Chapter 3 Fundamental Differences Between Goods and Services

Chapter Objectives • Discuss the four unique service characteristics that distinguish goods from services. • Understand the marketing challenges associated with intangibility and their possible solutions. • Describe the marketing challenges created by inseparability and their possible solutions. • Explain the marketing challenges associated with heterogeneity and their possible solutions. • Identify the marketing challenges created by perishability and their possible solutions. • Consider the impact of intangibility, inseparability, heterogeneity, and perishability on marketing’s relationship to other functions within the service organization. © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Opening Vignette: Qatar Airways • Consistently recognized as one of the world’s top airlines • First class – 6. 5 feet of leg room – Down duvets – Flat-folding beds with built-in entertainment systems and massage functions • Business class – Seats recline 173 degrees and have massage functions – Complimentary wine and champagne • New aircraft give aisle access to all passengers • Home terminal features expedited check-in, duty-free shops, conference rooms, a nursery children’s play area, spa services, a sauna and Jacuzzi, restaurants, and more • Meets or exceeds at least 800 quality standards in service and product delivery © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Intangibility: The Mother of All Unique Differences Tangible vs. Intangible • Example: purchasing a pair of UGG boots • Example: purchasing a movie ticket – Pick up the shoes – Feel the quality of materials – View their specific style and color – Sample the fit – Entitles the consumer to an experience – Subjectively evaluated © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 3. 1: Marketing Challenges and Solutions Pertaining to Intangibility © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Marketing Challenges Created by Intangibility • • Lack of service inventories Not protected by patents Not easily displayed or communicated Pricing is difficult – No cost of goods sold – The primary cost is labor © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Possible Solutions to Challenges Caused by Intangibility • Use physical evidence/tangible clues – The physical characteristics that surround a service to assist consumers in making service evaluations, such as the quality of furnishings, the appearance of personnel, or the quality of paper stock used to produce the firm’s brochure • Utilize personal sources of information – Sources such as friends, family, and other opinion leaders that consumers use to gather information about a service • Create a strong organizational image • Utilize an activity-based costing (ABC) approach – Costing method that breaks down the organization into a set of activities into tasks, which convert materials, labor, and technology into outputs © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 3. 2: Marketing Challenges and Solutions Pertaining to Inseparability © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Marketing Challenges Created by Inseparability • The service provider is physically connected to the service – The service provider becomes a tangible clue – Service providers are evaluated based on their use of: • • Language Clothing Personal hygiene Interpersonal communication skills © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Marketing Challenges Created by Inseparability (cont’d) • Customers are involved in the production process – Involvement may vary • Must be present throughout • Must be present to start and stop the service • Need only be mentally or remotely present – The customer has a direct impact on the: • Type of service desired • Length of the delivery service • Cycle of service demand – Service factories must be built with consumers’ presence in mind © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Marketing Challenges Created by Inseparability (cont’d) • Other customers are involved in the production process (shared experience) – Must manage different market segments with different needs within a single service environment – Other customers’ presence and actions can negatively or positively affect the customer’s experience • The mass production of services presents special challenges – An individual service provider can produce only a limited supply – The consumer is involved in the production process © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Possible Solutions to Challenges Created by Inseparability • Strategic selection and training of public contact personnel – Select for superior communication and interpersonal skills – Train in “soft” management skills • Reliability • Responsiveness • Empathy • Assurance • Managing the tangibles that surround the service © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Possible Solutions to Challenges Created by Inseparability (cont’d) • Develop strategies to manage consumers – The goal is to minimize the negative aspects and maximize the positive aspects of other customers • Restaurant reservation systems • Separating smokers from nonsmokers • Develop multisite locations – Limit the distance the consumer must travel to purchase the service – Act as factories in the field © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 3. 3: Heterogeneity: Marketing Challenges and Possible Solutions © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Marketing Challenges Created by Heterogeneity • Standardization and quality control are difficult to achieve – Variations in employees – Variations in same employee • Mood changes • Wellness/tiredness • “Bad day”/“good day” © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Possible Solutions to Challenges Caused by Heterogeneity • Pursue a customization strategy – Taking advantage of the variation inherent in each service encounter by developing services that meet each customer’s exact specifications – Downsides: • Customers may not be willing to pay the higher prices associated with customized services • The speed of service delivery may be an issue • Customers may not be willing to face the uncertainty • Pursue a standardization strategy – Through intensive training of providers – By replacing human labor with machines © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 3. 4: Perishability: Marketing Challenges and Possible Solutions © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Marketing Challenges Caused by Perishability • Matching supply and demand – Demand exceeds supply of service available – Demand exceeds optimal supply of service available – Demand is below optimal supply levels – Demand supply are at optimal levels © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Possible Solutions to Challenges Created by Perishability Demand strategies • Utilize creative pricing strategies to smooth demand – Early bird specials – “Matinees” • Implement a reservation system – The customer has reduced risk and wait time – The firm can prepare in advance for known quantity of demand © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Possible Solutions to Challenges Created by Perishability (cont’d) Demand strategies • Shift demand to complimentary services – Reduce perceived wait time for core service • Develop nonpeak demand periods – Utilize nonpeak periods to prepare for peak periods – Appeal to different market segments with different demand patterns © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Possible Strategies to Challenges Created by Perishability (cont’d) Supply strategies • Utilize part-time employees – Allows flexibility and lower labor costs – Sometimes causes consumers to associate the firm with lower job skills and lack of motivation and organization commitment • Share capacity – Permits the co-op to expand its supply of service as a whole • Prepare in advance for expansion – Build current facilities with future expansion needs in mind – Saves time and money in reacting to demand pressures © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Possible Solutions to Challenges Created by Perishability (cont’d) Supply strategies • Utilize third parties – Example: travel agency assisting airline customers – May expose customers to competitive offerings • Increase customer participation – Examples: self-serve fountain drinks, “salad bar, ” ATM, self-service gas pump © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.