
f our lifecycle. Your priorities as a teenager or a young adult or a family man
are very different. These differences are important as they enable the marketer
to fine tune his marketing effort by using family life cycle as a segmentation v
ariable. The family life cycle was developed in 1960 and was based on variables
like martial status, number and ages of children, work status and age. It has si
nce then, been widely used as a segmentation tool. Because our age, income and f
amily requirements, except for the basic necessities change over time, the famil
y life cycle and identification of family needs over various stages of the FLC a
re useful inputs to the marketer. The family life cycle consists of 5 stages, th
e young bachelor stage, the full nest I, the full nest II, the empty nest and th
e solitary survivor stage. Expenditure priorities and need for money at differen
t stages have interesting implication for the demand for various financial servi
ces. Table 11.1 gives you an idea of varying requirements of consumers for banki
ng services. 7
Table 11.1: Family Life Cycle and Banking Needs Stage Young Bachelor Stage Finan
cial Situation Few financial burdens, per capita income high,income low as compa
red to future prospects Home buying a priority, liquidity low, may have working
couples situation Income stabilized. Good financial position. Mid career, comfor
table position, money involving matters Banking Needs Credit Cards, auto loans,
low cost banking services Mortgage, Credit cards, Overdraft saving accounts Hous
ing and durables loans Home improvements loans Equity investment, certificate of
deposits, money market deposit accounts, fixed or flexi-deposits, other investm
ents services Social security services, few loan services, health insurance serv
ices
Full Nest I Married with young children
Full Nest II Older married with older dependents children
Empty nest - Older couple, with children now not living at home, may be retired.
Significantly reduced income
Source: Adopted from Exhibit 6.4. The family life cycle and Banking needs "Marke
ting of financial Service", Ann Pezzullo, American Bankers Association, McMillan
.
11.3 BRANDING OF FINANCIAL PRODUCTS
Branding, which is a major input in the marketing strategy of commercial product
s, can be successfully used in the marketing of financial services too. Brand is
a broad term that includes practically all means of identifying a product e.g.,
the LIC logo, Citibank’s “City” – schemes, Canara Bank’s “Can”schemes. Brand name is that
t of the brand which can be verbalized e.g., Citihome, Canstar etc. Brand mark i
s that part of the brand which can be recognised but is not utterable e.g. the L
IC folded hands symbol, Citibank’s distinctive lettering etc. These constitute the
logo of the company. Branding is of two types – individual branding which is one-
time affair like the Reliance public issue “Khazana” or umbrella branding, the pract
ice of labeling more than one product with a single brand name e.g., Citibank’s “Cit
ihome, “Citimoble”, and LIC’s “Jeevan Dhara”, “Jeevan Akshay”etc. The concept of branding o
inancial products offers several advantages. Brands command customer loyalty for
the product. Each brand has a consumer franchise which can be used to its advan
tage. Financial products aim to attract the investors to bring his savings into
the market. This is quite a delicate task because the investor’s money is involved
. Most of the financial instruments are very similar. This is where the advantag
es of branding can be exploited. Branding can help in creating differentiation b
etween the various financial products or public issues. Branding can also help t
o create some insulation from the competitor’s promotional strategy. A successful
brand will be demanded by a consumer even if the price is slightly higher. Trust
is the key element if people are expected to part with their money. A good name
evokes that trust and gives the investors confidence that their money will be s
afe. Branding, especially umbrella branding, helps the consumers to decide wheth
er to buy a product when the new product quality cannot be determined prior to p
urchase. Another strong advantage of branding is that good brands help to build
the company’s corporate image. In umbrella branding, the advertising and promotion
costs of subsequent products can be reduced considerably. This is because the b
rand-name recognition and preference is already there.
8
Branding of financial products has arrived in India in a big way. The first exam
ple of the handling of a public issue was when NTPC came out with its “Power Bonds”
in 1986. Since then, the investors have seen Reliance PetroChemical’s “Khazana”, Deepa
k Fertilizer’s “Mahadhan” and others. Most of the major issues of 1989 were branded -
Bindal Agro’s “Goldmine”, Usha Rectifier’s “Usha Lakshmi”, Essar’s “Steel Bonds” and Larsen
rbo’s “L&T Vision”. Banks too have gone in for umbrella branding in big way. For insta
nce, we have a series of Canara Bank’s schemes like, “Canpep”, Canstar” and “Canstock”, or,
the series of Citibank’s schemes – “Citione”, “Citihome”, “Citimobile”. Even institutions l
IC have jumped on to the branding bandwagon with their schemes like “Jeevan Dhara” a
nd “Jeevan Akshay”. The importance of brand name is crucial in the branding exercise
. The brand name should not be a casual after thought but an initial reinforcer
of the product concept. First, it should suggest something about the product’s ben
efits and qualities. Secondly, it should be easy to pronounce, recognise and rem
ember. Third, it should be distinctive. There are a couple of things to be caref
ul about while using umbrella branding. Spillover occurs when information about
one product affects the demand for other products with the same brand name. Spil
lovers can be positive or negative. All products under the umbrella contribute t
o the brand’s reputation. This joint estimate of quality is used to evaluate produ
ct. The company cannot control all the information revealed about its product, n
or can it precisely determine how information will be shared by its umbrella-bra
nded products. For instance, if customers are dissatisfied by “Citimobile” – this diss
atisfaction can spillover to “Citihome” and other Citi schemes. Thus, it is imperati
ve to maintain the quality of all the products under the umbrella brand, all the
times. A brand line should not be extended indiscriminately. Ries and Trout hav
e called it the line extension trap when the new products added to the brand doe
s more damage to the previous products than good. Any new product should be cons
istent with the established line. A “fit” is said to occur, when a consumer accepts
the new product as logical and would expect it from the brand. The company shoul
d know when to draw the line about introducing new products with the same brand
name. In other words, brand name should not be overused. For instance, if Canara
Bank introduces fifteen more “Can” – schemes, the investors will not only get confuse
d but also begin to doubt the quality of the previous schemes. Developing a bran
d requires a great deal of long term investment especially advertising, promotio
n etc. It is quite an expensive proposition and hence is worthwhile mostly for l
arge public issues or long term plans like a bank’s schemes. Nonetheless, the adva
ntage of branding can easily be exploited by the marketers of financial products
. With a little bit of caution and planning, branding can be as successful for p
ublic issues as it is for toothpastes or cigarettes. Activity 3 Identify any fin
ancial services offered by bank, where an attempt was made to create a successfu
l brand. Also identify the reasons, which make you think that it is a successful
brand. ........................................................................
................................................... ............................
................................................................................
............... ................................................................
...........................................................
Financial Services
9
11.4 CHANNELS OF DISTRIBUTION FOR BANKS
The channels of distribution in financial services perform a number of key funct
ions, as follows: Sales and offer of services and products, as well as advising
customers. Contact and liaison with advertising and public relations agencies to
assist in designing more effective advertising/promotional campaigns. Gathering
of information necessary for planning marketing activities, strategy decision a
nd product development. In distributing financial services, firms employ a numbe
r of channels. The advantages of direct distribution channels – for example branch
es, used to be lower operational costs and more efficiency. In comparison, the s
elling through indirect channels offers convenience to the customers and more “imp
artial” advice, as in the case of agencies. The Branch Network Bank’s major distribu
tion outlets are their branches. The design and development of the branch networ
k will be affected by : Characteristics of the products – importance of service qu
ality, inseparability of the product, intangibility of the product. Customer nee
ds – convenience, operating hours, availability of ATM, telephone banking, home ba
nking and so on. Environment factors – legislation, development of information tec
hnology. Competitors – if a branch network is efficient, it will be a competitive
advantage keeping up to date with changes made by competitors. Advantages of the
branch network includes: Its accessibility for customers. It keeps a bank’s name
in the public eye. The prime sites. Banks become accepted as an important member
of the community. Disadvantages of the branch network include: It is costly to
maintain premises. The staff costs. The major investment involved – the amount of
capital tied up in it. It is old fashioned, difficult to modernize. Small branch
es can be difficult to enlarge when expansion is necessary. Branch location and
distribution As the roles and functions of financial services continue to grow i
n most countries, pressures are building up for more efficient distribution syst
ems. Historically, for financial services, branches have essentially been retail
outlets. Although in the last few decades or so the roles of the branches have
changed, financial services customers still regard convenience of delivery as be
ing decisive when choosing a financial organisation. Moreover, location decision
s involves long-term commitment of resources and as such have implications on th
e long term profitability of the bank. In distribution of banking services the m
arketer is faced with a huge market that should be duly served. This market fall
s into two broad categories:
10
The mass (retail) market: Standard products, relatively inflexible in performanc
e and cost, can be offered to this market. It spells out the requirements of geo
graphical decentralization, standardized services, heavy advertising and promoti
on, attractive services and above all cost effective processes. The individual (
corporate) market: This market constitutes single orders of sufficient size of i
mportance to be profitable singled out for individual treatment. It requires ind
ividualized services and counseling, such as comprehensive financial advise, the
availability of research services and negotiated terms and so on. Banks are now
changing the image of their branches. Bank branches used to be serious, dull pl
aces that often intimidated customers. All the staff used to work behind securit
y screens and this created an unfriendly atmosphere. Now, some security screens
have gone, banking halls are brighter and a friendly atmosphere has been created
that is less daunting for customers. Branches are more like a financial service
s shop. Newly designed branches are open, planned and many staff have moved into
the banking hall to tables, to advise customers in a friendly way about financi
al matters, opening of accounts, solve problems or answering queries. Though the
importance of ATM’s, telebanking and internet banking is increasing, branches sti
ll continue to be the most important channel of distribution for banks. Internet
Banking Security First Network Bank, an Atlanta (US) based saving bank, is one
of the first international banks to go operational on the internet. Within 10 mo
nths of its launch in October, 1995 it garnered 5550 accounts and US$ 15 million
deposits across the world. The services being envisaged by Indian Banks include
: View transactions in their accounts, exchange messages with the officers conce
rned in the bank through a mailbox, request cheque book and get printed account
statements, structure loans by asking a series of ‘what if’ questions and getting an
swers. Request for funds transfer between accounts, issue stop payment requests
and standing instructions and do deposit modelling Have on-line connectivity pro
viding the customer with the ability to directly debit and credit the account wi
thout the bank’s intervention etc. A study estimates that in a full service branch
, the cost per transaction is US$ 1.07 as against US$ 0.54 for telephone banking
, US$ 0.27 for ATM full service, US$ 0.015 for PC banking and US$ 0.01 for inter
net based banking. Activity 4 a) Discuss with 15-20 bank customers, the uses and
applications that they have been making of the electronic modes of banking. Wha
t are the specific advantages they perceive? ...................................
................................................................................
.. .............................................................................
........................................ .......................................
.............................................................................. b
) Very large percentage of existing bank customers however, do not avail of the
electronic banking facilities. Discuss with some of these customers to elicit th
e reasons for their non utilization. ...........................................
.......................................................................... .....
................................................................................
................................ ...............................................
......................................................................
Financial Services
11
11.5 PRICING OF BANKING PRODUCTS/SERVICES
No discussion on marketing mix for banking services can be complete without unde
rstanding the concept of pricing and its importance, in detail. Pricing can be s
trategically used as a tool to meet/reduce the competition. Pricing affects the
product cost and also plays a key role in decision making of the buyers (custome
rs). Pricing is affected by competition, seasonality and general trend of demand
and supply. In short it can be said that the price is determined by cost, deman
d and competition in the market. Price in the eyes of the consumer is the evalua
tion of the total product offering which includes the brand name, package, produ
ct benefits, service, delivery, credit extended etc. Price can be defined as the
money value of a product or service agreed upon in a market transaction and can
be shown as – PRICE = sum of expectations + satisfactions. In a competitive marke
t, price is determined by free play of demand and supply. Price will increase or
decrease depending on increase or decrease in demand for product. Pricing decis
ions link the marketing actions with financial objectives of organisations. Pric
ing affects: 1) Sales volume 2) Profit margin 3) Rate of return on investment 4)
Product position 5) Image of the organisation Price simply read can be describe
d as “cost plus profit”. Therefore, proper analysis of cost and proper decisions reg
arding profit level have direct impact on pricing decisions/strategy. Normally d
irect expenses which vary with volume of production/sales are variable costs and
indirect expenses are fixed cost. A) Pricing Objectives The pricing strategy to
be adopted depends on the objective to be achieved. These objectives can be: 1)
Growth in Sales – A low price can achieve higher growth in sales volume but may a
ffect the profit level adversely. 2) Market Share- The customer acceptance is re
flected by market share of a product and is an indicator of acceptability of pri
ce. 3) Competition- To face the competition, prices can be lowered to maintain s
ales or in the absence of it, prices can be revised but stable prices help in ma
intaining image or brand name and quality. 4) Pre-determined Profit – If a profit
level is pre-decided as a policy, the price has to be maintained at a particular
level despite other factors as to ensure attaining that objective. 5) Corporate
objectives to have pay-back in a specific period also can affect the pricing an
d price level.
12
B) Pricing Methods I) Market based pricing system In order to understand consume
rs based inputs on pricing system, we should also take into account the market r
elated pricing systems which adopt one or more of the following approaches: i) i
i) iii) iv) i) Perceived value pricing Psychological pricing Promotional pricing
Skimming Perceived value pricing: This is based on the belief the consumers hav
e about the value of products and pricing is based on these assumptions. This is
supplemented by market research and if price is more than buyer – recognised valu
e, it may affect sales whereas if price is less than buyer – recognised value, the
revenue will suffer. Psychological Pricing: In many pricing systems, pricing is
based on prestige – and can be kept higher to promote the idea of status and qual
ity. Many other times the price will be just below a round figure say Rs. 99.90
(to show it is less than Rs. 100) or Rs. 499.00 (i.e. not Rs. 500/or above). Som
etimes instead of giving a 20% discount, the price per unit per-se will be const
ant (uncharged) but it is advertised that on purchase of 4 units one unit will b
e free. iii) iv) Promotional Pricing: This is used for promoting high level of s
ales or to clear excess stock which although is with a reduced profit margin. Sk
imming: This strategy is to ‘skim and cream’ i.e. adopting a high price approach. Wh
en the product is new and innovative and in a monopolistic or less competitive m
arket, the price will be higher (like in mobile phones) which can be progressive
ly reduced with entry of more producers.
Financial Services
ii)
II) Cost Based Pricing There are four main cost based pricing methods which are
: 1) Standard cost pricing 2) Cost-plus pricing 3) Break-even analysis 4) Manage
rial pricing III) Competition Related Pricing Strategies The competitive pricing
means pricing to compete with the leader in the market with respect to the pric
e. It can be either to set higher price initially and then to offer discounts kn
own as ‘discount pricing’ or to significantly increase sales volume by competing wit
h others already leading in the market by undercutting the prices significantly
with the sole idea of penetrating the market.
11.6 PROMOTION OF BANKING PRODUCTS / SERVICES
Promotion is a generic term used for the communication efforts of the firm that
are directed towards achieving the objectives of a marketing strategy.
13
The promotion efforts include the marketing communication through Advertising Sa
les Promotion Personal Selling Publicity Bank’s internal communication process, et
c. These elements of promotion serve as the link between the Bank and the target
segment of its market (customers). You may note that promotion does not mean on
ly advertisements but a Bank’s conscious communication efforts towards integrating
its marketing strategies with business plans. Promotion thus means the Bank’s wel
l organized, planned and goal oriented communication efforts which must be in co
ngruence with its overall business goals and objectives in the desired market ar
ea keeping specific needs of customer in mind. In the service industry like Bank
ing, promotion assumes all the more important position as what we really sell is
‘abstract’ thing i.e. service with the interest rates, range of product etc. being
more or less same, the service given through proper promotional channel makes al
l the difference between two Banks in marketing context. Promotion can thus mean
‘communicating with the buyers (customer), in order to strengthen his attitudes t
hat are favourable to the (Bank’s) sellers’ offering and to change his attitudes whi
ch are unfavourable to the sellers. This presupposes ensuring that such buyers b
ecome satisfied customers of the Bank, now or later. a) Advertising Although adv
ertising is a very effective and most frequently used promotional tool in market
ing of banking services, it is desirable to measure the effectiveness (impact) o
f an advertisement campaign. For this there cannot be any one criterion to asses
s the effectiveness. Normally below mentioned methods are used to measure effect
iveness of advertising: 1) Usage Measurement: This is done through measuring bus
iness growth, interviewing consumers. 2) Measuring Recalls: This can be either u
naided recall or aided recall – which assesses the extent to which advertisements
are retained in customers’ mind. 3) Psychological Measurement: This can be measure
d through interviews. 4) Attitude Measurement: This is done through structured i
nterviews or attitude scales. 5) Measuring Awareness: This is done through YES/N
O type questionnaires. The success of advertising affects successful launching o
f product/schemes, customer’s positive response of increase in business share. Thi
s can reflect in the business figures like Deposits, Advances, Profitability, et
c. and the comparison of pre and post advertisement figures can reveal the visib
le effect of advertising campaigns. It can thus be summed up that effective adve
rtising is the technique of creative communication. It ensures co-ordination and
application of various batches of the art and profession to achieve a pre-deter
mined end i.e. to communicate a message to the public in general or to the desir
ed segment of public/market in particular. Advertising is significant both as a
social and economic force.
14
Advertising serves as a ‘mouthpiece’ for the organisation’s objectives to be made publ
ic. In simpler words, advertisement makes use of communication process with inbu
ilt psychological and sociological contents which influence the buyer’s behaviour
in advertiser’s favour through a process cycle of – stimuli, response, motivation an
d reward. Activity 5 Carefully look through bank advertisements on the televisio
n and newspapers. What are the major themes that have been used to promote the b
anks? List these themes. .......................................................
.................................................................... ...........
................................................................................
................................ ...............................................
............................................................................ Do
the promotion efforts vary? How? i) With the type of Bank i.e. public, private o
r foreign? .....................................................................
............................................ ...................................
.............................................................................. .
................................................................................
................................ ii) With the type of product being marketed? ..
................................................................................
............................... ................................................
................................................................. ..............
................................................................................
................... b) Sales Promotion Advertising and Sales Promotion as parts
of the marketing mix are integrated with the marketing objectives and they are o
ften co-ordinated with other selling efforts. As the name suggests, sales promot
ion is a collective name given to all measures used to promote the sales. Any sa
les by an intending seller of a product presupposes a corresponding buyer and ,
therefore, to sell anything the buyer has to be made aware about the product and
its advantages to the buyer. The visible benefits of the product have to be dem
onstrated to facilitate buyer’s decision to buy that product. In a controlled econ
omy and market if the competition is low or less, sales promotion may not be nec
essary if there is only one seller and many buyers but in a competitive market p
lace, the importance of sales promotion cannot be undermined. In Indian context
in general and in marketing of banking services in particular during the launchi
ng of product, sales promotion is an important task. Before deciding the sales p
romotion strategy it is important to keep in mind following three essentials: i)
Product Knowledge: This is first essential. The employees and specialized staff
promoting a scheme/product must have the through knowledge of both the advantag
es and disadvantages of the product. Only after ensuring the market demand and s
pecific needs of customers, the product/scheme has to be launched with full deta
ils made available to staff before hand to promote this product in a better way.
Financial Services
15
ii) Market information: This means knowing who will buy the product, when he wil
l buy and why he will buy? This gives an idea about the probable market share an
d enables to decide promotion (selling) strategy to specific segment of the mark
et. This also enables the seller to decide on the advertising through proper med
ia keeping in view the specific needs of the potential buyers. iii) Reaching the
customer: After ascertaining the market and ensuring proper product knowledge t
o all concerned; when it’s time to reach the customer, the campaign has to take in
to account : a) TIMING – to launch the product; b) APPEAL – to target audience; and
c) GEOGRAPHICAL TIMING: to ensure that when the customers respond, in adequate q
uantity, product will be available at all probable locations of demand. Personal
Selling: Sales promotion also can be done through personal selling. In banking
context, it is the person at the counter who is the primary contact point with b
oth existing and potential buyers (customers). Well informed and well-trained st
aff at the counter, eager to explain the schemes to the customer using smile, co
urtesy and proper communication process can ensure successful sales promotion th
rough personal selling, within the branch, across the counter. The pro-active ap
proach of the staff and projecting a harmonious image of the bank taking keen in
terest in customers’ interest can do wonders to boost the image and increase busin
ess of the bank. Seminar, exhibitions, deposit mobilization-month/fortnight, bra
nch anniversary etc. are some of the other special sales promotion measures take
n by banks. The sales promotion is very important instrument which smoothens the
process of selling a product to the customer successfully. A well thought strat
egy of sales promotion, like planned advertising, should be looked at as an inve
stment and not just another expenditure. Sales promotion is a bridge between adv
ertising and actual selling in the field. Like the sum 2 + 5 = 5, when proper ad
vertising is added with sales promotion, publicity and personalized services it
can bring rich dividends in promotional efforts. c) Publicity The Oxford English
Dictionary gives definition of word “Publicity” as : “The quality of being public, th
e condition or fact being open to public observation or knowledge- the business
of making goods or persons publicly known”. The publicity differs from advertising
not in its aim but in its technique/s. While the latter has a more specific job
to do i.e. inform and motivate, publicity seeks to interest and draw attention,
without essentially motivating or informing the public Publicity can be good or
bad. With high customer expectations and presence of various consumer councils
these days it is just possible that a branch of a bank can get wide bad publicit
y for some mistakes/flaws or inadequacies in giving service. The publicity hando
uts or press releases are the commonest form of publicity. Such a press release
must i) ii) iii) give specific facts not give any sales promotion suggestion be
accompanied by photograph
16
iv)
be prepared/sent well in advance of the function/event. Publicity normally is no
t paid for by the organisations. It comes through good liaison with press report
ers, journalists and column writers. Good public relation strategy usually compl
iments publicity to boost the bank’s image.
Financial Services
Publicity does the job of reducing ill effects of bad news and also increases po
sitive effect of goods news if properly backed by proper public relations. e) In
ternal Communication Thus far we have seen the various promotional measures that
are required in the communication process to achieve the corporate goals and ob
jectives of the banks. In order to supplement such external communication measur
es, most of the banks also have internal communication strategies in the form of
an annual budget or business and corporate plan which spell out its goals, obje
ctives and targets during the financial year. The expectations of the CMD are co
nveyed with respect to corporate goals using past data and changes in economy an
d business environment appealing to the managers/staff to realistically assess t
he business potential in the common area of their branches and to arrive at revi
sed business targets as expected by corporate goals based on analysis of market
and potential of branches. Motivational techniques and recognition measures are
used in such an exercise of budget or business plan. The success of such an exer
cise largely depends on the realistic assessment of past data and realistic targ
ets set. The utilization of the top-bottom communication ensures positive feedba
ck/response from bottom to top. Besides business plan exercise, internal communi
cation also involves: 1) House Journals 2) Circulars 3) Corporate objective/Busi
ness plan booklets 4) D.O. letter for encouragement/appreciation 5) Posters etc.
11.7 INSURANCE
a) Need for Marketing Insurance Services Thre is an enormous scope to exploit th
e potential market and raise per capita life premium. The need for marketing ins
urance services also arises due to following factors: – The insurance products hav
e a distinct feature where benefits of the product comes at the later date and a
t times after a considerable time. – The demand unlike consumers products is not i
nbuilt. – Among the financial services too the insurance sector gets the least pri
ority as other investments avenues provide immediate yields. – In case of life ins
urance the case is further complicated as in India people have belief, tradition
al culture and religious background and tendency to leave everything to fate. Th
is happens specially in rural areas. – The rural market is still untapped. The ins
urance sector is yet to exploit this segment which have vast potentialities. 17
– The concept of proper financial planning, taxation and investment is still lacki
ng among the middle class strata. – Over the period of time the L.I.C. have come o
ut with multipurpose better yielding attractive terms insurance’s policies which c
ertainly needs effective marketing to wipe of the synergic ideas in the minds of
people that life insurance policies are mainly for death hazards. – The General i
nsurance have wide scope for marketing as small and medium business entrepreneur
s are yet to reap the benefits of general insurance schemes. b) Scope for Growth
of Marketing Insurance Services The scope for marketing insurance services is v
ast and thereby marketing of insurance services needs a re-look. There are numbe
r of impending changes that are likely to make this sector more dynamic. The Ins
urance Regulatory and Development Authority (IRDA) has been established in 1999
for promoting, regulating and strengthening the insurance sector. The following
factors may further induce promotion of marketing activities in the insurance se
ctor. a) IRDA aims at promoting the regulating professional organizations connec
ted with insurance and re-insurance business. b) The insurance sector is thrown
open to private and corporate sector. This will certainly expand the business di
mensions. c) There is also a move to specify the percentage of life insurance bu
siness as well as general insurance in rural and social sector. d) With the incr
eased spirit of investment education and awareness there are already indications
of increased participation. e) The yield on other avenues of investments such a
s banks, other financial institutions, mutual funds, capital market have come do
wn and almost at par with insurance investments. This trend will further enhance
the scope of marketing insurance services. f) Service standards are bound to im
prove and insurance premium should come down once the insurance reforms takes pl
ace. With such a positive development the marketing scope would further increase
. g) The process of privatization will bring in many customer friendly insurance
products. h) The marketing of insurance services would take together new shape
once banking services, insurance selling and fund management are all interrelate
d. i) Though the market of general insurance is smaller in comparison to life in
surance nevertheless the scope of growth is ample. j) The Budgetary provision ha
ve provided additional tax saving opportunity to certain specified insurance pro
ducts such as pension policies. This will give further fillip to marketing strat
egies. Activity 6 Against the backdrop of recent opening up of the insurance sec
tor, what do you think are the marketing implications for nationalist providers
like LIC and GIC? ..............................................................
............................................................ ...................
................................................................................
....................... ........................................................
.................................................................. .............
................................................................................
.............................
18
c) Strategies for Effective Marketing Selling of services are different from goo
ds in that, they are sold before production and consumption take place. Goods ar
e purchased first then sold and consumed. Services also have particular characte
ristics such as their intangibility and variability where they are difficult to
standardize. This makes it more difficult for customers to evaluate them (especi
ally when they have no understanding of the service being provided and are relyi
ng on professional competence). This assumes significant importance in case of i
nsurance services. Opening of insurance to private insurers has potential of inc
reasing sales in different segments because of: 1) Sophisticated and knowledgeab
le selling by qualified agents, 2) Cost effective products, 3) Increased use of “F
amily Package” policies (A good product-mix) i) ii) iii) iv) Widowed mothers Un-ma
rried mothers Single parent family Multipurpose products
Financial Services
However to augment the business in this sector and exploit huge resources availa
ble in the markets, effective marketing strategies will have prominent role. The
majority of insurance business is undertaken by the agents nominated for the pu
rpose. They have crucial role in mobilising the business. Therefore their profes
sional approach to consumers assumes significant importance. The following aspec
ts have to be considered in this regard. Awareness about Demographic Changes: An
agent must keep himself aware of latest trends, such as: i) With increase in “Ave
rage Life Span” in our country, the number of aged persons are on the increase eve
ry day. Therefore, the financial problems of longer retired life are no less tha
n those of early death. In future insurance market of Annuity and Pension plans
is going to expand significantly. ii) Restructuring of national economy has brou
ght in its wake many Voluntary Retirement Schems. The employees affected from th
ese schemes form potential group of pension or Annuity Schemes. Product Knowledg
e: It is obvious that a life insurance agent must know the product he is selling
. What he is selling is an INTANGIBLE commodity. Therefore, an agent should not
have superficial knowledge about various types of policies. He must be able to d
raw out the philosophy behind the launch of a product or insurance plan. Ability
to Convince: Imagine a situation where an agent says to his client “I will got to
my office and find out.” Such a salesman will not be able to convince his prospec
ts. KNOWLEDGE IS POWER: Yes, it has the powers to convince others. An agent, in
order to be successful must attain training sessions or seminars on insurance wh
ether held by his company or outside agency. He should make it a habit to read d
aily the material connected with his profession. Consumer Orientation: A custome
r is always right because he is the cause of your profession. You are for him. T
here may be many agents who are interested in him. Why he should be interested i
n you only? Here lies the
19
secret of your skills of salesman. Therefore, an agent has to so establish himse
lf as to enable the client to think that Agent cares for his interests, i.e. i)
Agent understands his needs. ii) Agent is considerate towards his difficulties.
Selling Right Type of Policy: An agent should never go by his personal gains. Th
e benefit of the customer (life assured) should be uppermost in his mind. It is
said a stitch in time saves nine. However, for an insurance agent a right advice
brings nine opportunities. Therefore, always sell the right type of policy. Act
ivity 4 Contact at least 5 people who have tried to claim their motor insurance
or household insurance policy in the event of a mishap. On the basis of their fe
edbak, note the kind of problems customers may face while collecting policy clai
ms. What is the advise that you would have for the marketers of insurance on the
basis of the feedback collected by you. .......................................
................................................................................
.... ...........................................................................
................................................ ...............................
................................................................................
............ d) Role of other Institutions in Marketing of Insurance Services An
open entry has been permitted to private corporate sector, foreign institutions
, banks and other financial institutions to the insurance sector. The systematic
and planned marketing strategies by new entrants in the market will certainly g
ive a different shape to marketing practices for various kinds of insurance serv
ices. We may mention the possible out come benefits as under: a) Banking service
s, insurance selling and fund management are inter related synergies. Therefore
insurance selling by banks are mutually beneficial to banks and insurance compan
ies. Banking products offer insurance product through the banking channel will c
omplement banking. b) With the entry of corporate sector with sophisticated tech
nology, the quality of services will improve significantly and so is the cost ef
fective products. This will certainly widen the market horizons. c) The regulati
ons and controlling measures by IRDA would provide protection to investor. d) Th
e professional training institutes will also have important contribution in trai
ning the personnel and thereby sharpening their professional skills. It will hav
e positive development on marketing of insurance services. e) There is also a ne
ed to expose institutional structure more particularly in the marketing segment
to rural and semi-urban areas. The efficient and well organized marketing strate
gies will bring more number of investors to insurance services and large populat
ion uncovered so far will have advantage of access to this sector. Exhibit 11.1
Financial Services Firms and Product Innovations Developing new products is of p
rime importance for organisations. The financial sector is also recognizing the
increasing importance of new products. Due to the rapidly increasing level of in
ternational competition there is a growing need for product innovation in bankin
g and insurance
20
Financial Services
products. The service characteristics of intangibility and inseparability raise
a number of issues related to new service development. The main problem regardin
g intangibility is that people cannot feel, see or touch the product being devel
oped, which means that people should work closely together in the development pr
ocess. Prototype is hardly possible. Intensive communication is needed between t
he people involved in developing the new services, maybe even more than would be
the case in manufacturing. The simultaneity of production and consumption (inse
parability) warrants strong customer and user involvement in the process. Becomi
ng more innovative requires alterations at the deepest levels of the organisatio
n. They key changes that are required to become more innovative are concerned wi
th the organisational structure, the underlying values and beliefs and informati
on technology. An important issue in becoming more innovative in the financial s
ervices is to designate explicitly a ‘place’ for product development. Also, consider
able attention has to be given to changes in the value system of the organisatio
n. Generally, banks and insurance companies are diffused with stability. Employe
es in these companies have to get used to a special product development function
and its importance. Role of IT in product innovations has also to be understood
. Changing the perspective and investing in IT would help in increasing the inno
vations potential of many banks and insurances companies
Source: Patrick Vermeulen, “Managing Product Innovation in Financial Services Firm
s”, European Management Journal, Vol.22 No.1 pp. 43-50, Feb 2004.
11.8 SUMMARY
This unit explored the basic concepts for understanding the way a consumer belie
ves in selecting and consuming financial products and services. In order to be a
ble to manage their marketing effectively, marketers of financial services must
understand why and how people believe, so that the pricing, distribution and com
munication of the organisation’s offer can be profitably offered to its target mar
kets. Apart from needs and perceptions, a number of individual variables like co
nsumer learning, their personality and self concept as well as group variables l
ike family culture, sub-culture, reference groups and society affect buyer behav
iour. The key elements in determination of the marketing strategies for financia
l services are the marketing objectives of the organisation, its target segment
and its marketing mix. The process would involve the best possible selection of
the elements of the marketing mix to enable the greatest degree of fit between t
he needs and wants of the selected target group and the organisation services of
fer such that the exchange process results in value creation for the consumer an
d the organisation. Once the organisation, looking at the needs of the target ma
rket determines what is sold to whom (decision on the service product), the pric
ing, promotion and distribution will be easier to determine. In practice, the de
termination of these elements involves a thorough understanding of buyer prefere
nces and company capabilities. In developing a marketing strategy for financial
services, marketers would thus need to go through a two steps process: First to
select or identify its target market or markets and then to design a marketing m
ix to meet the needs of the target market better than its competition can. In th
is unit you have been explained in details the branding, pricing, distribution a
nd promotional strategies for banks. 21
The insurance services in our country have wide scope for growth. A large number
of investors could be covered with effective marketing practices. The operation
al difficulties encountered so far in effective marketing will altogether have a
new look henceforth due to large number of players in the market. The professio
nal skills to mobilize the business will have key role in competitive environmen
t. With the increased participation by various segments, the role of other insti
tutes will also increase considerably. Need and strategies for effective marketi
ng of insurance services have been outlined in the unit.
1. Discuss the individual and family influences on buyer behaviour for financial
services. 2. Explain the importance of branding in marketing of financial servi
ces with the help of suitable examples. 3. Explain the development of different
types of bank branches and other models of delivery of banking service. 4. Expla
in briefly various methods of pricing financial products. 5. Define Promotion. W
hat should be a ‘Good Promotion Blend’, for marketing banking services? 6. Explain w
ith the help of examples how effective marketing can be useful in enhancing the
insurance business.
22
UNIT 12 TOURISM AND HOSPITALITY SERVICES
Objectives
After going through this unit you should be able to : describe the nature of tou
rism as a service industry and identify the participants in the tourism process,
discuss the factors governing tourism supply and demand, apply the various segm
entation criteria to the tourism market, identify the levels of demand for hotel
s, and discuss the components of the hotel marketing mix.
Structure
12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8 12.9 12.10 12.11 12.12 Introduction Fact
ors Governing Tourism Demand and Supply Segmentation in the Tourism Market The H
otel Market The Hotel Product Hotel Pricing and Distribution Communications Exte
nded Marketing Mix for Hotels Marketing Consortium or Cooperatives Summary Self-
Assessment Questions References and Further Readings
12.1 INTRODUCTION
The tourism and hospitality industry is identified by the products which are nee
ded to satisfy the demand for travel, accommodation, food and beverage away from
home. Demand for accommodation is a function of travel and tourism. A tourist i
s often defined as an individual spending at least 24 hours away from home for t
he purposes of pleasure, holiday, sports, business or family reasons. Tourism is
one the major industries today, with over 720 million tourist traveling annuall
y. The annual average growth rate for the industry is estimated to be between 9%
to 12% globally. Tourism as a service industry comprises of several allied acti
vities which together produce the tourism product. We find involved in the touri
sm product development, three major subindustries. They are: (a) tour operators
and travel agents; (b) accommodation sector (hotelling and catering); and (c) pa
ssenger transportation. According to international estimates, a tourist spends 3
5% of his total expenditure on transportation, about 40% on lodging and food and
the balance 25% on entertainment, shopping and incidentals. The product in this
case in not confined to travel and accommodation but includes a large array of
auxiliary services ranging from insurance, entertainment and shopping. Demand ge
neration, in addition to the consumer motivation, is also heavily dependent upon
powerful persuasive communication both at the macro (country) level and the mic
ro (enterprise) level. The 23
participants in the process of this service business can be illustrated by the F
igure below (Figure 12.1). Figure 12.1: Element of International Tourism Industr
y
Travel demand influenced by: rising incomes increased mobility improved transpor
t education marketing Tourist Industry Intermediaries travel agents tour compani
es hotel companies transport companies Travel destination influenced by: histori
cal connections accessibility nature of tourist product search for foreign excha
nge
Source: John Lea, “Toursim and Development in the Third World”, Routledge, Chapman a
nd Hall Inc. 1991
Some of the pointers to nature of tourism as a service industry are: 1) Tourism
accounts for nearly 6% of world trade. 2) Bulk of the tourism business is locate
d in Europe and North America, with 1/8 of the market share being shared between
the other world regions. 3) The highest growth rate in tourism in recent years
has been in the third world 4) Tourism, like most pure services, because of the
characteristic of inseparability, exemplifies a product which cannot be sampled
before purchase, the prospective consumers have to travel to a foreign destinati
on in order to consume the product. Technology today provides the opportunity of
some assessment of sorts, through net generated images and rich information. Wh
ile these do provide some basis for evaluation, only the actual transaction of t
he service act would lead to realistic assessment of the product. 5) The major p
layers in the tourism market include a number of intermediary companies. Some of
them transnational in character, some of them exhibit vertical integration, bot
h backward and forward, acquiring interests in all major sectors in this service
industry. Quite common is the existence of loose coalitions between intermediar
ies so that a more complete range of services can be offered to the consumer.
12.2 FACTORS GOVERNING TOURISM DEMAND AND SUPPLY
Because of the unique nature of the tourism product-it being an amalgam of the p
hysical characteristics of a destination and the infrastructural as well as mana
gerial efforts of the promoter; the determinants of tourism demand emanate from
both individual; tourist motivations and the economic, social and technological
factors. Not quite so apparent is the creation of tourism demand as result of so
phisticated tourism promotion. The economic, social, and technological determina
nts of tourism demand include high and rising incomes, increased leisure time, g
ood-education, new, cheaper and faster modes of transport. Some of the important
factors are discussed here. 24
a) Income Levels In the last 30 years, disposable incomes around the world have
shown upward trends, thus allowing more money for activities like leisure travel
. Smaller families have meant higher allocations per person in family. More and
more women are entering the work force and in real terms the cost of the travel
has fallen. The dramatic rise of tourism in the last 50 years can be attributed
in a large measure to the combined effect of more leisure time and rise in both
real and disposable incomes. b) More Leisure time Increasing unionization of lab
our right from 1930 onwards has reduced the number of working hours per week. Ch
anging managerial orientations towards human resources have increased the level
of pay and paid vacation time in most developed countries. Added to that is the
component of social tourism, in eastern European countries where the state often
pays for the cost of holiday for certain classes of employees. All this has res
ulted in a larger number of people having longer periods of leisure which could
be allocated to travel. c) Mobility Better transportation and communication serv
ices have made the world a smaller place, and have brought both exposure and awa
reness of distant lands to large sections of potential tourists across the world
. Faster modes of travel have cut down on travel time, making it easier for peop
le to economically plan and execute trips aboard. d) Growth in Government Securi
ty Programmes and Employment Benefits The growth in government security programm
es and well entrenched policies of employee benefits mean that quite a large num
ber of families may have long term financial security and may be more willing to
spend money for vacations. e) Growth of Business Business travelers have always
contributed to a large extent to the tourism traffic. The increasing volume of
transnational business and the attendant international travel has meant a spurt
in the tourism business. Business travel is in fact such an important segment of
the tourism market that many international airlines and hotel chains have targe
ted it as their key area of operation, developing a whole range of services to c
ater to the needs of the business travelers. f) Tourism Motivation Even if the p
eople have the time, the money and the mobility to travel, tourism will not occu
r unless people have the motivation to take a trip. Motivation to travel may spr
ing from a variety of needs. A variety of typologies developed for the tourists
have classified tourists as those wanting to satisfy need for status and self–este
em, need for recognition as well as the need to know and understand, and the nee
d for aesthetics. Consumer may know what they want but are frequently unaware of
the need that underlines that want. A couple may want a winter cruise but may n
ot be able to decipher why. All too often tourism marketing is focused on advert
ising to the want and not addressing the underlying need. If such needs can be e
stablished and promoted, the result would be a more effective marketing effort.
For example the couple who want the winter cruise may feel that they, on their r
eturn will be the envy of the entire neighbourhood (need for status) or a person
may feel that he would like to see a monument and its surroundings for himself
in order to truly appreciate its beauty (need for aesthetics). If such underlyin
g motivation can be unearthed, and the extent measured, it would be possible to
design tourism effort more effectively.
Tourism and Hospitality Services
25
A clue to the motivations regarding travel, apart for travelling for business is
provided by the tourist typologies, which classify tourists on the basis of rea
sons for travel. Valerie Smith gave an interactive typology of tourists stressin
g the large variety of tourists and their behaviour at a destination. According
to her, tourists can be classified into the following seven demand categories: i
) ii) iii) iv) v) vi) vii) Explorer: Very limited in number, these tourists are
looking for discovery and involvement with local people. Elite: People who favou
r special, individually tailored trips to exotic places. Offbeat: These are fill
ed with a desire to get way from the usual humdrum life Unusual: Visitors who ar
e looking forward to trips with peculiar objectives such as physical danger or i
solation. Incipient Mass: A steady flow, travelling alone or in small organized
groups using some shared services. Mass: The general packaged tour market, leadi
ng to tourist enclaves abroad. Charter: Mass travel to relaxation destinations w
hich incorporate as many standardized, developed world class facilities as possi
ble.
The interesting fact is that each of these categories has a corresponding range
of impacts on the host society and destination, the more intensive effects, prog
ressively, being felt in each category down the list. Erik Cohen has suggested a
cognitive normal typology to describe what travel, or a visit means to differen
t people. Thus tourism could be : i) Recreational: One of the commonest forms, t
he objective of travel here is to relieve the tensions and strains of work, invo
lves no deeper significance. Diversionary: When the visit is a true escape from
the boredom and routine of home life. Experiential: The tourist here is a modern
pilgrim looking for authenticity in the life of other societies because he has
seemingly lost it in his own. Experimental: When the tourist wants to experiment
with lifestyles other than his own. Existential: The type describes a tourist w
ho actually acquires a new spiritual centre as a result of the travel experience
.
ii) iii)
iv) v)
26
A different way of looking at tourists is by analyzing them psychographically. P
lag felt that psychographically all tourists can be viewed as being spread along
a continuum. At one end are allocentric tourists who want an independent vacati
on experience and at the other end are psychocentrics who become part of the mas
s tourism market. According to Plag, different type of tourists are attracted to
different tourist destinations depending upon their position between the two ex
tremes of the continuum. The new destinations generally appeal to the small numb
er of allocentric adventurous tourists, who prefer to fit in the local culture a
nd consequently make few demands. As the destination gains popularity, it loses
its charm for the allocentric who moves away to untouched locales. The destinati
on draws most of its tourists from the midcentric section now. As the destinatio
n gives way to larger and larger number of arrivals, it goes through another cha
nge and becomes dependent upon foreign investment and manpower. The psychocentri
cs now feel at home in such place, as it
offers a range of facilities and services “just like back home”, which incidentally
change its identity from the natural geographic and social locales which initial
ly lured the allocentrics. Generalisations like these help tourism marketers to
view tourism from he perspectives of both the tourists’ personal motivations (what
does it do for me) and the host society. There is, for example, evidence to sho
w that the aspirations of westerns tourists (comprising a major chunk of tourism
traffic today) may not tally with the priorities held by third world host count
ries for the development of their industry. Some governments may wish to maximiz
e income from the industry by encouraging mass tourism with a minimum of local c
ontact (as in case of beach resorts in Mexico). Others may wish to make their to
urist trade upmarket to gain the same benefit from a smaller number of top spend
ing investors (as in the case of Bali) while still others may want to encourage
mass tourism with maximum visitor-host interaction by encouraging the use of vil
lage accommodation and hotels. The Tourism Products and the Supply Factors The s
upply factors, as the mix of destination, facilities and services is usually cal
led, can be broadly classified into five broad types. a) Attractions: These may
be natural (land forms, flora, fauna) or man made (historic or modern) or by rea
son of cultural or sociological destinations (music, art, folk lore). b) Transpo
rt: Tourism growth is closely related to the supply and extent of development in
transport systems. Certain third world destinations and certain locations withi
n these countries are rendered in an advantageous position, by easy access to th
e world air routes. c) Accommodation: A critical component of the supply factor,
accommodation can be further divided into commercial sectors (hotels, guest hou
ses, holiday camps) and private residences or evencamping/canvassing sites. d) S
upport and auxiliary services: Cover a large array of supporting services such a
s shops, restaurants, banks and medical centres. e) Physical and communication i
nfrastructure: To make available the facilities noted above, the infrastructural
requirements needed are covered under this head. Examples are roads, airports,
electricity, sewage disposal and so on. These are generally provided by governme
nt because of high capital costs.
12.3 SEGMENTATION IN THE TOURISM MARKET
The tourism market can be segmented by using variables like: (a) age groups; (b)
number of trips taken per annum/season; (c) income and education; (d) purpose o
f the trip. In contrast to the first three the last variable i.e. purpose of the
trip has been fairly extensively used by the major players in the tourism indus
try – hotels, tour operators and travel agents, and airlines. Using this criterion
segments have been identified as travel for business, vacation, convention, per
sonal emergencies, visits to relatives and other types. The different elements i
n tourism marketing mix are then tailored to suit the different demand elasticit
ies of these segments. Table 12.1 gives an idea of the tourism market as segment
ed by purpose of travel, along with their major market characteristics. Other ba
ses sometimes used to segment Tourism Market are:
27
Table 12.1: Some Major Tourist Segments and their Main Marketing Characteristics
Main Tourist Segments Business Tourists Common Interest Tourists Big City Visit
friends, relatives, education, pilgrimage Partial seasonality
Marketing Characteristics 1. Typical Destination
Holiday Tourists
Resort-orientated
2.
Seasonality
High, marketing mix can assist however in spreading demand levels Could be influ
enced by promotion/ communications
No seasonality
3.
Length of Stay
Normally short and cannot be prolonged by advertising
Prefer long stay. This will be prolonged if the costs of additional stay are ‘reas
onable’ The cheapest mode of transport
4.
Mode of Transport
Varied mode(s) of transport. Time spent on the way to destination is part of the
holiday or package tour. Yes. Normally at un-expensive hotels
Airplane invariably. Objective is to reach the destination as soon as possible
5.
Hotel Accommodation User Requires Entertainment
Yes, normally expensive hotels
Only to a very limited degree No
6.
Very much so. Yes, but to a limited Normally the degree entertainment is part of
the tourist package. Very sensitive (high price elasticity of demand) Very impo
rtant Low price elasticity of demand
7.
Price Sensitivity
Sensitive
8.
Role of Advertising/ Marketing Communication
Rather limited
Quite important, particularly sales promotions are important Limited appeal
9.
Tour Package(s) Importance
Of great interest and demand
Of no appeal at all
Source: Meidan A, “The Marketing of Tourism in Marketing in Services Industries”, Ed
. Lovelock, Prentice Hall Englewood Cliffs N.J.
a) Benefit Segmentation: Based on the realization that different tourists seek d
ifferent benefits from the tourism experience, benefit segmentation consists of
identifying the benefits that the tourist might be looking for in a given produc
t class, identifying the kind of tourist who might be looking for each benefit a
nd defining the tourist destination which come closest to delivering each benefi
t. The objective here is to find sizable groups of people all seeking same benef
its from a tourism product. Once different benefit segments have been identified
and grouped, each segment can then be measured in terms of volume of consumptio
n, frequency of consumption and possible growth prospects. 28
b) Psychographic Segmentation: Using lifestyle and personality variations among
consumers, psychographic segmentation seeks to determine variance in consumer de
mand for tourism and then tailor or package the product to these demands. For ex
ample, travel agencies and tour operators market differently to ordinary familie
s seeking a relatively cheap summer holiday than to swingers (young unmarried, f
un-loving people seeking ‘up-to-date’ destinations and hedonistic living) c) Distanc
e traveled: As a generalization, long distance travelers comprise the larger and
more profitable segment in the tourism market while nearer travelers may be see
n as representing the low margin high traffic consumer groups. Marketers dependi
ng upon their marketing objectives and the need to balance margins and volumes,
use differential marketing mix to attract both segments.
12.4 THE HOTEL MARKET
The total hotel market, which consists of the total demand for hotel facilities,
may be divided into various segments. These segments are determined as per the
needs of the people and the means they possess to pay for their satisfaction. Th
e market for the hotel will be served according to what is provided, how it is p
rovided, and for how much. At a managerial level, it is relevant to conceptualis
e the demand for the hotel sector at both the primary and secondary levels, to b
e able to assess the requirements on the supply side.
Table 12.2: Primary and Secondary Levels of Demand Primary level i. Basic demand
which exists for hotel facilities but not being served at present. Displacement
demand arising from the clientele for other hotels where the customers’ needs are
not fully met by the market package offered. Created demand which does not exis
t so far, and arising from people who do not normally use hotel facilities, or f
rom people who do not use the hotel facilities in particular area. Futuristic de
mand which may occur at sometime in the future, due to certain socio-economic or
sociopsychological factors or both, e.g., rise in the standard of living and pe
r capita income (‘green revolution’ areas, new industrial complexes), increase in po
pulation, changing social systems and habits, etc.
ii.
Secondary level
i.
ii.
A new hotel introduced in a particular segment of the hotel market may eventuall
y be able to exploit all these levels of demand. It is essential that there shou
ld be substantial basic demand which can be tapped by a new hotel. Displacement
and created levels of demand require a period of time and sustained sales effort
to realise their potential, whereas, the assessment of future demand relates to
the continuing long-term prosperity of the hotel. If the basic demand is absent
but if the displacement, created and future levels of demand promise well for a
n investment appraised on ’10 to 15 year basis’, the
29
decision to start a new hotel under such circumstances has perforce to be a long
-gestation decision. For accommodation, each segment of the market, together wit
h its primary and secondary divisions, contains some or all of the potential buy
ers of hotel accommodation, as shown in Table 12.3, which may sometimes overlap.
There may well be more types according to the geographical, economic, industria
l, and social characteristics of the location of each hotel. Similarly, for food
and beverages, each segment of the hotel market contains varied categories of p
otential buyers of catering services which may also sometimes overlap.
Table 12.3: Potential Buyers for Accommodation and Catering Services Accommodati
on Transit tourists, passing through the particular location. Terminal tourists,
for whom the location represents end of a journey. Traveling businessmen. Visit
ing personnel, i.e., business or industrial employees for whom travel is an occa
sional part of their job. Organised tours. Conventions, conferences, workshops,
meetings, where the location is pre-fixed by the organisers. Social visitors, i.
e., guests to weddings or other social functions. Occupant customers staying in
the hotel. Transit or change customerspeople other than local residents of the a
reas patronising the hotel either by impulse of intentionally planned for meals,
refreshments, etc. Organisation and societies consisting of members acting in u
nison. Local business customers who patronise the hotel due to local industrial
or commercial activity. Meeting and conferences organised by agencies from outsi
de areas. People on tour who step into the hotel for meals, refreshments, etc.
Catering
12.5 THE HOTEL PRODUCT
The hotel product has a number of components like accommodation, food and bevera
ge, recreation and health, shops, car rental service, apart from others. But of
all these, the accommodation and food and beverage components are the primary on
es. 30
Philip Kolter has identified 5 levels of a hotel product. These levels are:
1. CORE BENEFIT THE FUNDAMENTAL BENEFIT THE CUSTOMER IS BUYING (HOTEL: REST/ SLE
EP) BASIC, FUNCTIONAL ATTRIBUTES (ROOM; BED, BATH…) SET OF ATTRIBUTES/CONDITIONS T
HE BUYER NORMALLY EXPECTS (CLEAN ROOM, LARGE TOWEL, QUIETER LOCATION) THAT MEETS
THE CUSTOMERS’ DESIRES BEYOND EXPECTATIONS (PROMPT ROOM SERVICE, MUSIC, CHECK IN/
OUT, AROMA) THE POSSIBLE EVOLUTION TO DISTINGUISH THE OFFER (ALL-SUITE HOTEL)
2.
BASIC PRODUCT
3.
EXPECTED PRODUCT
4.
AUGMENTED PRODUCT
5.
POTENTIAL PRODUCT
From the above table it is quite clear that at the “Core” level all hotels are alike
and the differentiation starts as you start moving up. The accommodation compon
ent of the hotel product requires a clear identification of the type of clientel
e the hotel wishes to attract and serve. Regardless of ‘star’ categorisation, as cus
tomers tend to graduate from one ‘star’ category to another, accommodation can be ei
ther of the luxury type almost regardless of the price, or the economy type prov
iding the essentials of shelter frugally. Between these two there are a variety
of accommodation facilities-catering to customer whose accommodation is paid for
; leisure customers who pay for their accommodation; customers who are part of g
roups either on business or on pleasure. However, once the hotel property has be
en constructed to serve identified and specific customer segments, the possibili
ty of variation is severely restricted. Admittedly, the economy type property ca
nnot be moved up into a luxury one without considerable expense and time althoug
h a reversal from the luxury to the economy class is more feasible and less prob
lematic. To tide over the above difficulties, hotel architects, the world over,
are now designing properties with as much flexibility as possible to make multip
urpose adjustable public rooms feasible. In the case of a hotel where such flexi
bility does not exist, the hotel product decision for accommodation will depend
entirely on the accuracy of selling rooms to the right type of customer. On the
other hand, the food and beverage component of the basic hotel product offers gr
eater scope for flexibility. Qualitative differentials can be very wide and woul
d range from high class a la carte high-price menu restaurants with complete tab
le service to the medium or low-priced menu dining rooms. Capital expenditure is
relatively lower- decor, furnishings and fittings can be changed more easily to
transform the image of a restaurant or dining room in either way. Availability
of room service from either the hotel’s own kitchens or from outside is another ar
ea of flexibility. It is obvious, however, that resident guests in a hotel know
what exactly they are buying in room occupancy and in food and beverage sales. H
ence their experience of the hotel product will condition their future relations
hip with the hotel and the patronage afforded. Table 12.4 below gives the variou
s ways in which accommodation and food service products can be augmented.
31
Table 12.4: Hospitality Product Augmentation Accommodation Reservation system co
nvenience Reservation system simplicity Acknowledgement of reservations Lift att
endants Room service Standard of housekeeping Courtesy Procedures for handling o
verbooking Information service Customer recognistion Credit provision Baggage ha
ndling Pet/child care Provision for disabled Group accommodation Discounts on cl
ub referrals, etc. Cleaning/laundry Courtesy care Willingness to bill later Food
and Beverage Speed of food service Ordering convenience Telephone Advance order
s Order-taking table staff Complaints procedures Advance reservations Reliabilit
y of food/beverages quality Customer advice on wines Provision of special foods
Cooking to order Acceptance of credit cards Variations in portions Home deliveri
es Extent of non-available menu items Fiber /calorie information Provision of do
ggy-bags Function-catering facilities Quality of table appointments Entertainmen
t Privacy / discretions
Source: Francis and Buttle, “Hotel and Food Service Marketing”
Activity 2 Compare the product mix of a city hotel with a resort hotel. Also ide
ntify those services which may create a competitive differentiation for both typ
es of hotels. ..................................................................
......................................................... ......................
................................................................................
..................... ..........................................................
.................................................................
12.6 HOTEL PRICING AND DISTRIBUTION
Pricing It is difficult for a hotel to exercise differential pricing except for
certain specific purpose. These may typically be differentials in tariffs and pr
ices during the peak and lean seasons; group rates; contract rates for airline c
rew; special conference rates or special concessions to attract customers etc. H
owever, by and large, hotel pricing tends to follow or conform to pricing standa
rds applicable to the particular city area or resort, to competitive hotels, to
the amount of traffic being generated in the hotel location, tourist location, i
nternational or national conference venue, and so on. Nevertheless, hotel pricin
g also suffers from a degree of lack of flexibility, although to a lesser extent
than that of the hotel product. The depreciated valuation of the hotel property
, its financial management efficiencies, credit policies and other factors, spec
ially cost of empty room-nights, fixed overheads, also have a bearing on tariffs
and menu prices. Distribution Hotel distribution relies on interdependence with
other industries serving travellers and tourists such as the transportation ind
ustry (airlines, railways,
32
roadways, shipping lines), travel agents and tour operators, national and state
tourism organisations, shopping and entertainment providers. In sum, those servi
ces which provide certain other facilities to the traveller or the tourist which
are bought when accommodation and food are assured. Some interesting features o
f hotel distribution need critical examination. The first is cooperative distrib
ution which operates in passing on traffic overflow from one hotel to its neighb
our, on a reciprocal basis, without affecting regular business with the main int
ermediaries in the distribution system such as travel agents; tour operators; ai
rlines and special business clientele. The second is the increasing development
of franchising. Franchising may take various forms but it basically involves mak
ing available to the franchisee (the beneficiary) of a service, system that is d
esigned and controlled for quality standards by the franchiser. The franchisee g
ets the advantage of being part of a reservation and sales system which ensures
a certain level of business which may not be available otherwise. The franchisee
also benefits from the image of the franchiser, professional advice and trainin
g provided by the franchiser. In the process, he improves his own operational im
age and efficiency. The franchiser also benefits as his investment is not requir
ed in the franchisee’s properties. At the same time, the franchiser’s distribution s
ystem is expanded and the franchisee is well motivated to succeed in his own bus
iness. Hotel distribution is, thus, an important element of the marketing mix. A
ctivity 3 Identify the role of a travel agent in marketing hotel services airlin
es. ............................................................................
............................................... ................................
................................................................................
........... ....................................................................
.......................................................
12.7 COMMUNICATIONS
Perhaps this element of the hotel marketing mix is the most important one as it
is directly responsible for bringing customers to the hotel. Hotel marketing com
munications are either direct or indirect. The direct communications are through
personal selling, advertising, sales promotion and direct mail. Appropriate mes
sages are conveyed to those who are potential buyers of the hotel product and th
ose who directly influence decisions to buy the hotel product. Personal selling
of the hotel product is effective when long-term relationship between the hotel
and the customer is sought. It is also required where the level of business per
customer is likely to be significant. Indirect marketing communications for hote
ls include public relations and publicity, both of which may or may not form a p
art of the hotel’s marketing communication programme but may function independentl
y. The major elements of the hotel communication mix thus are – mass media adverti
sing, direct mail, sales promotion, public relations, and publicity. 1) Advertis
ing Hotel advertising is an effective and, generally, a long-term effort to info
rm the customer about the existence of the property, giving details about the lo
cation and types of facilities offered. Advertising is also aimed at influencing
the attitude of the customer to bring about his acceptance of the particular se
rvice offered. Informative advertising is necessary for a new hotel or a hotel o
ffering new facilities or services which are different from the past. Persuasive
advertising is aimed at a more competitive situation.. 33
In advertising, a hotelier is dealing with a non-personal contact with the targe
t audience, unlike sales promotion where the hotelier is aware of the identity o
f the target. The purpose of advertising is indeed the same as the purpose of co
mmunication – it aims to inform and persuade the consumer or the travel trade to c
hange, to influence their attitude towards the advertiser’s product or organisatio
n. Effective advertising not only gains the attention of the prospective guest,
advertising will be the first introduction of the area, location and the hotel i
tself. The success of this introduction will invariably depend upon the impressi
ons made. To ensure that this impression is favourable, all advertising should h
ave the touch of quality or class. A flavour of showmanship and originality in c
oncepts are required to make advertising efforts effective, distinctive, interes
ting and compelling. Further, to meet the competition, effective advertising mus
t stand out as superior to competing advertisements, which, in turn, need an eff
ective advertising campaign. In the hotel industry, planning the advertising cam
paign is very important as the hotel product has certain unique characteristics:
it being highly intangible cannot be exhibited; it is normally purchased in adv
ance and from a distance; since it cannot be transported, it cannot be taken to
the market-place. Hence one has to depend on the descriptions and the representa
tions of the hotel product rather than the actual product in the market-place. A
dditionally, if the hotel product in the market-place can only be promoted on th
e strength of these descriptions and representations, then its competitive posit
ion is a direct result of the quality of those descriptions and representations.
Therefore, the advertising campaign should be planned carefully and well in adv
ance. The rationale behind identifying the target audiences and creating proper
message is that there is a need to differentiate marketing communication or adve
rtising approach to different target audiences. Market segments are different be
cause they have different needs, they have different requirements; they want to
buy different products or they want to buy the same product, but for different r
easons. Hence, while making an attempt to communicate with different target segm
ents, there should be a differentiated communication approach. In communicating
with the travel trade a hotel must provide the facts and figures in simple langu
age whereas a consumer may like to listen to evocative language. While communica
ting with the prospective hotel guest, it is essential to identify psychological
motivation and try to motivate the prospective hotel guest through a message wh
ich promises a benefit – a benefit that will satisfy the guest’s psychological or ot
her needs. The hotel product facilities and services can be advertised against a
number of areas, as there are different market segments, as mentioned below: Co
nventions, conferences and meetings Room occupancies Reservations for various ho
tel facilities Good eating and top class food Family dinner Dining, dancing, and
discotheques Bar and permit rooms Buffets, special dinners, and lunches Sophist
icated entertainment Popular entertainment Weddings and special accommodations F
estival and parties
34
The objective of advertising in hotel industry vary from image building to immed
iate sale. One may advertise keeping more than one objective or a mix of objecti
ves in view. Some of the objectives of hotel advertising are given in Table 12.5
.
Table 12.5: Objectives of Hotel Advertising To – – – – – – – increase sales Induce potentia
uest/customers to visit the hotel Obtain enquiries through mail/telephone on a p
riority basis Promptly announcing special offers or any other attraction Secure
enquiries from travel agents/tour operators/wholesalers Stimulate impulse action
(e.g., book a table for dinner) Induce conference buyers to contact hotel Publi
cise unique selling points of the hotel – location, atrium or special architectura
l features and any other specific feature – which would attract attention – Support
regular travel/tour agent in selling the hotel To – – – create awareness or interest i
n ‘Facilities/services available’. Individual facilities (rooms, suites, pool, bar,
health club, etc.) Group of facilities, e.g., specialty restaurants, etc. Specia
l facilities/services, e.g., CCTV, audio-visual equipped conference hall, full o
ffice-cum-secretarial services with internet, STD telephone, fax, etc. create aw
areness or interest in ‘Benefits to be gained by patronizing hotel’: Specific, e.g.,
tangible, psychological, aesthetic Financial e.g., prices, discounts, credit, e
tc. Quantitative, e.g., portions, size of guest rooms, private balconies, etc. Q
ualitative, e.g., guest room climate control, wide range of items on menu To cre
ate awareness or interest in ‘Versatile advantage of hotel’. Mini- Frigidaire in gue
st room “do-it-yourself” tea/coffee/breakfast kit in guest room Multipurpose meeting
room-cum-wedding hall Collapsible bed-cum-divan/room convertible into meeting a
nd private dining room “Wake-up call”-cum-”appointment reminder” device in guest room cr
eate awareness or interest in ‘Resources behind the hotel’. Stand-by generator for u
ninterrupted power supply Water purification system: “Drink from bathroom tap” “Take a
tour of our kitchen”: latest equipment “Meet our managers”: quality of service-orient
ed staff effectively counter wrong impression created by: Competitors Media Publ
ic Opinion educate guests/customers on: Conveniences Atmosphere and general fine
sse New facilities/services provided create favourable image of hotel: Good empl
oyer Good corporate citizen Role in the community Foreign exchange earner Develo
ping and supporting ancillary-supplier industries/business
To – – – – – – – – – To – – – – To – – – To – – – To – – – – –
35
Determining and Creating Specific Advertising Message With a penetrating knowled
ge of the consumer’s wants and the product’s qualities, the hotel or the hotel organ
isation (or the advertising agency on behalf of the hotel or hotel organisation)
has the background to create messages that will interpret the want-satisfying q
ualities of the product in terms of consumer wants. The advertising message thus
becomes a connecting link with the advertiser, with want-satisfying products or
services and the potential hotel customer with wants to be satisfied. So there
is a need to have a professional approach while designing the specific advertisi
ng message. Therefore, it is essential to know the job which has to be done; to
know the hotel product; to know the requirements of potential hotel customers; t
o know answers to the requirements of the potential customers. The conference bu
yer, for example, needs certain specific information of particular interest and
importance to him. So when a hotelier communicates with the conference buyer thr
ough the news media (like press release, etc.) there is a need to differentiate
between the communication approach. In case of conference and convention market
segment it is essential to provide technical information, facts and figures in i
ts communication. How high your conference halls are? Whether the ceiling is fle
xible? It is important because if the ceiling is low and the conference buyer wa
nts to have audio-visual presentation that may not be possible. The conference b
uyer would also be interested in the configuration of seating arrangement – how ma
ny people can see the platform? How many people can see the screen on which some
audio-visual presentation may be projected? Information regarding secretarial s
ervices, computers, stenographers, typing, simultaneous interpretation, details
of technical equipments, audio-visual projector, overhead projector, slide proje
ctor, sound amplifiers, microphones, TV sets, CD players, computers etc. would a
lso help a conference buyer in taking decision whether to book a conference in a
particular hotel or not. An advertising copy is still incomplete – it needs more
information. The conference buyer is also interested in getting information abou
t the rest of the hotel or hotel organisation, so the advertisement copy must pr
ovide information regarding location of the hotel and how attractive it is, whet
her conference can be held during a particular time of the year or throughout th
e year, transport facilities, other services, track record with other conference
buyers, prices, etc. In a nutshell, one can say that while advertising it is ne
cessary to remember what your advertising job is, what your hotel product is, wh
at are the requirements of potential customers and what are the answers to the r
equirements of the potential customer. Advertising Decisions: In the process of
advertising, several decisions need to be taken. The most important is – how much
to spend? A common method is to allocate a percentage of the sales revenue, eith
er past or anticipated, for advertising expenditure. This takes no account of th
e real need for advertising. In fact, it may be essential to advertise heavily w
hen sales revenue is low or in a situation of decreasing demand. Another method
is to take an ad hoc decision as to how much the hotel can afford to spend on ad
vertising anticipating additional business. This is a very subjective approach a
nd ignores the problem that advertising may be needed most when the business can
least afford it. A third method is to undertake advertising expenditure if the
current value of the extra revenue generated will be greater than the cost of ad
vertising. This would be an acceptable decision if necessary information was ava
ilable as to how responsive the demand was to advertising expenditure. Very few
companies can arrive at a sound investment decision approach of this
36
kind towards advertising expenditure. A fourth method is to achieve competitive
parity, i.e., in a situation where hotel units have agreed against using price c
ompetition, individual units will aim to spend as much on advertising as their c
ompetitors do, resulting in an increase in the industry’s costs without any corres
ponding benefit. The fifth method is to develop an advertising budget to achieve
a certain set of objectives or tasks. It is in this method that the role of adv
ertising, as part of the promotion element in the marketing mix, can be clearly
identified to inform by answering the following four questions. First, is advert
ising used to inform or persuade the customer, or is it to consolidate or reinfo
rce the existing customer-acceptance of the hotel? Second, is the information to
be conveyed through advertising general in nature or for promoting a special fa
cility or service? Third, is the advertising to reach habitual or impulse buyers
, the customer himself or his influencing agent, existing or new customers, loca
l, national or international customer? Lastly, what will be the overall effect o
f advertising or revenues-in particular, whether a general increase in occupancy
or food and beverage sales is expected; alternatively if off-season facilities
are to be utilised to be best advantage? If the advertising decision is based on
the fifth method, it is possible to select appropriate media – newspapers or maga
zines, radio/TV or cinema, direct mail or handouts and beam the correct advertis
ing message to the appropriate audience. 2) Sales Promotion Sales promotion is a
imed at generating immediate response in terms of a buying decision. For a hotel
which wishes to cash in on sales promotion, the specific part of the business w
hich stands to benefit, i.e., room sales or food and beverage sales, has to be c
learly identified and a promotion drive which will bring about the desired incre
ase of sales must be launched. For instance, a hill station hotel which normally
has almost empty rooms during winter or offseason may promote its accommodation
and other facilities when a famous winter sports festival is to be held in that
area or a national or international conference is to take place or any other sp
ecial convention or workshop where participating delegates also need relaxation.
People who would normally not visit the hill station in winter will do so when
presented with such an opportunity. There are two ways in which one can examine
sales promotion. First, schemes which can be defined in terms of time, and secon
d, as an ongoing permanent activity/function. Irrespective of these distinctions
one can clearly identify three groups of activities under sales promotion: trad
e promotions; consumer promotions; and displays. Trade promotions are schemes wh
ich are generally intended to induce or persuade the travel trade or the distrib
ution channel to generate more demand. The term “travel trade” has been used in its
generic form-to refer to all the available distribution channels or outlets to t
he hotel industry. Trade promotions are, therefore, schemes which are intended t
o induce or persuade the travel trade to sell more of the hotel product or hotel
service and for this purpose a variety of incentives are given. Consumer promot
ions are schemes to persuade the consumer, i.e., the potential hotel guest or th
e user of hotel services, to buy a particular hotel product or service, at a par
ticular point of time. Consumer promotions should be understood as the first def
inition of sales promotion schemes which are defined in terms of time and are fi
nite. The third group of activities which include product display and related po
int-ofsale material, i.e., posters, show cards, display units, etc., help keep i
n perspective the view that one can’t obviously display the actual hotel product o
r service at the point of sale and so one has to depend on the descriptions and
representations of the actual product.
37
Forms of Travel and Tourism Consumer and Trade Promotion Schemes: Hotel promotio
n, as individual schemes, more often than not are cooperative schemes, i.e., the
y depend upon one or more of the other sector(s) of the travel and tourism indus
try. Some schemes can be set up and operated by a hotel but a great deal of prom
otional schemes available to the hotel industry are dependent on the cooperation
of other sectors of tourism and travel industry. The other reason is to enlarge
the awareness of the opportunities available to the different sectors in the in
dustry. In Table 12.6 different types of sales promotion methods have been liste
d. The list is neither exhaustive nor are the examples given for each type of pr
omotion listed, meant to be exhaustive. These are some of the schemes available
to the hotel as well as to the hotel industry, as such. The examples prove that
most promotions of the hotel product are cooperative and the industry is depende
nt on the cooperation of other sectors, namely, airlines, transport operators, t
ravel agents, tour operators or allied sectors.
Table 12.6: Forms of Travel and Tourism Consumer and Trade Promotion Schemes Typ
e of Promotions 1. Price-off Promotions Example Special terms for specific clien
ts at specific time; e.g., off-peak discounts: discounts for specific departure/
hotel stay dates or times, etc. Special package deals, e.g., three weeks stay fo
r the price of two; family plans; children free if accompanied by parents; speci
al introductory prices, etc. Coupons entitling the holder to special terms, e.g.
, discounts at shopping centres, discounts for petrol, free excursions and sight
seeing tours, free use of hotel recreation facilities, etc. Prizes awarded to co
nsumers winning special contests, e.g., free holdings/stays. Prizes awarded to t
ravel trade winning special contests, e.g., free holidays/stays, or other articl
es, usually products of the destination country concerned. “X” sum of money off next
booking if done within a certain period of time; “Give away” to loyal customers. Of
fered to retailers/wholesalers for achieving specified sales volumes, e.g., bonu
ses, override commissions, quantity or volume discounts, etc. Money-back guarant
ees in case of cancellation of flights, tours failures, bad weather, etc. Purcha
se of tours on installment payment basis, normally extended by travel trade orga
nisations with bank affiliations– “Travel now, Pay later schemes”, etc. Acceptance of
payment by credit card. Allowance or financial assistance given to a tour operat
or or travel retailer advertising specified hotel/product.
2.
Premium Offers
3.
Couponing
4. 5.
Contests (consumer) Contests (trade)
6.
Loyalty Schemes
7.
Trade Incentives/Discounts
8.
Guarantees
9.
Credit Schemes
10. Cooperative Advertising
38
11. Training Schemes
Free familiarisation tours for travel agents/ tour operators; training seminars
and briefings for sales personnel, etc. Free display material and other selling
aids offered to retailer/wholesaler as a part of the special campaign. There is
a particular pattern in all the commercial hotels around the world, namely, a qu
iet weekend, because business people go home. How a hotel should go about for ge
nerating additional business, because anything extra that one gets is really wor
thwhile. The hotel or hotel organisation can contact the people to organise fair
s, exhibitions, fashion shows, cultural sessions, etc., during these days. And o
ne can contact them either personally or through direct mailing. To generate mor
e demand for “Food and Beverage”, hotels offer the first drink free as part of sales
promotional efforts because after one drink the guest may well ask for more and
thus give additional business to the hotel. Some hotels give special coupons to
honeymooners to come and celebrate their first or subsequent wedding anniversar
y. This gives an aura and finesse to the hotel. It also ensures permanent custom
er and future business. Travel sales promotional efforts help in developing good
relations with the travel trade and may help in getting favourable publicity. S
ome of the hotels give free tickets to their guest for sound and light shows con
ducted in their hotels. This promotional effort helps in developing and cementin
g good guest relations. Some of the beach resort hotels whose business depends o
n sunshine can give such type of guarantees to their guests during the off-seaso
n. If there is no sunshine the money paid is returned to the guest. If the hotel
has some credible system of good weather forecast, one can get good business. S
ome hotels in collaboration with consumer goods organisations, organise contests
for joint promotion.
12. Merchandising Support
13. Quiet Weekend
14. Welcome-cocktail
15. Honeymooners Return Trip
16. Discount for Agents and Airlines’ Crew
17. Free Ticket for Sound-n-Light Show
18. Sun-n-shine Guarantees
19. Consumer Contests
Activity 4 Identify how important it is for a hotel located at a Hill Station to
use “Promotions” during off-season. Also identify the possible sales promotion sche
mes it can offer. ..............................................................
.............................................................. .................
................................................................................
........................... ....................................................
........................................................................ 39
3) Public Relations Public relations can never be some kind of special sugar tha
t can be sprinkled or coated on a sour or difficult situation to make it taste s
weet or comparatively functionally easy. Public relations, as a marketing commun
ication function, aims to supplement the total communications/promotional effort
by helping to create and enhance a favourable image of the hotel or the hotel o
rganisation; and by counteracting any adverse influence that may exist from time
to time, as also by creating a proper goodwill for the hotel or hotel organisat
ion. It is needless to say that a well researched and effective public relations
mechanism will pay handsome dividends in the long run. At all times, remain gen
uine and don’t attempt to oversell. Public relations ought to be a sustained ongoi
ng affair and it should be harmoniously integrated into the total promotional ef
fort. When it comes to operational levels, public relations must be distinguishe
d in terms of a ‘variety of public’ – guests, media professionals, government agencies
, community, and employees – which are of interest to the hotel as a unit or the o
rganisation and therefore strategies should be evolved to exercise healthy relat
ions with all such publics. Guest Relations: There is an obvious public or group
which is the customer and this form of public relations is termed guest relatio
ns. Media Relations: Hotels also deal with the media, with the press and with el
ectronic media, in other words, with the mass media. Hotels need mass media eith
er for their own sake because they are opinion leader, also because they influen
ce public opinion, or they want to reach some other group through the media. Thi
s aspect of public relations is described as media relations or press relations.
This is probably the most important area of the total public relations of a hot
el organisation and indeed any organisation in the tourism industry. Relations w
ith Government Agencies: These are the authorities with whom the best of relatio
ns, at various levels, have to be maintained whether they are city authorities,
local, state government or central government. They all have a bearing on the op
eration of the hotel or hotel organisation. Community Relations: There is also t
he community within which the hotel operates. This is important from the point o
f view of a hotel and therefore, there is a need for community relations. The qu
estion of community relations is very important for certain hotels that are loca
ted in fairly remote areas of the country. Also to those which cater to foreign
tourists where there is a very sharp distinction in lifestyles and in the spendi
ng pattern of the community within which the hotel operates. In an underdevelope
d area of the country, if a luxury resort is created (it may not be luxury from
an industrial and technical point of view, but for the people who live in and ar
ound that area where the hotel is being built, it is luxury) it is possible that
the community may resent it. This factor dictates a need for good community rel
ations. Employee Relations/Labour Relations: And finally, an important aspect to
which a great deal of public relations activity, on the part of a hotel, must b
e directed, is the group of employees of a hotel. Employees relations or labour
relations is very important because the hotel industry is a service industry, an
industry in which a large proportion of the labour force comes into direct cont
act with the customers; an industry which depends on the personalised and qualit
ative aspects of the product. Hence, unless one can generate the fullest enthusi
asm, highest loyalty, high sense of motivation, and pride in the organisation, o
ne’s effort to create consumer satisfaction may very well be
40
frustrated. So another area to exercise good public relations is employee relati
ons. There can be a wide variation in the objectives of PR from one organisation
to another. The nature of the relationship between an organisation and public v
aries, depending on factors such as the size of the organisation and community w
ithin which it operates; the product; types of services or faculties offered; th
e type of target market segment, etc. Some of the public relations activities al
l of which may not be applicable in case of a hotel are as follows: Listening to
the public to determine their attitude about the organisation and its policies,
programmes, products, personnel and practices. Satisfying hotel customers or re
moving guest dissatisfaction through prompt handling of complaints, correcting t
he causes of the complaint or any irritants and making need based adjustments in
the policies, practices or products (as a package of services) of the hotel org
anisation. Establishing a customer or travel trade correspondence function to an
swer enquiries about any matters regarding the hotel or hotel organisation. Gett
ing feedback and creating/developing promotional material, advertising appeal, o
r total advertising campaigns, sales letters, direct mail material, etc. Trainin
g of employees to provide prompt, pleasant, courteous, accurate and friendly ser
vice to anyone who contacts the hotel organisation personally, on phone or throu
gh correspondence. Assisting the managers and employees of the various departmen
ts of the hotel in improving their own communication and public relations effort
s so that their is an air of efficiency. Working with the personnel in advertisi
ng (can be the advertising agency), sales promotion and personal sales to create
consistent, effective, honest and persuasive messages for all of the hotel or h
otel organisation’s publics. Establishing open communications with other organisat
ions, government agencies, travel agents, tour operators and community leaders o
n matters relating to the organisation and its economic, environmental and socia
l impact on the country, local community, and individual consumers. Conveying to
society that the organisation is listening, reacting, adjusting, and progressin
g in its attempts to promote optimum satisfaction to its diverse publics. These
are only few samples of the kind of objectives public relations personnel have e
stablished in a hotel or a hotel organisation. Some of these objectives may appe
ar to be quite broad in their content and scope for operational purposes. If, ho
wever, a constant and in-depth attempt is made, these can help to a great extent
in promoting the hotel package of product and service. 4) Publicity Another asp
ect of marketing communication is publicity which is the promotion not necessari
ly created by the organisation and usually generated by the media. Thus, publici
ty is not a marketing function like marketing research, product planning, distri
bution system, advertising, sales promotion, public relations, etc., which are t
he marketing activities/techniques. Publicity is rather an objective of public r
elations as through good public relations one tries to get publicity and generat
e publicity. News media in every community do look upon industries, hotels and o
ther business for news. This occurs because every enterprise has an important an
d even direct bearing on the social, economic and sometimes political life of th
e community. Newspapers present news of public interest to the readers.
41
Bad publicity is mostly the result of lack of information and often an indiffere
nt attitude towards the press. Hence newsworthy information should be made avail
able to the press. It is in the interest of the organisation to supply this info
rmation because it shows a willingness to cooperate. An indifferent attitude may
unfortunately result in damaging coverage through an article, review or apprais
al of a situation or condition; or even an unfavourable report that will adverse
ly affect the image and the business of the hotel. A willingness to share the ne
ws with the media will help a great deal in handling those situations where wron
g published new would affect the hotel or hotel organisation.
12.8 EXTENDED MARKETING MIX FOR HOTELS
The conceptual framework of the extended marketing mix, as applicable to service
s has been discussed in Unit 7. Let us see how these concepts are applicable in
the hospitality sector. The first element of the extended marketing mix for serv
ices is physical evidence which includes servicescape as well as other tangibles
. Tangibles are those objects and physical clues which might represent the servi
ce. For example dress code of staff, etc. The servicescape relates to the settin
g in which the service is delivered. Servicescape issues are particularly signif
icant in all services where “customer goes”. (You may be aware that services can be
classified into three broad categories. First are those service organisations wh
ere customer goes. Like, we go to a hotel, hospital, bank, restaurant, health cl
ub, etc. The second is those service organisations which go the customer. For ex
ample, an AMC provider goes to the customer to service the computer hardware. Th
e third type of service organisation are those in which neither the customer goe
s nor the organisation and both transact from the distance, like a mobile phone
service provider, credit card, insurance services etc.). From Table 12.7, we can
identify how these servicescape elements and physical evidences are relevant in
the hospitality industry
Table 12.7: Servicescape and Other Tangibles in a Hotel Servicescape Facility ex
terior Exterior design Signage Hotel gate area Landscape Parking Surrounding env
ironment Facility interior Interior design and equipments Lobby and other waitin
g areas Interior of rooms Room size Types of specialty Restaurants Pool area Lay
out of the various facilities Air quality/temperature Other Tangibles Business c
ards Stationery Billing statements Reports Employee dress Uniforms Brochures Int
ernet/Web page
42
The second element of the extended marketing mix is people. In the service organ
isations both internal marketing and selection of the right target customers are
important. Internal marketing and management of employees are also important in
hospitality sector. It is being said that in hotel organisations the room to em
ployee ratio is 1:2. This means, a 100 room hotel may have about
200 employees. It is likely that the service may suffer if this ratio is not mai
ntained. Some hotels have identified alternate options to reduce the labour cost
. For example, most hotel guests expect bed-tea and, therefore, room service sta
ff requirements are very high. Some hotels provide electric cattle, tea bags, su
gar and milk powder in the room itself, and they find that their costs are much
less than hiring people to deliver bed-tea. Similarly other areas are being iden
tified for reducing the man-power costs while maintaining the quality of service
s. Integration of information technology is one such method. The third element o
f extended marketing mix is the service delivery process. There can’t be any compr
omise on such issues and we have seen that in some of the excellent properties (
hotels), they do not attract many customers because of poor service delivery. On
the other hand, small and ordinary properties which are able to compete very we
ll in the market place only on the efficiency in service delivery and high quali
ty. Activity 5 a) Compare the servicescape and tangibles of two hotels in your c
ity; one should be at the higher end and the other on the lower. ...............
................................................................................
...................... .........................................................
............................................................ ...................
................................................................................
.................. b) Also study the relative importance of those aspects in mar
keting hospitality services. ...................................................
.................................................................. .............
................................................................................
........................ .......................................................
..............................................................
12.9 MARKETING CONSORTIUM OR COOPERATIVES
There is need for cooperation among the small and medium independent hotel opera
tors due to increase in the pressure put on them by chains and also by the trave
l and tourism industry as a whole – like, airlines getting into hotel and travel t
rade; tour operators getting integrated, etc. So, the marketing of the hotel pro
duct has become a problem for the smaller hotel operators. The solution to this
problem perhaps lies in cooperative marketing efforts which could be either ‘group
marketing’ or ‘area marketing’. In ‘group marketing’, the basis of cooperation is similar
ity in standards – the standards may be according to ‘Star’ categorisation, similarity
of services, similarity of attractions, etc. In group marketing, one way is for
hotels to cooperate throughout the country thus offering a total India to a bud
get tourist or group of tourists. The rationale behind getting together is natur
ally ‘gain’. A small operator operating a small hotel independently in a town cannot
really afford to spend even on the minimum promotional effort that is required
of a hotel (assuming that particular hotel is not in a monopoly situation), on t
he other hand, if hotels join together they can afford to send their sales repre
sentative to the travel agents to sell their hotels abroad. Further, this cooper
ation can be extended to referrals and recommendations also. 43
The other form of cooperation for hotel marketing is called ‘area marketing’. Area m
arketing could be a ‘cooperative’ of independent hotels in an area or destination – al
l hotels of the area get together and attempt to promote the market or the area
together, irrespective of the difference in standards or quality of the hotels.
The effort is to attract tourists to a particular destination, which could be a
location, a city, a resort, a state or a country.
12.10 SUMMARY
Tourism and Hospitality is one of the major industries today. This unit explains
you the various marketing aspects related to tourism and hotels. The unit began
with an understanding of various elements of international tourism industry and
the factors governing demand and supply. You were also explained the major tour
ist segments and their main marketing characteristics. Subsequently marketing is
sues related to hotels have been discussed. Some of the key decisions relating t
o hotel marketing are: the products, the price or tariffs, distribution and mark
eting communication. Just as the chef prepares varied and tasty dishes with the
same basic ingredients, the marketer can also vary the quantum and proportion of
the elements of the marketing mix to achieve appropriate marketing goals and sa
les targets. A hotel where the product is already designed and fixed, one cannot
change the prices quite often and the distribution is limited to a few selected
outlets, it is marketing communication which is the most significant component
of the marketing activity. Although the various marketing communication activiti
es are undertaken separately, it is necessary to undertake an interrelated appro
ach so that messages conveyed through personal selling, advertising, sales promo
tion, public relations and publicity are not at cross-purposes. These may tend t
o confuse rather than clarify the single important communication of the hotel, w
hich is the product the hotel offers to the customers it wishes to serve on term
s that are both acceptable to the customers and economically viable for the hote
l. In the ultimate analysis, the marketing communication effort generates a conv
iction and confidence whether the hotel is worth patronising or not. It is, ther
efore, difficult to assess a marketing communication programme in terms of sales
and revenue of t he operating departments, unless the trends of such sales and
connected transactions are monitored carefully over a period of time, especially
in these days of competition.
1. Describe the main participants in the international tourism process and discu
ss the factors responsible for growth of tourism industry. 2. What is a hotel pr
oduct? Identify the support and facilitating services for a business hotel in a
metropolitan city. 3. Do you think that the concept of marketing mix is applicab
le to the hotel industry? If yes, how? 4. Explain the distribution strategy you
would follow for a budget hotel located at a popular hill resort. 5. Recall your
experiences of staying in a particular hotel more than once. Did the “Heterogenei
ty of Service”, each time you visited, affect your satisfaction levels? Would you
recommend some practical tips for standardisation? Also identify the marketing c
ommunication mix of the above hotel and recommend improvements in it. 44
Apte, G. “Service Marketing”, Oxford University Press, 2004. Bukart, A.J. and S. Med
ilik, “Tourism – Past, Present and Future”, Hienemann London, 1975. Kotas, R. (ed), “Mar
keting Orientation in the Hotel and Catering Industry”, Surrey Univ. Press, 1985.
Ravi Shanker, “Communication for Confidence”, Asian Panorama, Sept-Oct, 1989, pp. 17
-23. Ravi Shanker, “Sales Promotion in Hotel Industry”, Indian Journal of Marketing,
May-August, 1990, Vol. XX, No. 9-12, pp. 2, 28-33.
45
UNIT 13 HEATH SERVICES
Objectives
After going through this unit you should be able to: describe the types and segm
ents of health services in Indian market, explain the concept underlying pricing
of health services, understand the strategic considerations in implementing the
pricing policy, explain the service quality issues in health services, and unde
rstand the role of marketing communication for health care services.
Structure
13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8 13.9 13.10 Introduction Types of Health
Services Pricing of Health Services Implementing the Pricing Policy: Strategic C
onsiderations Service Quality in Health Care Marketing Communication for Health
Care Services Case Study Summary Self Assessment Questions Further Readings
13.1 INTRODUCTION
The Indian Health Care Market is more of seller’s market. The demand far outstrips
the supply. As in case with any other product or industry in a seller’s market, t
he ‘marketing’ aspect in Indian Healthcare market is given a low level of importance
. Some of the organisations which have started giving a thought to marketing are
also more limited to ‘sales’ aspect or ‘image building’ exercise and not to total marke
ting approach. However, there will be changes in the near future towards accepta
nce of marketing activities as an essential part of health care organisations, t
hough not as much as in developed countries (where demand/supply conditions and
purchasing powers are totally different from ours). The major reasons necessitat
ing a shift towards marketing approach in India are: In certain market segments,
competition is becoming more intense. More consumer awareness. Setting up of Co
rporate Hospitals. Increasing purchasing power. Need to attract limited availabl
e specialists. In India, where medical care infrastructure is inadequate compare
d to the requirements, proper attention has be to given to educate people about
the nature of illnesses, the facilities available, importance of healthcare and
hazards of ignoring these aspects. An educated citizen would mean better utiliza
tion of available facilities as well as prevention of many diseases, thereby eas
ing pressure on the scarce resources. 46
13.2 TYPES OF HEALTH SERVICES
The type of health services available in India can be broadly categorised into t
wo : a) Government owned b) Privately owned / commercial The Government (both Ce
ntral and State) has a network of institutions at primary, secondary, and tertia
ry levels. These include sub-centers, primary health centers, community health c
enters, rural hospitals and dispensaries in rural areas, sub-divisional and divi
sional hospitals , medical college hospitals and specialised hospitals. One impo
rtant government health care scheme is the Employee State Insurance scheme desig
ned for industrial workers. The scheme is mainly financed by contributions from
employers and employees in the implemented areas. The scheme provides both medic
al benefits as well as cash benefit like sickness benefits, disablement benefit,
maternity benefits etc. During the last couple of decades a lot of private nurs
ing homes, diagnostic centres and specialty hospitals have come up in urban area
s, with their major market being middle and high income group people. The health
care market has also witnessed the emergence of ‘Corporate Hospitals’ in India. Apol
lo Hospitals, a Rs. 10.24 crore public limited venture opened at Chennai on Sept
ember 18,1983 has the distinction of being the first corporate hospital in the c
ountry. Medical care is now emerging as a big industry in the private sector. Th
is has resulted in some competition and better availability of advanced technolo
gies/super specialties, which were so far available in western countries only. S
ince large investments are required for setting up of such hospitals, it was bey
ond the scope of an individual and the most viable alternatives was to have corp
orate hospitals. However, most the these recent developments are again mainly ta
rgeted at middle and high income groups. Raju and Joshi have classified the heal
th care needs in India into three main categories: 1) Emergency Care: As the nam
e suggests, this is required in situations of dire necessity like accidents, fir
e, stroke etc. These are the situations when the survival of the patient is in q
uestion. 2) Routine Care: This refer to periodic patient visits to the medial pr
ofessional involving checkups and for ailments where meeting a doctor is essenti
al but an immediate meeting is not critical. 3) Elective Treatment: This is a me
dical procedure that a patient chooses to undertake on his or her own initiative
. These include ‘Life Stage Treatments’ (associated with events which people typical
ly plan for at some stage in their life like permanent birth control procedures,
teeth removal in old age etc) and ‘Life Style Treatments’ (associated with activiti
es that people undertake to improve their ‘Self’, boost their image e.g. cosmetic su
rgeries, weight reducing treatments, hair implantation etc.). Life Style Treatme
nt segment is likely to grow in India at a fast rate.
Health Services
13.3 PRICING OF HEALTH SERVICES
Pricing is one of the most important decisions that you as a provider of health
services will have to take. The sheer variety of available price levels for simi
lar services among different providers of medical and health services is indicat
ive of the differential practices that are being used to arrive at the ultimate
price for various services.
47
The pricing strategy for any given serivce, medical services included, depends o
n three basic fundamentals. These are costs, value and competition. The costs re
present the monetary value of everything that the organisation has to utilize in
order to create and offer the service for the patients. In the short run or the
long run, all costs must be recovered if the organisation is to earn profits. C
osts thus represent the lowest limit below which in the long run, prices cannot
be set. On the other hand, you cannot set the price, beyond the value that your
customers assign to the service, simply because at that price level, exchanges (
or purchse of service) will not take place. Consumer’s perception of value of a gi
ven service would thus set the upper limit beyond which prices cannot be set. Be
tween these two limits service organisations may have the freedom to charge what
ever prices they determine, but for the presence of a third variable, the compet
ition. You are not the only provider of health services in the market. There may
be several other providers with similar or better services. The prices that you
r competitors charge for a similar service will limit your freedom of setting pr
ices between the two limits provided by the costs and the consumer’s concepts of v
alue. The prices being charged by the competition would thus determine the actua
l level at which prices for a given treatment or service may finally be set in b
etween these two limits. To recapitulate the three basic variables that are fund
amental to any pricing decision are: how does my consumer define value for a giv
en service. what are my costs in providing that service. how does my competitor
price the same service. Activity 1 Identify any basic hospital service like an X
-ray analysis, a complete health check examination or a medical consultation for
suspected typhoid in three medical establishments in your city. Do you find any
price variatins? What in your view are the reasons for these variations? ......
................................................................................
...................................... .........................................
................................................................................
... ............................................................................
................................................
Why is Pricing for Medical/Hospital Services Different from Pricing for Goods
In order to realistically set your prices, you should be able to have an appreci
ation of what role does price play in the customers’ decisions to avail a given me
dical service or health plan. Health providers must, therefore, have a clear ide
a about how their prospective client population perceive prices and price change
s of various medical services offered by them. The three basic ways, in which pr
icing for hospital/clinical/medical services differ from pricing for goods are t
he issue of customer’s knowledge of prices, the role of prices in indicating quali
ty of services and the issue of non-monetary costs. a) Prices of Hospital Servic
es and Customer Knowledge: How important is price to the customer when he/she tr
ies to select a particular hospital/ practitioner for a particular treatment? Do
customers have any idea at all about the costs associated with such services? D
o customers really have clear awareness about the exact prices they would be req
uired to pay for a given treatment before they decide to avail of a given treatm
ent? Let us briefly look at these issues and their implication for pricing of he
alth services. To take a simple exercise, ask adult people around you a few ques
tions about health services and their prices. For example, what is the price for
a medical checkup in your city? What is the price for a service like a root can
al operation, or a 48
simple tooth extraction? What is the price one is likely to pay for a bone setti
ng process after a fracture and so on. You will find that few people will be abl
e to answer accurately on the basis of their memory alone, because clear ideas a
bout such prices are not available. The price point in our memory for a product
or service is called the ‘reference price’ for that product or service. Very few pro
spective patients have a clear reference price for the range of health services
provided by hospitals and clinics. Let us examine some of the reasons for this p
henomenon. Health services are intangible, and can be offered in a variety of co
nfigurations with variation in accompanying services. Hospitals, therefore, are
able to create a number of permutations and combinations of a given treatment pa
ckage, resulting in complex pricing structures. If a prospective customer wanted
to have comparative assessments of prices for a Ceaserian section, she/he would
find that the type of package varies (length of stay, associated services provi
ded), patient particulars may vary and necessitate price variation (complexities
, age, medical condition), the level of services may vary (single vs. double roo
m, patient to nurse ratio etc.) Few hospitals would offer exactly the same featu
res or package of services. Prices are, therefore, not strictly comparable. The
problem becomes compounded on account of the fact that in quite a few cases medi
cal providers may be unable to give an accurate price figure in advance as they
may not, at the very outset know what a given treatment would ultimately involve
. In case of health services, customer’s individuals needs also result in differen
t prices being charged. Previous history, general medical condition, age related
health complications etc. may often determine the course of action that would n
eed to be taken for a given patient, final prices, therefore, may also be a func
tion of individual needs of different patients. It is also comparatively difficu
lt to gather accurate pricing information of all comparable hospitals, because u
nlike retail outlets displaying prices on their merchandise, prices of health se
rvices are not really displayed except for routine services and consultation cha
rges. It must now be clear to you that prospective customers often possess inacc
urate information about prices of health services. The implication of the fact f
or your pricing strategy are important. The first implication is that consumer u
ncertainty can be reduced by finding some ways of communicating prices at least
for all routine services; creating of price visibility is an issue that many hos
pitals consider seriously. The second implication is that while the customer may
not ‘know’ the final price until after he has been in the service transaction for s
ometime for his initial treatment, prices become an important criterion for repu
rchase of the service as the customers’ knowledge of the service costs has now bec
ome more accurate. b) Prices and Quality of Health Services: One of the interest
ing things about service prices is that because other cues to quality of service
are seldom available, customers tend to use prices as indicators of service qua
lity. In case of goods, the tangible nature of the product and the possibility o
f physical examination by touching, smelling, feeling enables a customer to have
an assessment of the quality of the product before he buys it. In case of servi
ces which are intangible, such pre-purchase assessment is difficult. Research sh
ows that in case of most services, because other tangible indications to assess
quality are not available, consumers use physical evidence and price as
Health Services
49
surrogate indicators of service quality. Wherever pre-purchase assessment of qua
lity is not easily assessable high prices in the consumer mind get associated wi
th high perceived quality. Medical services are among the services which are hig
h on credence qualities, where evaluation of service quality even after experien
cing a given service (for example a by pass surgery) is difficult to make. In su
ch situation consumers depend on prices as a cue to quality. Prices for medical
services, therefore, must be determined keeping in mind the fact that price and
quality for such services are positively associated. In addition to cost coverag
e and/or meeting the competition, prices must be set to convey an appropriate an
d desired quality image. c) Costs other than the Monetary Cost: There is an incr
easing realisation on part of service providers that apart from the monetary cos
t, customers have to bear several non monetary costs also while availaing a give
n service. Sometimes these costs affect consumer valuation and affect his choice
of alternative service offers. These costs include time costs, search costs and
psychic costs. Health services require direct participation of the patient and
thus require him to spend both waiting time and interaction time with the hospit
al subsystems – registration, specific tests and of course the doctors. For any gi
ven appointment his time spent may comprise both waiting time and time with the
doctor. Time spent in availing a given service represents a specific cost to the
customer. Some health services, specially the costlier ones like a by pass surg
ery require the customers to go through a lot of information search to identify
the best possible alternative offers are comparable, one variable may include ap
art from the prices, the expertise of the doctors, facilities offered, location
etc., such costs are sometimes considerable and also have to be borne by the cus
tomer. Sensory costs are the other class of costs that may make a difference. Un
pleasant sounds, noise, crowds are some of the sensations that most people are u
ncomfortable with. In hospitals that are located in crowded or squalid neighbour
hoods, or are overcrowded customers may have to bear these costs. If there are a
lternatives which are comparable on other variables mentioned earlier, customer
may like to avoid the sensory costs, even if they have to pay a little higher. F
or health services, one of the most potent costs are the psychic costs – not under
standing the service, fear of uncertainty, fear of undesirable consequences like
pain, disability or loss of control are very important in the customer’s decision
to avail or postpone a given medical transaction. Providers of health services,
therefore, must be aware of not only the monetary costs like cost of time, cost
of search, sensory and psyche costs because there costs offset consumer valuati
on significantly and should this be an input in pricing consideration. Activity
2 Talk to two patients of a premium private clinic/hospital in your town and to
two patients from the Government hospital. Discuss with them their reason for se
lecting the hospital they chose. From the former, try to find out, why inspite o
f high price, was their choice made in favour of this hospital. How does their a
nswer reflect the concepts studied above? ......................................
................................................................................
...... .........................................................................
................................................... ............................
................................................................................
................
50
13.4 IMPLEMENTING THE PRICING POLICY: STRATEGIC CONSIDERATIONS
In addition to variables like costs, demand and competition and the consideratio
ns of your own objectives in arriving at a pricing figure, there are certain iss
ues which demand decision before you can implement and administer a pricing stra
tegy. Lovclock has clearly focussed on these issues in terms of key questions th
at must be addressed while determining the pricing strategies. The following dis
cussion highlights these issues and the underlying decision that must be made in
order to be able to define and implement your pricing strategy. i) How Much to
Charge: The issue of costs is important for the pricing decision. The health ser
vice provider, however, would need to decide upon the relevant costs that must b
e considered while arriving at the pricing decision. Is the hospital trying to c
over only the variable costs or all the costs, whether it has decided to allocat
e a share of the fixed costs across all priced services and is seeking to get th
em also covered? Is there a way in which costs of fixed goods such as land and b
uilding can be spread over all services or over a period of few years? Should th
e hospital have a basic package of core services priced at a certain level and t
hen keep on adding to the price depending upon the combination of value added se
rvices availed along with the core service? Answers to these questions would dep
end upon the choices you make and will thus determine the actual figure you want
to finalise as the price for a given service. For the market/markets that you c
ater to, you would also need to assess the prospective customers’ sensitivity to p
rices. While for a lot of health services, because of their necessity and expedi
ency nature, customer do not display high levels of price sensitivity, yet for f
requently availed routine services like medical checkups, ultrasounds, dental fi
llings etc. wide price differential may make customers go to alternative provide
rs unless they are supported by superior value through accompanying services. Pr
ice discounts should be carefully used. All discounts affect the overall total r
evenue to the organisations and reduce the contribution margin from each transac
tion. While offering specific price discounts to attract a given segment may cre
ate marketing opportunities in new segments, heavy discounting may actually inte
rfere with the valuation of the service in the eyes of the high paying customers
. Discounting over time, however is prevalent in the health sector, where unders
tanding the customer reluctances to stay in a hospital over weekends some hospit
als offset the dip in weekend utilisation of operating and post-operating servic
es by offering substantial discount on operations during the weekend. Advocates
of psychological pricing suggest that when prices of services are in term of an
odd figure e.g. a sonography costing Rs. 490.95 as opposed to Rs. 500, it gives
the consumer the feeling of paying “somewhere around 400” rather than almost 500. Si
nce people rarely carry an absolute figure in their mind as the price for a give
n service this perception of the price as “somewhere around 400” is likely to give a
substantial competitive pricing edge to your prices if odd pricing or psycholog
ical pricing is used. Hospital administrators on the other hand and sometimes cu
stomer as well may actually welcome the convenience of round price figures. ii)
On What Basis should Prices be Charged: As a complete service provider, you will
need to identify the basis on which prices would be charged
Health Services
51
in your hospital. You would recognise that in your case, there could be actually
more than one basis on which price could be charged. For example, fee could be
charged for admission (or registration) and then on a time basis (duration of st
ay on a per day basis in the hospital) or on the basis of resources consumed (ad
ditional nurses hired for round the clock care). Different establishments also v
ary in their practices as to whether they should bill each element of the treatm
ent separately or charge a single ‘package price’ for the whole transaction. It is h
owever a good practice to have a price figure for each service element, even tho
ugh the policy is to quote a package price to the customer. iii) Where should Pa
yment be Made: You must clearly indicate the payment procedures in terms of whet
her the payments should be made and receipts collected at the reception counter
or at the Accounts and Billing department if you have a separate section like th
at. Increasingly consumers today are using their credit cards to make payments,
where customers simply give their card number and ask for their account be bille
d directly. Policies allowing cheque payments for government employees may allow
greater willingness for patients to choose one particular hospital over another
. All these are example of facilitation provided especially if the payments are
large. iv) Where and How should the Payment be Made: The two alternative options
that service organisations use are asking the customers to pay in advance or to
ask for payment once the treatment is completed. Most prevalent in case of medi
cal care is the practice of asking the customer for an initial advance deposit,
with the balance being billed later as the treatment progresses or is completed.
This practice makes sense because specialist services or time of specialists ma
y need to be allocated or services brought in, expensive resources may need to b
e appointed and scheduled in advance of the acutal treatment. In addition, very
often in the beginning of the treatment, the service provider is rarely ever com
pletely sure as to what costs the treatment will actually entail, the complicati
on that may arise, the additional services that may need to be provided. It is,
therefore, prudent to ask for an initial deposit and then identify the billing i
nputs as they accrue. v) How should Prices be Communicated: Once the decision on
how much a charge and how the payments are taken, the hospital must at a policy
level decide how the prices are to be communicated to the customers. Since pric
es constitute an important input in the purchase of at least some of the medical
services, creating information acces to prices can enable customer to minimise
some of the uncertainty in decision making. Not only do customers need to have s
ome information on prices in advance, they also need to have information on how
and when would they be required to pay. It is, therefore, advisable to instituti
onally decide, how much information on prices is to be communicated and how? Sho
uld rate lists for various services be on display or the rate cards be given to
customers once they seek that information. Decision on how public should know pr
icing information needs to be institutionally taken and then clear unambiguous c
ommunication of prices needs to be managed. To define the term in the most compr
ehensive way we can say value to the customer is the sum total of all perceived
benefits minus the sum of all the perceived costs. Looking at this concept of va
lue, it must be clear to you that the larger the gap between perceived total ben
efits and perceived total costs, the greater is the value that the customer woul
d perceive in a given service. To enhance this perception of value in a given pr
ice category, therefore, as a provider of health services you may follow two alt
ernative strategies or follow a combination of both. Value can be enhanced by in
creasing the benefits that you give to your customers or by rendering costs. On
the side of costs, apart from the monetary costs, in services like health, other
costs like cost of time
52
(waiting in the reception, waiting for an appointment), cost of effort (in terms
of access to location), cost on account of stress and sensory costs like fear a
re very relevant. If the provider can manage to reduce some of these costs, he c
an alter the customers perception of value of his own service. What you must app
reciate is that while comparing alternative providers of health services, custom
ers use this perception of ‘net’ value i.e. the difference between perceived benefit
s and perceived costs, rather than just the figure of monetary prices. You must,
therefore, consider carefully the perceived benefits that are associated with y
our hospital services and the perceived costs that the customer has to bear, bef
ore arriving at a monetary price figure for your services. Activity 3 Based on y
our knowledge of practices regarding communication of prices by clinics/hospital
s, prepare a note on what needs to be done further looking at the customers need
for information on the one hand and the peculiar nature of the health service o
n the other hand. ..............................................................
............................................................. ..................
................................................................................
......................... ......................................................
.....................................................................
Health Services
13.5 SERVICE QUALITY IN HEALTH CARE
As discussed in Unit 8, Gronroos suggested that the quality of service as it is
perceived by consumer has two dimensions – a technical or outcome dimension and a
functional or process related dimension. That means, the consumer judges the qua
lity not only on the basis of what is being delivered but also how that outcome
is delivered. For example for consumer of health care services the primary expec
tation is related to the response to the illness–‘cure’. The process of achieving this
end is characterized by the delivery of service experience – ‘care’. As health care s
ervices are rich in credence qualities and, therefore, the technical outcome is
dfficult to evaluate, consumer would tend to make the assessment of the technica
lly complex cure dimensions on the basis of the more familiar ‘care’ experience. Gab
bott and Hogg suggest that evaluation of the clinical aspect of the service is p
articularly complex for individual patients but the impact of it upon overall sa
tisfaction is unquestionable i.e. if the patient considers the medical response
to have been inadequate, aspects of care can’t compensate sufficiently to result i
n overall satisfaction. However, given the difficulties in adequately evaluating
“cure” and the investment that a patient has in believing in the doctor’s ability to
treat illness, it is suggested that patients take this aspect of the service for
granted and evaluate their service provision on the other aspects of service de
livery. Recollect the five dimensions of service quality developed by Parasurama
n, Zeithaml and Berry as discussed in unit 8. Let us apply them to the health ca
re services. Reliability: Ability to perform the promised service dependably and
accurately (example – doctor keeps the appointment on schedule, diagnosis prove t
o be accurate). Responsiveness: Willingness to help customers and provide prompt
service (example – no waiting, doctor’s willingness to listen). Assurance: Employee
s’ knowledge and courtesy and their ability to inspire trust and confidence (Examp
le – reputation, credentials and skills. 53
Empathy: Caring individualized attention given to customers (Example – acknowledgi
ng patient as a person, remembers previous problems, patience). Tangibles: Appea
rance of physical facilities, equipment, personnel and written materials (Exampl
e – waiting room, examination room, equipment, report cards). Zeithaml and Bitner
suggest that since health care services involve some amount of uncertainty/high
risk, assurance dimension would be of great importance to the consumers. In the
early stages of relationship, the consumer may use tangible evidence to assess t
he assurance dimensions. Visible evidence of degree, honours and awards and spec
ial certifications may give new customer confidence in a professional service pr
ovider. Raju and Joshi suggest that the hospitality level offered by the healthc
are provider is more important for life stage and life style treatments and goes
a long way in making the patient feel safe and secure about undergoing a proced
ure, as well as assuring that the hospital would provide all the requisite servi
ces prior to and after the treatment. Also patients from different strata of soc
iety are starting to have differing expectations from hospitals about the level
of service they should be provided while being treated. Some providers have, the
refore, developed capabilities for providing differential levels of service at r
egular, premium and luxury levels. For this health care providers should use res
earch techniques to map out the consumer decision making process and the relativ
e importance consumers assign to expertise and hospitality. The next logical ste
p would be to understand service features that relate to consumer perceptions of
expertise and hospitality. Finally, the provider should understand the cost imp
lications of making changes in these features and their relative impact on consu
mer choice and revenues. Poor service quality can be caused by a number of facto
rs. These include organisations’s lack of understanding of customers expectations;
not selecting the right service design and standards; inability or unwillingnes
s to meet the standards i.e. not delivering as per the service standards; not ma
tching performance to premises. To provide quality services, an organisation sho
uld first learn about consumer expectations through market research. Even in the
developed countries, in the not-too distant past, health care organisations had
little first hand familiarity with marketing research. (Marketing Research is t
he objective and systematic process of gathering, analyzing and interpreting dat
a relevant to a specific situation or problem facing an institution). However, a
s hospitals increasingly have adopted a marketing orientation, they are choosing
to use marketing research to help them understand marketing problems and opport
unities. Loubean and Jantzen (1998) conducted a survey of 230 hospital executive
s in USA to assess the kind of marketing research activities being conducted by
hospitals. Hospital’s administrators reported that satisfaction surveys of both in
patients and outpatients are the most widely used research applications with mor
e than 80% of the respondents reported usage of these two methods within the las
t year. Of the surveyed respondents 48% performed a competitive analysis of othe
r institution within the last year and 78% performed the analysis within the las
t three years. The researchers go on to suggest that “hospitals seeking effective
marketing strategies need to recognize that a broad array of marketing research
information is available to them. Research is not inexpensive, but it can be one
of the hospital’s best values because, if done properly, it leads to better decis
ion making. Hospitals should develop and fund annual research activities’. Activit
y 4
54
Talk to different consumers of health care services and determine the relative i
mportance of the five service quality dimensions as perceived by them.
................................................................................
........................................... ....................................
................................................................................
....... ........................................................................
................................................... Internal Marketing and Servi
ce Quality As you would have noticed earlier in the service marketing triangle (
unit 1) that internal marketing plays a critical role in services marketing. Als
o internal marketing was discussed in detail in Unit 7. It enables the employees
to keep the promises that have been made to customers. Internal marketing can b
e viewed as the building of customer orientation among employees by training and
motivating both customer-contact and support staff to work as a team. The role
of employees in a service organisation is very dramatically highlighted by Hal R
osenbluth; owner of a chain of successful travel agencies, in his book titled “The
Customer Comes Second” wherein he argues that a company’s first focus should be on
its employees. “Only when people know what it feels like to be first in someone el
se’s eyes can they sincerely share that feeling with them”. Similarly Benoy mentions
that for service business such as health care that are labour intensive and dem
and high levels of personal contact between the service provider and the custome
r, no marketing plan can be considered complete unless it includes strategies fo
r reaching and winning over its internal customers. He further goes on to define
internal marketing as “the application of marketing, human resources management a
nd allied theories, techniques and principles to motivate, mobilize, co-opt and
manage employees at all levels of the organisation to continuously improve the w
ay they serve external customers and each other. Effective internal marketing re
sponds to employee needs as it advances the organisation’s missions and goals.” The
activities involved in internal marketing income competing for the talent, train
ing employees, empowerment, knowing employee needs, good internal communication,
measuring and rewarding quality. You will study more about some of these aspect
s in the section on Human Resources Mangement.
Knowledge is empowering. When customers and visitors ask, the employees know wha
t is going on and why. They feel they are the hospital, rather than answering. “Th
ey tell me nothing!” If you don’t tell them, if they don’t know, then distorted rumour
s start circulating. Worse yet, they feel excluded and not a true part of the ho
spital. Employees, in general, are well motivated and want to do well. Further m
ore, no one knows the job better than individual employees themselves. Therefore
, if you create an environment in which they feel comfortable enough, knowledgea
ble enough, about the business to feel that they own the business in a sense, th
ey will contribute – providing, of course, that their capacity to contribute is en
hanced by a responsive upper structure of the organisation. (Rabkin and Avakian,
1991)
Health Services
13.6 MARKETING COMMUNICATION FOR HEALTH CARE SERVICES
Communication is an essential part of marketing. In fact it is one of the elemen
ts of marketing mix i.e., promotion. Few goods or services, despite being well d
eveloped, priced and distributed can sustain the market place without effective
promotion. Promotion can broadly be understood as “communication by marketers that
informs, persuades and reminds potential buyers of a product to influence an op
inion or elicit a response.” The various elements of promotional mix are advertisi
ng, sales promotion, public relations and personal selling. However, in this sec
tion we are going to focus on word of mouth communication, since in case of serv
ices, especially services which involve
55
some amount of uncertainty or risk (like health services), consumers tend to rel
y more on information from personal sources (e.g. friends) than from nonpersonal
sources (e.g. mass media). Therefore, word of mouth (w.o.m.) communication beco
mes a critical part of health care marketing. Before moving further let us study
a definition of w.o.m. communication. It may be defined as “Oral, person-to-perso
n communication between a receiver and communicator whom the receiver perceives
as non commercial regarding a brand, a product or a service.” Though not under the
direct control of marketer, they can still influence it. A health care marketer
might ask how favourable word of mouth can be prompted, unfavourable word of mo
uth reduced – and since either effort will likely require marketing expenditures,
what results can be expected. Besty and Madeline have highlighted a number of is
sues regarding w.o.m. communication in health care marketing: i) Word of mouth i
s more effective than advertising. And in the health care field, the difference
is even more striking than in other purchase categories. The effectiveness of wo
rd of mouth applies across the board in terms of the kinds of responses marketer
s traditionally seek. Word of mouth communication not only increases awareness a
nd knowledge, but is also persuades and lead to action, such as actually choosin
g the provider one has heard about. Favourable w.o.m. communication can’t overcome
personal negative experience. Health care organisations should encourage its em
ployees, their spouses to become involved in community and neighbourhood groups
and to educate them on what to say when they get there, in the hope that a sourc
e of word of mouth communication is listening. Word of mouth increases as the le
vel of satisfaction increases. An emotionally positive experience with a health
care provider increases w.o.m. and satisfaction which in turn, raises the odds t
hat w.o.m. will be positive. A marketer, therefore, has an opportunity to enhanc
e experience that leads to positive w.o.m. So, health care marketers should seek
a mandate to provide emotional highs to the patients and prevent strong emotion
al negatives, even if these goals involve serious trade-off. Consumers of medica
l care are more likely to engage in negative w.o.m. than they are to complain to
their health care provider. Health care providers, therefore, must make a great
er effort than marketers in other industries to make complaining easy and accept
able.
ii)
iii) iv)
v)
vi)
Activity 5 Find out the information acquisition activities undertaken by consume
rs for selecting a health care provider. .......................................
................................................................................
... ............................................................................
.............................................. .................................
................................................................................
......... ......................................................................
.................................................... Advertising Though advertis
ing is not being used substantially by hospitals in India, it can be a significa
nt means of communication to the customer. Clow suggests that by incorporating t
he five dimensions of service quality (discussed earlier in this unit) – assurance
, reliability, empathy, responsiveness and tangibles into their advertising, hea
lth care providers can increase the level of perceived quality and thereby reduc
ing the perceived risk. To be effective, health care 56
advertisements must contain one or more of these dimensions in the form of headl
ines, copy or captions. Pictures and drawings can also be used. To prevent clutt
er and confusion, an advertisement should focus on only one or two clues; more c
an be used by cycling several advertisements.
Health Services
13.7 CASE STUDY
Marketing of Cardiac Care at Ehirc Escorts Heart Institute and Research Centre (
EHIRC) is the first comprehensive research facility dedicated to the study, trea
tment and prevention of heart diseases in India. It has been truly a quantum lea
p in the cardiac care field of health care in India. Heart disease is recognised
as one of the world’s largest killers. In India, the incidence of heart disease i
s rising at an alarming rate. As compared to western countries, the type of coro
nary artery disease in India differs in its patterns. Even the age of onset of c
oronary artery disease is much lower so that many Indians are getting heart atta
cks at as young an age as 30 to 40 years. It has been proved that adequate preve
ntive measures and early detection is extremely successful in reducing the incid
ence of heart attacks. Since the research data generated in the West is not tota
lly applicable to the causes and factors of heart disease in India, in-depth inv
estigation on a national level is vital, so that our own environment, dietary, s
ocio-economic, ethnic factors, etc. can be modified to reduce heart attacks in o
ur country. To accomplish this goal, EHIRC was setup in 1988 at a cost of Rs. 20
crores and has undergone a major expansion recently . The costs of surgery and
investigations in India are a fraction of costs incurred for similar services ab
road. Today, an open heart operation inclusive of all hospital costs, an attenda
nt’s fare, boarding etc., for the three weeks would cost at least 6 to 8 times in
USA as compared to the cost at the institute, with the added advantage of contin
ued after-care as well as cardiac patient being in his or her own environment an
d among his or her relatives. The costs of other services like angiography, angi
oplasty, examinations, etc. are significantly lower than in any foreign country.
The Health Care Industry in USA has become very competitive and it is becoming
increasingly more competitive. This has necessitated each hospital to identify a
nd develop any function or service which can provide a competitive edge. As a re
sult, many health care providers are now recognizing the important role that the
sales function can play as an integral part of the total marketing mix. We in I
ndia, to some extent, feel uncomfortable in selling hospital services. This is d
ue to our culture and heritage. This need not be so. Patients need education. Th
ey need information. And each person is a patient! So the task of a salesman for
health services is unlimited. This is what marketing can do, and will do. The f
ollowing can be used effectively in this regard : patient educational folders an
d leaflets which are interesting to read and absorb, well-illustrated using Indi
an scenarios. regular patient clinics in satellite towns to educate and inform a
nd to encourage to get the comprehensive cardiac check-up done. use of TV, CCTV
and video films to inform the educated people and promote the institute.
57
spread of insurance idea. health clinics and camps in companies, colleges, schoo
ls, and similar organisations. informing physicians, primary and secondary healt
h centres in regard to facilities available. educational write ups in main line
and regional newspapers to increase awareness of cardiac ailments. mass contact
programmes – arranging public lectures by medical super stars. Twelve Noble ways t
o get More Patients 1. Put yourself in your patient’s shoes: It is a basic and com
monsensical concept . Sometime should be spent every day thinking from the patie
nt’s point of view. It may be difficult but it will mean more sales of hospital se
rvices. Listen to the patients Ask questions from them Do something extra for ea
ch patient Admit mistakes to the patients gracefully. 2. Patient Satisfaction: A
patient can take away his business to a hospital wherever he gets better value
for his money and better service. He does not have to give reasons for his actio
n. It is his money and he can spend it where he likes or the way he likes. Techn
icians and assistants in the hospitals are people and if they are not satisfied,
one can never have satisfied patients. This is simple but often ignored fact. M
any hospitals have succeeded without proper medical facilities, none without pro
per technicians. Employees with average intelligence and initiative, when treate
d with respect and dignity as individuals, given training and motivation will tu
rn out to be good technicians. 3. Continuous communication with the patients: Co
mmunication with the prospects and the patients is the core of good marketing. H
ow to achieve it? There is no magic wand in the world that will help achieve it;
only patience and persistence pays. Each employee should be trained to be good
listener to the patients when they come into the hospital or when they write to
the hospital. This includes encouraging the patients to open up and express them
selves clearly. In our country with so many festivals for Devis and Devtaas, a h
ealth provider has several ‘excuses’ to send a postcard to his patients. The postcar
ds can contain simple messages to help the patients. And when a patient comes in
, he should really be helped, otherwise it will result in stinking publicity. A
promotional mailer can be so fine tuned that it can reach the individual on his
birthday, on his anniversary and so on. 4. Patient oriented hospital: It is not
a simple task, but can be done by following the patient by patient approach. Whe
n does a hospital becomes patient oriented? As soon as the facility starts rende
ring, through thoughts and actions, the best possible service to each of its pat
ients. This way a hospital becomes great for its patients. Patients do not like
to come to a big hospital where they get lost, but they love coming to a great h
ospital where they will be given the best possible attention. Also a big hospita
l does not necessarily make more profits than a great hospital. 5. Patient orien
ted polices and procedures: A hospital exists so long as the patients keep on co
ming. Hospital policies and procedures, even if they have
58
been given by the best business management professor, are suicidal if they incon
venience the patients. 6. Patients must be given the best possible services: Pat
ients should be given “USA” - Unique Service Advantage – and once they get it, they wi
ll become repeat patients and bring more patients. It simply means some extra an
d individual care to show that the business of patients mattes a lot for the hos
pital. May be the best equipment can be installed, hospital be opened for longer
hours for the convenience of patients, and so on. It also involves studying the
competitors and to start serving the patients better. 7. Patients want answers
to their problems; they are not impressed by the 3 Cs: A hospital where the pati
ents get answers to their problems is a better “mousetrap” than a hospital where the
patient’s problems don’t get solved. Patients are not impressed by the carpets, chr
ome and chandeliers (3Cs) in the hospital. Patients will flock to that hospital
which follows a more helpful attitude. The 3Cs won’t help if they are shown the ru
les and regulations whenever they come with problems. A health provider should n
ot only work harder to satisfy his patients but must also appear to be doing so.
Patients with complaints must immediately get the feeling that they are still w
elcome – rather more welcome- than when they had come in the first place. A bit of
additional consideration is all that is required to convince the patients that
they are wanted at the hospital. 8. Listen, listen , listen …… to your patients: The
patients should be given a proper hearing. Very often, their complaints are lik
e burning embers and if ignored, may become huge fires, or on the other hand can
be turned into ashes by merely dropping a few drops of cold water in the form o
f an instant helpful attitude. If properly attended to, complaints can be turned
into opportunities. A health facility that wants to earn a good reputation in t
he long run also ensures that the patients are encouraged to lodge complaints an
d each complaints is fully investigated. 9. Each of the employees should visit p
atients: In a health facility , every employee does something – directly or indire
ctly for the patients. Otherwise, he does not have a right to be on the payroll
of hospital. If so, how is it that some of employees never see the faces of thei
r patients, as least, not away form the hospital. In the hospital , a selling at
mosphere should be created wherein every employee gets an opportunity to market
the services. 10. Checking with patients about employees attitude: Why customers
(patients) quit? 1% Die 3% Move away 5% Form other friendships 9% For competiti
ve reasons 14% Because of product dissatisfaction 68% Quit because of attitude o
f indifference towards customer by some employees Notice the last line carefully
. A continuous follow up , therefore, should be done with the patients to find o
ut how they feel about the hospital employees and how they are treated by them.
11. Solve the small problems of patients today: A hospital is not a bed of roses
. Of course, most of us feel that it is a bed of roses when we see it
Health Services
59
from a distance. It is only when we touch the bush to pluck the roses that we ge
t pricked by the thorns too. And every hospital must learn how to handle difficu
lt patients with extra care. A difficult patient is like a dark cloud with a sil
ver lining. He presents an opportunity in disguise to test the hospital’s orientat
ion to him. Fortunately, patients are people and the rule of 80:20 applies to th
em too, i.e. 80 percent of patients are reasonable and they forgive very quickly
while it is only 20 per cent who carry their grievances on and on. 12. Dissatis
fied patients are best teacher: One can never please 100 percent of patients, 10
0 percent of the times and 100 per cent of the days. If one can do so it is eith
er a sellers market or he is a genius or he is not taking takeable risks. Genera
lly for an average hospital one-third of patients are very satisfied, another on
e-third are reasonably satisfied and the balance one third are not fully satisfi
ed and, in fact may be 10 percent are fully dissatisfied. These dissatisfied pat
ients should be searched for and once they are located, one- third of the proble
ms are solved. Close attention should be paid to every word they say and it shou
ld be noted down. This conveys that personal interest is being taken in the matt
er. The objective is not to win the argument but to come to an agreement that sa
tisfies a dissatisfied patient.
13.8 SUMMARY
Application of marketing concepts in health care services in India is gaining wi
despread importance. This has happened because of a number of changes taking pla
ce like setting up of corporate hospitals, growing consumer awareness, increasin
g purchasing power, growing market for elective treatment. Pricing is one of the
crucial issues in healthcare marketing. In this unit you have studied the basis
for pricing and the ways in which pricing for health services differ from prici
ng for goods. The various strategic considerations in implementing the pricing p
olicy have also been explained to you. For health care marketers it is crucial t
o appreciate the importance of not only what is being delivered but also how it
is being delivered. That is, they have to take care of the ‘cure’ as well as the ‘care’
aspects. Further, for health care services, which involve some amount of uncerta
inty or risk from customers’ point of view, word of mouth communication plays an i
mportant role.
1. Why is pricing for health services unlike the pricing of a product? What diff
iculties can be envisaged while pricing health services? Discuss with the help o
f examples. 2. ‘Pricing strategy includes much more than determining what to charg
e’. Examine the statement with regards to pricing of health services. 3. What are
the components of service quality? How would you apply these to health care serv
ices? 4. Discuss the importance of word of mouth communication for health care s
ervices. 5. What changes do you envisage in the Indian health care market with t
he emergence of corporate hospitals?
60 Benoy, J.W. (1996) “Internal Marketing Builds Service Quality”, Marketing Health
Services, Chicago, Vol. 16, Issue 1, p. 54.
Besty, G. and Madeline, J. (1995) “Word of Mouth Communication: Causes and Consequ
ences”, Marketing Health Services, Chicago, Vol. 15, Issue 3. Clow, K.E. (1995) “Adv
ertising Health Care Services”, Marketing Health Services, Chicago, Vol. 15, Issue
2. Engelberg, M. and Neubrand, S. (1997) “Building Sensible Segmentation Strategi
es in Managed Care Setting”, Marketing Health Services, Chicago, Vol. 17, Issue 2,
p. 50-55. Gabbott, M. and Hogg, G. (1996) “The Glory of Stories: Using Critical I
ncidents to Understand Service Evaluation in the Primary Health Care Context”, Jou
rnal of Marketing Management, 12, p. 490-503. Glynn, W.J. and Barnes, J.G. (1995
) (Ed.) “Understanding Service Management”, John Wiley & Sons. Gronroos, C. (1990) “Se
rvice Management and Marketing”, Lexington Books p. 37-39. Loubean, P.R. and Jantz
en, R. (1998) “Marketing Research Activities in Hospitals”, Marketing Health Service
s, Chicago, Vol. 18, Issue 1, p. 12-17. Rabkin, M.T. and Avakain, L. (1992) “Parti
cipatory Management at Boston’s Beth Israel Hospital”, Academic Medicine, Vol. 67, M
ay, p. 289-294. Raju, J. and Joshi Y. “Come Health or High Water.” Brand Equity, The
Economic Times, 25 June 2003. Rust, R.T., Zohorik, A.J. and Keiningham, T.L. (1
996) “Services Marketing”, Harper Collins College Publishing. Zeithaml, V.A., and Bi
tner, M.J. (1996), “Services Marketing”, McGraw Hill International, p. 117-122. Zeit
haml, V.A., Parasuraman A. and Berry, L.L. (1998) “Delivering Quality Service: Bal
ancing Customers Perceptions and Expectations”, Free Press, NY. Zeithaml, V.A., Pa
rasuraman A. and Berry, L.L. (1985) “Problems and Strategies in Services Marketing”,
Journal of Marketing, Spring, p. 33-46.
Health Services
61
UNIT 14 CASE STUDY : SERVING THE GLOBAL INDIAN*
Objectives
This unit is a case study on financial services marketing and relates to various
issues concerning the banking industry in India. After studying this case, you
should be able to : understand the changes coming out in the Indian Banking Sect
or, examine different products being offered in retail as well as corporate segm
ents of the banking industry, and explore strategies for globalization of Indian
Banks.
Structure
14.1 14.2 14.3 14.4 14.5 14.6 14.7 14.8 14.9 14.10 Introduction Changing Face of
Indian Banking Industry Transformation in the Indian Banking Sector ICICI Bank
Ltd Retail Banking Business of ICICI Bank Corporate Banking Business of ICICI Ba
nk Organisation Structure of ICICI Bank The Global Growth Strategies of ICICI Ba
nk Discussion Questions Appendix
14.1 INTRODUCTION
Mr. Bhargava Dasgupta heads the international business operations of ICICI bank
and he has to travel a lot these days. He is busy in building the ICICI bank’s nex
t big platform- globalization. He feels that it is impossible to reach to the cl
ients everywhere across the world physically for providing the financial service
s, so it will be strategically sound to leverage the relationships with other ba
nks in serving the global consumer. The success of the bank in the domestic mark
et is largely credited to the customer orientation, high quality of customer ser
vice, innovative financial product introductions and active involvement in servi
ng the emerging and latent needs of the Indian consumer. They want to take their
domestic market success to the global level. The recent spot of operations by t
he bank is an indicator of becoming a global financial service provider. ICICI b
ank has opened its first overseas branch in Singapore in 2003; in mid 2003, they
opened the representative offices in London. They are close to acquire properti
es by the year 2003 end in Pundong and have already procured properties in East
London to start their business operations including strategies to open offices i
n Toronto and Bahrain. They have to decide about how to reach out to the global
Indian in the large part of the globe within their financial limits compared to
global giants like ABN
* This case has been developed for academic purpose, for the students to have an
understanding of financial services marketing. It has been prepared from the da
ta available from public domain and interviews conducted in the bank by the auth
or. This case is not to illustrate effective or ineffective handling of administ
rative situation.
62
AMRO, Citi Bank and other banks. Their global rollout expenditures are around Rs
. 450 crores (100 Million USD) which they can fund from the domestic balance she
et. The subsidiaries in Canada and England have already used 70 million USD of t
his capita. They are also toying with an idea that some of the representative of
fices can be converted to subsidiaries where they will be looking for their own
capital for operation in future period than relying on the parent company capita
l. Mr. Dasgupta is of the opinion that the entry strategy in different countries
is a function of the local regulations. Many countries have the rules to run th
e bank as a representative office offshore branch before they are permitted to b
e a subsidiary of the parent company. ICICI bank’s biggest business was in the are
a of industrial lending and few years before they have derisked the portfolio in
entering into the consumer finance business quite aggressively. They are in the
process of next growth opportunity by serving the financial needs of the global
Indian consumer. The banks target is to make this SBU (global business) contrib
uting one third of the bank’s business in the coming five years (by 2008). Mr. Bha
rgav Dasgupta was pulled from the Venture capital subsidiary to head this global
financial service initiative. Mr. Dasgupta is scheduled to give a presentation
to the board about the strategy to make this initiative achieve its goal. Prior
to preparing his plan for the proposed meeting, he thought of giving a bird’s eye
view on the bank’s emergence and growth as a strong player in the domestic market
and also evaluating the possible alternatives before him for serving the global
Indian consumer.
Case Study: Serving the Global Indian
14.2 CHANGING FACE OF INDIAN BANKING INDUSTRY
Financial sector reforms were initiated in India in early 90s with a view to imp
roving efficiency in the process of financial intermediation; these reforms have
facilitated greater choice for consumers, who have become more discerning and d
emanding, compelling banks to offer a broader range of products through diverse
distribution channels. The traditional face of banks as mere financial intermedi
aries has since altered and risk management has emerged as their defining attrib
ute. The Indian financial system is identified with two set of institutions viz.
regulators and intermediaries. Regulatory Institutions are statutory bodies ass
igned with the job of monitoring and controlling different segments of the India
n Financial System (IFS). These Institutions are given adequate powers through t
he vehicle of their respective Acts to enable them to supervise the segments ass
igned to them. It is the job of the regulator to ensure that the players in the
segment work within recognized business parameters maintain sufficient level of
disclosure and transparency of operations and do not act against the national in
terests. At present, there are two regulators directly connected to Indian finan
cial system. They are Reserve Bank of India and Security and Exchange Board of I
ndia. Intermediary financial institutions include banking and non banking financ
ial institutions. The banking financial institutions participate in the economy’s
payments mechanism, i.e., they provide transaction services, their deposit liabi
lities constitute a major part of the national money supply, and they can, as a
whole, create deposits or credit, which is money. Banks, subject to legal reserv
e requirements, can advance credit by creating claims against themselves. Other
63
financial institutions can lend only out of resources put at their disposal by t
he savers. Financial institutions are the primary source of long term lending fo
r large projects. Conventionally, they raised their resources in the form of bon
ds subscribed by RBI, Public Sector Enterprises, Banks and others. With the dryi
ng up of concessional long term operations funds from the Reserve Bank in the ea
rly 1990s, financial institutions have increasingly raised resources at the shor
t end of the deposit market. The Banking Segment in India functions under the re
gulation of Reserve Bank of India. This segment broadly consists of commercial b
anks and co-operative banks. Non-banking Financial Institutions carry out financ
ing activities but their resources are not directly obtained from the savers as
debt. Instead, these Institutions mobilize the public savings for rendering othe
r financial services including investment. All such Institutions are financial i
ntermediaries and when they lend, they are known as non-banking financial interm
ediaries (NBFIs) or investment institutions. Some of the major non-banking finan
cial intermediaries include Unit Trust Of India, Life Insurance Corporation (LIC
) and General Insurance Corporation (GIC). Apart from these NBFIs, another part
of Indian financial system consists of a large number of privately owned, decent
ralized, and relatively small-sized financial intermediaries. Most work in diffe
rent, miniscule niches and make the market more broad-based and competitive. Whi
le some of them restrict themselves to fund-based business, many others provide
financial services of various types. The entities of the former type are termed
as “non-bank financial companies (NBFCs)”. The latter type is called “non-bank financi
al services companies (NBFSCs)”. The commercial banking structure in India consist
s of two major set of players scheduled commercial banks and unscheduled banks.
The scheduled commercial banks constitute those banks which have been included i
n the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn incl
udes only those banks in this schedule which satisfy the criteria laid down vide
section 42 (60) of the Act. This sub sector broadly consists of private sector
banks, foreign banks. The banking sector is dominated by Scheduled Commercial Ba
nks (SCBs). As at end-March 2002, there were 296 Commercial banks operating in I
ndia. This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 19
6 Regional Rural Banks. Also, there were 67 scheduled co-operative banks consist
ing of 51 scheduled urban co-operative banks and 16 scheduled state co-operative
banks.
14.3 TRANSFORMATION IN THE INDIAN BANKING SECTOR
Financial sector reforms were initiated in India in early 90s with a view to imp
roving efficiency in the process of financial intermediation, enhancing the effe
ctiveness in the conduct of monetary policy and creating conditions for integrat
ion of the domestic financial sector with the global financial system. The first
phase of reforms had an approach of ensuring that ‘the financial services industr
y operates on the basis of operational flexibility and functional autonomy with
a view to enhancing efficiency, productivity and profitability’. The second phase,
guided by Narasimham Committee II, focused on strengthening the foundations of
the banking system and bringing about structural improvements. Among others, the
important issues relate to corporate governance, reform of the capital structur
e (in the context of Basel II norms), retail banking, risk management technology
and human resources development 64
The significant transformation of the banking industry in India is evident from
the changes that have occurred in the financial markets, institutions and produc
ts. While deregulation has opened up new vistas for banks to augment revenues, i
t has entailed greater competition and consequently greater risks. Cross-border
flows and entry of new products, particularly derivative instruments, have affec
ted significantly on the domestic banking sector, forcing banks to adjust the pr
oduct mix, as also to effect rapid changes in their processes and operations in
order to remain competitive in the global environment. These developments have f
acilitated greater choice for consumers, who have become more discerning and dem
anding compelling banks to offer a broader range of products through diverse dis
tribution channels. The traditional face of banks as mere financial intermediari
es has since altered and risk management has emerged as their defining attribute
.
The Growth of Universal Banking
A universal bank is a supermarket for financial products. Under one roof, corpor
ate can get loans and avail of other services, while individuals can bank and bo
rrow. To convert itself into a universal bank, an entity has to negotiate severa
l regulatory requirements. Therefore, universal banks in the Indian context have
been in the form of a group offering a variety of services under an umbrella br
and such as ICICI or HDFC. In universal banking, large banks operate extensive n
etworks of branches, provide many different services, hold several claims on fir
ms (including equity and debt), and participate directly in the corporate govern
ance of firms that rely on the banks for funding or as insurance underwriters.
14.4 ICICI BANK LTD
ICICI Bank is India’s second-largest bank with total assets of about Rs. 1 trillio
n and a network of about 540 branches and offices and over 1,000 ATMs. ICICI Ban
k offers a wide range of banking products and financial services to corporate an
d retail customers through a variety of delivery channels and through its specia
lized subsidiaries and affiliates in the areas of investment banking, life and n
on-life insurance, venture capital, asset management and information technology.
ICICI Bank’s equity shares are listed in India on stock exchanges at Chennai, Del
hi, Kolkata and Vadodara, the Stock Exchange, Mumbai and the National Stock Exch
ange of India Limited and its American Depositary Receipts (ADRs) are listed on
the New York Stock Exchange (NYSE). One of the biggest mergers in the Indian fin
ancial system has been the merger of the ICICI with ICICI bank, which helped the
m move towards the universal banking. The management was of the view that the me
rger of ICICI with ICICI Bank would create the optimal legal structure for the I
CICI group’s universal banking strategy. The merger would enhance value for ICICI
shareholders through the merged entity’s access to low-cost deposits, greater oppo
rtunities for earning fee-based income and the ability to participate in the pay
ments system and provide transaction-banking services. The merger would enhance
value for ICICI Bank shareholders through a large capital base and scale of oper
ations, seamless access to ICICI’s strong corporate relationships built up over fi
ve decades, entry into new business segments, higher market share in various bus
iness segments including fee-based services and access to the vast talent pool o
f ICICI and its subsidiaries. 65
In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the me
rger of ICICI and two of its wholly owned retail finance subsidiaries, ICICI Per
sonal Financial Services Limited and ICICI Capital Services Limited, Shareholder
s of ICICI and ICICI Bank approved the merger in January 2002, the high court of
Gujrat in March 2002 and the High Court of Judicature at Mumbai and the Reserve
Bank of India in April 2002. Consequent to the merger, the ICICI group’s financin
g and banking operations, both wholesale and retail are integrated as single ent
ity.
14.5 RETAIL BANKING BUSINESS OF ICICI BANK
Retail banking is a key element of ICICI’s growth strategy. With upward migration
of household income levels, increasing affordability of retail finance and accep
tance of use of credit to finance purchases, retail credit has emerged as a rapi
dly growing opportunity for banks that have the necessary skills and infrastruct
ure to succeed in this business. ICICI Bank has capitalized on the growing retai
l opportunity in India and has emerged as a market leader in retail credit. The
dimensions of the retail strategy include innovative products, parity pricing, c
ustomer convenience, strong processes and customer focus. Cross-selling of the e
ntire range of credit and investment products and banking services to customers
is a critical aspect of ICICI’s retail strategy. ICICI Bank offers a wide range of
retail credit products. It has expanded the market significantly over the last
few years by taking organized retail credit to a large number of high-potential
markets in India, by penetrating deeper into existing markets and by offering cu
stomized solutions to meet the varying credit needs of the Indian consumer. ICIC
I Bank is one of the leading providers of mortgage loans, two-wheeler loans, com
mercial vehicle loans and personal unsecured loans, and continues to maintain le
adership in automobile finance. ICICI Bank’s total retail disbursements in fiscal
2003 are approximately Rs. 200 billion. Retail credit constituted 18% of ICICI B
ank’s balance sheet at March 31, 2003, compared to only 6% at March 31, 2002. Cros
s selling has emerged as one of the significant drivers of retail credit growth.
In fiscal 2003, cross selling accounted for about 20% of mortgage loans and aut
o loans and about 25% of credit cards issued. In May 2003, ICICI Bank acquired t
he entire paid-up capital of Transamerica Apple Distribution Finance Private Lim
ited (TADFL), which is renamed as ICICI Distribution Finance Private Limited (ID
FL). IDFL is primarily engaged in providing distribution financing in the two-wh
eeler segment. The acquisition is expected to supplement the Bank’s retail franchi
se, especially in the two-wheeler segment.
Retail Deposits
During fiscal 2003, ICICI continued its focus on retail deposits. This has reduc
ed its funding cost and has enabled it to create a stable funding base, with ove
r 4.7 million deposit customers. Following a life stage segmentation strategy, I
CICI Bank offers differentiated liability products to various categories of cust
omers depending on their age group (Young Star Accounts for children below the a
ge of 18 years, Student Banking Services for students, Salary Accounts for salar
ied employees, Roaming Current Accounts for businessmen, Private Banking for hig
h net worth individuals and Senior Citizens Accounts for individuals above the a
ge of 60 years). ICICI Bank has further microsegmented various categories of cus
tomers in order to offer products catering to specific needs of each customer se
gment, like defence banking services for
66
defence personnel. This strategy has contributed significantly to the rapid grow
th in the retail liability base.
Credit Cards
ICICI Bank is also the largest incremental issuer of cards (including both debit
and credit cards) in India. At March 31, 2003, ICICI Bank had issued over 3.4 m
illion debit cards and 1.0 million credit cards. Its multi-channel distribution
strategy provides its customers 24%7 accesses to banking services. This distribu
tion strategy not only offers enhanced convenience and mobility to the customer
but also supports its customer acquisition and channel migration efforts.
Electronic Channels
During the year, ICICI has expanded its electronic channels and migrated large v
olumes of customer transactions to these channels. Seventy percent of customer i
nduced transactions take place through electronic channels.
ATMs
During fiscal 2003, the Bank significantly strengthened its ATM network, taking
the total number of ICICI Bank ATMs to 1,675. ICICI Bank has also pioneered the
concept of mobile ATMs to reach out to remote/rural areas. Other facilities offe
red through multilingual screen ATMs include bill payments and prepaid mobile ca
rd recharge facility. ICICI bank is also planning to share the network with othe
r key players in financial services market to give a wider access to its custome
rs.
Internet Banking
ICICI Bank has about 3.4 million customers with Internet banking access, who can
undertake all their banking transactions (other than physical cash transactions
) on the Internet. ICICI Bank’s Internet banking customers can also pay their bill
s for more than 45 billers and shop on 85 online shopping portals.
Phone Banking
ICICI Bank considers phone banking to be a key channel of service delivery and c
ross-sell. ICICI Bank’s 1,750-seat call centre, the largest domestic call centre i
n India, can now be accessed by customers in over 355 cities across the country.
The call centre handles more than 2.5 million customer contacts per month. The
call centre services all retail customers across the ICICI group. The call cente
r uses state-of-the-art voice-over-Internet-protocol technology and cutting-edge
desktop applications to provide a single view of the customer’s relationship.
Mobile Banking
ICICI Bank’s mobile banking services provide the latest information on account bal
ances, previous transactions, credit card outstanding and payment status and all
ow customers to request a cheque book or account statement. ICICI Bank has now e
xtended its mobile banking services to all cellular service providers across the
country and NRI customers in the United States, United Kingdom, Middle East and
Singapore.
Service Delivery through Multi Channel Distribution Network
With the foundation of a strong multi-channel distribution network, it has succe
ssfully developed a robust model for distribution of third party products like m
utual funds, Reserve Bank of India (RBI) relief bonds, and insurance products, w
ith market leadership in these areas. This model also allows it to
67
meet all customer needs by offering the customer the complete basket of financia
l products, while leveraging its distribution capability to earn fee income from
third parties.
Online Trading
ICICI direct (www.icicidirect.com) is the market leader in Internet based share
trading, with complete end-to-end integration for seamless electronic trading on
stock exchanges. ICICIdirect has a rating of “TXA1” from CRISIL, indicating highest
ability to service broking transactions. During the year, ICICIdirect launched
online trading in the derivatives segment of the NSE.
14.6 CORPORATE BANKING BUSINESS OF ICICI BANK
ICICI Bank provides innovative financial solutions to its corporate clients, tai
lored to meet their requirements, while diversifying its revenue streams and gen
erating adequate return on risk capital through risk-based pricing models and pr
oactive portfolio management. Its focus in the financial year 2003 is on technol
ogy-driven enhancement of delivery capabilities to offer improved service levels
to clients. It set up centralized processing facilities for back office operati
ons where technology is leveraged to benefit from economies of scale arising out
of large transaction volumes. During the year it continued to expand the scope
of its Web-based services. ICICI Bank provides corporate internet banking servic
es through ICICIebusiness.com, a single point web-based interface for all corpor
ate products. The portal enables clients to conduct their banking business with
ICICI Bank through the Internet in a secure environment. ICICI Bank offers onlin
e foreign exchange and debt securities trading services. A dedicated product and
technology group develops and manages back-office processing and delivery syste
ms. Dedicated relationship groups for corporate clients and the government secto
r focusses on expanding the range and depth of its relationships in these sector
s. In the corporate segment, it focusses on leveraging its relationships to expa
nd the range of products and services to channel finance, transaction banking an
d non-fund based products. ICICI Bank has strong relationships with several larg
e public sector companies and state governments and it is leveraging these relat
ionships to expand the range of transaction banking services. It has already bee
n empanelled for collection of sales tax in eight states. It continued to focus
on corporate lending transactions including working capital finance to highly ra
ted corporate, structured transactions and channel financing. It also focused on
leveraging its skills in originating and structuring transactions as well as on
its ability to take large exposures to adopt an originate-and-sell-down strateg
y. This not only increased the risk-adjusted return on the capital employed but
also enabled it to offer a comprehensive solution to its corporate clients. ICIC
I Bank’s dedicated structured finance, credit and markets group, with expertise in
financial structuring and related legal, accounting and tax issues, actively su
pports the business groups in designing financial products and solutions. This g
roup is also responsible for managing the asset portfolio by structuring portfol
io buy outs and sell-downs with a view to increase the risk-adjusted return on t
he capital. During fiscal 2003, ICICI Bank focused on the agri-financing segment
and developed several innovative structures for agri-business, including dairy
68
farming, farmer financing and warehouse-receipt-based financing. It achieved rob
ust growth in this segment and is working with state governments and agribased c
orporate to evolve viable and sustainable systems for financing agriculture. It
has also integrated its rural banking, micro-finance and agrifinancing activity
to offer integrated banking services in rural areas.
Treasury
The principal responsibilities of the Treasury included management of liquidity
and exposure to market risks, mobilization of resources from domestic institutio
ns and banks and international multilateral and bilateral institutions and banks
, and proprietary trading. Further, the treasury leveraged its strong relationsh
ips with financial sector players to provide a wide range of banking services in
addition to its liability products. In fiscal 2003, the balance sheet managemen
t function within treasury, managed interest-rate sensitivity by actively using
rupee-interest-rate swaps as well as by adjusting the duration of the Government
securities portfolio held for compliance with Statutory Liquidity Reserve (SLR)
norms. Further, efforts are undertaken to make the bankingbook-interest-rate po
sitions more liquid by selling illiquid loans and substituting them with marketa
ble securities. The focus of trading operations was active, broad-based market m
aking in key markets including corporate bonds, government securities, interest-
rate swap and foreign exchange markets. A focus area in fiscal 2003 is the deliv
ery of market solutions to corporate clients in various areas such as foreign ex
change, fixed income and swaps. There is a significant increase in both the volu
mes and profits from foreign exchange transactions, swaps and loan syndication.
As one of the largest players in the corporate debt market, it offered two-way q
uotes for many corporate debt papers, thereby increasing the liquidity and depth
of the market. Effective fiscal 2004, it has restructured its treasury operatio
ns to separate the balance-sheet management function (which now forms part of th
e finance group), the corporate markets business (which has been integrated into
the structured finance, credit & markets group) and the proprietary trading act
ivity (which is now housed in a separate proprietary trading group).
14.7 ORGANIZATION STRUCTURE OF ICICI BANK
ICICI Bank’s organizational structure is designed to support its business goals, a
nd is flexible while at the same time seeking to ensure effective control, super
vision, and consistency in standards across business groups. The organization st
ructure is divided into five principal groups namely Retail Banking, Wholesale B
anking, Project Finance & Special Assets Management, International Business and
Corporate Centre. The Retail Banking Group comprises ICICI Bank’s retail assets bu
siness including various retail credit products, retail liabilities (including o
wn deposit accounts and services as well as distribution of third party liabilit
y products), and credit products and banking services for the small enterprises
segment. The Wholesale Banking Group comprises ICICI Bank’s corporate banking busi
ness including credit products and banking services, with dedicated groups for c
orporate clients, Government sector clients, financial institutions and rural an
d micro-banking and agri-business. Structured finance, credit portfolio manageme
nt and proprietary trading also form part of this group. The Project Finance Gro
up comprises our project finance operations for infrastructure, oil & gas and ma
nufacturing sectors. The Special Assets Management Group is responsible for larg
e non-performing and restructured loans.
69
The International Business Group is responsible for ICICI Bank’s international ope
rations, including its entry into various geographies as well as products and se
rvices for non-resident Indians (NRIs). The Corporate Centre comprises all share
d services and corporate functions, including finance and balance sheet manageme
nt, secretarial, investor relations, risk management, legal, human resources and
corporate branding and communications.
14.8 THE GLOBAL GROWTH STRATEGIES OF ICICI BANK
Mr. Dasgupta was looking at the future proposition of earning one third of the t
otal revenue from the international business operations by the year 2008. There
are four alternative strategies available for ICICI bank to provide financial se
rvices to the global Indian. The first strategy is to build a regional base in n
eighboring countries like Nepal, Bangladesh and Sri Lanka. Some of the banks hav
e followed this strategy in the past. Standard Bank had used this strategy to ex
pand its business in Africa, but the neighbours around India are not economic po
werhouses for which the opportunity to grow in these markets are limited. The se
cond strategy is to enter growth markets aggressively through the process of acq
uisitions. Mr Rana Talwar of Standard Chartered Bank followed this strategy by b
uying banks in Asia and Latin America. There is a risk involved in the acquisiti
on process in the foreign country from two points. The legal procedures for acqu
isitions varies from country to country and secondly the issue of non performing
assets of the existing banks may create problem to the ambitious growth plan of
the bank. But he was sure some of these banks may serve as gold mine with highe
r return potential in developing nations. This also needs a bigger balance sheet
that the current balance sheet of ICICI bank for a high level of acquisition. T
he third strategy is to take a strong product and make it global. Identification
of a core competitive advantage and then building a strategy on this particular
advantage may also bring success to the banks global vision. Citibank expanded
in the recent decades by following such a strategy of building the credit card b
usiness as its core competency for entering in to new markets. The complex finan
cial service mix as well as the rapid change in level and type of technology as
the enabler to the service provider brings doubt about such a strategy. However,
ICICI bank has a set of successful products but they do not have a solid financ
ial product as the unique selling proposition for the global market. The fourth
strategy is to follow the customer. Many Spanish banks followed this strategy to
enter in to the Latina American market. The non resident Indian business is gro
wing in countries like Dubai and Bahrain, there is a SinoIndian trade boom which
can be financed from the Shanghai operations, the growing link with the ASEAN n
ations can be serviced from Singapore. There are also traditional business inter
ests in countries like USA and UK but there are also potential risks involved in
the form of operating with international partners for some period until they es
tablish the offshore subsidiaries. Similarly selected market coverage may limit
the scope and image of the bank as a global financial service provider. Mr. Dasg
upta has to consider other issues. ICICI bank is still the number two bank in th
e country with ample scope for growing its business in the domestic market. The
internationalization of other global players have come only after
70
securing the home business and channelizing the liquid funds from the domestic m
arket for international operations. HSBC bank moved out of Hong Kong when it had
a substantial position in the domestic market for international shores. Many fi
nancial experts are still of the opinion that the balance sheet of ICICI bank is
still weighed down by problem loans to industries such as textiles, steel and t
elecom. The NRI as a business proposition has to be evaluated. The recent spike
in the NRI deposits is because of the higher interest rates in India compared to
global rates. As Reserve Bank of India is cutting down the interest rates to ma
ke it at par with global rates, it may hit the whole business proposition. Mr. K
.V. Kamath, the CEO of the company thinks that the global Indian consumer is not
bothered about the exchange rate risks and NRI remittances can be a good busine
ss proposition with a mix of portfolio management to mortgages rather than ordin
ary deposits. Mr. Dasgupta believes that it is right time to go global as major
economies are still recovering from a recession. Therefore, an opportunity for c
heaper deals and quality recruitment exists for the bank. The decisions to enter
in to International operation seem very complex for the bank. In addition, he h
as to decide about the strategies to handle global risk in the business and the
structure of the global organization, as he has to operate in a multi cultural e
nvironment. He was sure that one of the strategic options explained above could
take ICICI bank to the global platform as a financial service provider. He was n
ot sure which one. One thing he was sure about the future of the International o
perations. ICICI bank is going to concentrate on India related business in all t
hese places rather than competing with global players with higher financial musc
les and better service offers. ICICI is there to look after the Indian companies
that are rapidly globalizing their operations. The motto should be to serve the
customers at anywhere in the world with a correspondent relationship with other
banks.
14.9 DISCUSSION QUESTIONS
1. What problem Mr. Bhargava Dasgupta is facing in this case? 2. What are the st
rategic alternatives available for Mr. Dasgupta to serve the Global Indian Consu
mer? 3. What do you mean by originate-and-sell-down strategy? 4. Explain the fin
ancial service mix portfolio of ICICI bank in retail sector? In corporate sector
? 5. What recommendations will you make to Mr. Bhargava Dasgupta? Should he go g
lobal? Give your reasons.
14.10 APPENDIX
ICICI Bank: Sales and Profit Analysis Operating Profit 723.70 867.00 1465.10 290
8.70 4556.00 Net Profit 421.00 732.60 1107.00 2014.20 8685.00 71
Year 1998 1999 2000 2001 2002
Sales 1666.40 6972.20 8730.00 14745.90 69340.40
Ratio Analysis of ICICI and Other Players
Bank SBI ICICI 11.10 HDFC 11.12 UTI Bank 9.00
CAPITAL 13.50 ADEQUACY RATIO EARNING RATIOS Fund based income as a % of Op Incom
e Fee based income as a % of Op Income 91.75
93.37
89.91
92.26
8.24
6.62
10.08
7.73
PROFITABILITY RATIOS Cost of Funds Ratio Net Profit Margin Return on Net Worth D
EPOSIT RATIOS Demand Deposit of Total Deposits Saving Deposit of Total Deposits
Time Deposit of Total Deposits Deposits within India as % to Total Deposits 15.1
1 22.21 62.66 97.54 7.65 7.87 84.46 100.00 22.12 20.83 57.03 100.00 14.65 8.38 7
6.95 100.00 6.91 8.43 18.05 9.63 9.62 17.49 4.83 15.53 17.21 6.46 10.23 21.09
PER BRANCH RATIOS Operating Income Per Branch Operating Profit Per Branch Net Pr
ofit Per Branch Personnel Expenses Per Branch Borrowings Per Branch Deposits Per
Branch PER EMPLOYEE RATIOS (Rs. in Units) Operating Income Income Per Employee
Operating Profit Per Employee Personnel Expenses Per Employee Deposits Per Emplo
yee 1,749,960.13 11,285,851.51 5,096,576.92 8,021,214.71 40.28 8.83 3.42 6.26 12
0.39 45.78 27.80 6.04 105.70 33.08 16.73 6.58 133.95 32.79 13.84 6.09
10.25 326.09
100.43 1,325.87
98.90 968.66
51.38 1,211.77
383,526.38 272,189.95
2,370,995.47 380,211.89
1,594,907.12 317,157.17
1,963,259.20 364,542.34
14,168,713.69
45,442,741.79
46,704,383.22
72,560,821.21
72
P
Online Services Bill Payment Shopping Share Trading Charity Anywhere Banking Hom
e Loans Home Search Online Stock Investment Customer Service Tax queries answere
d Donate2India Money2India IPO Account for Returning Indians Mutual Funds GI Bon
ds Rupee Savings Account High interest Fixed Deposits Debit cum ATM card ICICI B
ank Bonds Credit Credit NRI Service Investments Cards Demat
Product Mix Width (Personal Finance)
Mobile Banking Banking Alerts Credit Card Alert
r
Banking
Loans
o
Savings Account
Home Loan
d
Fixed Deposit
Personal Loan
u
c
Easy FD
Car Loan
t
Recurring Deposit
Two Wheeler Loan
L
Private Banking
Commercial Vehicle Loan
i
n
Roaming Current Account
Loans against Securities
e
Young Stars
Farm Equipment Loans
L
Bank@campus
Construction
Salary Account
Office Equipment
e
Women
Medical
n
EEFC (Exchange)
g
Consumer Durables and
t
h
Resident Foreign Currency (Domestic)
73
74
P
Capital markets Securities Management Services Equities Equity Derivatives Forex
VOSTRO Accounts Term loans Automated INR Payment Services Working capital finan
ce International Banking Services Agri business business
Product Mix Width (Corporate Finance)
Corporate & Structured Finance Working Capital Financing Auto Loan Receivables C
redit Card Receivables
r
Central Government Collecting Bankers Securities Treasury Bills – (T-Bills) Initia
l Public Offer (IPO) Funding GDR/ADR/Euro Issues and arbitrage Debt Trust & Rete
ntion Account Services INR Agency Clearing Services Cross Border Trade Services
Escrow & Paying Bankers
Transaction Banking
Treasury Solutions Invesment Solutions
o
d
Cash management services
Forex markets
General Banking
Bond markets
u
Trade finance
c
t
Repos/Reverse Repos Bonds and Debentures Bank Guarantees Clearing & Settlement B
ankers
Commodity markets Call Money/Notice Money, Term Money and Fixed Deposit
Lending rates
Fertilizer Subsidy Receivables Export Receivables
L
i
n
Inter Corporate Deposits Certificates of Deposit Commercial Paper Bills Rediscou
nting Scheme (BRDS) Temporary Overdrafts Intra Day Funding DVP Funding Overdraft
Against Shares
SGL settlements through Constituent account with ICICI Bank
e
Dealer financing EPC Contract Financing Investment Monetisation Trade financing
(long term) (REIT) / (REMIC) structures Brand financing Vendor financing, Transp
orter financing
L
e
n
g
t
h
PROFIT AND LOSS ACCOUNT Schedule I. INCOME Interest earned Other Income Profit o
n sale of shares of ICICI Bank Ltd held by erstwhile ICICI Ltd TOTAL II. EXPENDI
TURE Interest expended Operating expenses Provisions and contingencies TOTAL III
. PROFIT/LOSS Net profit for the year Profit brought forward TOTAL IV. APPROPRIA
TES/TRANSFERS Statutory Reserve Transfer from Debenture Redemption Reserve Capit
al Reserves Investments Fluctuations Reserve Special Reserve Revenue and other R
eserves Proposed equity share Dividend Proposed preference share Dividend Interi
m dividend paid Corporate dividend tax Balance carried over to Balance sheet TOT
AL Significant Accounting Policies and Notes to Accounts Cash Flow statement Ear
ning per share (Refer Note B.9) Basic (Rs.) Diluted (Rs.) 19.68 19.65 11.61 11.6
1 3,020,000 (100,000) 2,000,000 1,000,000 500,000 600,000 4,597,758 35 -589,092
50,520 12, 257, 405 650,000 --160,000 140,000 960,000 --440,717 44,953 195,614 2
, 591, 284 12,061,791 195,614 12, 257, 405 2,582,990 8,294 2, 591, 284 15 16 17
79,439,989 20,116,900 13,650,139 113, 207, 028 15,589,235 6,225,770 2,867,900 24
, 682, 905 13 14 93,680,561 19,677,741 21,519,297 5,746,598 (Rs.in 000s) As on
31.03.2002
11,910,517 125, 268, 819
27, 265, 895
18 19
75
BALANCE SHEET Schedule CAPITAL AND LIABILITIES Capital Reserves and Surplus Depo
sits Borrowings Other liabilities and provisions TOTAL 1 2 3 4 5 9,626,600 63,20
6,538 481,693,063 343,024,203 170,569,258 1, 068, 119, 662 9,625,472 56,324,080
320,851,111 492,186,592 162,075,756 1, 041, 063, 011 (Rs.in 000s) As on 31.03.2
002
ASSETS Cash and balance with Reserve Bank of India Balances with banks and money
at call and short notice Investments Advances Fixed Assets Other Assets TOTAL C
ontingent liabilities Bills for collection Significant Accounting Policies and N
otes Accounts Cash Flow Statement 12 6 7 8 9 10 11 48,861,445 16,028,581 354,623
,002 532,794,144 40,607,274 75,505,216 1, 068, 119, 662 894,385,070 13,367,843 1
7,744,682 110,118,817 358,910,797 470,348,661 42,393,443 41,546,611 1, 041, 063,
011 394,465,858 13,234,184
18
76
MS-65
Block
5
SECTORAL APPLICATIONS-II
UNIT 15 Educational Services UNIT 16 Professional Support Services: Advertising
Agencies UNIT 17 Telecommunication Services UNIT 18 Product Support Services UNI
T 19 Case Studies 5 21 31 47 59
1
Sectoral Applications-II
GNOU, New Delhi
Print Production
2
Printed at:
BLOCK 5 SECTORAL APPLICATIONS-II
In the previous block (Block 4) we have discussed marketing issues related to th
ree specific service sectors namely ‘financial services’, ‘hospitality and tourism ser
vices’ and ‘health services’. In this last block of the course we will cover four more
service sectors. Unit 15 on ‘Educational Services’ gives you an indepth exposure to
the concept of education as a service, the marketing implications of service ch
aracteristics in the context of education, marketing strategy issues, and planni
ng of the marketing mix for education. Unit 16 on ‘Professional Support Services’ re
lates to one of the vital support services to commercial world i.e. advertising.
It discusses in detail services marketing applications for advertising agencies
, various marketing options that can be exercised by agencies and the positionin
g strategies. Unit 17 covers the ‘Telecommunication Services’, which have witnessed
a revolution in the last few years. The unit covers the growth of telecom sector
in India, regulatory framework, the changing market structure, tariff issues an
d service quality parameters. You will appreciate that services marketing is not
only relevant to services sector but to goods manufacturers as well. Unit 18 ti
tled ‘Product Support Services’ explains the concept of product support services and
describes the different categories of these services. The unit also includes a
case study. The last unit of the block contains two small Case Studies. The firs
t case presents an interesting study on customer expectation and customer orient
ation in an insurance company. The second case relates to service concept and di
stribution aspects.
3
BLOCK
1.
rvices
2.
5. 6. 7.
ix for Services
3.
8. 9. 10.
STRATEGIC ISSUES
4.
11. 12. 13. 14.
of Health
5.
15. 16. 17. 18. 19.
4
UNIT 15 EDUCATIONAL SERVICES
Objectives
After going through this unit you should be able to: classify education as a ser
vice along the various classification schemes; describe the marketing implicatio
ns of service characteristics in the context of educational services; analyse th
e issues to be addressed in service strategy formulation for education; discuss
the service mix elements for educational services and draw generalisations for d
esign of educational service; apply the concepts developed for pricing, promotin
g, designing and delivering educational products.
Structure
15.1 15.2 15.3 15.4 15.5 15.6 15.7 15.8 15.9 Introduction Service Classification
and Education Service Characteristics and Implications for Marketing of Educati
on Marketing Strategy and Education The Marketing Mix Conclusion Self Assessment
Questions Further Readings References
15.1 INTRODUCTION
Marketing of education is a subject with very wide coverage if one considers tha
t formal education begins at the school age and depending upon the choice, vocat
ion and circumstance of the persuants, matures into intermediate and higher leve
ls of learning including professional and specialised fields. Apparently, benefi
ts sought from higher and professional or vocational courses are more tangible o
r measurable in terms of entry qualifications to a chosen profession, certificat
ion to enable practicing a profession or relative ease of access to a suitable f
orm of livelihood. Not attempting to cover the marketing of education per se, th
e scope of this unit is limited to the post school or higher education. Table 15
.1 gives the details of growth in higher education in India.
Table 15.1: College Education in India (Nos.) 2000-01 7, 834 2, 169 251
2001-02 General Education Colleges Professional Colleges* Universities
+
1999-00 7, 782 2, 124 244
1990-91 4, 862 886 184
8, 361 2, 340 261
* Medicine, Engg. & Technology and Architecture, Teachers training colleges only
+ Including deemed universities and institutions of national importance Source
: Statistical Outline of India 2003-2004, Tata Services Ltd; p.215
5
Without making specific commends about any particular discipline, the unit delib
erately seeks to keep the treatment of the subject general, as the objective is
to develop a basic understanding of the concepts involved in the marketing of ed
ucation as a special case of marketing of services. Interestingly, the need to ‘ma
rket’ their services has not really been felt by the education sector, as educatio
nal institutions, be they colleges or Universities or institutions catering to s
pecific fields like ours, have faced more demand than they could cope with. For
specialised fields like management and computer education, where attractive mark
et potential has increasingly caused more and more institutions to be set up, co
mpetitive situation is changing. Even the institutions facing heavy demand have
been confronted with the question of being able to choose the desired target cus
tomers, and therefore face issues like product differentiation, product extentio
n, diversification and service integration. There is a basic concern with buildi
ng and retaining organisational reputation for creating a ‘pull’ in the market. All
this has activated some interest in the hitherto neglected area of marketing of
education services. Let us try to understand some of the basic services marketin
g concepts, relevant to marketing of education. Before going into the subject of
education services marketing it is important to understand the concept of educa
tion as a service. Going by the AMA definition “services are those separately iden
tifiable, essentially intangible activities, which provide want satisfaction and
are not necessarily tied to the sale of a product or another service”1. Providing
a service may or may not require the use of tangible goods. However, when such
use is required, there is no ownership transfer of these tangible goods in servi
ce buying transaction. Education as a service, then, can be said to be fulfillin
g the need for learning, acquiring knowledge-providing an intangible benefit (in
crement in knowledge, professional expertise, skills) produced with the help of
a set of tangible (infrastructure) and intangible components (faculty expertise
and learning), where the buyer of the service does not get any ownership. He may
have tangible physical evidence to show for the service exchange transaction bu
t the actual benefit accrued is purely intangible in nature.
15.2 SERVICE CLASSIFICATION AND EDUCATION
A number of classification schemes have been developed to classify the whole arr
ay of services according to some chosen variables. One of the simplest schemes c
lassifies services as consumer, intermediate and industrial service. Education i
s a service that is geared primarily to the consumer market, therefore it can be
classified as a consumer service rather than an intermediate or industrial serv
ice, though packages of industrial training are also designed for the organisati
onal customers. On the basis of the way in which services have been bought, educ
ation, depending upon the type and level can be classified both as a shopping se
rvice and as a speciality service. Swan and Pruden have suggested that establish
ing whether service is bought for instrumental motives (i.e. as a means to an en
d) or an expressive motive (as an end in itself) provides a useful framework for
service designers.2 For majority of customers education may fulfill the instrum
ental function, but there is always a category of customer from whom education a
nd the pursuit of knowledge are expressive motives. Another classification schem
e categorises services as equipment based and people based services, depending u
pon which resource is primarily used in the production of the service.3 By its v
ery nature, education is essentially a people
6
based service though some service delivery systems may make heavy use of technol
ogy and equipment. Services have also been classified on the level of personal c
ontact as low contact or high contact services.4 Recent developments in open and
distance learning systems have successfully countered the challenge of constant
ly maintaining high levels of contact, by creating specialised kinds of user fri
endly course material and using multi-media technology to gain access to student
s. Shostack, who in her studies has stressed the intangibility characteristic of
services has classified services on the bases of dominance of tangibility/intan
gibility, along a continuum of a pure tangible product with high tangibility dom
inance to a pure service with intangibility dominance.5 Accordingly education ca
n be classified as a pure service with dominant intangibility content.
Educational Services
15.3 SERVICE CHARACTERISTICS AND IMPLICATIONS FOR MARKETING OF EDUCATION
1. Intangibility Education like most ‘pure’ services is an intangible dominant servi
ce, impossible to touch, see or feel. Evaluation of this service however can be
obtained by judging service content (curricula, course material, student workloa
d, constituent faculty) and the service delivery system. The consumer, based on
these evaluations, has a number of alternative choices before him and may make s
election on the basis of his own evaluation referrals, opinions sought from othe
rs and of course a brand or corporate image of the organisation providing educat
ion. At the end of the service experience, the consumer gets something tangible
to show for his efforts i.e. a certificate or a grade card denoting his level of
proficiency at the given course/programme. According to Bateson, finer distinct
ion of intangibility into palpable and mental intangibility, has implications fo
r the marketing of the educational services.6 For reasons of both mental and pal
pable intangibility: Education cannot be seen or touched and is often difficult
to evaluate: It is therefore, imperative to build in “service differentaition” in th
e basic product to enable competitive positioning. Precise standardisation is di
fficult: For educational packages of same levels and bearing similar certificati
on (e.g. B.A., B.Sc., and B.Com. degree programmes, postgraduate commerce and sc
ience programmes, management diploma and degree programmes) across universities
and colleges, it is often difficult to bring about standardisation of course des
ign as resources/needs/objectives of different institutions may differ. Institut
ions like Universities, though, try to manage equivalence in standards through B
oards of Studies which are generally inter-university bodies. Technical educatio
n is sought to be standardised through bodies like the All India Council for Tec
hnical Education. Interestingly, the lack of standardisation also opens up the m
arketing opportunity of creating highly differentiated, need based course packag
es, suited to chosen target groups of customers or serving specialised/localised
needs. Education as a service cannot be patented: This feature implies that cou
rses designed or developed at one institution can be replicated and offered at o
ther institutions. It also implies that as far as the service product features a
re concerned, all advantages of a given competitor have an essentially perishabl
e character. Only those discernible strengths which have their basis in the peop
le resource, cannot be easily replicated. Hence, the added importance of faculty
selection and motivation for educational institutions. 7
As these implications of intangibility become apparent to the service product de
signers and providers in the field of education, the following pointers to marke
ting planning emerge: i) Focus on account of intangibility should increasingly b
e on benefits delivered by the service system and the uniqueness of the package
that is being offered. The benefit accruing to the student may emanate from the
service product-its depth, width, level or variety or from the uniqueness of the
delivery system, the evaluation system or the extremely high goodwill enjoyed b
y the institution. Education, like most other pure services, should be tangibali
sed so that the beneficiary has some physical evidence to show for his achieveme
nts. Certifications for various levels of attainment, citations and separate cer
tificates for any special achievements or activities should be duly prepared and
delivered in time to be meaningful. Branding through effective use of Institute
/University acronym, to aid instant identification and recognition should be pra
cticed. Concerted efforts at building up organisation’s reputation through perform
ance as well as through skillful use of communication tools would need to be car
ried out to associate this ‘brand name’ with a desired ‘brand image’.
ii)
iii)
2. Perishability Services are perishable and cannot be stored. To an extent, edu
cation displays this characteristic which results in certain features. Productio
n and consumption are simultaneous activities: This is true of most conventional
teaching institutions where face to face teaching necessitates simultaneous pro
duction and consumption. Open and distance learning systems which make substanti
al use of technology, however, have made it possible for production and consumpt
ion of the service to be carried out at different times-the use of audio-video u
nits and preparation of course materials sent to the students across the consume
r population, are designed to meet the challenge posed by the perishability char
acter of services. No inventories can be build up: This is true of most services
, as well as education, as an unutilised service like a course on offer, or a le
cture scheduled to be delivered, cannot be stored, if there are no students enro
lling for the course or to attend the lecture. This factor opens up the challeng
e of managing the service in the face of fluctuating demand. Nearly all universi
ties at one time or the other have faced the problem of overstaffing, when certa
in disciplines went out of vogue, like pure sciences and post graduate courses i
n languages. The marketing implications of perishability necessitate that a bett
er match between supply and demand for educational packages would need to be mad
e. Course design and course offers need to be preceded by a need analysis of the
target population before the decision to launch them is made. This points towar
ds the use of marketing research techniques for service development (designing t
he course concept) and planning, but more than that it necessitates a shift from
‘institution orientation’ to a student or ‘customer orientation’. Courses need not be o
ffered because the institutions have available expertise in an area or it is som
ething that the institution has been traditionally doing. In consonance with the
marketing concept, the capability of finding a better fit between the needs of
the society and the design of the offering, would define the difference between
an effective and a non effective institution. 8
3. Inseparability Services are also characterised by the factor of inseparabilit
y in the sense that it is usually impossible to separate a service from the pers
on of the provider. In the context of education, this translates into the need f
or the presence of the performer (the instructor) when the service is to be perf
ormed and consumed. This necessarily limits the scale of operations to the numbe
r of instructors available, it also means that the distribution mode is more oft
en than not direct in the sense that no intermediaries are involved; the transfe
r of knowledge is directly from the provider to the learner. As noted before, op
en learning systems have overcome the characteristic of inseparability by incorp
orating the teacher into the material and bringing about a separation between th
e producer and the service. A direct marketing implication of this inseparabilit
y is the need for obtaining/training more service providers as well as the need
for more effective scheduling of operations. 4. Heterogenity Heterogenity in the
context of services means that unlike product manufacturing situations where de
sign specifications can be minutely standardised and followed, the standards of
services, educational services included, would depend upon who provides the serv
ice and how. This heterogenity of performance renders service offers for the sam
e basic “service product” from different institutes vastly different from each other
. Even though standardisation of courses according to some prescribed norms may
be attained, it is difficult to ‘standardise’ individual performance i.e. that of th
e faculty resource person. That, perhaps, is not even a desirable goal in educat
ion, but maintenance of a certain quality standard across ‘performers’ certainly is.
In the absence of accepted quality standardisation mechanisms in this context,
it is the market forces alone, which would force quality standards on education.
Dwindling registrations in institutions, snatching away of “market shares” by more
effective competitors is what is making institutions take a renewed look at qual
ity of service delivery and mechanisms for maintenance of standards. In terms of
marketing implications, the hetrogenity characteristic of educational services,
necessitates careful personnel selection and planning, constant and careful mon
itoring of standards which can provide cues to the prospective customers to aid
choice of institutions. Examples of these cues could be success rates of the pla
cement programme, the absorption of the institutions product in the job market,
or the performance of the pass-outs at other competitive examinations. 5. Owners
hip Ownership or the lack of it also characterises service. In the context of ed
ucation, the customer only buys access to education, or derives the learning ben
efit from the services provided. There is no transfer of the ownership of tangib
les and intangibles which have gone into creation of the service product. Paymen
t of fees (price for the service) is just the consideration for access to knowle
dge and for the use of facilities for a given tenure. Activity 1 Study a few edu
cational institutions around you, if possible let these include a University, a
professional institution and a private college. How do these institutions addres
s the issue of standardisation of services? Do the processes to achieve standard
isation vary with the type of institution? .....................................
................................................................................
...... .........................................................................
.................................................. .............................
................................................................................
..............
9
15.4 MARKETING STRATEGY AND EDUCATION
It has been pointed out in almost all studies on the subject of services marketi
ng that strategic management and marketing strategy for each organisation needs
to be unique in itself as it is organisation and situation specific. Some direct
ions for marketing strategy for education may, however, be drawn keeping in mind
the special characteristics of education as an intangible dominant, people base
d, high contact consumer service. These are outlined below. 1. 2. The dominantly
intangible nature of education service may make the consumer’s choice of competit
ive offers more difficult. In case of delivery systems where the performance of
the service demands the presence of the instructor, marketing of education would
need to be localised and offer the consumer a more restricted choice. Of course
, as institutions build up their “pull” in the market, consumers are willing to relo
cate themselves to avail of the service. Perishability may prevent storage of th
e service product and may add risk and uncertainty to the marketing of education
, specially in the event of fluctuating demand for courses/instructors/disciplin
es.
3.
The basic question for strategic marketing planning that need to be answered are
: i) What business are we in? In order to properly define the mission and the ov
erall objective of the organisation it is essential to define what business we a
re in. Are we in the business of transmission and propagation of knowledge? Are
we in the business of creating new knowledge? Are we in the business of developi
ng professional skills? Are we in the business of creating special skills or pre
paring people for a specific vocation? Or are we there to provide basic knowledg
e and training to people which will enable them to reach a level where they can
make further choices? Answers to these questions will lead the institution to id
entify what it holds to itself as the organisational mission and overall objecti
ve. Who are our customers and what benefits do they seek? Identification of targ
et markets and understanding the needs of customers, as well as the criteria the
y use to make choices, represents an important step in marketing strategy formul
ation. For an educational institution, the task translates to determining what i
s the nature of the benefits sought by its set of ‘customers’. Are they merely seeki
ng a certification, or development of a specific kind of expertise or is accumul
ation of knowledge the real value sought? Since the purchaser of the educational
service is primarily buying the expertise or knowledge he believes that the ins
titution has at its disposal, it is important for the institution to be able to
define the kind of expertise it is capable of producing. It is also important to
develop an understanding of the criteria prospective students apply when they c
hoose between competing institutions. A study in the Indian context, for managme
nt education, reveals that some of the criteria used by students to choose betwe
en institutions were: a) reputation of the institution, b) number of applicants
keen to enroll in the course, c) past success rate of placement, d) faculty expe
rtise, e) width of specialisation offered, f) infrastructural facilities, and 10
g) fees.
ii)
Identification of criteria used to differentiate between competing offers may le
ad institutions to lay emphasis on developing competing strengths and creating p
erceived differences between their offers and the competitor’s offer. Activity 2 T
alk to ten students of a computer education programme or institute, to find out
what are the precise benefits that each seeks from the experience. Then, study t
he programme/institute to find out how well the service product design and deliv
ery at the institute are capable of delivering these benefits sought. ..........
................................................................................
................................. ..............................................
............................................................................. ..
................................................................................
......................................... ......................................
................................................................................
..... iii) How can we build or defend own competitive position? Every organisati
on has to consider an entry strategy into a market and then creation and protect
ion of a competitive position. Though a number of alternative positioning choice
s are possible for educational institutions, task of positioning is a slightly m
ore difficult proposition here, because of the absence of a strong tangible core
to the service offer. One of the basic ways to achieve a strong competitive pos
ition is to build up strong service differentiation which can generate a clearly
focused organisational and product image in the consumer’s mind. Examples can be
found in the case of NIIT which identified the need for computer education and t
raining in the Indian market and built up expertise to cater to clearly defined
need segments in terms of basic learners, job aspirants, people needing to updat
e their knowledge, organisational customers needing customised packages and so o
n. Another example is that of Indian Institute of Management, Ahmedabad, which t
hrough development and nurturance of highly specialised faculty resource and exc
ellent industry interaction has built up formidable barriers to competition. The
se clearly differentiated positions enable these institutions to generate large
number of aspirants and select the desirable quality of students. iv) How should
we offer new service offers that help/strengthen the competitive position? As n
eeds and wants of the consumer population change, existing course packages or de
livery systems may cease to satisfy them. A preemptive approach to education pla
nning suggests that ‘satisfiers’ to such needs be preemptively developed and offered
before the need really becomes apparent to the consumers themselves. Since educ
ation to an extent, represents a derived demand dependent upon the final demand
for desired qualifications for employment, changing job scenarios, industry requ
irements and consequent need for qualifications may be one indicator to watch, f
or generation of new service offer ideas. Though a highly structured approach to
research and development in a new service may be difficult, there is no reason
why systematic organisational processes for generating and testing new course pa
ckage concepts and weeding out old and unprofitable services shoud not be design
ed. Activity 3 Identify educational institutions in your area which can be terme
d ‘highly successful’. What are the ingredients of their competitive strength? .....
................................................................................
...................................... .........................................
................................................................................
.. .............................................................................
.............................................. .................................
................................................................................
..........
11
15.5 THE MARKETING MIX
As you know the traditional 4 P concept developed for marketing of products has
been conceptually extended by Booms and Bitner to include 3 more Ps i.e. People,
Physical evidence and Process. Developing the right marketing mix for marketing
of education would mean constantly fashioning and reshaping the components of t
he mix into the most effective combination of the components at any point of tim
e. Let us, by considering these components, try to study what considerations do
education planners and dispensers need to keep in mind, with respect to these el
ements of services marketing. We shall mainly concentrate on the aspects of the
service product and promotion, as concepts of process and people have been integ
rated in the concept of the augmented service product. Considerations of price a
nd place have also been discussed.
1. The Service Product-The Education Package
While deciding on the education packages to be offered to a consumer population,
the starting point obviously has to be the consumer. It in imperative at the ve
ry outset of deciding the service product, to outline the distinction between wh
at an educational institution offers in terms of its service and what benefit do
es its larger population derive from it. Central to the idea of a service produc
t, are the consumer benefit concept, the service concept, the service offer and
the service delivery system. While the consumer benefit concept defines what ben
efits do consumer derive from a particular educational package offered, the serv
ice concept is concerned with the definition of the general benefit the service
organisation offers on the basis of the consumer benefits sought. Thus at the ve
ry basic stage of the design of the education offer, marketing orientation sugge
sts that the offer should be fashioned as a response to the identification of th
e consumer benefits sought. According to Groonroos, the service concept has to b
e defined at two levels8. The general service concept refers to the essential ut
ility being offered (a computer training organisation offers solution to the pro
blem of keeping up to date information flows within the organisation) while at t
he core of the service offer are specific offers (software training packages for
bank employees). Let us try to elaborate the concept of service offer a little
more as it has specific implications for marketing of education. Developing the
education product, according to the conceptualisation developed by Groonroos ent
ails: developing the service concept, developing a basic service package, develo
ping an augmented service offering and finally, and managing image and communica
tion. (As explained in Unit 5 also) As already noted, the service concept define
s the intentions of the organisation in respect of offering a certain benefit to
the consumers. The ‘basic service package’ described the bundle of services that ar
e needed to fulfill the needs of the target market. Extending this to the educat
ion sector, the basic service package determines the entire package offer which
is a designed to fulfill the learning needs of a target population. For decision
making purposes it is essential to recognise this basic package as consisting o
f three elements. These are: the core service, the facilitating service (and goo
ds), and 12 the supporting service
The core service is the reason for being in the market. A management institute e
xists because it equips people with skills and abilities to manage organisations
. Faculty expertise and the accumulated experience at the institute represent th
e core resource for supplying this benefit. However, in order to make it possibl
e for students to avail these services, additional services are required. A regi
stration and admission service, class schedules, counselling service, enabling s
tudents to make relevant specialisation choices, and library facility are requir
ed so that the students are facilitated in deriving the benefits of the core ser
vice i.e. the learning. These services are called the facilitating services. It
is important for the planners to realise that if the facilitating services are n
ot adequately provided, the core benefit cannot be consumed. Sometimes tangible
goods are also required to avail the benefit of the core service. Course materia
l, in the form of books and prepared course notes, instruction manuals, computer
s, classrooms and class equipments are examples of facilitating goods that help
access the core benefit. The third element of service that goes to make the basi
c service package is the supporting services. Like facilitating services, they a
re also auxiliary to the core benefit but their objective does not lie in facili
tating the use of core service, rather they are used to enhance the value of the
core product and to differentiate the service offer from other comparable offer
s. An efficient placement cell in the above mentioned example, high quality resi
dential facilities, good network of exchange relationships with business organis
ations, do not facilitate the learning process but add value to the service offe
r by adding to the utility derived from the total offer. From a managerial viewp
oint, it is important to make a distinction between facilitating and supporting
services. In order to effectively access the core package, the facilitating serv
ices are necessary and the service package would collapse, if the facilitating s
ervices are not provided. The marketing strategy directive that can be developed
here is that for highly intangible core service products like education, facili
tating services should aspire to attain a quality level which enables them to be
come a competitive strength. Supporting services which are essentially designed
as a means of competition, diminish the value of the package if they are lacking
. The core benefit, learning however, can still be derived if the supporting ser
vices are deficient or absent. The basic service package, however, is not equal
to the service perceived by the consumer. An excellent basic education package,
along with its facilitating and support service elements may be made ineffective
by the way students are handled or student interactions are managed. How the wh
ole service offer is perceived forms an integral part of the total product. The
basic service package and the elements that go into the service perception form
what has been termed as the augmented service product. The Augmented Service Pro
duct integrates the concept of service process with the services offer. Three di
stinct elements which along with the basic offer go into the creation of the aug
mented service product as components of the perceived service process are: i) ii
) iii) accessibility of the service, interactions with the service organisation,
and consumer participation.
Taking the example of a university, accessibility of the service would depend up
on: The number and skills of the persons associated with providing the core, fac
ilitating, and supporting service. Office hours, class and seminar schedules, ti
me used for other services 13
Exterior and interior of offices, classrooms, facilities. Tools, equipments, stu
dy materials etc. The number, quantity and aptitude levels of students involved
in the learning process. The interaction between the service provider (the Unive
rsity) and its customer can be in terms of : Interaction with resource faculty (
their expertise, skill, attention, attitudes) Interaction with other service int
erfaces (admission, evaluation, students inquiries, students welfare office, off
ice staff, hostel wardens and proctors. Reception-attitudes and willingness of r
esponse, accurate answers.) Interaction with the physical environment (space, cl
eanliness, maintenance, noise levels) Interaction with accessory service system
(waiting line for admission, results, enquiries, payment receipts etc.) Interact
ion between students and, Interaction of the various subsystems with each other
(faculty, facilities, office personnel, other service departments). Customer par
ticipation is a concept which identifies the impact the receiver of the benefit
has on the service he perceives. In the above example the student is expected to
fill in various forms, exercise choices of disciplines and subject combinations
and participate in the learning process through interaction and attention. The
service rendered by the University would be dependent upon the quality of studen
t participation in the above and allied activities. Specifically the aspect of s
tudent participation that are relevant are : Are students knowledgeable enough t
o identify their need or problem, and to exercise choice options offered by the
University? Are they reasonably aware of the time and flexibility dimensions off
ered to them? Are they prepared and willing to share information and feed back?
Are there any quicker and more efficient ways of motivating participation? The a
ugmented service offer can be diagramatically represented as shown in Figure 16.
1
Figure 16.1: The Augmented Service Offer The Service Concept
The Core Service Accessibility of the Service Facilitating Services Supporting S
ervices
Interaction
Consumer Participation Source: Groonroos, C. “Services Management and Marketing”, Le
xington Books, Lexington 1990.
14
In planning the total educational package offer, therefore the focus of the conc
ern is not the course alone, the package has to be seen as a total offer along w
ith its facilitating and supporting services. As planners identify that consumer
perceptions are also affected by inputs other than the core service, attention
needs to be focused on the accessibility, interaction and consumer participation
aspects as well as the basic service offer, so that the augmented education ser
vice offering can be effectively created and positioned. Activity 4 For the foll
owing products, on account of your familiarity with them identify the core servi
ce, the facilitating and the support services, in each case : (a) the university
/college that you attended for your degree level; (b) the training programmes of
fered to various cadres in your organisation; (c) the distance learning programm
e that you are undergoing now. .................................................
.................................................................. .............
................................................................................
...................... .........................................................
.......................................................... .....................
................................................................................
..............
2. Pricing of the Education Service
Pricing decisions for the service offer are of a major importance and shoud idea
lly be related to achievement of marketing and organizational goals. Pricing of
the educational offer however, typically represented as ‘tution fees’, is subject to
certain constraints and characteristics. Most educational institutions, in fact
all public institutions like the Universities, institutes of technology, medica
l and engineering colleges, come under the category of services where price are
subject to public regulation. In all such cases the price element is not control
lable by the marketer, instead it becomes a subject matter of public policy, whe
re political, environmental and social considerations take priority over purely
economic considerations. Prices may be based on the ability to pay (fee structur
e relating to parents’ income in case of Universities) or some socially desirable
goals (total fee exemption for women candidates in states like Rajasthan and Guj
arat). Autonomous institutions also subject themselves to formal self regulation
of price for example, the institutions like AICWA, and AICA are subject to inst
itutional regulations relating to fee structures which they decide for themselve
s. On the other hand private institutions, typically in specialised fields like
medicine, engineering, computers and management tend to price their services on
what the mrket would bear. As most of these institutions operate in subject fiel
ds where demand far exceeds supply, prices charged depend upon economic conditio
n, consumer feelings about prices, buyer need urgency, competition in the market
place, level of demand etc. Heterogenity of services and different pricing cons
iderations used by different types of institutions make price a less important d
eterminant of consumer choice in educational services. The more the services are
homogenous (undergraduate, graduate courses in the basic disciplines) the more
competitive would tend to be the pricing. Another generalisation that can be dra
wn from product marketing is that the more unique the education service offer, t
he greater would be the ability of the providers to vary prices according to the
buying capacity of the consumer population. 15
Differential pricing, based on the consumer’s willingness to pay may also be utili
zed for the education service. The practice of charging different fees for the s
ponsored candidates and the non sponsored ones is common in professional courses
, so is the practice of charging differential fees from full time and part time
evening participants of the study programme. 3. Promotion and the Education Serv
ices Offer The objective of promotion in education services is akin to its role
in other marketing endeavours. Accordingly, the basic objective that promotion a
s a marketing tools is expected to play for marketing of education would include
: Building awareness of the education offer package and organisation providing i
t. Creating and sustaining differentiation of the organisation and its offer fro
m its competitors. Communicating and portraing the benefits to be provided. Buil
ding and maintaining overall image and reputation of the service organisation. P
ersuading customers to use or buy the service. Generating detailed information a
bout core, facilitating, supporting and augmented service offer. Advising existi
ng and potential customers of any special offers or modifications or new service
offer packages. Eliminating perceived misconception. Educational institutions h
owever, have not been able to use promotional tools effectively because of certa
in perceived notional barriers. Some of these barriers are: i) Most educational
institutions are product oriented rather than market or student oriented. They p
erceive themselves as producers of certain educational programmes, rather than a
s satisfiers of certain learning needs. This lack of marketing orientation, keep
s those managing educational institutions from realising and exploiting the role
that promotion could play in attaining their organisational objectives. Profess
ional and ethical considerations may prevent the use of certain forms of promoti
on. Established educational institutions may regard the use of mass media advert
ising and sales promotion as being in bad taste. The nature of competition in ca
se of educational institutions like Universities, technology and management inst
itutes is such that they are unable to cope with their present demands and work
loads. They therefore may not feel the need to promote for demand generation pur
poses. What has to be realised however, is that even such institutions need to u
se promotion for image creation and to sustain as well to maintain a secure mark
et position, and to improve the quality of customers (students) seeking their se
rvices. The nature of consumer attitudes regarding education and their perceptio
n of mass media information sources may sometimes preclude the use of intensive
promotion. For making their choices regarding a particular institution or a cour
se package, prospective students rely mostly on subjective impressions of the in
stitution, or use surrogate indicators of quality like the provider’s reputation o
r image. They also tend to rely heavily on word of mouth referrals rather than p
ublished literature or material supplied by the institution.
ii)
iii)
iv)
16
Due to some of the above considerations, as also because of prevailing ‘industry t
radition,’ promotion of educational service has tended to rely more heavily on the
component of publicity rather than any other element. Studies in the field of m
arketing of services indicate that the reluctance towards using mass media adver
tising or sales promotion is partly due to the inherent psychological barrier an
d partly due to the misunderstood role of these tools. Restrictions on advertisi
ng for several professional services are being slowly relaxed. Growing competiti
on and the threat of losing market shares has awakened many a institution to rea
lise the importance of mass media tools like advertising for organizational as w
ell as service offer promotion. Some guidelines that can be used while applying
this powerful tool for generating awareness, interest and enrollment are summari
sed below: a) Create Clear, Simple Messages The real challenge in advertising ed
ucational services lies in communicating the range, depth, quality and level of
service offers by a given institution, in simple, unambiguous form. The need of
giving pertinent information has to be balanced against the need to avoid wordy
copy. b) Emphasise Service Benefits Based on an identification of benefits sough
t, advertising for the educational product should emphasise the benefits to be p
rovided rather than the technical details of the offer. c) Make Realistic, Attai
nable Promises Education by its very nature is a high reliability service, where
expectations are high. Unfulfilled promises create dissonnance. Promises in ter
ms of performance of services therefore should be realistic. d) Build on Word of
Mouth Communication and Referrals As noted earlier, non marketer dominated sour
ces in case of education marketing may be more important to the consumer. Educat
ional organisational should therefore build upon the importance of word of mouth
communication by persuading satisfied consumers to share their sense of satisfa
ction with others; directing ad campaigns at opinion leaders; and encouraging po
tential consumers to talk to existing consumers. e) Provide Tangible Clues In te
rms of certification, records of attainments and past success figures, provide t
he prospective target population with tangible clues to enable them to make choi
ces. f) Develop Continuity in Advertising Most successful institutions position
themselves in different ways, so that their images are discernibly different in
the eyes of the consumer population. Positions could be built around innovative
teaching methods, faculty expertise, research and development possibilities, int
ernational orientation, tradition of quality, range and depth of specialisations
offered, progressiveness, delivery system, flexibility, supporting services or
a combination of any of the above. Once a theme has been identified, consistent
use of themes, formats, symbols and images enables recognition of the organisati
on and its association with the desired values.
17
4. Place Decision and the Education Service In most cases the educational servic
es represent the single location and direct distribution processes with no inter
mediary between the producer and the consumers of the service. The learning proc
ess is usually accomplished by the user of the service going to the service prov
ider. However, because of buyer need urgency and the nature of the utility deriv
ed, accessibility and convenience for educational service location are not as cr
itical a factor as in case of, say, a banking service. Depending upon the compet
itive situation, the factors that have marketing implications in terms of locati
on are: a) What is the market demand? Will the purchase of service be postponed
or negated if the institution is not conveniently located? How critical are acce
ssibility and convenience in service choice decision? Are competitors finding al
ternative ways to reach to the markets? (for e.g. distance learning in education
) Can some competitive advantage be gained by developing alternate/different nor
ms of service location and delivery? How do flexibility, being technology or peo
ple based, affect the educational service offer in terms of flexibility in locat
ion and relocation? Is there an obligation on part of the institution to be loca
ted in a convenient site? (e.g. public health education centres, family planning
training centres, vocational training centres etc.) How critical are complement
ary services to the location decision? (Transport to and fro, residential and ca
nteen facilities and so on)
b)
c) d)
e)
Answers to issues like the above underline the critical importance of the locati
on decision and may result in more systematic approaches than in the past. Activ
ity 5 Promotional activity in most educational institutions barring the private
ones is noticeable by its absence. Most of the public institutions, however have
a public relations office. Talk to the public relations officer of a few public
institutions to find out the type of ‘communication-mix’ used by the institutions.
Also, try to explore in each case why mass media advertising is not being used f
or market cultivation? .........................................................
.................................................................. .............
................................................................................
.............................. .................................................
.......................................................................... .....
................................................................................
......................................
15.6 CONCLUSION
In the present era, it is not natural resources or natural wealth which distingu
ish an affluent society from a backward one, it is the accumulation and developm
ent of the knowledge resource. Education was never as important a utility as it
is today. People however differ in the benefits they seek from the educational s
ervices offered to them. It is important, then, in order to be able to satisfy t
hese needs and wants effectively, that a marketing orientation be applied to the
conceptualisation, design and delivery of educational service. This is even mor
e imperative in a developing country like India, where resources are scarce and
a better match between needs and services provided needs to be attained. Educati
on planners, in order to plan the service offer well and deliver it effectively,
need to understand the behaviour of the target population, and the criteria the
y use to exercise choice. The key to better delivery of the education
18
service is not that it is performed by people but that it is performed for peopl
e. People therefore represent the starting point for analysis to precede concept
ualising the service offer and developing it into a marketable service package.
The education service offered by the institution must reflect the organisational
response to the identified needs and wants of the target segment, in a given so
cio-economic context.
1) What are the marketing implications of intangibility, inseparability, perisha
bility and heterogenity for education services? Discuss with the help of suitabl
e examples. Using the criteria of different benefits sought by target customers,
how can educational institutions build or defend competitive positions. Use exa
mples to support your answer. What are the levels at which a service concept has
to be defined? Applying the generalisation developed by Groonroos, define the g
eneral service concept and specific service offer for a) A computer institute b)
An in-house training programme for sales personnel c) Refresher courses for sen
ior executives 4) What are the implications of core, facilitating and supporting
services for marketers of education? Discuss the concept of an augmented servic
e products with the help of examples from the educational services. The interact
ion between the provider of an educational service and its customers can be at v
arious levels and in different forms. Describe the components of this ‘interaction’
for any educational institution of your choice. What are the major promotion obj
ectives that an education service provider may seek? Are these objectives in any
way different from those sought by product marketers? Comment. Identify the maj
or barriers to effective use of promotion by educational institutions. What step
s do you suggest could be taken to overcome these barriers? Evaluate the critica
lity of the location decision for educational service. Does the significance of
location decision vary over types of educational services? Justify your answer w
ith the help of examples.
2)
3)
5)
6)
7)
8)
1) 2) 3) Kotler, Philip, Marketing for Non-Profit Organisations (Englewood Cliff
s, N.J., Prentice Hall, 1982). Wilson, Aubrey, The Marketing of Professional Ser
vice (London : McGraw Hill 1972). Gummersson, Evert, Toward a Theory of Professi
onal Service Marketing (Industrial Marketing Management, Vol. 7, 1978).
15.9 REFERENCES
1) 2) AMA Definition of ‘Service’ as quoted in, Stanton, W.J., Fundamentals of Marke
ting, McGraw Hill, New York, 1981, p. 441. Swan J.E. and Pruden H.O., Marketing
Insights from a Classification of Services, American Journal of Small Business,
july, 1977 Vol 11, no 1. 19
3) 4) 5) 6) 7)
Classification by Thomas T. from Levelock C.H., Classifying Services to Gain Str
ategic Marketing Insights, Journal of Marketing, Summer pp. 11-12, 1983. Kotler,
Philip, 1986 Marketing Management, Analysis Planning Implementation and Control
. Prentice. Hall of India, New Delhi. Shostack G.L., Breaking free from Product
Marketing, Journal of Marketing, Vol 41, no. 2, April 1971, p. 77. Bateson, J.,
Do we Need Service Marketing? Marketing Consumer Services: New Insights, Report
75-115, Marketing Science Institute, Boston 1977. Booms, B.H. and Bitner M.J., M
arketing Strategics and Organisation Structure for Service firms in Donnelly J.
and George W.R., (Eds), Marketing of Services AMA, 1981. Grooroos, C., Services
Management and Marketing, Lexington Books, Lexington 1990. Cowell, D., The Marke
ting of Services. William Heinemann, London, 1984.
8) 9)
20
UNIT 16 PROFESSIONAL SUPPORT SERVICES : ADVERTISING AGENCIES
Objectives
After going through this unit you should be able to: evaluate the importance of
marketing applications to advertising agencies; apply the general concepts of ma
rketing, to advertising industry; identify the various styles of growth in the c
ontext of advertising agencies; discuss the content of growth strategies for adv
ertising agencies; explain the positioning and competitive strategies for advert
ising agencies.
Structure
16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9 Introduction Application of the Gen
eral Concepts of Marketing to an Agency Setup Agency Growth : Its Style and Cont
ent Agency Positioning How Does Strategy Vary with the Size of the Client? How D
oes Strategy Vary According to Size of Agency? Conclusion Self Assessment Questi
ons Further Readings
16.1 INTRODUCTION
The growth of study of modern medicine around 1700 witnessed a movement from pan
aceas to specific diagnosis and the search for specific remedies against specifi
c ills. Similarly the study of services marketing can benefit more by concentrat
ing on specifics, focussing at smaller sub-groups of services business and ident
ifying what can be done with the marketing variables in each of these fields. Wi
th the advertising business in India growing rapidly, with many new small agenci
es entering the market, some even closing shop and brand casualties increasing,
the need to look at the marketing concepts that apply in this industry is strong
er than ever before. If advertising is looked upon as the brand building activit
y, then future brands need to be invested in by studying the marketing of profes
sional advertising services. An attempt in this direction is being made in this
unit. This attempt shall be broken up into three parts. a) b) c) Application of
the general concepts of marketing of services to the advertising industry. Ident
ifying the style & content of agency growth. Understanding Agency Positioning &
Strategy.
21
16.2 APPLICATION OF THE GENERAL CONCEPTS OF MARKETING TO AN AGENCY SET UP
i) The 4 Ps : Kotler defines a generic marketeer as one creating value through c
onfiguration, valuation, symbolisation & facilitation. In an advertising agency
scenario this includes the design of the advertising services package, whether t
he services offered are inhouse or from freelancers, the range of services offer
ed and the intensity of service offering of each of the services in the range. V
aluation is the media commission earnings of an agency which are fixed at 15% (u
ntil an agency offers unethical discounts). However, valuation of other services
in its package can vary as can its art charges. Symbolisation is what the agenc
y is perceived as by its target audience. Alternate sysmbolisation alternatives
can include positioning by size, by creative talent, by auxiliary services, by m
arkets etc. Facilitation has more to do with accessibility of service and ease w
ith which client can tap each of the service offerings of the agency. The produc
tion consumption interaction in advertising allows for direct distrubution only.
Three More Ps : The above four concepts corresponds broadly with the four Ps of
marketing. However, in the marketing of services 3 more Ps are important. These
are personnel, physical facilities and process management. Though these three P
s deal with the preparation of the service, they are as important as the other 4
Ps. This is so because the consumer is very often taking part in the shaping of
the service offering. The production and consumption interaction is a unique cha
racteristic of the service industry. Consumers can influence not only accessibil
ity of a service but also communication about it. A dissatisfied consumer, resea
rch proves, will influence a large number of people to abstain from using the se
rvice. The process management and physical facilities are critical as they work
together every time to prepare the service for the consumer.
ii)
iii) Service : A Non-standardised Product : Factories have set formulas for ingr
edients so that the consumer knows exactly the type of product he is going to co
nsume. For an advertising agency, there is usually no standardised product. When
an agency is called by client for consultation on a problem, the solution to th
e client’s problem may well lie with the three other Ps (Product, Price, Place), t
han with promotion. Interaction between client and agency may bring out the fact
that advertising is not the right tool to use at this point of time. Should the
client’s problem lie in the area of promotion, the solution may demand market res
earch or it may need a direct marketing campaign instead of media releases. Henc
e a good client servicing person in an advertising agency can not be given a pre
determined product to sell. iv) Service : Where Product Quality needs Renewal on
Every Purchase : While all products produced by a factory may meet predetermine
d quality norms, in the service industry giving the consumer consistent quality
may not be as easy. This is because the service has to be renewed with every pur
chase. Because a service has to be created every time the customer demands it, t
here is a production consumption interaction while the demand is being fulfilled
. As service is usually given personally, the interpersonnel dynamics between th
e people offering the service and the consumer has to be nurtured so that the re
newal of the service meets certain norms of both service quality and consumer sa
tisfaction. In advertising, agencies giving good creative inputs may also be cha
nged by clients because servicing may not be able to create a positive experienc
e in the client’s mind. The production consumption interaction in such a case does
not meet client’s
22
demand of service quality, hence consumer dissatisfaction is expressed. An appre
ciation of the renewal aspect of service brings out the importance of people and
process (Two of the three new Ps.) v) Service : An Intangible : With no physica
l ownership rights existing on the offering to the customer, no transfer of owne
rship can take place as in a tangible product. Also, unlike a physical product,
they can’t be evaluated easily by taste, smell, feel etc. While the agency’s output
may help to sell physical products (sometimes services too) of the client, the a
gency has no physical product itself to sell. Its physical products at best may
be artworks, which by themselves have no value. Alternatively the agency could b
e considered as selling time and space on the air and in the press. Evaluation o
f its service, however, can only be done overtime by the response it generates.
There are no tangible ways of measuring it today.
Professional Support Services : Advertising Agencies
Activity 1 Visit an advertising agency and collect information to analyse the wa
y the 7Ps have been applied to the service. ....................................
................................................................................
....... ........................................................................
................................................... ............................
................................................................................
............... ................................................................
...........................................................
16.3 AGENCY GROWTH: ITS STYLE AND CONTENT
A) Content/philosophy of Growth Agency growth is a dependent variable. The busin
ess philosophy of a good agency defines its growth, as a dependent variable of t
he client’s growth. Thus the primary task of an agency is to make its client’s produ
cts grow. In the long run when planning for growth of the agency, it becomes ver
y important to develop skills that nurture and foster the growth of the client o
rganisatioin. Though physically agencies may execute artworks, write copy, produ
ce films, plan for media buying and provide routine servicing to clients, this i
s only the outer manifestation of its real business. The real job of the agency
is to build brands, increase market shares, penetrate new markets, influence pro
duct development and planning, understand, participate in and may be, even influ
ence marketing strategies. The job again may not end here. A client organisation
is different from a brand. It may have needs of corporate communication which m
ay have to be identified and then fulfilled. The client as a corporate identity
may be evolving. The agency could participate in its process of identifying new
markets, new products and new business. Thus an agency should grow not only with
the brands that it helps to build but also evolve and grow with its client orga
nisations. B) Style of growth As with marketing of any business firm, there are
three objectives that professional firms also seek: sufficient demand, sustained
growth and profitable volume. To achieve these objectives professional firms ne
ed to market themselves. The three styles of marketing for an agency (as for any
professional firm) can be: minimal, hard-sell and professional marketing. 23
Minimal Marketing : Minimal marketing is practiced by many firms offering profes
sional services. These firms dislike thinking of themselves as businessmen, inst
ead state that they are motivated by service. They think of marketing as a sales
man’s job and look down on business solicitation. They believe that their good wor
k will get more clients. Hard Sell Marketing : Hard sell marketing is at the opp
osite end of the spectrum to minimal marketing. It reflects a total sales orient
ation, offering price discounts, bad mouthing competition, offering referral com
missions and indulging in practices bordering on violating professional codes of
ethics. This approach forgets like any sales oriented approach, that there is m
ore to business than attracting clients. Marketing involves a discipline of iden
tifying and cultivating a market, choosing targets, developing services, formula
ting plans etc. Professional Marketing : This approach to marketing of professio
nal services is in consonance with the professional code of ethics. Such an appr
oach involves: planning for long-range marketing objectives and works out strate
gies to match; training staff to improve the efficiency and effectiveness of mar
keting and personal selling; allocating time and budget to support marketing act
ivity; and ensuring that quality of professional services offered currently does
not suffer as marketing activity is increased. Such effort is usually preceeded
by gathering data about the market. Strategies are evolved thereafter. These st
rategies may include “service” or “market” sepecialisation. Specialisation in any partic
ular service/range of services may give and agency a cutting edge with clients w
ho are looking for those services. Similarly specialising in certain type of mar
kets (say “public issues” market) may pre-empt segments of the market to the agency.
Another strategy may be of expanding services to current clients. Activity 2 St
udy the advertising scene in India by looking at agency profiles reported in mag
azines like A & M, Business Today, Business India, etc. Analyse the patterns of
agency growth to give examples of minimal marketing, hardsell marketing and prof
essional marketing. ............................................................
............................................................... ................
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........................... ....................................................
....................................................................... ........
................................................................................
...................................
16.4 AGENCY POSITIONING
One way of defining Positioning of an advertising agency could be: “Bringing the r
ight people together and making them work effectively for a brand”. This is an inc
omplete definition for it ignores the ‘consumer benefit’ approach or the client’s poin
t of view. Clients have specific needs when searching for agencies. Agencies hav
e more strengths in certain areas. Symbolisation (or positioning) is the ‘value ad
ded’ dimension agencies give to these strengths so that the client perceives them
as fulfilling his specific needs.
24
Positioning by Size
A client may be looking at a “big” or a “small” agency. The positioning statement for a “b
ig” agency includes “full infrastructural back up, many branches, the ability to thi
nk and act big, benefit of experience of handling many product categories etc.” Po
sitioning staement for a “small” agency includes “flexibility, personalised service an
d attention, innovation, quick turnaround time and ability to go that extra mile
for a client and his product etc.”
Positioning by Talent
It must be remembered here that an agency has to offer full fledged services. Ho
wever its positioning may be decided by the strength it creates in one particula
r area. Creative oriented : The client may be looking for agencies which are cap
able of delivering strikingly different creative output. This positioning can cu
t across the size barrier. The “small” agency too can position itself in this slot,
earning the label as “creatives hot shot” for itself. Clients may find strikingly di
fferent creative output very suitable in product categories where technology has
matured and no distinct product advantages exist. A client may need to bank upo
n creative to create a “communication difference”. Marketing input oriented : Some a
gencies may have strengths of having good brand thinkers. This, then, becomes th
e point of differentiation for the agency. Clients, too, may look for such agenc
ies with whom they can discuss marketing strategies. The benefit offered by this
positioning to the client is a better interpretation of the marketing concept i
nto advertising. Others : Other alternatives could be based on talent in the age
ncy. For example an agency may be able to offer good “servicing input”, another may
have excellent “media planning” skills etc. Positioning by Auxiliary Services Agenci
es can position themselves by offering additional services like in-house “market r
esearch” services. Further alternatives are “Direct Marketing”, “Public Relations” etc. Th
ese package of services can help give and agency the extra edge with clients who
se usage level of such services are high. The synergy of advertising with market
research or direct marketing is the consumer benefit offered by agencies choosi
ng this positioning alternative. Positioning by Markets It is possible for an ag
ency to position itself by markets, too. Some agencies in India specialise in “pub
lic issue” advertising. Their positioning in this segment is so strong that few co
nsumer product launches are done by these agencies while the bulk of the public
issues business in the country is diverted to them. There are also some agencies
whose bulk business comes through publishing “Tender Notices” of public sector unde
rtakings. This is another example of specialisation by markets. It is possible f
or agencies to specialise in industrial products advertising or retail advertisi
ng. Positioning by Price Though professional code of ethics do not allow any dis
counting practices on media commission earnings, some agencies position themselv
es by offering discounts to clients.
25
Activity 3 Look at the advertising agency that you studied for Activity 1. Can y
ou analyse the positioning the agency has sought to achieve? What are the altern
ative positions for this agency, looking at its infrastructure, resources and ma
rkets? .........................................................................
.................................................. .............................
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.............. .................................................................
.......................................................... .....................
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16.5 HOW DOES STRATEGY VARY WITH THE SIZE OF THE CLIENT?
The nature of inputs required from an agency vary with the size of the client an
d the brand. Different expectations from agency in enterpreneurial, medium size
and dominant brand positions are discussed here. a) Client: Enterpreneurial Agen
cy Task: “Nurturing of new brand”, “Create positioning” When the client is young and sma
ll and is launching a new product, this is an enterpreneurial phase for the clie
nt. The services the client demands of the agency must be able to comprehend the
growth pangs of an enterpreneurial organisation and even though such brands usu
ally bring low levels of billing, an agency must devote time to their needs whic
h are usually unique and require an enterpreneurial decision making streak in th
e agency as well. Quick decisions and quick reflexes of an agency are critical a
s enterprenuerial marketing is like guerilla warfare. Such tactics, if backed by
sound marketing thinking at client/agency end usually lead to success and risin
g brand shares. The basic agency task is however to create a brand positioning s
trategy for the client. Quick responses of client and agency as they fine tune t
he positioning in the market place are critical. The demands from various depart
ments of the agency for an enterpreneurial client are as follows:
Servicing: Personalised to the enterpreneur. Decision Making: Quick, based on gu
t feel.
Servicing person: Should be senior, capable of thinking on his feet. Must have k
nowledge of Account Planning. Media Planning: Should focus on low cost, unconven
tional media. Account Planning: Should be capable of evaluating if client’s gut fe
el meets marketing logic. Creative: Client Focus: Should never let the focus shi
ft from the brand positioning in the flood or ideas coming in. In early enterpre
neurial phase may be survival. Agency should understand this.
b) Client: Medium Size Agency Task: “Strengthen brand positioning” to build brand le
ader. Two scenarios are discussed here: i) When client’s growth is faster than the
market growth Here the focus moves to one of strategic planning for a brand to
become a leader. Even when a brand has succeeded in an enterpreneurial set-up,
26
the agency for its next phase of growth may have to alter its style as the clien
t may enter new markets and segments by now and even though servicing may still
be personalised, account planning will need to be more formalised keeping many m
ore variables in mind, which, at an enterpreneurial risk-taking stage may have b
een ignored. The basic agency task here is to sterngthen brand positioning to bu
ild a brand leader. ii) When market growth is faster than client’s growth rate. Wh
ere a medium-size brand has been dormant for a long period of time in a market w
hich is otherwise growing at a healthy rate, it may be useful for the agency to
use some enterpreneurial concepts in both product and promotion design to make t
he brand an active player again. Repositioning of a brand becomes the major bran
d building task of the agency. The client should be motivated to relook at prici
ng and distribution strategies by the agency. The focus for different department
s of the agency for a medium size client are as follows:
Servicing: May be personalised still. But agency should meet second line marketi
ng people to receive market feedback directly (In nonenterpreneurial situation:
It is heirarchial and partly personalised).
Decision Making: Agency should promote formalised decision making based on Accou
nt Planning recommendations, to dilute focus on gut feel only. Media planning: H
as to think of using mass media judiciously. For building brand leaders, Media D
ominance Strategy has to be worked out.
Account planning: Should be the key agency focus so as to heighten brand positio
ning or to “reposition”a slow moving brand. Creative: Client focus: To make brand di
stinction totally different from others, it should use media differently or desi
gn the message differently. It must be made long term here by agency advice.
c) Client: Market Leader Agency Task: “Maintaining” dominant brands When brands are
dominating ones in their product category, and market share can be increased onl
y marginally, with the category itself nearing maturity stage, the key function
is of maintaining brand shares. The focus is on “pre-emptive” strategies and not “atta
cking” strategies. Competitors’ strategies have to be preempted and defensive mechan
isms worked out. Aggressive strategies at this stage may drain more financial re
sources than they can generate. The brand positioning has to be guarded here aga
inst imitators. The focus of various departments of the agency for a large size
client is outlined below:
Servicing: Formal, following heirarchial structure.
Decision Making: Formalised Account planning: The key input to strategy here is
Market Intelligence (what the competitors plan to do) as as to pre-empt. Client’s
marketing has to participate in this. Creative: Media Planning: Client focus: De
fensive strategy for brand position. Focussed for those target audiences which c
ompetitors are planning to tap. In other media, reminder level to be maintained.
Defensive for brand position and share, offensive for competitive threats.
27
Viewing the above analysis according to the stage of the product life cycle of t
he product would generate the following conclusion: A. “Create Brand Positioning” En
terpreneurial needs in servicing, planning & execution. B. “Strenghten Brand Posit
ion” Account planning needs dominant. Or If brand not moving well: “Reposition” it. C.
“Guard Positioning” Maintenence for dominant brands. Activity 4 Select an agency wh
ich caters to several clients. Analyse the‘Agency Task’ with respect to each type of
client. How would you say the task varies between clients, if at all. .........
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16.6 HOW DOES STRATEGY VARY ACCORDING TO SIZE OF AGENCY?
The strategy options for small, medium & large size agencies are discussed here.
i) The Small Size Agency Small agencies by their very size usually do not have
very large brands to work on. The agency focus then largely becomes enterpreneur
ial, where the agency should have an ability to select clients whose products ha
ve a USP which is capable of becoming a benefit, highly desirable to a particula
r target audience in the market. At this stage, agency strategy involves a searc
h for the right clients i.e. the agency should catch the enterpreneur who has a
good product. The success of the brand then becomes the sucess of the agency. Ho
wever, faulty selection and non-payment by the client is a risk. Hence mortality
rate of small agencies is higher than for medium and large scale agencies. The
other alternative strategy for a small size agency could be to offer some specia
lised services. Clients, irrespective of size, needing strengths in certain serv
ice areas would find such agencies useful. For example, agencies having good stu
dio facilities could cater to clients who have needs of printing or other work r
equiring high quality artwork. In case a small agency has a large brand, its rev
enues become largely dependent on the brand. This is both a constraint and an op
portunity. The constraint is that the brand portfolio of the agency is very narr
ow. Hence the agency could become overdependent on the brand. Such dependence ma
y hamper giving professional advice, especially when it is unpleasant for the cl
ient. The opportunity is that the success of the brand is the key of the agency’s
success. If the agency realises this fully and establishes a healthy professiona
l working relationship with the client it could be mutually very beneficial. The
agency would devote its fullest energies to the success of the brand, giving a
growing brand the attention it deserves. In the long run, it 28
would be advisable for the agency to diversify its client mix, for recessionary
market conditions in the agency’s major brands market and a subsequent financial i
nvolvement would be unmanageable for a small agency. ii) Medium Size Agencies A
medium size agency should invest in tomorrow with small brands that it builds in
to leaders. It should have a balanced client mix. With more than a couple of bra
nd leaders bringing the front, half a dozen or more, major brand players in thei
r market and a handful of small clients who have a potential for becoming leader
s tomorrow. The advantage of the medium size agency is clear. it is neither too
big to be unaffected by a change in any client’s health neither is it too small to
avoid offering comprehensive advertising services. Its product portfolio, shoul
d consist of “today’s bread winners” who are some large brands as well as “tomorrows bre
ad winners” which are small brands the agency is nurturing to become brand leaders
. The key benefit a medium size agency offers its clients (its positioning state
ment) is that it is not too big for its clients to lack personalised agency atte
ntion. Neither is it too small to avoid investing in full fledged infrustructura
l support services. Therefore it can claim to offer the best of both worlds to a
client. iii) Large size agencies A large agency must heighten its positioning a
s a leader. This can be done by setting industry standards. A leading agency, fo
r example, produced an Urban Market Index and Rural Market Index which not only
helps other agencies but also clients in their planning. “Another strategy is to h
elp in creating better training facilities to train professionals for advertisin
g. This creates goodwill as many students may move to client organisations. It a
lso helps to attract the best talent, hence preserving the pre-eminent place for
the agency in the long run. This could also be done through organising seminars
for both agencies and clients. Yet another strategy could be to create industry
standards in auxiliary services like market reserach by setting up independent
companies to handle these services. Such services can be used by both, clients a
nd other agencies. Hence a large agency’s client list reads like a who’s who of bran
ds. The advantages of such a scenario are obvious. The disadvantages need lookin
g at. Due to the size of such agencies, it becomes unviable to handle brands whi
ch generate turnovers below a certain size. This leads the “innovator enterpreneur
s” who are creating new product categories and attacking new markets to look elsew
here. It therefore makes eminent sense for large agencies to set up smaller “siste
r” agencies who can not only handle such clients but can also pick up competitive
brands to the parent agency’s brands. The latter is identical to a “multi branding” st
rategy used by dominant companies to maximise market share in large markets. The
launch strategy for these “sister” agencies could well be a positioning stance that
is the antithesis to the larger parent agency. If the larger agency is perceive
d as one following classical rules of advertising, the sister agency could well
be a maverick. This would get both type of clients and brands and diversify the
product/client mix of the group. Such an anti-thesis positioning would be useful
when a larger growing segment of brands have a potential of succeeding using su
ch a positioning stance. Usually the anit-thesis positioning of the smaller agen
cy is “better servicing”, “more time for client” etc. The positioning also reflects itse
lf in clients chosen: they could be smaller say retail v/s. manufacturers etc.
16.7 CONCLUSION
In short, unlike factories, which have standardised products, advertising is a d
ynamic situation where every output of the agency is different from the previous
one. The production consumption interaction not only calls for direct
29
distribution but is the prime determinant of the output. Advertising is a busine
ss of managing people: clients, on one hand and agency personnel on the other. T
he key task is to maintain enthusiasm and a desire for excellence among all of t
hem. Advertising is a game of bringing out the differences among two products, a
nd creating a USP for a brand. An agency must develop this ability to make a dif
ference for a brand and therefore for itself. That is what successful agency pos
itioning and agency growth are all about. An agency, in the final analysis is kn
own by the brands it builds.
1) 2) 3) How do the marketing mix elements relate to advertising agencies? Expla
in by giving specific examples. What is the significance of service characterist
ics like non-standardisation, perishability and intangibility for ad agencies? E
xplain in detail. Contrast the minimal marketing, hardsell marketing and profess
ional marketing approaches in the context of ad agencies. Which of them do you c
onsider most relevant looking at the advertising scene in India today? What do y
ou understand by ‘Positioning’? What are the positioning alternatives for ad agencie
s? Explain with the help of examples. How do strategies and client focus vary ac
cording to the type of client and the agency size? Illustrate your answer with s
uitable examples.
4) 5)
1) 2) 3) Maister David H., Professional Service Firm Management, 4th ed., (Bosto
n, MA: Maister Associates, 1989) Wilson, Aubrey, The Marketing of Professional S
ervice (London : McGraw Hill, 1972) Philip Kotler and Paul N. Bloom, Marketing P
rofessional Services (Englewood Cliffs, N.J. : Prentice-Hall, 1984).
30
UNIT 17
Objectives
TELECOMMUNICATION SERVICES
After studying this unit you should be able to: understand the growth trends in
the telecom sector in India; highlight the competitive structure in the telecom
industry; understand the key issues related to pricing of telecom services; desc
ribe the service quality parameters for telecom service providers.
Structure
17.1 17.2 17.3 17.4 17.5 17.6 17.7 17.8 17.9 Introduction Growth of Telecom Sect
or in India Tariff Issues Sector Dynamics and Implications for Firm Level Compet
ition The Changing Market Structure Service Quality Summary Self Assessment Ques
tions Appendix Appendix 1 : Chronology of Indian Telecom Deregulation Appendix 2
: Key Features of NTP 99
17.1 INTRODUCTION
The telecom sector in India has witnessed rapid changes in the last few years. T
here have been far reaching developments in Information Technology (IT), consume
r electronics and media industries across the globe. The Government of India has
recognized that provision of world-class telecommunications infrastructure and
information is the key to rapid economic and social development of the country.
This will not only help in the development of the IT industry, but will also pro
vide for widespread spillover benefits to other sectors of the economy. The firs
t step in this direction was the announcement of the National Telecom Policy in
1994 (NTP 94). This provided for opening up the telecom sector to competition in
Basic Services as well as Value Added Services like Cellular Mobile Services, R
adio Paging, VSAT Services, etc. It also set targets for provision of telephone
on demand and opening up of long-distance telephony. This was followed by a New
Telecom Policy declaration in March 1999 (NTP 99) to remove some of the bottlene
cks and push the liberalization process forward. The policy maker for India’s tele
communications sector is the Ministry of Communications and Information Technolo
gy, which operates through two government bodies — the Telecom Commission and the
Department of Telecommunications (DoT). The Telecom Regulatory Authority of Indi
a (TRAI) is an independent regulator that reports to Parliament through the Mini
ster. The Telecom Commission performs the executive and policy-making function,
the DoT is the executive and policy-implementing body while the TRAI
31
performs the function of an independent regulator. Secretary, DOT, is the exoffi
cio Chairman of the Telecom Commission.
17.2 GROWTH OF TELECOM SECTOR IN INDIA
Telecommunications was not perceived as one of the key infrastructure sectors fo
r rapid economic development during the formative years of the Indian economy. T
he relatively low levels of investment in this sector affected the quality, quan
tity and range of services provided. In 1998, number of phone connections per 10
0 persons in India was 2.2 while the world average was 14.26 (World Telecommunic
ation Development Report, ITU, 1999). According to a report by Ernst and Young (
E&Y) this teledensity is expected to cross 20 percent by 2008. According to the
report the total telecom revenues in India are expected to almost triple from $9
billion in 2002 to $2325 billion by 2007. As in the other parts of the world, t
he global wireless revolution has been the principal growth engine in India. For
the provision of basic services (fixed line), the entire country is divided int
o 21 telecom circles, excluding Delhi and Mumbai. Bharat Sanchar Nigam Limited i
.e. BSNL (erstwhile Department of Telecommunications (DoT)) provides basic servi
ces in the 21 telecom circles, while Mahanagar Telephone Nigam Limited (MTNL) se
rves Delhi and Mumbai, which are two metro license areas. Table 17.1 shows the l
ist of basic services operators in India , while Table 17.2 presents the subscri
ber base corresponding to each operator. BSNL’s market share has increased from ab
out 80 per cent to 84 per cent between March, 1997 and March, 2003, while the sh
are for MTNL has dropped considerably.
Table 17.1: List of Basic Service Providers and their Area of Operation Area of
Operation All over India Delhi & Mumbai M.P., Delhi, Haryana, Karnataka, TN Maha
rashtra A.P., Delhi, Gujarat, Karnataka, TN Gujarat, AP, Bihar, Delhi, Haryana,
HP, Karnataka, Kerala, MP, Mah., Orissa, Punjab, Rajasthan , TN, UP(E), UP(W), W
B Punjab Rajasthan Name of Service Provider Department of Telecommunications, no
w BSNL MTNL Bharti Telenet Ltd. Tata Teleservices Pvt. Ltd. (earlier Hughes Ispa
t Ltd.) Tata Teleservices Pvt. Ltd. Reliance Telecom Pvt. Ltd.
HFCL Shyam Telelink Ltd.
In the early years after liberalization, India restricted the number of licenses
awarded for basic services. The market was divided into separate circles and th
e policy admitted one private operator in each to compete with the incumbent DoT
(now BSNL) and MTNL. New entrants were allowed to offer intra-circle long dista
nce services, but DoT maintained its monopoly on inter-circle National Long Dist
ance (NLD) telephony. Initially, the bidding process led to six new entrants in
basic services. In the year 2001, the policy was changed to allow unlimited entr
y into each circle for basic services and subsequently 22 additional 32
license agreements have been signed. For the list of basic service providers and
their area of operation refer to Table 17.1. As of December 31, 2003 BSNL contr
olled 84.8%, MTNL 10.6% and other private operators 4.6% of the fixed service ma
rket.
Table 17.2: Subscriber Base – Basic Services
Service Provider 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03
Telecommunication Services
DoT/BSNL 11,530,276 14,394,956 17,927,526 22,479,721 28,108,976 33,218,498 35,93
2,877 MTNL 3,012,324 3,406,740 Nil Nil Nil Nil Nil Nil 3,653,913 13,980 6,070 Ni
l Nil Nil Nil 4,031,624 91,967 22,110 26,713 Nil Nil Nil 4,327,158 115,212 69,59
9 58,736 109 8,998 13,441 4,629,709 180,989 160,672 150,400 140 27,150 64,926 4,
690,080 370,973 233,397 365,190 958,534 82,265 111,647
Bharti Nil Telenet Ltd. Hughes Ispat Ltd. Nil
Tata Tele- Nil services Reliance STL HFCL Total Nil Nil Nil
14,542,600 17,801,696 21,601,489 26,652,135 32,702,229 38,432,484 42,744,963
In the year 2003-04 while the fixed lines including WLL (F) showed an increase o
f 3% over the previous year, during the same period the mobile services includin
g Cellular and WLL (M) showed a spectacular growth of 160% i.e. from 13 million
to 33.58 million subscribers. This trend is not unique to India. Worldwide trend
s also confirm the same results i.e. higher growth in the mobile sector.
Figure 17.1: Actual and projected subscriber growth, fixed-lines and mobile, mil
lions, 1990-2010
Mobile hashas ov ertake n Mobile overtaken fixed-lines in iCambodia, fixed -line
s n Ca mb odia, Finla Italy, y, K orea Finland, nd, I tal Korea Mobile subscribe
rs to to Mobile s ubscri bers ov ertake fixed-line overtake fixed-line worl dwi
de be fore 20 05? worldwide before 2005? Mobile rev enue Mobile revenue to to ov
ertake fixed-line after overtake fixed-line after 2004? 2004? Fastes t gr owth
Fastest growth in i n dev eloping coun tries developing countries
2 00 0
1 50 0 Fixed Mobile 500
1 00 0
0 199 0 200 0 201 0
Source: 1990-1998 data from ITU World Telecommunication Indicators Database. 199
9-2010 ITU
Figure 17.1 shows the prediction made by International Telecommunications Union
(ITU) that mobile will overtake fixed worldwide, perhaps by 2005. Interestingly,
this has already happened in a few countries. In India, it is envisaged that by
2007 mobile phones will surpass fixed phones. However, with the current structu
ral changes in the telecom sector including the move towards unified licensing i
t is more than likely that this will happen earlier. Private participation in th
e cellular-mobile market in India has been very successful. Eight cellular licen
ses, two in each of the four metros, were awarded in October 1994. Subsequently,
bidding resulted in the award of licenses in 18 Circles. (Circles have been cla
ssified as category A, B and C based on market characteristics and telephony pot
ential in diminishing order of attractiveness). For two circles, Jammu and Kashm
ir, and Andaman and Nicobar Islands, no bids were received, while for West Benga
l and Assam, only one bid each was made. A list of existing cellular operators a
nd their area of operation is provided in Table 17.3. The subscriber base crosse
d 3.5 million
33
by the last quarter of 2001, at the end of March, 2003 it reached to about 13 mi
llion and was more than 33 million by the end of March 2004. (Cellular and WLL – M
combined). The top five mobile operators (Cellular and WLL-M combined) as of De
cember 2003 in terms of market shares were Reliance (21.9%), Bharti (19.34%), BS
NL (17.34 %), Hutchison (13.26%) and Idea (7.88%). Table 17.4 gives the details
of growth in subscriber base for cellular services.
Table 17.3: List of Cellular Service Providers and their Area of Operation Categ
ory Metros City/Circle Delhi Mumbai Chennai Kolkatta A’ Circle Maharashtra Gujarat
A.P. Karnatka T.N. B’ Circle Kerala Punjab Haryana U.P.(W) U.P.(E) Rajasthan M.P.
W.B. C’ Circle H.P. Bihar Orissa Assam N.E. J&K Source: www.coai.com Operator 1 B
harti BPL RPG Bharti BPL Hutch IDEA Bharti BPL Escotel Spice Comm Escotel Escote
l ADL ADL IDEA Reliance Bharti Reliance Reliance Operator 2 Hutch HMTL Bharti Hu
tch IDEA IDEA Bharti Spice Comm Aircel BPL ADL Hexacom Reliance Reliance Relianc
e Reliance Operator 3 Operator 4 MTNL MTNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BS
NL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL Batata Bhart
i Hutch Reliance Bharti Bharti Hutch Hutch Bharti Bharti Escotel Bharti Bharti E
scotel Escotel Bharti Escotel -
Table 17.4: Subscriber Base – Cellular Services Category All Metros ‘A’ Circle ‘B’ Circle ‘
Circle All India March 97 325,967 9,698 3,000 366 339,031 March 98 551,757 176
,954 138,309 15,296 882,316 March 99 519,543 354,799 284,189 36,915 1,195,446 M
arch 00 795,931 585,653 460,094 42,633 1,884,311 March 01 1,362,592 1,165,778
932,685 116,040 3,577,095 March 02 2,567,757 2,134,333 1,501,151 227,573 6,430,
814 March 03 4,439,524 4,364,943 3,374,538 508,632 12,687,637 March 04 7,941,7
66 9,698,299 7,402,067 1,112,273 26,154,405
Source: www.coai.com
34
Activity 1 Visit the website www.coai.com and find out the market positions of t
he various cellular service providers. .........................................
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17.3 TARIFF ISSUES
It is now widely recognized that enhancing efficiency and investment in telecom
requires the introduction of competition, which in turn needs a regulatory mecha
nism to facilitate competition. An essential ingredient of transition from a pro
tected market to competition is alignment of prices to costs (i.e., costoriented
or cost-based prices), so that prices better reflect their likely levels in a c
ompetitive environment. In basic telecom, for example, a major departure in pric
ing of services involves cross-subsidization. Cross subsidization involves provi
ding one service such as monthly rental below cost and another such as Domestic
Long Distance (DLD) and International Long Distance (ILD) above cost to recover
cost and also to generate surplus for investment. Table 17.5 shows that in 1998,
70 per cent of BSNL’s (then DoT) revenue was due to only 13 percent of the subscr
ibers. This can be estimated by calculating the cumulative distribution of subsc
ribers and revenues from Table 17.5. For example, 2.7% of subscribers contribute
d 46.1% of revenue. The next 2.5% of subscribers contributed 9.8% of revenue, im
plying that 5.2% of subscribers contribute 55.9% of revenue and so on. One reaso
n for this was the very high price of long distance calls compared to local call
s. The considerable difference between the price of a local call and that of DLD
and ILD calls was policy driven. Empirical evidence shows that it was 90 times
more expensive to make a long distance call from Delhi to Mumbai in 1998 compare
d to local call and the corresponding ratio for an ILD call to USA. This implies
that those who made long distance calls were cross subsidizing those who used t
he telephone for only local calling.
Table 17.5: Revenue Contribution by Different Subscriber Groups Share of Total S
ubscribers 2.7 % (those making more than 10,000 call bi-monthly) 2.5 % (those ma
king between 5001 and 10,000 call bi-monthly 7.9 % (those making between 2,001 a
nd 5,000 calls bi-monthly) 14 % (those making between 1,001 and 2,000 calls bi-m
onthly) 21.3 % (those making between 501 and 1,000 calls bi-monthly) 51.7 % (tho
se making 0 to 500 calls bi-monthly) The Contribution of These Subscribers to Ca
ll Revenue 46.1 % 9.8 % 13.4 % 11.6 % 10 % 8.1 %
Source: Telecom Regulatory Authority of India (TRAI). 1999, “Telecommunication Tar
iff Order.”
Traditionally, BSNL (DoT earlier) tariffs cross-subsidized the cost of access (a
s reflected by rentals) by domestic and international long-distance usage charge
s. In order to promote desired efficiencies, ‘re-balancing’ of tariffs is a necessit
y, and, therefore an important policy issue. Re-balancing of tariffs involves re
ducing tariffs that are above costs while increasing those below costs. Thus, re
-balancing implies a reduction in the extent of cross-subsidisation in the fixed
services sector. Such a rationalization is required as a condition precedent to
35
the conversion of a single operator system to a multi-operator one. A small prop
ortion of the subscribers account for a major share of call revenue, and these s
ubscribers would be the subject of competitive churn when private sector operato
rs enter the market. For example, Hughes teleservices (now TATA) targeted the hi
gh revenue paying subscribers when it entered the market in Mumbai and made attr
active offers to corporates and potential clients in the rich districts of Narim
an point and Colaba. Similarly, Bharti in Madhya Pradesh acted likewise in the c
ities of Indore and Bhopal when it newly entered the market in 1996. Such cream
skimming or cherry picking is a commonly adopted pricing strategy for new entran
ts in telecommunication markets when facing entrenched incumbents. Loss of high
revenue customers will have a significant effect on the revenue situation of the
incumbent, making it difficult to meet its revenue objectives. Thus, while tari
ffs have to be reduced for the services that are priced much above cost (e.g., l
ong distance and international calls), tariffs for below-cost items need to be i
ncreased. Such a re-balancing exercise is common when preparing the situation fo
r competition. Otherwise, competition will result in a decline in above cost pri
ces without any compensating charge in the below cost prices. Cost-based prices
restrict the possibility of cream skimming by operators. The methodology of spec
ifying tariffs included the following feature to impart flexibility. For certain
services, TRAI specified particular tariff levels while for several others it a
llowed forbearance. Forbearance is a feature that permits service providers to s
et their own tariffs without approval from the regulator. Usually it is a practi
ce followed in markets where there is substantial or adequate competition. Even
for those services for which tariff levels are specified, the framework includes
the possibility of providing alternative tariffs. The tariffs specified by TRAI
form a package that is termed the “standard tariff package.” This package must alwa
ys be provided to the customer. In addition, the service provider is left free t
o provide any “alternative tariff package.” Since the standard tariff package is alw
ays available to the customer, any alternative tariff package has to be better i
n order to attract any customer. Therefore, the standard tariff package provides
a minimum guarantee to the customer. In one sense, it specifies the peak expend
iture level for the customer, with the alternative tariff packages being attract
ive only if the expenditure involved in them is lower than that for the standard
tariff package. This method of flexibility was adopted because of the growing t
endency in telecom markets to provide different tariff combinations for various
baskets of services. Thus the standard tariff package could be viewed as a ceili
ng tariff, with operators free to provide alternative tariffs that were below th
is level. For cellular mobile, tariffs were restructured because the prevailing
rentals were low and call charges were high. This resulted in a tariff structure
that dissuaded usage and loaded the subscriber base. Thus, call charges were re
duced and rentals were increased. The methodology clearly included license fee a
s costs and showed that a high license fee translates into higher tariffs. Stand
ard monthly rental for mobile cellular was increased from Rs 156 to Rs. 600, but
the maximum call charge was reduced from a peak of Rs. 16.80 per minute to Rs.
6 per minute. The service providers were allowed to give alternative tariff pack
ages which resulted in lower tariffs. The possibility of giving alternative tari
ffs provided a means of addressing several concerns. Over time, with greater com
petition in the market, tariffs for long distance calls and for cellular mobile
have seen dramatic declines within such a framework. The reduction in tariffs ha
s also been spurred by the introduction of wireless in local loop (with limited
mobility) and the major cost reduction due to technological change. With the new
service providers relying on more recent, cost efficient technologies, Indian t
elecom market is emerging with very strong competitive pressure.
36
The basic driving force of growing competition in what was once thought to be a
natural monopoly is the increasing versatility with which services can be provid
ed, based on the digitisation of all signal-transfer technology. As the manner i
n which signals are transferred from one location to another becomes common, it
is possible for a service provider in one segment of telecommunication, say netw
ork television services, to perform the functions of another, say, the local pho
ne company. Efforts to maintain barriers across such segments will eventually be
overwhelmed by technology. Regulation will follow convergence rather than the o
ther way around. Convergence will eliminate the existing barriers between differ
ent types of services, for example, between basic and cellular and allow service
providers and, thus, consumers to benefit from scale and scope economies. This
has already been initiated in India with a move towards unifying the licenses fo
r Basic and Cellular services.
17.4 SECTOR DYNAMICS AND IMPLICATIONS FOR FIRM LEVEL COMPETITION
a) Basic Services After NTP 1994 was announced, move was made to include private
participation in providing telecom services. During September 1994 guidelines w
ere issued for private sector participation in basic services. In January 1995 t
enders (circle-wise) were invited for the 2nd operator in Basic service. In the
year 1997 private operators started providing basic services.
Table 17.6: Extent of Competition as on 31st March 1997 Circle/City A&N AP Assam
Bihar Gujarat Haryana HP J&K Kerala Karnataka Maharashtra MP NE Orissa Punjab R
ajasthan TN U P (E) U P (W) WB Mumbai Kalkatu Delhi Chennai Number of Basic play
ers 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Number of Cellular players 0
1 0 0 2 2 1 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2
b) Cellular Services Licences were issued for Cellular Services for metros in No
vember 1994. In December 1994 tenders were invited for 19 circles apart from 4 m
etros. In most of the circles/metros two operators began service, making the mar
ket a duopoly. 37
c) State of Telecom Market as on 31st March 1997 Basic subscriber base Cellular
Subscriber base Teledensity 14.54 Million 0.34 Million 1.56
Number of NLD players: 1 (BSNL) Number of ILD players: 1 (VSNL) The data shown a
bove demonstrates that the telecom sector in 1997 was dominated by the governmen
t owned monopoly, with a few private operators in the cellular mobile segment. T
eledensity was low and prices were relatively high. Although the market had been
opened to competition in the basic and cellular segments, the structure remaine
d concentrated i.e. the market was fairly monopolistic. In the year 1999, NTP-99
was announced. Its main objectives are shown in Appendix 2. In 1999, DoT was di
vided into DTS (Department of Telecom Services) for service provision and DoT fo
r policy making. In the year 2000 DTS was corporatised as BSNL, which is the nam
e under which it operates today. Until June 2001, there were only 6 private oper
ators in operation apart from BSNL (operating all over India except Delhi and Mu
mbai) and MTNL (operating in Delhi and Mumbai). During this period, existence of
private operators did not provide adequate competition to force down prices. Th
ere was virtually no competition in Basic services. As on 31st December 2003, sh
are of private operator in basic service market was less than 5%. Licence for 3r
d Cellular operator was granted to the Government owned service providers, BSNL
& MTNL. MTNL started its Cellular services in 2001 while BSNL started its servic
es in 2002. An interesting development in cellular tariffs was witnessed at this
time. There was a steep and sudden decline in tariffs by the private operators
in anticipation of entry of 3rd cellular service provider. However, an analysis
of market shares of cellular operators shows that MTNL has not been able to make
a significant impact in the Cellular Market. At the end of September 2003, MTNL’s
share in Delhi was 6% and 8% in Mumbai. An interesting fact is that the private
operator that entered the markets of Delhi and Mumbai almost a year after MTNL,
has acquired a larger share of the market. Whereas, BSNL as the 3rd entrant has
had relatively more success achieving a 22% market share on an all India basis
as of September 2003 (operating in 19 circles). The fourth Cellular operator als
o started service along with BSNL in the year 2002. As one would expect, the ent
ry of competition in cellular mobile has provided a boost to the market in terms
of subscriber acquisition, tariff changes and value added services like roaming
, SMS, cricket updates, stock market news etc. Based on the prevailing tariffs i
n the market, costs and extent of competition, TRAI decided to introduce forbear
ance in the year 2002. Thus cellular service providers are now free to determine
the price of tariff offerings to subscribers.
17.5 THE CHANGING MARKET STRUCTURE
Several parts of the sector have been liberalised and along with reforms the mar
ket structure has also undergone a significant change. Unlimited entry of new pl
ayers has been allowed in basic, NLD, ILD, ISP and infrastructure businesses. Ce
llular mobile has upto 4 operators in each service area. As a result of these ch
anges, the sector presents a very different picture from the one that obtained i
n 1997. There are 8 different operators in certain lucrative 38
service areas such as Delhi, Chennai, Karnataka etc. There are 4 NLD and 5 ILD o
perators in India. The way in which the structure of the industry is changing at
a phenomenal speed seems unending at the moment. The Reliance launch has been a
catalyst not just in the ensuing price competition but even more significantly
in attempting to alter the mindset of all the stake holders of the telecom busin
ess. One early casualty is going to be the most conventional way of looking at t
he business: henceforth the services and the tariff on offer cannot be fitted so
easily into neat compartments such as basic telephone services, mobile services
or local calls, STD calls and so on. Bundling, which is examined later in this
section is one example of this. Three to four leading private players are likely
to emerge as competition to the incumbents, BSNL and MTNL, which have a signifi
cant presence across the value chain. The Tata Group, Reliance Infocom and Bhart
i Televentures have announced plans to emerge as integrated telecom companies of
fering end-to-end services to customers. Hutchison, on the other hand, appears t
o be focused on cellular services, with no stated intention of entering other bu
sinesses. The VSNL acquisition has catapulted the Tata Group to the leading posi
tion among private Indian telecom players. With a 100 per cent share in the lucr
ative ILD business, a leading share in Internet services, and a favourable NLD l
icense, VSNL fits in perfectly with the group’s plans of providing integrated tele
com solutions. The Tata-VSNL team will now embark on its next challenge - ensuri
ng a smooth transition at VSNL and integrating business plans for ILD, NLD and I
nternet/data services to enhance value for its customers and shareholders. This
increase in competition has not only increased the market size for telecom, but
has also resulted in substantial tariff declines. The next section analyses this
phenomena. a) Trend in tariffs There can be no question about the direction of
change in average tariff in the sector. The trend has been consistently downward
. There are many ways to estimate the decline in tariffs for telecom services an
d some may be subjective. While different methods may result in different estima
tes, the message that comes through is that substantial declines in tariffs have
occurred that can only be attributed to the intense competition in the market.
The reason why estimates of tariff declines could vary is because prices vary de
pending on the nature of usage and the package of services viz. local NLD, ILD,
value added services etc. chosen by the subscriber. Another complexity in teleco
m is the widespread use of multi part pricing i.e. a fixed monthly rental for ac
cess to the service and a variable charge depending upon usage and the nature of
calls. Moreover service providers have attempted to segment the market accordin
g to subscriber types and have tried to customize tariff offerings to best meet
the needs of different subscribers. Thus a number of tariff plans are available
which subscribers choose according to their requirements. In September 2003, TRA
I did a study on trends in tariffs for Fixed, Cellular and WLL (M) services. The
following graph shows the results of that study.
39
Comparison of effective charge per minute for 400 MOU/month (Rs.) 3.00 2.50 2.00
1.50 1.00 0.50 0.00 Fixed WLL(M) Cellular
Mar.-01 Jun.-01 Sep.-01 Dec.-01 Mar.-02 Jun.-02 Sep.-02 Dec.-02 Mar.-03 Jun.-03
0.69 1.25 2.42
0.69 1.37 2.41
0.69 1.37 2.06
0.69 1.37 2.06
0.69 1.37 1.89
0.69 1.37 1.89
0.69 0.71 1.70
0.69 0.71 1.70
0.69 0.71 1.63
0.78 0.67 1.12
MOU: Minutes of Use The above graph is based on the calculations performed on th
e minimum tariffs prevailing in the market at various points of time for average
local usage of 400 minutes (outgoing + incoming). As stated above, tariff decre
ases have been an unmistakable feature of the telecom market in India over the l
ast few years, although different analysts could come up with different estimate
s depending on the methodology adopted for the purpose. b) Innovations in Tariff
offerings Technological progress has blurred the boundaries between different p
latforms for access services. Thus, competition is not only within the service b
ut also between the services, viz, cellular and WLL (M). One manifestation of th
is competition has been examined in the previous section on tariff declines. Ano
ther is the frequency of change in tariff plans offered by operators. Not only i
s the frequency of change high, service providers are also designing innovative
tariff plans to attract subscribers. Further, service providers are striving to
lock their customers for a longer period of time to prevent churn. Acquiring sub
scribers is passé; customer retention has become vital. c) Bundling of services An
other interesting change in the sector is the multiple licenses owned by a singl
e company. As stated earlier, India has issued separate licenses for Basic, Cell
ular, NLD, ILD, ISP services. In view of the fact that a single operator has acq
uired multiple licenses and can thus offer multiple services, one of the innovat
ions that have occurred relates to bundled offers. An integrated operator (Integ
rated operator means that one business house possesses cellular or basic i.e. ac
cess, NLD, ILD and ISP license. This enables the service provider to offer end-t
o-end services to the customer under its own brand name) can design more bundles
and innovative schemes compared to a standalone operator. Some of the bundled o
ffers are described below. CUG (Closed User Group) : Forming a group of customer
s where the calls within group are either not charged or are charged very low an
d the calls made outside the group are charged higher. Friends and Family : Unli
mited free talktime to a selected number for a cost of a fixed monthly charge.
40
Free VAS (Value Added Services): such as SMS, CLIP free with certain tariff plan
s. Unlimited usage free: Tariffs with high monthly rental and unlimited free usa
ge. This may attract the high callers and this type of packages also ensures a m
inimum ARPU (Average Revenue per User) to the service provider. Zero Rental: Pac
kages with no or zero rental and high calls charges. This type of package may at
tract very low users, who want to own a phone but use it very rarely. Prepaid pl
ans with no administrative charges or plan fee: This ensures a fixed ARPU to the
service provider. Also, customer gets a chance to use his net payout to the ful
lest. Plans to lock customers for a longer period of time: Tariff plan for minim
um commitment of 3 years. Although it provides a facility to the customer to exi
t the plan but at a very high cost, which discourages the customer from exiting
the plan. Plans with very low rental but outgoing calls are barred: At a very lo
w monthly cost ranging between Rs. 70 to Rs. 150, customer can receive any numbe
r of calls. Also if someone wants to make outgoing calls, he can use VCC (Virtua
l Calling Card). It is a perfect substitute of pager or may be one step ahead. T
he intense competition witnessed in telecommunications has several implications
that go well beyond the immediate sectoral interests. Such competition has been
price-driven; with the existing service providers hoping to retain their market
share through tariff cuts in the wake of strong emerging challenge. The immediat
e gainers are the consumers, especially users of mobile. Activity 2 Try to find
out examples of bundling in other industries (sectors) in India. ...............
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17.6 SERVICE QUALITY
The Telecom. Regulatory Authority of India Act 1997 11(1) (b) (v) as amended by
TRAI (Amendment Act, 2000) mandates TRAI to “lay down the standard of quality of s
ervice (QOS) to be provided by the service provider and ensure the Quality of Se
rvice and conduct the periodical survey of such service provided by the service
providers so as to protect interest of the consumer of Telecom Services”. One coul
d argue that in a competitive environment, Regulator need not bother about QOS P
arameters and competition will automatically take care of it. Unfortunately, in
reality it is not so. Even in the countries, where there has been competition in
various telecom services for a long time, the QOS is a major concern to protect
consumer interest. After going through a consultation process through written c
omments and open house discussions, TRAI issued a QOS Regulation on 5th July, 20
00 both for Basic as well as Cellular Services. This Regulation has laid down be
nchmarks for various QOS parameters with the following objectives: 41
i)
Create conditions for customer satisfaction by making known the quality of servi
ce which the service provider is required to provide and the user has a right to
expect. Measure the Quality of Service provided by the Service Providers from t
ime to time and to compare them with the norms so as to assess the level of perf
ormance. To generally protect the interests of consumers of telecommunication se
rvices.
ii)
iii)
QOS Parameters for Basic Telecom Services The following key benchmarks have been
set for basic services i) ii) iii) iv) v) vi) vii) viii) Provision of a telepho
ne after registration of demand for exchange areas declared on demand : 100% wit
hin 7 days. Fault incidences (No. of faults / 100 subscribers / month): <3 Fault
repair by next working day: >90% Mean Time To Repair (MTTR): <8 hours Call Comp
letion Rate within a local network: >65% Metering and billing credibility: Not m
ore than 0.1% of bills should be disputed. Operator Assisted Trunk Calls: Urgent
<1 hour, ordinary <2 hours Customer Care (Promptness in attending to customers
requests) 95% of requests: a) Shifts : <3 days b) Closures: <24 hours c) Additio
nal facility : < 24 hours Percentage of repeat faults: <1%
ix)
QOS Parameters for Cellular Services On similar basis QOS Regulation have been l
aid out along with the benchmarks for cellular services. A) Fault incidence and
Repair i) ii) iii) i) ii) iii) iv) i) ii) iii) Fault incidence (Number of faults
/100 subscribers/month): <1 Faults cleared with 24 hours : 100% Accumulated dow
n time of Community isolation: <24 hours Call Success Rate (within licensees own
network): >99% Service Access Delay : Between 9 to 20 Call Drop Rate : <3% Perc
entage of connections with good voice quality : >95% Billing complaints per 100
bills issues: <0.1% Percentage of billing complaints resolved within 4 weeks: 10
0% Period of all refunds/payments due to customers from the date of resolution o
f complaints as in (ii) above: <4 weeks
B) Network Performance
C) Billing Complaints
In a survey conducted by IMRB on behalf of TRAI to assess the quality of service
s provided by the service providers (for the period Oct. – Dec. 2003) following is
sues emerged. a) The basic services being provided are not upto the desired stan
dards. The situation is particularly bad in respect of provision of new connecti
on within 7 days, number of faults per 100 subscribers per month, time taken to
repair faults, and time taken to shift connections and closures.
42
b)
Cellular operators are providing much better quality of service than their basic
counterparts. Fierce competition in the cellular market has forced operators to
constantly keep improving their networks, resulting in acceptable levels of ser
vice. The key concern areas for CDMA operators are billing complaint incidence,
billing complaint resolution and fault incidence, in that order. The performance
of the CDMA operators on the remaining parameters is good.
The details of QOS regulation and detailed reports on surveys conducted are avai
lable on TRAI’s website : www.trai.gov.in Activity 3 As a user of telecom services
, try to evaluate the service quality of your service provider(s) based on the p
arameters given in this section. ...............................................
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17.7 SUMMARY
This unit gave you an overview of fixed line and cellular mobile industry in Ind
ia. There has been a significant growth in the Indian telecom market during the
last few years. A number of steps have been taken by the Indian government which
have resulted in a dynamic change in the competitive structure of the industry.
The unit outlines the steps taken and analyses the competitive structure prevai
ling in the industry. Issues related to pricing (tariffs) have been discussed in
detail. The unit ends with the service quality parameters relevant to telecom s
ervice providers.
1. 2. 3. 4. Discuss the major trends in the growth of telecom sector in India du
ring the last few years. What are the important issues that should be kept in mi
nd while deciding on the pricing issues for telecom services? Explain the nature
of competition prevailing in the telecom industry in India. What are its implic
ations for the telecom firms? What is bundling? Why do you think bundling has em
erged as an important aspect of customer pricing, especially in context of telec
om service provision inIndia. Do you think bundling is always in customer intere
st? Give Reasons. What are the service quality parameters for basic telecom serv
ices and for cellular mobile services? Why have such parameters been introduced
by the regulatory authority? 43
5.
17.9 APPENDIX
Appendix 1 : Chronology of Indian Telecom De-regulation Year 1992 1994 Event Bid
s invited for radio paging services in 27 cities Bids invited for cellular mobil
e services in four metro cities National Telecom Policy announced Radio paging,
V-SAT data services, electronic mail services, voice – mail and video – text service
s opened to private providers DoT guidelines for private sector entry into basic
telecom services in the country Eight cellular licensees for four metros finali
zed after over two years of litigation 1995 DoT calls for proposal to operate ba
sic, cellular telecom services and public mobile radio trunked (PMRT) services D
oT receives bids for basic, cellular and PMRT services Most cellular operators i
n circles sign license agreements DoT announces cap on the number of circles bas
ic operators can roll out services in. Licensees selected for five circles. 1996
After setting reserve prices for circles, DoT invites fresh bids for basic serv
ices in 13 circles Five successful bidders short-listed for providing basic serv
ices Poor response to third round of basic telecom bidding. Only on company bids
- for Madhya Pradesh. Selected bidder of first round refuses to extend bank gua
rantees for its four circles. Challenges in court DoT move to encash guarantees.
Three more companies move court against DoT move to encash guarantees. 1997 Tel
ecom Regulatory Authority of India (TRAI) formed. First basic telecom service co
mpany signs license and interconnect agreements with DoT for Madhya Pradesh Seco
nd basic service provider signs basic telecom license pact for Gujarat TRAI quas
hes DoT move to increase tariffs for calls from fixed-line telephone to cellular
phones VSNL calls for global tenders to find a partner for its South Asian regi
onal hub project Internet Policy cleared; license agreement for basic services i
n Maharashtra also becomes operational Basic service licensees for Andhra Prades
h and Punjab sign basic telecom agreements with DoT. 1999 TRAI Issued First Tari
ff Order. New Telecom Policy announced. TRAI Issues First Regulation on Intercon
nection and Usage Charge Conditions for migration to revenue sharing from fixed
license fee regime issued Cellular operators allowed the use of any digital tech
nology;MTNL given a license to provide cellular mobile service under these flexi
ble technology conditions. 2000 Ordinance promulgated divesting TRAI of adjudica
tory role. TDSAT created to settle disputes between licensor and licensee. Appea
ls against TRAI decisions to be heard by TDSAT. TRAI implements second phase of
tariff re-balancing
44
Policies announced for easier entry/operation of new service providers in the va
rious sectors, e.g., VSAT, PMRTS, Radio Paging, Unified Messaging, Voice Mail Go
vernment has allowed the setting up of international gateways to private interne
t operators Guidelines for Issue of Licence for National Long Distance Service G
uidelines for Issue of Licence for Cellular Mobile Telephone Service 2001 Guidel
ines for Issue of Licence for Basic Telephone Convergence Commission of India Bi
ll laid in Parliament. Open competition policy announced for International Telep
hony Service Usage of Voice Over Internet Protocol permitted for international t
elephony service First License for National Long Distance service signed Launch
of WLL(M) services by Basic service provider in the market 2002 Guidelines for I
ssue of International Long Distance Licence First License for International Long
Distance service signed First private operator begins ILD service TRAI revises
tariffs for WLL(M) TRAI leaves Cellular tariffs to market forces, service provid
ers to notify their Reference Tariff plans TRAI introduces the Reference Interco
nnect Offer (RIO) regulation TRAI introduces Regulation on Quality of Service Fo
r VOIP Based International Long Distance Service 2003 TRAI introduces the Teleco
mmunication INTERCONNECTION USAGE CHARGES (IUC) Regulation TRAI leaves NLD secto
r left under forbearance subject to a ceiling tariff TRAI leaves ILD sector left
under forbearance TRAI mandates Basic Service Operators (BSO) to be non-discrim
inatory in provision of Infrastructure facilities to ISPs TRAI gives its recomme
ndations on unified licensing for basic and cellular mobile services TRAI gives
its recommendations on “WLL(M) Issues Pertaining To TRAI Based On HON’BLE TDSAT’S Orde
r TRAI Forbears Basic Service Tariffs Except Rural Tariffs
45
Appendix 2 : Key Features of NTP 99 Some of the notable advances marked by the N
TP 99 are as follows: Speeding up competition in long distance, including usage
of the existing backbone network of public and private entities in Rail transpor
t, Power and Energy sectors for data (immediately) and for domestic, long-distan
ce voice communication when the latter is opened to competition from January 200
0. This increases the scope for entry of a new category of ‘infrastructure provide
rs’ or ‘carrier’s carrier’. Fixed Service Providers (FSP) shall be freely permitted to e
stablish ‘lastmile’ linkages to provide fixed services and carry long-distance traff
ic within their service area without seeking an additional licence. Direct inter
connectivity between FSPs and any other type of service provider (including anot
her FSP) in their area of operation and sharing of infrastructure with any other
type of service provider shall be permitted. Policy to convert Public Call Offi
ces (PCOs), wherever justified, into Public Teleinfo centres having multimedia c
apability like Integrated Services Digital Network (ISDN) services, remote datab
ase access, government and community information systems etc. Transforming, in a
time-bound manner, the telecommunications sector to a greater competitive envir
onment in both urban and rural areas providing equal opportunities and level pla
ying field for all players. Strengthening research and development efforts in th
e country and provide an impetus to build world-class manufacturing capabilities
. Achieving efficiency and transparency in spectrum management. Commitment to re
structure DoT. Interconnect between private-service providers in the same Circle
and between service provider and VSNL along with introduction of competition in
Domestic Long Distance. Undertaking to review interconnectivity between private
-service providers of different service areas, in consultation with TRAI. Permis
sion for ‘resale’ of domestic telephony. Clarity regarding number of licenses that e
ach operator may be granted. (This could lead to consolidation of industry opera
tors over the long term). Emphasis on certain other issues including Standardisa
tion, Human Resource Development and Training, Disaster Management and Change in
Legislation.
46
UNIT 18
Objectives
PRODUCT SUPPORT SERVICES
After going through this unit you should be able to: understand the concept of p
roduct support services; describe the different categories of product support se
rvices; explain the service quality issues related to product support services;
and apply the key learning to the case study given at the end of the unit.
Structure
18.1 18.2 18.3 18.4 18.5 18.6 18.7 Introduction Characteristics of Product Suppo
rt Services Classification of Product Support Services Goal of Product Support S
ervices: Customer Satisfaction Summary Self-Assessment Questions Case Study
18.1 INTRODUCTION
In this unit, you will be able to understand the concept of product support serv
ices which is important for goods as well as services marketers. After sales Ser
vice is normally referred as customer service. Customer service is a philosophy
in which all employees feel and act accountable for creating satisfied customer.
Value added customer service is the responsibility of all the employees of the
organization. Accountability is vital to customer service and in a successful se
rvice oriented organization every one is accountable for the customer satisfacti
on. It is the job of every marketer to create satisfied customer. In many organi
zations product support service or customer service is a department or a section
where customers with complains are guided for a reactionary solution to the pro
blem that he experiences with the use of the product. Customer services or after
sales service should be an attitude of the organization. It should become a par
t of the corporate culture .It should be the fundamental aspect of a business ph
ilosophy and should be a commitment to ensure that customers leave more excited
than when they walked in the door. A popular saying is that advertising brings c
ustomers to the stores where as poor customer service takes them away from the s
tore and the brand. The product support service is a value-added service to matc
h the customer expectations. It is also necessary to know what consumer’s value in
the product support services. They can be grouped as quality, availability, kno
wledge of the people with whom they work, ease of doing business, support servic
es, performance of the product, follow through by the people with whom they deal
and the price. All these elements are more important to the consumer than the e
lement of price in a post purchase situation. So though the performance of the p
roduct support service staff one can also increase the profitability and profit
potential of the organization. There are various myths about product support ser
vices and their lesser relevance in the Indian context. They are because Indian
marketers think that good customer service is time consuming. The research speak
s otherwise. It
47
says that getting a new customer takes more time than getting more business out
of an existing and satisfied customer. Some people are of the opinion that servi
ng existing customers is expensive. Quality gurus are of the opinion that 35% of
the customer complaints are about the poor quality of the service delivery than
the customer complaints on product performance or the price of the product. The
re is a high sense of gratification among managers and they often tend to forget
that the expectation of the customers increase over a period of time. It is alw
ays prudent to benchmark against evolving customer service expectations than ben
chmarking against competitors in the industry. In a surplus demand market, the m
arketer does not care for the concept of customer service as he realizes that th
e customers are going to come to them anyway. A strategic outlook to the busines
s will always goad managers to look at customer service as a strategic tool than
a complaint management system in the organization. Many a times companies have
a philosophy of properly serviced. It means: Identify customer service needs req
uirements. Develop appropriate products and services to meet those needs which a
re consistent with your business strategy and profit objectives. Match the produ
ct to the needs, with appropriate prices, channels of delivery, presentation and
communication to the consumers. Develop and maintenance a continuous service pr
ocess for the target customers. Activity 1 Visit an after sales service station
of any consumer durable, and conduct an in depth interview of the customers on w
hat constitutes ‘after sales service’ and how are they satisfied with their products
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18.2 CHARACTERISTICS OF PRODUCT SUPPORT SERVICES
Most companies in manufacturing and service business offer their customers a pac
kage of a product called a solution, which is a combination of the core product
and a variety of service related activities. These services provide the differen
tiation that separates successful firms from the also-rans. Performing well in s
ervice delivery requires modern marketers to understand. What action and reactio
n consumer expect from the organization. Grouping of these actions in to core an
d support service elements. Evaluate how well the organization is performing on
each one. Redesign existing service packages in order to offer customers in each
target market segment a product offering and delivery system that meets their e
xpectations for performance and value within the constraints of a price that wil
l allow the service provider to have an allowable profit. The concept of an augm
ented product is an explanation of the package of services that are bundled with
the core and tangible product as a complete offer to the consumer. According to
Theodore Levitt “ We live in an age in 48
which our thinking about what a product or a service is must be quite different
from what it ever was before. It is not so much the basic, generic central thing
we are selling that counts, but the whole cluster of satisfactions with which w
e surround it.” According to Levitt, the total product concept consists of core or
generic product; the inner band surrounding this core is termed as expected pro
duct, representing customer’s minimal expectations, It includes pricing, delivery,
appearance of facilities and personnel, personality of the service people and s
o forth. The next encircling band is called the augmented product which includes
further benefits, added to enhance the appeal of the product; as the market bec
omes accustomed to specific augmentations, these may eventually turn to the expe
cted product level. The area encircling the outermost concentric band is called
the potential product. Which consists of everything potentially feasible to attr
act and hold customers in contrast to the augmented product that means everythin
g that has already been done to the product. Shostack distinguished between the
tangible and intangible elements involved in service delivery. For example in an
airline business, the intangible elements include transportation itself, servic
e frequency and preflight, in-flight and post flight services. The aircraft, foo
d and drinks that are served are tangible. By highlighting the tangible componen
ts marketers can determine whether the organization is tangible dominant or inta
ngible dominant. The performance of each service influences the quality of the o
thers, the product support services should contribute to the over all service pe
rception. It is necessary to obtain information about consumers over all satisfa
ction on core as well as split services. Management must decide what is the righ
t set of support services to be offered to the customers. Decisions can also be
made to unbundle the prices by charging for each set of services after the perio
d of warranty is over for an extended product support service.
Product Support Services
18.3 CLASSIFICATION OF PRODUCT SUPPORT SERVICES
Product support services are broadly classified in to the following eight catego
ries. Product Support Services
Information
Consultation
Ordering
Hospitality
Safekeeping
Exceptions
Billing
Payments
1.
Information: New customers and prospects need information to make decisions abou
t a product. They want to know what product will best meet their needs. The exis
ting customers also need information regarding the usage, maintenance of the pro
duct during the life of the product. The prospects in on line buying also need i
nformation that will guide them to move to the site that will provide informatio
n to them. Traditional ways to provide information is through the support litera
ture, printed notices, flyers, brochures and instruction books. Current methods
include videotapes, compact disks, software driven tutorials, touch screen video
display, computer accessed bulletin boards and menu driven recorded telephone m
essages. 49
2.
Consultation: Providing information suggests a simple response to customers’ quest
ions. Consultations involve dialogue to probe customer requirements and then dev
elop a tailored solution. The services under consulting covers advice, auditing,
personal counseling, tutoring and training in product usage, managing or techni
cal consulting. The solution selling approaches by software measures is an examp
le of technical consulting in software markets. Order Taking: Once the selling p
rocess is over, acceptance of applications, orders, reservations are components
of order taking. Unless the service organization is accessible to its customers
the real business may not happen. Some service providers establish formal member
relationships with customers like Insurance companies and utilities, credit car
d companies and clubs. A reservation is a special type of order taking which ent
itles customers to a special type of order taking. Examples include the airlines
, cinema halls, and restaurant tables. Hospitality: Certain service requires cus
tomers to enter the service factory and stay there till service delivery is comp
lete. Well-managed businesses try to treat the customers as guests. Examples of
hospitality elements include greeting, food and beverages, toilets and wash room
s, bathroom kits, waiting facilities and amenities, including lounges, waiting a
reas, seating facility, weather protection, magazines, entertainment and newspap
ers, transportation and securities. Airlines, Service stations, personal service
providers follow this kind of an orientation in business. Safekeeping: While vi
siting a service site customers want assistance with their personal possessions.
Unless certain care taking services are provided, they might find the support s
ervices infeasible. The examples of safekeeping include provisions for the coatr
ooms, baggage transport, handling and storage, safekeeping of the valuables and
childcare and pet care. The second category of safekeeping involved the physical
delivery of goods when the consumers buy them over phone or Internet. Support s
ervices of this nature may include packaging; pick up, delivery, assembly, insta
llation, cleaning and inspection. Customers buying consumer durable are also loo
king for safekeeping in the form of maintenance and warranty and whether they ca
n purchase the maintenance contract as a part of insurance. Exceptions: It inclu
des a group of services that fall outside the routine of the normal service deli
very. The exceptions include special request where individual or corporate custo
mer may request some degree of customized treatment that requires a departure fr
om the normal operating procedures. Advance requests include personal concerns r
elated to stages in life cycle or personal disabilities. Problem Solving involve
s situations when normal service delivery fails to run smoothly as a result of a
ccidents, delays, equipment failures or customers experiencing difficulty in usi
ng the product. Handling of complaints/suggestions/complements requires well-def
ined procedures. When the consumer wants to express dissatisfaction, offer sugge
stions for improvement, or pass on compliments, it should be easy for the custom
er to do so and the service provider should be able to respond at the earliest t
o these problems. Restitution is the process by which the customers are redresse
d. Customers expect to be compensated for serious performance failures. This com
pensation may take the form of repairs under warranty, legal settlements, refund
s, an offer of free service in the future or other forms of payments in kind. Bi
lling: It is common to almost all services unless the service is provided free o
r as a part of the deal. Inaccurate, illegible or incomplete bills offer an oppo
rtunity to disappoint customers. Billing should be also done timely so that it w
ill result in faster payments. Various forms of billing procedures exist includi
ng verbal billing practices to machine driven billing procedures
3.
4.
5.
6.
7.
50
and online billing procedures. Different kind of billing services include period
ic statement of account activities, invoices for individual transactions, verbal
statements of amount due, machine display of amount due, selfbilling by the cus
tomer and the online billing. 8. Payments: A bill requires a customer to take ac
tion on payment either on personal basis or through the bank advice. Customers e
xpect ease and convenience of payment including credit when purchasing goods. Th
e payment elements include self service, direct to payee or intermediary, automa
tic deductions from financial deposits and control and verifications. The self s
ervice include exact change in machine, cash in machine with change returned, in
sertion of prepayment cards, insertions of tokens, electronic fund transfer, mai
l a check. Direct to payee or intermediaries include cash handling and change gi
ving, check handling, credit charge, debit card handling, coupon redemption, tok
ens and vouchers etc. Control and verification include automated systems like ma
chine-readable tickets at entry gates and personal systems like gate controllers
and ticket inspectors.
You will appreciate that the eight product support services explained above are
important not only for the services marketers but for the marketers of tangibles
goods as well (Also, It is possible to outsource many of these services). In ma
ture industries the core product becomes a commodity. The competitive advantage
is derived out of value creating support services that surround the core product
and is used for creating differentiation. Customer satisfaction is the measure
and goal of an effective customer service program.
18.4 GOAL OF PRODUCT SUPPORT SERVICESCUSTOMER SATISFACTION
Customer satisfaction occurs when the performance meets customer expectations. I
n a competitive environment, with frequent new product introduction, merely meet
ing expectation may not be sufficient Organizations that challenge themselves to
exceed rather than meet expectations are more likely to pleasantly surprise the
ir customers, cement loyalties, and invest in developing new products and proces
ses that enhance customer value. The ‘exceed’ definition is compatible with the defi
nition of customer satisfaction – meeting the customer’s stated and latent requireme
nts. Customer expectations are a function of the past experience with the compan
y’s products and competitor’s products and communication messages from the company a
nd its competitors. If expectations are hard to match then performance is much m
ore within the company’s control for managing customer satisfaction level. The org
anization first identifies the components of product or service performance that
are especially valued by its target customers and then deliver superior satisfa
ction on those dimensions. Activity 2 It is said that most of the Indian organiz
ations provide very poor quality of after sales service. Make it a point to visi
t a petrol pump, a multi brand outlet of refrigerators and a company showroom of
a motor cycle company and conduct an interview with each of the service manager
s by asking a question “what is the meaning of customer satisfaction for their org
anization and how do they measure it with their customers.” ......................
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Quality is a concept related to the attitude of the customers and their comprehe
nsive evaluation of the product support services. It is built up from a series o
f evaluative experiences of the service delivery of the organization to the cust
omers. The quality of a product support service can be only accessed after the s
ervice is consumed. The assessment of the quality of the service is made during
the delivery of the service and encounter of the customer with the service perso
nnel. Customer satisfaction with service quality can be defined by comparing per
ceptions of service received with expectations of service desired by the consume
rs. When the expectations exceeded, service is perceived to be of exceptional qu
ality and also to be a pleasant surprise. So dimensions of service quality refer
s to process quality as judged by consumers during service and output quality ju
dged after a service is performed. Parasuraman, Zeithaml and Berry suggested tha
t the criteria used by consumers that are important in molding their expectation
s and perceptions have five dimensions viz. Reliability, Assurance, Responsivene
ss, Empathy and Tangibles. These have been discussed in detail in Unit 8 on Serv
ice Quality. There are four key factors that can influence a customer’s expectatio
ns, which may help customers in shaping their expectations of a support service
Word of Mouth Communication: This is the communication that flows from one perso
n to another in a social loop and helps in formulating service quality perceptio
ns. Personal Needs and Preferences: The relative importance that the person give
s to the product support service as an essential part of the offer also influenc
es the service perception Past Experience: The customer expectations also depend
upon past experiences with the service provider of the customer. External Commu
nications: External communication like advertising, public relation and other pu
blicity tools also influence the quality of service perception There are various
issues involved in the quality of product support service productivity. The man
agerial task is to transform the service inputs in to outputs, to bring a balanc
e between the productivity of services and quality of services. If the productiv
ity will increase then there is a chance that the quality will be compromised. P
roductivity helps to keep the costs down as lowering prices helps in building th
e market and compete better. Higher productivity helps in generating additional
revenue that helps in enhancing marketing budget and program and rising profits
helps in investing in innovative product support programs. Quality helps in gain
ing competitive advantage particularly in a commodity market where every product
looks similar. It also helps in increasing customer value that contributes towa
rds improving the bottom line. The quality of the product support service is mea
sured by three parameters. They are efficiency, effectiveness and productivity.
Efficiency is a comparison to a standard, which is usually a time-based phenomen
on that explains how long the employee, takes to perform the service function. E
ffectiveness is the degree to which the firm is meeting its goals where as produ
ctivity is the financial valuation of output to inputs i.e. consistent delivery
of output desired by customers should command higher price. Leading service and
consumer durable companies measure the gap between the customer’s expected support
s services against the perceived services as a routine feed back process. Zeitha
ml, Parasuraman and Berry developed a model which suggest that customers becomes
dissatisfied when their perceptions about service performance don’t match their e
xpectations and the model explains five gaps that can lead to customer dissatisf
action. The Gaps Model has been explained to you in Unit 8 (Block 3).
52
Activity 3 From the activity 1 and activity 2 study build up the service quality
diagram of the automobile company and identify the key gaps for the dealer. ...
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.... ...........................................................................
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18.5 SUMMARY
In this unit we have essentially looked in to the issue of product support servi
ces for the organizations. The complete product solution constitutes an intangib
le component to augment the physical product in the form of product support serv
ice. The objective of any product support service is to create a satisfied and l
oyal set of customers who will rebuy the product as well as get involved in cros
s selling and up selling. These customers will also play the role of an advocate
for the product. Product support services augment the core product by deliverin
g higher quality. There are various types of product support services like infor
mation, ordering, hospitality, safekeeping, exceptions, billing and payments. Th
ese services help in building higher level of customer satisfaction. The level o
f satisfaction largely depends on the type and quality of services provided to t
he customer. Research has identified five key and independent dimensions of serv
ice quality. They are reliability, responsiveness, assurances, empathy and tangi
bility of services. A service provider has to give attention to these dimensions
failing which there can be service quality delivery gaps.. A suitable understan
ding of the service quality gaps can help a manager to develop strategies to mai
ntain service quality and achieve greater customer satisfaction.
1. 2. 3. Describe the concept of product support services? What is the importanc
e of these services for marketers of tangibles? What are the various kinds of pr
oduct support services? Discuss with the help of examples. What is the goal of a
ny product support services and what dimensions can lead to an effective service
quality delivery?
18.7 CASE STUDY
Customer Satisfaction Program Of DBCL DBCL is a multi crore company in Indian ma
rket. The company markets a wide variety of products in the market. It started a
s a small company during pre-independence India and was marketing locks for the
mass market. Over the years the company has grown into a large corporate house a
nd markets a range of products starting from the locks to refrigerators, edible
oil, office equipments and furniture, manual and electronic typewriters, store w
ells and computers in Indian market. The company has a sister concern which conc
entrates in to soaps only and is a leading player in the Indian soap market. The
y manufacture and market both washing soaps and bathing soaps. The company has i
ts headquarter in Mumbai, the commercial capital of India. 53
Mr Chintamani Rao is the CEO of the computer and office equipment division. Rece
ntly the company has conducted a study and has identified that multinationals an
d some Indian joint ventures are making inroads in to its office equipment and f
urniture division. Traditionally they were the market leader in this segment and
for long they have a premium image as the quality producer and supplier of the
office equipments and furniture. They were the number one player in the typewrit
er market, be it electronic or manual but due to rapid adoption of computers, th
e typewriter market has undergone a change and there is a large-scale switch to
computer typing and printing from the traditional typewriters. The company could
foresee this well in advance and decided to launch computer and office equipmen
ts for this emerging market segment in Indian market. They started an ambitious
program to become the market leader in the office equipment and computer busines
s in the early 1999. They could find out from customer survey that the erstwhile
customers are frustrated with the quality of services provided by the product s
upport service staff in the company. They lost significant amount of the market
share to the new multinationals like IBM, Compaq, HCL, Zenith and some local man
ufacturers. Taking quality and customer satisfaction as the strategic goal and u
ndertaking cost reductions, restructuring of the organization and introduction o
f new products, DBCL could fight back the market share war and increased market
share by 7% in the office equipment and computers division in three years period
of time. They were in the process of gaining almost 2% market share every year
since 1999. Leadership through quality service has been the motto of the company
and customer satisfaction has become the mascot of the company over these years
reflected in all the activities in the organization, be it strategic or tactica
l. In June 2003 Mr Chintamani was reviewing the customer satisfaction program at
DBCL and was seriously considering with ideas to make changes in the existing p
roduct support service and consumer satisfaction program or modify any of the ex
isting programs for better service delivery. The Office Computer Market In India
The penetration of personal computers in Indian market has been very slow at th
e household level. The total sales were confined to the upper class Indians. Var
ious factors are attributed to this phenomenon. The disposable income level of a
verage Indian, the concentration of the purchasing power in urban centers, the l
evel of adoption of computer education in the school and college curricula, the
career opportunities in the filed of computers, application of computers and com
puter related technology in the business domain are some of the factors that con
tributed to the poor penetration of personal computers at the household level. H
owever there was a big change happening in the business area. Companies were eag
er to leverage the benefits of the liberalization and working very fast to catch
up business to cater to the global volumes. Many multinationals entered in to t
he Indian market through both organic and inorganic route. There were takeovers
and buyouts in Indian markets where the multinationals were buying Indian compan
ies with substantial business presence for inorganic growth. Large corporate hou
ses were either undergoing joint ventures or increasing their market presence by
expanding and restructuring their organizations to suit to the liberalized comp
etition. These kinds of anthromorphic changes made the companies to invest subst
antially in information technology infrastructure. There were two kinds of inves
tments seen in the organizations viz. huge investments in procuring the hardware
and also for procurement of software.
54
Market Segments and their Characteristics It was this kind of investment on hard
ware where DBCL saw an opportunity to grow with its office equipment and compute
r business. The total market for office equipment was largely divided in to thre
e tiers. The low tier represented the market where people were buying computers
to support their business. These are the people who were in to the business of p
roviding services of typewriting, photocopying and was a captive market for DBCL
for a long time. But this market was price sensitive and gave lesser value to t
he concept of product support services. So local small time vendors who were doi
ng assembly of components and selling computers at a lower rate and providing af
ter sales service locally were a big threat to the DBCL market which was selling
products with a higher price tag compared to the assemblers in the local market
s. The mid tier consisted of offices whose requirements were more than ten but l
ess than twenty-five personal computers. These business houses were conscious ab
out quality but were not ready to depart a large sum for the concept of product
quality and superior service. Mostly, industry treated them as also ran customer
s. There were low end players like Zenith, Piramals in western Indian market, Mo
nosoft in the eastern Indian markets and few of the Korean majors (other than LG
and Samsung) playing a mid price and average service game in this market. These
players targeted majority of small and medium business. There was a price advan
tage in these markets for the medium operators where their brand name did not pl
ay any role. The top tier consisted of large corporate houses who were going for
a large scale investment and information technology restructuring in their orga
nizations, not only by buying hardware but also investing substantially on softw
are, operating systems, servers and solution providers like SAP and other supply
chain and customer relationship management software. The companies were investi
ng heavily and they were quality conscious. They were giving high importance to
the product support services in their purchase decision due to the simple fact t
hat their business model was more driven on information technology platform, so
a longer downtime of the systems means loss of business and chaos in business op
erations. The companies were looking for quality product support services as the
key differentiation in business due to high level of commoditization in the har
dware product market. Profit margins in this market were quite high, so also the
demands of product support services. Many companies were providing different ki
nd of warranty schemes also to attract the customers including onsite service by
the vendors. DBCL looked in to this market for quality hardware provider becaus
e the company was perceived as a quality player when there were no computers in
the office equipment market. The Nature of Competition The market was highly com
petitive. At the low end were the unbranded local players who were providing exc
ellent support services due to the small market size and closeness with the cust
omer and the price advantage. On the mid segment the customers were bargain hunt
ers and expect everything under the sun as a part of the deal. A large number of
national and Indian players were operating in this segment. This market was pur
ely a commodity market and decisions were made on the basis of price though they
valued customer service and after sales support as important. The top end of th
e market was quality conscious and was mostly dominated by players like IBM, Com
paq, Apple, Dell, LG, Samsung, HCL and of course DBCL. The customers were more s
ensitive to services and valued the quality and type of service as the key diffe
rentiator before making a purchase decision.
55
DBCL saw an opportunity to grow in this market and regain its market share but M
r Chintamani from his market visits was not sure about the perception of custome
rs about the product support services provided by DBCL to the existing customers
. He was of the opinion that the best way to enter in to this market is to provi
de the computer related products to the existing customers who are using DBCL pr
oducts in their offices. He was sure they can use the same concept of “office face
lift” that they were using for marketing office furniture including and cabinets
and separators with a proposition of giving a modern look to the office for mark
eting computers. He had a faint idea that the customers don’t perceive the company
was quality service provider. He was curious to know what were the reasons for
which DBCL was perceived the way it was. He decided to conduct a marketing resea
rch on these issues and in order to get a neutral view contacted Prof Tapan K.Pa
nda (TKP) of Indian Institute of Management Kozhikode (IIMK) to conduct a survey
on the perception of customers on DBCL as a quality service provider. The resea
rch report revealed horrible stories about the company. People perceived DBCL as
a traditional organization still living in the preliberalization era. They are
of the opinion that customer care department was not prompt enough to respond to
their complains and the grievances were redressed after a long period of time.
This has spoiled the goodwill of the company as a good service provider. Histori
cally the low wend of the market was serviced by the dealers and distributors an
d the high end of the market by the company service personnel. The perception of
the customers about DBCL as a quality service provider has eroded over years. S
o the priorities for the company in its new vision statement was to achieve a hi
gher return on investment, market share and customer satisfaction. The earlier c
ustomer satisfaction program brought this into light that customer satisfaction
was not a priority of the company as they were operating in the same mindset of
pre-liberalized era. Mr Chintamani was convinced that customer satisfaction goal
can itself bring more closer to the other two objectives. He announced customer
satisfaction as the sole goal of the organization in a series of meetings and d
iscussions platforms in the organization. He issued a set of guidelines and requ
irements to make customer satisfaction as the key goal of the organization, to a
ll its operating units. Operating units were asked to prepare their own strategi
es to achieve the goal of customer satisfaction through voluntary quality circle
s. He insisted that a common and uniform measure should be used across the count
ry for measurement of customer satisfaction. The units were allowed to conduct t
heir own market survey, asking different questions on the dimensions of service
quality as briefed by Zeithaml, Parasuraman and Berry (See Unit 8). The external
corporate goal was to cross all the competitive benchmarks in the industry and
the internal goal was to improve the service quality five times over two years f
rom the current level on all the dimensions of quality. The top managers were tr
ained to become quality leaders and role models for the subordinates on service
behavior to the customer. They should personally take the lead and satisfy custo
mer requirements and resolve customer complaints by themselves. It was also the
responsibility of all the executives in the hierarchy to develop a responsive me
chanism and attitude at each level towards customer problems. Each customer inte
raction was treated as an opportunity to enhance the experience of customers wit
h DBCL. Customer relations groups were initiated at each level to have direct cu
stomer contact and do the follow up for finding out reasons of customer dissatis
faction and to resolve customer objections at the earliest. The perceived benefi
ts of the customer relations groups were to
56
stay closer to the customers, having a cross functional outlook to customer issu
es and having a closed loop process to identify problems, to conduct a root caus
e analysis, and provide recommendations for avoidance and elimination of the cus
tomer problem. The staffs at the local level were empowered to take collective a
ction for enhancing customer satisfaction. Attempts were also made to establish
customer support teams for post sales follow up and customer complaint managemen
t systems across the organization. The customer satisfaction were measured by th
e external customer satisfaction data collected through a mail questionnaire met
hod from the customers who had obtained services in a month time from the servic
e personnel and internal quality workshop improvement programs done at various l
evels of the organization. The external data collection was done through periodi
c survey, new establishment surveys, opinion of the decision makers as well as t
hat of the users of the products collected across the industries to measure the
universal application of the customer satisfaction program. The internal measure
of the customer satisfaction and service delivery was done by analyzing and ben
ch marking the processes and standards set for the purpose. All the research res
ults were made available to the service employees to build their awareness and c
ommitment to the customer satisfaction program and invite their recommendations
to bring improvements in the level of customer satisfaction. Summer of 2003 and
The Future Mr Chintamani could find out that the customer satisfaction program i
n DBCL has brought very good results but he was planning to take the strategy fu
rther and delight the customer by outsmarting the competitive benchmarks through
the introduction of a new customer guarantee program. This satisfaction guarant
ee program will lead to greater customer satisfaction and higher loyalty rate am
ong its existing customers helping them for cross selling and up selling the new
innovative products of the office equipment division. It wanted to come out wit
h a guarantee program that will be difficult for the competitors to compete. (Yo
u may also refer to Unit 10 wherein issues related to service guarantees have be
en discussed) Many senior managers are of the opinion that they should come out
with money back guarantee program, which is based on a proposition that if one i
s not satisfied with the product or service, he can return the product, and take
back the money. Others are of the opinion that service guarantee will be a bett
er option which is based on a proposition that if the machines are not operating
as per the promise then the customer will receive five to fifteen percent off i
n the next deal. The third option is a product performance guarantee in which th
e proposition is that if the machine does not perform as per the specifications
for the period of warranty, then the whole unit shall be replaced at no charge.
The fourth option is a product fit guarantee in which the proposition is that if
the product does not fit to the promised level during the period of warranty th
en the customers can trade it in for full credit towards any other product as de
sired by the customers. All these options were quite unique in the Indian market
and if the customer satisfaction programs are not properly executed then may co
st very heavily to the company. Yet Mr Chintamani was sure that the board will d
efinitely approve the idea that quality of the customer service should be the
57
differentiator in the market where customers are quality conscious and market is
slowly moving towards commoditization. It is the over all experience of the sol
ution and not the physical features of the product that will drive the brand val
ue and business profit in the future. IIMK conducted research for DBCL on the ab
ove propositions. They conducted both qualitative research through focus group a
nd in depth interview of the existing customers and a personal survey in selecte
d cities of India having corporate headquarters of large concerns. Some key issu
es came out of the study that include the credibility of a guarantee program. Cu
stomers are of the opinion that any body can offer a guarantee program but custo
mers will look at the credibility of the organization offering the guarantee in
terms of its capability in delivering it and its past practices and intentions i
n delivering it to the customers. The length of the guarantee is also an importa
nt factor. If the guarantee is for a year or two then in a durable like computer
s and office equipments, it is treated as a sales plea. If it is offered for a l
onger period of time then the customer must be indirectly paying a premium for t
he purchase. For the service guarantee, the time taken to respond to the custome
r’s problem and the down time of the machine at the customer’s point will be the dec
iding factor. The money back guarantee is a low commitment from the supplier as
the supplier wants to escape the route of providing the quality after sales serv
ice through paying the cash back to the consumers than solving the problem. Agai
n the dissatisfied customer will walk to the competitor with the cash for a deal
and companies will lose the opportunity of generating business from the custome
rs. The product performance guarantee should be provided at the customer’s request
than by the company policy and company should not ask any questions for the sam
e service. The product fit guarantee was not found suitable among many customers
, as they do not want a machine replacement rather, they prefer the machines to
function properly and without much trouble to the organization. Mr. Chintamani d
ropped the idea of money back guarantee as it shows a lower commitment to the se
rvice quality and he also decided against the product fit as it was not preferre
d by customers. A guarantee program should not be a replacement program. It shou
ld be a strategy of building relationship and commitment being responsive to the
customer problems. The service guarantee should be linked to the response time
and the performance guarantee to decider of the product performance standard. In
majority of the Indian organizations, the performance guarantee was decided by
the supplier and manufacturer, Mr Chintamani is thinking whether this can be lef
t to the consumer to decide the level of the performance guarantee, which can be
put to the market as a value differentiator for higher customer satisfaction. H
e has to suggest what kind of customer guarantee program DBCL should offer to th
e market. Questions 1. 2. 3. 4. What problem DBCL is facing in this case? What f
actors have contributed to such a situation for the company? Evaluate the option
s available to Mr. Chintamani for developing the customer guarantee program? Sho
uld Mr Chintamani decide in favor of performance guarantee program? If yes then
develop a customer guarantee program for DBCL? What kind of internal orientation
is necessary in the product support service department for making your suggesti
on a successful strategy in building customer loyalty and goodwill for DBCL?
58
UNIT 19 CASE STUDIES
This unit consists of two cases- ‘Is the Customer Always Right?’ and Dosa King’.
CASE 1: IS THE CUSTOMER ALWAYS RIGHT?
Objectives
After going through this case you should be able to: identify the main issue in
the case; analyse the facts of the case to comment upon the issue in the case; p
rovide suggestions for decision making in relation to the main and attendent iss
ues in the case. After reading the case, try to attempt the following.
Discussion Questions
1) Do you think the customer in this case is justified in making the kind of com
plaints he did? How do you interpret the difference between the accounts rendere
d by the customer and the Assistant Branch Manager? Give suggestions to resolve
the matter between the customer and the insurance company.
2)
Case On August 28, Mr. Gurucharan Singh joined as Regional Manager, ABC Insuranc
e Company (AIC), Chandigarh. As he had risen through the ranks, he had a lot of
experience behind him. His recent two visits abroad had completely changed his p
erspective of services marketing. “There is a lot to be done in the service sector
in India” - was his conviction. With this objective in mind - the day he joined a
s the Regional Manager, he called a meeting of all Divisional and Branch Manager
s, to share his views on “Challenges for Insurance Industry”. Since then, all was go
ing fine until he received an angry letter (Exhibit 1) from Mr. Chawla who was d
isgusted with the working of the company and with the behaviour of an Assistant
Branch Manager (ABM) of one of the branches of ABC Insurance Company. To respond
the customer complaint he marked the letter to the ABM for his comments. The re
ply came back (Exhibit 2). After reading the observations made by the ABM he rai
ses his head and wonders–who is right? Where should the company draw the line on c
ompensation and service? What is the best way to handle cases of complaining cus
tomers? He thinks for a while and then reacts. He has a few challenges ahead. EX
HIBIT 1 The Regional Manager ABC Insurance Company Ltd. Chandigarh. Sir, I am an
gry, frustrated and a disappointed ex-customer of your company. Prior to the rec
ent set of events, which have really put me off, I viewed your company to be the
best. Hence, although your company’s Branch Office is far off from my place I opt
ed doing business with you. Not only have I insured my
59
vehicles—a car and a scooter—with your company, but am also a holder of your househo
ld and mediclaim policies. It all happened this way: July 28: Your Development O
fficer, Mr. R.K. Singh came to my place and informed me that the insurance polic
ies of my car and scooter expire on July 30, hence, have to be renewed. As I was
satisfied with the service of your company I drew post dated cheques of July 30
in favour of the Branch Manager, AIC, and handed it over to Mr. R.K. Singh. I a
lso requested Mr. Singh to hand over the cover note of the policy to my son as I
was to be out of station between July 30 and August 5. August 6: On my return t
o Chandigarh on 6th evening I enquired from my son about the cover note of my re
newed policy. I was told that he has not received any policy or a cover note fro
m Mr. R.K. Singh. August 7: On August 7 I rang up your branch office and enquire
d for Mr. R.K. Singh. I was told that Mr. Singh is in the field and the Branch M
anager is on one month leave ending on August 30. The same day my son met with a
n accident. Although he escaped unhurt, my scooter was badly damaged. As Mr. Sin
gh had neither given us the covernote of our renewed insurance policy nor had he
intimated us anything about it, my worry now waswhether my scooter was insured
on July 30 or not? August 8: I did not attend my office and went to your branch
office. I waited there for two hours until Mr. R.K. Singh showed up. On enquirin
g whether my vehicles were insured on the 30th of July or not, he very apologeti
cally informed me that although the policy was drawn on the 30th of last month i
t could not be delivered, as he was extremely busy with his sister’s marriage. I t
hanked my stars that the policy was issued prior to the accident. I appraised Mr
. Singh of the accident and requested him to send his surveyor to assess the los
s. Mr. Singh assured me that the surveyor will reach my place the same evening.
Sir, the surveyor did not come. Promise was not kept. Augst 9: Saturday (Holiday
) Surveyor did not come. August 10: Sunday (Holiday) Surveyor did not come. Augu
st 11: I visited your branch office again and met the Assistant Branch Manager.
He was aware of the accident. Sir, if at all he was aware of the accident why di
d he not send the surveyor in the last three days? Anyway, he assured me that th
e surveyor will visit my place the same evening and the surveyor did come. Augus
t 20: I called the Assistant Branch Manager from work and enquired about the pro
gress made in my case. I was told that the surveyor has not yet submitted his re
port. August 27: I again rang up the Assistant Branch Manager and enquired about
the progress. He informed me that although the surveyor has not yet submitted t
he report but has informed him that the loss is to the tune of Rs. 800/-. You kn
ow sir, I was shocked. I was shocked because any one could look at my scooter an
d assess the loss to be over Rs. 800/. Our mechanic had estimated the loss well
over Rs. 1500/. Can you understand my frustration? With a view to discuss the is
sue in detail I suggested a meeting with the ABM at 3 p.m. the same day. He said
he was busy that day, and suggested the next morning 10.30 A.M. He also promise
d to get the surveyor’s report by then. I agreed to it.
60
August 28: Instead of attending to my office I reached the branch office at 10.3
0 AM sharp only to be told the ABM is away to the Regional Office and shall be b
ack soon. Frustrated and irritated, I waited for him for about an hour and then
left for my office. In the afternoon, I again rang up your branch office. The AB
M was not there. I left a message for him that he should speak to me on 25468 th
e moment he is back. No call came from the ABM. August 29: Instead of going to m
y office I again visited your branch office and fortunately met the ABM. I expre
ssed my displeasure at the treatment meted to me at his hands the day before. Sh
ockingly, instead of being apologetic for his conduct he told me that since the
surveyor had not yet submitted the report he could not do anything about my prob
lem of claim assessment. Sir, is it the way that your company treats customers?
If he could not get the surveyor’s report by then and could do nothing about my pr
oblem why did he agree to meet me and waste my time the earlier day and this day
? When I insisted that I must speak to his superior he said—I could meet the Branc
h Manager as he was joining on the 31st but he will also not be able to do anyth
ing about it. Your ABM was so unprofessional, that he also remarked that “all cust
omers estimate their losses on the higher side”. What did he mean by this statemen
t? Do you think we are swindlers who earn profit out of our insurance policies?
Over the years I have done Rs. 20,000 worth of business with your company and I
have never made a claim. I was so disgusted with your ABM that I could do nothin
g else but walk out of his office, with a hope to meet the Branch Manager on Mon
day the September 1. September 1: I met the Branch Manager. He was understanding
and gave me a patient hearing. He suggested that since he was away for long he
does not know anything about this case, hence, it would be better if I could con
tact him the day after. September 3: I called the Branch Manager from work. He i
nformed me that the actual loss assessed by the surveyor is Rs. 1,300/ and not R
s. 800/. I blessed my stars. Thank God, something was moving in the positive dir
ection. Even though I was sure Rs. 1,300/ shall not meet the actual expenses on
repairs I agreed for the settlement of claim at Rs. 1300/. The Branch Manager as
ked me to go ahead with the repairs and submit all bills in original. September
15: I went to your branch office with required relevant documents for my claim.
In the mean time I got my scooter repaired which had actually cost me Rs. 2,200/
. The BM informed me that it would take 15 days to process my papers and for the
funds to come, hence, it would be better if I collected my claims cheque in the
first week of October. October 5: When I reached your office on October 5 there
were lot of bombshells in store for me. My misery had not ended. It was just th
e beginning of it. 1. 2. I was told that the Branch Manager has gone on a three
week training program to Calcutta and much against my wishes I had to meet the A
BM. Your ABM informs me that the claim could not be settled as it had to be reas
sessed.
Case Studies
Sir, I lost my temper and enquired your ABM about the whole reassessment busines
s—“Office confidentials can not be shared with customers” was your ABM’s reply. Helpless
and frustrated as I was—I left his office telling him that if he wants my busines
s back he’d better contact me. Sir, that was more than two weeks ago and I haven’t h
eard from your ABM. I 61
am outraged at this entire episode, by the way your company treats its customers
, by ABM’s conduct, by the lack of communication and by the ridiculous system of w
orking you have. If you want me back as your customer I expect full claim of Rs.
2200/- (for which I have documents) and apology from your ABM, or else you can
kiss our business good-bye, along with that of our friends and colleagues at wor
k, who would soon hear all about the AIC way of doing business. Yours Sincerely
Rajesh Chawla
EXHIBIT 2 The Regional Manager, ABC Insurance Company Ltd., Chandigarh. Sir, Thi
s is in response to your letter requesting detailed information on customer comp
laint of Mr. Rajesh Chawla. I read Mr. Chawla’s letter and reviewed the whole case
. I am convinced that this office made all efforts to set things right for Mr. C
hawla, although he may not accept it. Nevertheless, should you feel that we have
fallen short of company’s expectations we shall love to be portrayed as bad boys
in the eyes of the customer, if it helps in any way. However, I deem it fit to m
ake you aware of some mitigating circumstances which I can share only with you a
nd not with the customer. Unfolding these shall help you understand the case mor
e accurately and fully. 1. That the customer received the covernote of his insur
ance policy a week late is a news for me. He never mentioned about this delay to
me. Then how could I react to his problem unaware? However, I agree Sir, it was
a lapse on our part. Hence, after receiving the letter and knowing about this l
apse we have instructed the Development Officers accordingly. Although, the comp
any should not appoint surveyors of customer’s choice, after years of experience w
e have all realized that the customers get only more dissatisfied if we appoint
surveyors against their wish. We appointed Mr. Jaiswal as surveyor on August 8 (
Friday) to assess Mr. Chawla’s loss on the following grounds. a. Mr. Chawla expres
sed his wish to our Development Officer (Mr. R.K. Singh) that if possible Mr. Ja
iswal be appointed as the surveyor. b. As Mr. Jaiswal and Mr. Chawla stay in the
same colony, I felt that the proximity of their residence shall enable Mr. Jais
wal to complete the survey early and to the customer’s satisfaction. 3. Why Mr. Ja
iswal could not perform survey on August 8, 9, and 10 (Fri, Sat and Sun) needs s
ome explanation.
2.
62
On August 8, the day Mr. Chawla intimated Mr. Singh (Development Officer), about
the accident I called Mr. Jaiswal’s residence. I was informed by his wife that Mr
. Jaiswal is away to Pathankot and will be back by 6 p.m. the same evening. I le
ft clear instructions with her for Mr. Jaiswal that he has to perform a survey t
he moment he is back. I also left Mr. Chawla’s address with her. As a follow up me
asure when I rang up Mr. Jaiswal’s residence on Aug 9 (holiday) I learnt that he s
hall be back from Pathankot only by Monday
morning. At this, I could have appointed some other surveyor even on a holiday—but
would Mr. Chawla have liked it? In his letter Sir, Mr. Chawla has conveniently
not mentioned that Mr. Jaiswal was his choice. 4. Much of Mr. Chawla’s gripe conce
rns with my absence from office on August 28 when he had come to meet me. If you
recall Sir, on August 27 evening-following the traditions of the company we had
a welcome party for you. In the party Sir, you had wished to meet all Divisiona
l and Branch Managers the following day at 10 am, in your office. As I was actin
g BM then, I had to set priorities—either to attend the meeting or to attend to Mr
. Chawla. I chose the former as it was your first day in office as Regional Mana
ger and the first formal meeting with you.Nevertheless, before leaving for your
office on August 28, I made attempts to contact Mr. Chawla and inform him about
the change in my program. Unfortunately, the office neither had Mr. Chawla’s conta
ct number nor was he listed in the telephone directory. Hence, I could do nothin
g else but leave instructions with my office to request Mr. Chawla to wait as I
expected the meeting to be over soon. The meeting got stretched and I got delaye
d in reaching my office. By that time Mr. Chawla had already left after creating
a scene in the office. The same afternoon while I was away to meet a client, Mr
. Chawla rings up at our office at about 4 p.m. Not finding me he left his telep
hone number which I presume is his office number. When I reached back office at
5.30 p.m. I tried my best to contact him but in vain. Probably his office was cl
osed by then. Sir, as you can tell from the tone of Mr. Chawla’s letter, he is a v
ery demanding, persistent individual. What his letter does not tell you, however
, is that he inundated us with the sheer volume of calls between August 20 and 2
7. Given the number of calls, there was no way for me to demonstrate progress in
his case, when he called again on August 27, but to mention my casual conversat
ion with Mr. Jaiswal that he expects the loss to be to the tune of Rs. 800/ to R
s. 1000/. Agreed, I failed in getting the surveyors report by Aug 28 as promised
. But that was because Mr. Jaiswal fell ill and could not prepare the report. Ne
cessary to mention that Mr. Jaiswal submitted his report on Sept 1 while he was
still down with flu, only on my insistence. With regard to reassessment, we have
just followed company’s standing policy. As Mr. Jaiswal was black listed as a sur
veyor by our regional office on October 1 we have sent all pending claims assess
ed by Mr. Jaiswal for reassessment. Mr. Chawla’s letter has several misstatement o
f facts. While there is no point in disputing these with him, you would like to
know the following. a. I never said that neither the BM nor can I do anything ab
out his problem of claim assessment. My statement was — “Although we do not interfer
e with the surveyor’s report because it reflects upon our professional integrity,
but I shall speak to the surveyor and see what can be done about it. However, no
one can do anything till we receive Mr. Jaiswal’s report”. b. No way did I give an
impression that Mr. Chawla is a swindler. I just appraised him of the fact that
when customers assess their loss they do not deduct depreciation and accessory l
osses out of the total loss. Hence, the actual assessment is always lesser than
the actual loss. c. With regard to the reassessment Sir, I never said “office conf
identials can not be shared with customers”. My statement was “although there is not
hing confidential, we do not generally share such information with customers”. Abo
ve all, I made it clear to Mr. Chawla that Mr. Jaiswal is blacklisted.
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5.
6.
7.
63
7.
Agreed, I have maintained silence for two weeks since his last visit to our offi
ce. This is because I strongly believed that: a. Mr. Chawla just did not want to
see me—he also makes mention of this in his letter. b. I would have hurt him more
with the reassessment business. c. Mr. Chawla had more confidence in the BM. He
nce, I felt it would be better that the BM comes back from his training and sort
s out the issue.
If Mr. Chawla is unhappy with the idea of reassessment and delay in his claim se
ttlement, I can suggest nothing to rebuild his confidence in us. His demand to r
ecover Rs. 2200/ is a bit far fetched. For apology I am always there. Sir, this
brings up two questions: While protecting the interests of the customer should w
e also not protect the interest of the company? Should we mind losing business o
f such customers? With regards, Sincerely yours (A.B.M.)
CASE 2 DOSA KING
Objectives The learning objectives of this small case study are to enable you to
understand the service offer concept behind the proposed new service; explain t
he service process, as applicable to the service in question; analyse the issues
of distribution and delivery as relevant to this service. After going through t
he case you are expected to define the basic issues in the case; analyse the inf
ormation given in the case to attempt the following. Discussion Questions 1) Com
ment upon the service offer as conceptualised by Mr. Narayanan. How are the issu
es of service product standardisation and service quality addressed by the servi
ce concept? Suggest possible launch strategy for Dosa King. Evaluate the price a
nd distribution strategies decided by Mr. Narayanan. Do you think he should go a
head with the franchising option? Give reasons for your answer. How do you asses
s the success of this service concept? What do you think would be a better cours
e of action for Mr. Narayanan, allowing Dosa King machines to be operated from e
stablished restuarants or insisting upon separate booths independent of the rest
aurants.
2) 3)
4) 5)
Case In 1989, Mr. Narayanan, Chief Executive and Promoter of Gum India Limited (
makers of Big Fun & Champs Chewing Gum) came up with the concept of a chain of M
asala Dosa outlets serving a standardised, economically priced masala dosa in a “f
ast food” environment.
64
Starting with this concept, he conceptualised a machine that would manufacture d
osas automatically. A company was registered under the name and style of “Indian F
ood Fermentations Limited” and work commenced upon developing the automatic Dosa M
aker. A year later, after over 5000 man hours of R & D effort, a machine was evo
lved which could make dosas automatically. In this electrically operated machine
, a dollop of batter would drop on the heated tawa; once the dosa was ready, a d
ollop of masala would drop onto the dosa and the dosa would be automatically fol
ded and picked up and inserted into a paper bag for handing over to the customer
. The batter and masala mix would be manufactured in a central plant at Nagpur a
nd supplied to the numerous outlets all over India. The company plans to give th
e dosa making machines on lease to franchisees all over India and eventually als
o enter markets in the Gulf and SE Asia where large Indian ethnic communities ex
ist. A promotion is planned on a co-operative basis with the franchisees. Mr. Na
rayanan is confident that his Dosa King dosas shall be of uniform, standardised
quality and taste at all outlets and can be marketed at a very reasonable price
of Rs. 4.00 per dosa leaving a 20% margin for the franchisee. He hopes to have 1
00 outlets in selected cities by mid 1992 and to enter about 50 towns with a net
work of 500 outlets by end 1993. Now Mr. Narayanan is wondering which market/tow
n he should select for his test marketing. He also has to decide whether he shou
ld give higher priority to launching Dosa King franchise in Metros or mini Metro
s or whether he should go first to state capitals and other large to medium citi
es. He has also to decide whether his initial foray should be in North, East or
Western India. He has ruled out South India as he feels the customers are likely
to be very discriminating and might not accept his machine made dosa. Further m
ore, he felt a dosa was not as much of a “fun” or “speciality” or “eating out” food in the
outh as in the rest of India. Recently, Mr. Narayanan was beset with another dil
emma. Although the Dosa King machine requires only a 8 sq. ft booth for operatin
g and can therefore be installed just about anywhere, he has been approached by
a few restaurant operators who want to instal it because of its novelty appeal.
He has to decide whether to insist upon a separate booth independent of any rest
aurant or allow his machines to be operated from established restaurants.
Case Studies
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MARKETING OF SERVICES
1
MS-65
2
MS-65
Strategic Issues
3
MS-65
4
MS-65
5

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Indira Gandhi National Open University School of Management Studies

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