SERVICES MARKETING : CHAPTER – 5

Products & Packaging, and Demand & Capacity Planning

PRODUCTS & PACKAGING FOR THE SERVICES

Service Product Level :

A “Product” is generally referred to as any goods or services, or in fact any of the ten entities that can be marketed. In the context of service marketing product means any service in its presentable form- simple or in combination with some frills. These extra things are generally referred to as the packaging of services, and the final presentable offering is known as a product. E.g., Financial Products, Insurance Products, Banking Products, etc. On the basis of the amount or the extent of packaging, we have four levels of products :

1. The Core Product : This is the basic minimum service which satisfy the need of the customer.

2. The Actual Product : This is the Core service with some tangible aspects of the service.

3. The Augmented Product : This is the actual product with some additional benefits that the customers need and the company satisfies them by superior service offers.

4. The Potential Product : Finally the company can still go further by finding out any potential or hidden areas of additional benefits & features (that can add value to the service offering) that can satisfy the customers.

Ex. Core = A person hires a tax consultant for tax computation;

Actual = the consultant may file the tax returns in addition;

Augmented = the tax consultant may advise for tax savings & various investment methods available;

Potential = in case of any dispute or case, the tax consultant may plead for his client in the court.

Service Product Decisions :

Service product decisions are nothing but the various market offers of the company at various points of time, like the starting of business, and later. The timing, the different markets, the different products, etc. A new company starting business may offer one product to a particular market, and later may add another product or another market or both, and so on. The following are the four possibilities :

For Existing Product For New Products

For Existing Markets MARKET PENETRATION PRODUCT DEVELOPMENT

For New Markets MARKET DEVELOPMENT DIVERSIFICATION

1. Market Penetration : This is a kind of strategy where the service provider wants to sell more of its services to the existing markets to achieve a larger market share, but doesn’t try to change the product or the market. This involves the lowest risk amongst these four methods. This can be done in the following methods :

a. Maintaining or increasing the market share of existing services by –

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i. Promotional activities,

ii. Aggressive advertising,

iii. Brand repositioning,

iv. New pricing Strategies, etc.

b. Driving away the competitors by restructuring a mature market by making it unsuitable for them, like –

i. Designing a suitable low price strategy,

ii. An aggressive promotional activities, etc.

c. Inducing the existing customers to use the services frequently by –

i. Inducing loyalty schemes,

ii. Providing club membership

2. Market Development : Here the marketer tries to enter into new markets with the existing services. This involves medium risk. The company can do it in the following ways :

a. Entering a new geographical market, like multinationals opening shops in other countries,

b. Entering into new market segments, like air travel reducing economy class fares to attract more passengers from 1st AC trains,

c. Adopting or creating a new distribution channel, like banks offering Insurance products, or allowing customer to pay thro’ credit cards, internet/mobile banking, etc.

3. Product / Service Development : Here it’s just the opposite – a new product/service is developed or an existing service is modified for the existing market. This involves medium risk. It’s done to attract and retain the existing market, like LICI offering risk cover added money back policies, and now offers unit linked (MF) policies.

4. Diversification : This is the case where both the services are changed/modified/developed & the new markets are sought. This involves the highest risk. This is done by many companies frequently. Ex., Tata, Reliance companies entering into MF business.

Branding in Services :

A brand is an identification of certain products & services, on the basis of certain attributes of the products & services. Simply, a name is given to the attributes for easy identification, generation of confidence & repute.

1. Types of Branding : There are a few types of branding, they are :

a. This type of branding is whether the brand is owned by the manufacturer/original service provider or the licensed franchise. Some companies allow their brands to be used by their franchisees on the basis of some agreement, others don’t, they have only dealers.

b. Multi-Product branding strategy is where the company uses the same brand for all its products & services. Even some group companies (like Tata group, Reliance group) use the same brand name for all its companies & products.

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c. Multi-Branding strategy is where the company has different brand names for its different products, like LICI has given different brand names to its different products – Jeevan Suraksha, Jeevan Dhara, Jeevan Sanchay, etc.

d. Combination brand name strategy is where the company brand name is combined with the product brand name like, SBI Gold Card, SBI Silver Card, SBI Kissan Card, etc.

2. Brand mobility : People, Brands, and their change are all dependent on one another. The change in one will cause the others to change. This is not static, people change brands, brands change people.

Categories for New Service Developments :

In the earlier section, we came across the new product developments for both the existing & the new markets. Major innovations are done for the new market. Products improvements are for the existing market. In both the cases, technological developments are involved.

New Service Development Process :

It’s seen generally, that the fixed cots are low & the variable costs are high for the goods, but for the services, it’s the reverse, because of some inherent nature of the services. Stating in the context of costing, the break-even point is lower in case of goods than in case of services. Hence, it becomes more critical to plan & develop a new idea of services. The service marketers need to analyse several factors and adhere to some logical steps of procedures for this. They are given below :

1. Generation of Ideas : The first thing is to generate an idea of a service that is to be developed. For this the help of market research (external) can be taken, or the opinions/suggestions of the employees (internal) of the firm can be accepted & analysed.

a. External Source : This is obtained from market feedback, market trend, consumers’ feedback & information, their satisfaction, likings, etc. Market survey, market research can help in this regard. A well maintained MIS & marketing database can be also of immense importance.

b. Internal Source : The firm employs several people who have developed a fair knowledge about the services, the customers, market, etc. They should be encouraged to give their suggestions & opinions for development of new ideas or for improvement of the existing services.

2. Screening : This is the second step, where all the ideas thus generated are pooled & all the information available are recorded. The advantages, disadvantages, available resources, expected return on investment, possible obstacles, the current market scenario, market demand, competition, all these are put to detailed screening & discussion. Finally the apex decision making body of the management selects & approves the service.

3. Testing the concept : If the MR is already used in the earlier steps, then the concept is tested, but if it is not, then the MR now can be used for knowing the customers’ or the market segment’s reaction to this service. Today MR is highly specialised & for a good price the firm can hire the best services to find out the market response to the new service.

4. Business Analysis & Design of Service : If everything is positive till now the idea of a new service is put to critical business analysis. The following are the important steps :

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a. Analyse all the seven Ps of marketing mix,

b. Next, analysing the target market segment, existing customer trends, current & future potential of demand, external influencing factors, etc.

c. Analysis & design of the final service : Risk awareness & analysis are very important in this stage. The following risk areas related to service description have been envisaged by Lynn Shostack, which need to be tackled properly :

d. Oversimplification : While communicating with the internal customers as well as external customers, oversimplification must be avoided in describing the benefits & features of the services to be offered.

e. Incompleteness : The management, employees, and the customers should try to understand all the aspects in a service description. An incomplete or incompletely understood service description will adversely affect the service delivery & consumption.

f. Subjectivity : There is a possibility of the service description getting limited to the knowledge of the person presenting it. This is due to the inadequate knowledge or bias of the presenter.

g. Biased Interpretation : This happens when there is a misrepresentation of words whether intentionally or inadvertently, between the management & the service personnel or between the service personnel & the customer.

Hence it is suggested that the service design description should contain both verbal & visual clues and representation.

5. Test Marketing : This step is used for further reducing the risk. Test marketing should be done before the actual launch of the services. This is known as a pilot project in the context of MR. The company may choose a smaller portion of the target segment (known as the test market) for this service where consumer feedback can be obtained immediately. Depending on the feedback, the firm can make pre-launch adjustments, modifications, rectifications. If the test market is successful, then the launch takes place. If the launch is successful in a particular segment, then the firm can try another segment. This is known as a roll-out process. At this stage firms should take another precaution. They should watch their competitors – when a firm develops new things, the competitors don’t sit idle, they know & develop matching services or other new ones. Thus the whole situation changes.

6. Infrastructure Development : These are needed for the new products – they may be new / additional facilities, equipment, premises, capacities; hiring, training, redeploying, of personnel; pricing, promotional, packaging designs; etc.

7. Service Launch : This is the last stage of new service launch. If everything goes well at each step, the service is finally “launched”. Thus the product life cycle starts, where the service earns revenue & slowly the retune maximises. At some point the cost is fully covered. This is known as the product/service life cycle.

Product Lifecycle :

After the product is launched, it goes thro’ different stages of ups & downs in terms of revenue generation as the time passes. For the service marketing context we have generally four such distinct stages as given in the following :

1. Introduction : The first stage is the launch of the service or the introduction in the market. Then the marketer can adopt the marketing strategy on the basis of the policies of the company. This stage doesn’t earn any profit for the firm. But this stage

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is used for establishing the product in the market by carefully monitoring the performance, efficiency & quality improvements.

2. Growth : If the factors are favourable, then the second stage is the growth stage. The brand awareness is prominent, the customers’ satisfaction will give rise to growth in demand, and also revenue. The firm can further spend some amount for the promotion & ads. At some point, the market share becomes optimum & profit margins are higher.

3. Maturity : If a firm is doing well in a particular service & in a particular segment, there will be some competition sooner or later. In a highly competitive market, the firm can seek to modify services, increase efficiency, try to tap other segments, but all these add up the costs & a matching revenue is not forthcoming. So at a point the growth ceases. This is known as the maturity stage.

4. Decline : This is the final stage of the life cycle of a product/service. Slowly, because of the various factors the demand decreases which reduces the revenue & profit margin, and the firm needs disproportionately more resources to keep going. So things decline. The best thing to do is to discontinue with the service and develop & launch a new one – and the whole cycle starts all over again.

MANAGING DEMAND & CAPACITY

Concept of Demand in Services :

Since the services can’t be stored as an inventory for future use, and since services are perishable, hence the demand becomes critical. Once the demand is not catered, it’s lost for ever. The best a marketer can do is to minimise to some extent by careful planning & adopting some strategies. The following are the factors which affect demand fluctuation :

1. Contraction & Recession : Contraction refers to a decrease in growth of economy or in economic activity. This are visible when we have more unemployment, more inflation, low GDP, low production, etc. It happens due to the depression in the economy, which is known as depression. In such a state, people have less purchasing power, and demand for goods & services is less. Some people may have money, but they prefer to spend less & save more for the uncertainties of the future.

2. Expansion or Boom : This is just the reverse of contraction & boom, where the economic activities are more, overall economic growth is there. If it remains for a longer period, we call it boom. People have more purchasing power, less unemployment, the feel good factor is there, and the demand for the services increases.

3. Technological Developments : This is one of the biggest source of demand in goods & services. In the last 15-18 years the world has seen the fastest development in three areas – Computers, Internet & Telecommunications, which have revolutionalised the way we live. This needs no elaboration.

4. Demographics : The best example is the BPO Industry in India, because (1) Inexpensive & (2) skilled man power, (2) English speaking workforce. We have a huge BPO Industry here giving services to the developed world.

5. Natural & other Disasters : Another important factor is the natural calamities & disaster, like big accidents, terrorist attacks, cyclone, floods, breakout of dreaded diseases, wars, etc. These have a tremendous affect not only to the sufferers, but also to the potential consumers for fear of consequence.

Demand Patterns :

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Marketers need to understand the pattern or way the demands behave, with respect to time, place & person. Then the relevant strategies can be developed.

1. Sketching demand patterns : Companies need to keep a track record or log book, where all the demands are recorded on daily, weekly, monthly, seasonal, & yearly basis, and a graphical chart, sketch or a report can be made. After a few years, a set of patterns can be accurately predicted.

2. Foreseeable cycles : Then some easily predicted or foreseeable cycle can be made. On that basis services can be planned. Ex. Health check-ups in hospitals, in a lean spell.

3. Random demand variations : Some other service demands are not easily predictable, or they occur randomly, even if the cause can be ascertained. Say health care or insurance when a flood or earthquake occurs.

4. Demand Patterns by market segments : Another more specialised database keeping is done for different demand pattern of customers of different segments. E.g., for a group of family the bonus time is holiday time, whereas for another group this is insurance premium pay time.

Capacity Constraints :

Capacity of a company is defined as the ability to meet the demand and the extent to which it can do it. For production of goods this can be expanded or contracted easily. But for services it is difficult, as four critical factors are involved. This are done with utmost care, planning, cost effective measures.

1. Time : Time is limited and mostly specialised professionals have this constraints, they can’t take up more than the time permits and have to be idle if there are none. This can be tackled by business houses by opening shop for extended hours when the demand is more & vice versa. Say doctors can have more consulting hours when there is demand. The service providers must be willing to accept the change in situation. (Types of Services – Legal, Consulting, Accounting, Medical)

2. Labour : Labour or workers are another area of constraint. Beyond the full work load it’s hard to cater to more. On the other hand temporary employment is not available sufficiently in skilled category. This can be tackled by out sourcing the workers to a contractors who has a large work force with him. He can adjust between several companies, but again the difference in the skill is a bottleneck. (Types of Services – Law Firm, Consulting Firm, Accounting Firm, Health Clinic)

3. Equipment : Like machinery, transport etc. are needed more in no. when there’s a bigger demand. For a limited period a company can’t buy extra equipment or machinery. But these can be managed by careful planning – like having sufficient equipment for the minimum level in a cycle say a year with down/maintenance time, and out sourcing the additional demand by accurate prediction as far as possible. (Types of Services – Delivery services, Telecommunications, Network Services, Utilities, Health Club)

4. Facility : These are mostly the infrastructure like premises, building, hotel rooms, restaurant tables, class rooms, etc., which can’t be increased easily or quickly. But to some extent they can be enhanced, like two shifts in the class rooms, adding a few tables & rearranging them in a restaurant, adding more compartments in a train, more flights for air travel, etc. (Types of Services – Hotels, Restaurants, Hospitals, Airlines, Theatres, Schools)

Strategies to Match Demand & Capacity :

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The most important job of the service marketer is balancing / matching the demand & capacity. In a particular demand cycle there should be minimum occasions for demand being more, or the idle capacity, with the least extra cost. This can be done as already given and by shifting demand :

1. Demand Shift : There are some services where the demand can be shifted, that means the timings can be changed without much discomfort, like use of telephone or internet etc. The prices are more during the peak period and less in slack period. There is a limitation, it is not practical in a restaurant, if there is no additional capacity, then the firm looses customer who go to another. There are some other methods :

a. Varying the original services offer : Bigger service providers offering smaller services during low demand period. Like marriage caterers offering smaller parties of birthday, business gatherings etc.

b. Communicating with the customers : By the effective communication, the service marketer can explain the practical situation to the potential customers, so that they can shift their requirement timings. Again this is applicable to a small portion of cases, where choices are available. Some customers are by nature rush avoiders, so to some extent the nature takes care of the shifting.

c. Altering the service delivery timings : Earlier banks used to work from 10 am to 2 pm. Now the scheduled banks have working hours 10 to 3.30, and the new generation private banks have 9.30 to 4.30 timings, and some even are open on Sundays. This is apart from the 24-hr ATMs.

d. Price differentiation : This concept works on the basis of the economy of supply & demand. Having a differential pricing as mentioned earlier, say for bars daytime is low priced. But here there is a limitation – it doesn’t apply to many services or many customers. Also there is a danger of attracting another segment or dissatisfying the target segment. The marketer has to be very particular about the price sensitivity of the customers

2. Adjusting capacity to meet demand : As discussed earlier.

3. Strategies for Shifting Demand to match Capacity :

DEMAND TOO HIGH DEMAND TOO LOW

Use signage to communicate busy days & times. Use sales & ads to increase business from current market segments.

Offer incentives to customers for usage during non-peak times.

Modify the service offering to apply to new market segments.

Take care of loyal or regular customers first. Offer discounts or price reduction.

Advertise peak usage times & benefits of non-peak use.

Modify Hours of operation.

Charge full price for the service – no discounts. Bring the service to the customer.

4. Strategies for Flexing Capacities to match Demand :

DEMAND TOO HIGH DEMAND TOO LOW

Stretch time, labour, facilities & equipment. Perform maintenance, renovations.7

Cross-train the employees. Schedule vacations.

Hire part-time employees. Schedule employee training.

Request over-time work from employees. Lay-off employees.

Rent or share facilities.

Rent or share equipment.

Sub-contract or out source activities.

Creating Demand Inventory :

There are some special cases where an inventory can be created for the demand for services, like queuing & reservation systems.

1. Queuing system : like waiting for turn in a dental clinic.

2. Reservation system : like railway travel.

Yield Management :

For marketing services, the demand can’t be matched with capacity to a high level, but it can be done to a considerable extent. The method by which a firm manages to have the minimum gap in demand / capacity, the maximum possible customer satisfaction with the maximum return / profit is known generally as the Yield Management. In other words it is to find the best balance at any time amongst the prices charged, the target segment, the capacity & resources used to get the best possible financial returns.

1. Definition : Yield Management is defined as the process of allocating the right kind of capacity, to the right kind of customer, at the right price so as to maximise the revenue or yield. This can be a complex mathematical model. But in simple arithmetic we have :

(YIELD) = (ACTUAL REVENUE) ÷ (POTENTIAL REVENUE);

(ACTUAL REVENUE) = (ACTUAL CAPACITY USED) × (AVERAGE ACTUAL PRICE);

(POTENTIAL REVENUE) = (MAXIMUM CAPACITY) × (MAXIMUM PRICE);

(YIELD) = [(ACTUAL CAPACITY USED) ÷ (MAXIMUM CAPACITY)] × [(AVERAGE ACTUAL PRICE) ÷ (MAXIMUM PRICE);

( % YIELD) = ( % CAPACITY UTILISATION) × ( % PRICE REALISATION).

2. Yield management process :

a. The first step is to segment the market based on customer needs and their ability & willingness to pay.

b. The second step is to collect the information regarding highs / lows of demand & capacity, and a decision as to how to tackle the situation.

c. The third step is to take advantage of varying needs by using the differential pricing system

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3. Application areas of yield management :

4. Benefits of yield management : Yield management is to balance the demand & capacity in a profitable way. The following are a few of the advantages :

a. It demonstrates the ability of the management to sell its service at a higher price, when the customers are willing to pay.

b. It also helps the management determine the break-up of services to be sold at full value and at a discounted price.

c. It helps in fixing the prices in the discounted category using the demand levels forecast earlier.

d. This concept also helps the organisation manage inventory at an optimum level and thus avoid market share erosion or revenue dilution.

5. Challenges & Risks using Yield Management : Yield management improves revenues. But it is not without its disadvantages. They are the following :

a. Loss of competitive focus : Yield management may result in over focussing on profit maximisation & inadvertent neglect of aspects of the service that provide long term competitive success.

b. Customer Alienation : If customers learn that they are paying a higher price for service, than someone else, they may perceive the pricing as unfair, particularly if they don’t understand the reason. Customer education is thus essential in an effective yield management programme. Customers can be further alienated if they fall victim (and are not compensated adequately) to overbooking practices that are often necessary to make yield management systems work effectively.

c. Employee morale problems : Yield management systems take much guess work and judgement away from sales reservations people. Although some employees may appreciate the guidance, others may resent the rules & restrictions on their own discretion.

d. Incompatible incentive & reward system : Employees may resent yield management systems if these don’t match the incentive structures. E.g., many managers are rewarded on the basis of capacity utilisation or average rate charged, whereas yield management balances the two factors.

e. Lack of employee training : Extensive training is required to make a yield management system work. Employees need to understand its purpose, how it works, how they should make decisions, and how the system will affect their jobs.

f. Inappropriate Organisation Yield Management Function : To be most effective yield management, an organisation must have centralised reservations. While airlines & some large hotel chains & shipping companies do have such centralisation, other similar organisations may have decentralised reservation systems and thus find it difficult to operate a yield management system effectively.

© Himansu S M / Written Sep-2006, Published Feb-2010

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