Services-Marketing-National Open University PDF

Indira Gandhi National Open University School of Management Studies
MS-65
Marketing of Services
Block
MARKETING OF SERVICES: AN INTRODUCTION

UNIT 1 Marketing of Services: Conceptual Framework UNIT 2 Role of Services in Economy UNIT 3 International Trade in Services, The WTO, and India UNIT 4 Consumer Behaviour in Services 5 20 37 53
Marketing of Services: An Introduction
Course Preparation Team*

Prof. L.M. Johari FMS, Delhi University Delhi Prof. J.D. Singh IMI New Delhi Prof. 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 Jameshedpur Mr. Arun Shankar Citi Bank New Delhi Dr. V. Chandrashekhar Mahindra Days Hotels & Resorts, Bangalore Ms. Sudha Tewari Parivar Seva Sansthan New Delhi Mr. Pramod Batra EHIRC New Delhi Ms. Rekha Shetty Apollo Hospitals Madras Ms. Malabika Shaw AIMA New Delhi Mr. Saurabh Khosla Tulika Advertising Agency New Delhi Mr. Sanjeev Bhikchandani Sanka Information Pvt. Ltd., New Delhi Prof. J.B. Nadda Goa University Goa Mr. M. Venkateswaran Transportation Corporation of India, Hyderabad Prof. Rakesh Khurana School of Management Studies IGNOU, New Delhi Prof. Madhulika Kaushik School of Management Studies IGNOU, New Delhi Mr. Kamal Yadava School 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, Khozikode Calicut Prof. B.B. Khanna Director School of Management Studies IGNOU, New Delhi 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. Rajat Kathuria IMI, New Delhi
Dr. Rupa Chanda IIM, Bangalore
Print Production
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June, 2004 (Revision) Indira Gandhi National Open University, 2004 ISBN-81-266-1276-2 All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other means, without permission in writing from the Indira Gandhi National Open University. Further information about the Indira Gandhi National Open University courses may be obtained from the Universitys Office at Maidan Garhi, New Delhi-110 068. Printed and published on behalf of the Indira Gandhi National Open University, New Delhi, by Director, School of Management Studies. Paper Used: Agro-based Environment Friendly Cover Design by: H.D. Computers, Inderpuri, New Delhi. Laser Composed by: ICON Printographics, B-107 Fateh Nagar, New Delhi-110 018
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BLOCK 1
MARKETING OF SERVICES : AN INTRODUCTION
The first block of the course is concerned with the conceptual framework regarding 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 marketing practices and applications need to be specifically evolved for services, as they are in certain characteristics distinct from goods. The unit deals with the concept of a service and its classifications, the difference between goods and services, the marketing implications of these differences and the service marketing 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 international as well as Indian scenario. It also brings out brief details of some important service sectors in India. The next unit is on International Trade in Services, The WTO, and India. It outlines recent trends in international trade in services, provides an overview of GATS and Indias negotiating strategy and domestic reforms. The last unit of the block gives details of consumer behaviour in services.
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 Economy International Trade in Services, the WTO, and India Consumer Behaviour in Services
2.
5. 6. 7.
SERVICES MARKETING MIX

Product and Pricing Decisions Place and Promotion Decisions Extended Marketing Mix for Services
3.
8. 9. 10.
STRATEGIC ISSUES
Service Quality Managing Capacity/Demand Retaining Customers
4.
11. 12. 13. 14.
SECTORAL APPLICATIONSI
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 APPLICATIONSII
Educational Services Professional Support Services: Advertising Agencies Telecommunication Services Product Support Services Case Studies 1. Is the Customer Always Right? 2. The Case of Dosa King.
UNIT 1 MARKETING OF SERVICES : CONCEPTUAL FRAMEWORK

Objectives
After going through this unit you should be able to:

define the concept of services, identify the reasons for growth of the service sector, explain the characteristics that distinguish services from products, explain the implications of these characteristics in terms of designing a marketing strategy, explain the ways in which services can be classified so as to develop frameworks for managing them, 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 Reasons for Growth of the Service Sector Characteristics of Services Services Classified The Services Marketing Mix Summary Self Assessment Questions Further Readings References
1.1 INTRODUCTION
Economists have divided all industrial and economic activities into three main groups: 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-industrialised era, primary activities were the mainstay of the economy. The Industrial Revolution marked the beginning of increasing importance of secondary activities and the gradually decreasing the status of agriculture and allied activities. The period following World War II saw USA become the worlds first service economy with more than 50 per cent of the working population employed in producing services and today 80 per cent of the US economy is service-oriented. This led a New York Congressman to remark that America is becoming a nation of people who are serving each other hamburgers or taking in each others laundry. However, the US service industry is a very technical and sophisticated one comprising computer and software development, business consultancy, telecommunication, banking and insurance. This pattern of economic development is not universally applicable to all countries. 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 retain its stronghold on the economy. The manufacturing and service sectors are growing not only in volume but also in sophistication and complexity. The
wide array of services found in the metropolitan cities in India compare favourably with those found anywhere in the world. Deniel Bell, in his book The Coming of the Post-industrial Society called this period of dominance by the service sector as the post-industrial society1 . According to him: if an industrial society is defined by the quantity of goods as marking a standard of living, the post-industrial society is defined by the quality of life as measured by the services desirable and possible for everyone.
1.2 THE CONCEPT OF SERVICE

Widespread interest in the effective management and marketing of services as well as the inconclusive debate on how distinct is the marketing of intangible services from that of the tangible products, have enriched the literature by highlighting the service characteristics as that of intangibility, immediacy, individuality, 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 people-based than technology-based. Services supply cannot be easily changed to meet the suddenly changed market needs. Service demand has greater elasticity. Services face unique quality control issues and a larger number of problems in customer 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 looking around identify services which can be classified along this continuum? Think of the services utilized by you as an individual, as a family and as an organisation. ............................................................................................................................ ............................................................................................................................ ............................................................................................................................ ............................................................................................................................ 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 provided 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 need to define the concept of service from a marketing view-point. Kolter offers one 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 want-satisfaction, and are not necessarily tied to the sale of a product or
Table 1.1: List of Selected Services
Marketing of Services: Conceptual Framework
Utilities Electricity Water Supply Law Enforcing, Civil, Administrative and Defence 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 (Passenger and Freight) Post and Telegraph Telephone and Telecommunication Broadcasting (All India Radio) Telecasting (Doordarshan) Distributive Trades Wholesale Distribution Retail Distribution Dealers, Agents
Insurance, Banking, Finance Banks Share and Stock Brokers Business, Professional and Scientific Activities Advertising Marketing Research Consultancy Accountancy Legal Medical Educational Research Maintenance and Repairs (of plants, machinery and equipment) Leasing Computer Programming Employment Agencies Leisure, Recreation Cinema, Theatre Clubs, Gymnasiums Restaurants, Hotels Video Game Parlors Casinos Self-improvement Courses Miscellaneous Beauty Parlors Health Clubs Domestic 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 (permanent ownership) to these tangible goods.3 As in the case of a product, in the case 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 provide the clue for designing the most appropriate marketing strategy. A restaurant provides satisfaction to its customers on the basis of type and quality of its food, 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 was a flop right from the start. On the advice of its marketing consultant, the restaurant changed over from serving elaborate, expensive meals to a fast-food outlet providing quick, reasonably priced meals
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 complex, the owners realised that in lunch-break, people do not visit a restaurant for relaxation or status satisfaction. They have limited time at their disposal and 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 catering 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, identify 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 earlier 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 services your first concern should be the identification of the customers needs. A clue 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 need or want that these services satisfy. The nature of services which these organisations are providing. How the services of these organisations are differentiated from those of their competitors? ................................................................................................................ ................................................................................................................ ................................................................................................................ ................................................................................................................
1.3 REASONS FOR GROWTH OF THE SERVICE SECTOR

Manufacturing industries grew because they produced tangible goods which satisfied peoples physiological needs of food, shelter and clothing. As the basic need was fulfilled there was demand for improved satisfaction, and this led to a proliferation 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 for leisure rather than for doing odd repair jobs in the house had led to the growing tribe of plumbers and electricians. Increasing affluence combined with increasing complexity of life and increasing insecurity has led to the phenomenon of credit cards and travelers cheques which have proved to be almost perfect substitutes for money. These credit cards provide convenience and safety. In fact, convenience is proving to be a key concept in the provision of services.
Table 1.2: Reasons for Growth of Service Industries
Reasons 1 Increasing affluence
Types of services required Greater demand for services (activities which consumers used to perform themselves) such as interior decoration, laundry, care of household products such as carpets, care of garden etc. Greater demand for recreation and entertainment facilities, travel resorts, adult education and self-improvement courses. Greater demand for crches, baby sitting, household domestic help Greater demand for nursing homes and health care services Greater demand for skilled specialists to provide maintenance for complex products such as airconditioners, cars, home computers. Greater demand for specialists in income-tax, labour laws, legal affairs, marriage counseling, employment services. Greater demand for purchased or leased services, car rental, travel, resort to time sharing rather than ownership basis. The computer-sparked development of such service industries as programming, repair and time sharing.
More leisure time
Higher percentage of women in labour force Greater life expectancy
Greater Complexity of products
Increasing complexity of life
Greater concern about ecology and resource scarcity
Increasing number of new products
Source: Schoell, K.F. and J.T. Ivy, 1981 Marketing : Contemporary Concepts and Practices, Allyn and Bacon; Boston.
1.4 CHARACTERISTICS OF SERVICES

Services have a number of unique characteristics that make them so different from products. Some of the most commonly accepted characteristics are: a) Intangibility b) Inseparability c) Heterogeneity d) Perishability e) Ownership
Intangibility When you buy a cake of soap, you can see, feel, touch, smell and use it to check its effectiveness in cleaning. But when you pay fees for a term in college, you are paying for the benefit of deriving knowledge and education which is delivered to you by teachers. In contrast to the soap where you can immediately 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 (transaction) but it has some tangible aspects such as the particular plane in which you fly (and the food and drink which is served). In this case the service has both 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 intangible 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 Marketing 41 (April 1977): 73-80. American Marketing Association.
The distinguishing feature of a service is that its intangible aspect is dominant. J. Bateson has described the intangible characteristics of services which make them distinct from products4. These intangible features are:

A service cannot be touched Precise strandardisation is not possible There is no ownership transfer 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 service cannot be separated from the person or firm providing it. A service is provided 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 physical infrastructure (hotel, train). A plumber has to be
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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 produced 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 involved in providing and rendering services and this makes standardisation a very difficult task to achieve. The doctor who gave you his complete attention in your last visit may behave a little differently the next time. The new bank clerk who cashed your cheques may not be as efficient as the previous one and you have to spend more time for the same activity. This is despite the fact that rules and procedures have been laid down to reduce the role of the human element and ensure maximum efficiency. Airlines, restaurants, banks, hotels have large number of standardised procedures. You have to reserve a room in a hotel and this is a straight 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 hotel 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 facilities 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. Perishability 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 hall 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 this perishability aspect is that most services may face a fluctuating demand. There is a peak demand time for buses in the morning and evening (office hours). Certain train routes are always more heavily booked than others. This fluctuating demand pattern aggravates the perishability characteristic of services. Ownership When you buy a product you become its owner-be it a pencil, book, shirt, refrigerator 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 drive your car; by paying the required charges you can have a marketing research firm survey into the reasons for you products poor sales performance, etc. In case of 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 provides. If we closely examine the reasons why products are purchased, we find that they are bought because they provide certain intangible benefits and satisfactions. Detergent powder provides the primary benefit of cleanliness, air-conditioners provide the benefit of a cool, comfortable environment, a mixer-cum-grinder provides convenience. The only difference between products and services is that 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-point, the same concepts and techniques are applicable for both products and services. The successful marketing of both requires market research, product design, product planning and development, pricing, promotion and distribution. However, for marketing services, the marketing
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manager must understand the nature of the five characteristics of services and the manner in which they impinge on the marketing strategy. Table 1.3 describes the implications of characteristics of services and how the marketing strategy can be focused to overcome these constraints. Besides the constraints highlighted in Table 1.3, are some other factors which have inhibited the active marketing of services. Professionals such as doctors and lawyers have traditionally been opposed 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. Difficult to judge quality and value in advance. Not possible to patent or have copyright Relatively difficult to promote. Requires presence of performer/producer. Direct sale. Limited scale of operations. Geographically limited market Difficult to standardise quality. Means of overcoming characteristics Focus on benefits. Use brand names. Personalise service. Develop reputation. Increase tangibility (e.g. its physical representation)
Inseparability
Learn to work in larger groups. Work faster. Train more service performers
Heterogeneity
Careful selection and training of personnel. Define behaviour norms. Reduce role of human element. Mechanise and automate maximum possible operations. Better match between supply and demand by price reduction in low demand season Stress advantages of nonownership such as easier payment scheme.
Perishability
Cannot be stored. Problem of demand fluctuation
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 shops, barber shops etc. also limits the use of marketing techniques which can be successfully used in larger organisations and then there is the case of service organisations such as schools, hospitals and, universities which enjoy more demand than they can cope with. These institutions have, therefore, never felt the need for actively marketing their services. Activity 3 Looking at inseperability of the service and its producer as a major characteristic that distinguishes products and services, you can imagine the implications for marketing the services of consultants, musicians, stage performers and advertising creatives. Talk to some 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 provide strategic insights in managing them. Utilizing different bases, these schemes allow us to understand the nature of the service act, the relationship between 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 Nature 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 possessions 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 Transportation Laundry/Dry cleaning Lawn care Services directed at intangible assets Banking Legal Services Insurance Accounting
Services directed at peoples bodies Healthcare, Salons, Restaurants, Transportation 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 relationships with service providers and opt for receiving services continually. Services can therefore be classified on the basis of whether the nature of the relationship is continuous or intermittent and whether a consumer needs to get into a membership relationship with the service organisation to access and utilise the service.
Table 1.5: Services and Customer Relationships Type of Relationship Nature of Delivery Continuous Membership Insurance Education Banking Theatre seat subscription 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 delivery sites (whether single or multiple) and the method of delivery to classify services in a 2 3 matrix. Then implications here are that the convenience of receiving the service is the lowest when the customer has to come to the service and must use a single or specific outlets. As his options multiply, the degree of convenience 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 Customer goes to service organisation Service organisation comes to the customer Customer and organisation transact business at arms length Availability of outlets Single site Theatre Lawn care Pest control Credit cards Local TV station Multiple site Bus Service Fast Food Chain Mail delivery Emergency auto repair Telephone company Broadcasting
4. Proportion of Tangibility and Intangibility Using the characteristic of intangibility of services, Shostack6 proposed that all goods and services can be placed on a tangibility intangibility continuum, with services clustering towards low to high intangibility. Accordingly, services can be classified as those with a low intangibility content (a fast food restaurant) and a pure service, having very high intangibility content (Education, consultancy, Medical advice). 5. Service Inputs Services based on this criterion have been classified as primarily equipment based or primarily people based service depending upon which input is primary applied to get service outputs. The equipment based services can be further classified according to whether they are fully automated, or consist of equipment monitored by unskilled persons (lift operators, delivery van personnel) or need the presence of skilled personnel to man the equipment (quality control, diagnostics services). 6. Contact between the Consumer and the Service Provider Services also differ in the extent of contact that needs to be maintained between the 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 user needs to spend with the service organization/provider in order to utilize/acquire the service. Examples of low contact services are telecommunications, drycleaning 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 large or primarily at individuals7. The public services include utilities and infrastructural services like transport and communication. They also include services provided by the state for public welfare like hospitals, educational and vocational institution, parks and museums etc. The private services on the other hand include the whole gamut of service designed
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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. private consumption. Involved here are issues of process, volume and distribution of services when they are designed as public services. Services have also been classified by Kotler8 as services designed for profit and non profit services, depending 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 seem inadequate. Careful management of these 4 Ps Product, Price, Place and Promotion though essential, are not sufficient for successful marketing of services. Further the strategies for the four Ps require some modification while applying to services. Since services are produced and consumed simultaneously, the contact personnel or the service delivery personnel become extremely important. It is during these encounter of service providers and customers i.e. the process on which a lot depends with regards to the final outcome as well as the overall perception of the service by the customer. The actual physical surroundings during these 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 Ps added to the traditional mix. These are:
People
All human actors who play a part in service delivery and thus influence the buyers perceptions; namely, the firms personnel, the customer, and other customers in the service environment The environment 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 Consumers perceived value Quality/ Price relationships
Location Accessibility Distribution channels Distribution coverage
Advertising Personal Selling Sales Promotion Publicity Public relation
Training Discretion Commitment Incentives Appearance Inter personal behaviour Attitudes 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 activities
Source: Booms, B.H. and Bitner, M.J, Marketing Strategies and Organisation Structure for Services Firms, in Donnelly J and George W.R. (eds), Marketing of Services, AMA, 1981
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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 offeringsis 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 necessarily all marketing activities performed by the firm) can plan and implement most of the marketing activities i.e. the marketing department is able to control almost the total marketing function. In the service sector the situation is entirely different. A traditional marketing department in services can only control a minor part of the marketing function. Usually, it doesnt have the necessary authority to manage the buyer/seller interaction. The marketing department, therefore, cannot plan and implement activities pertaining to interactive marketing function. Therefore the marketing function, which is a key function in service sector 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 departments basically address to External Marketing only. However, all three sides are critical to successful services marketing and the triangle cant be supported in 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 services. Services are essentially performance. The service sector has grown substantially in all the developed economies as well as in India. The reasons for growth in service industries include increasing affluence, more leisure time, greater life expectancy, increasing complexity of life etc. Marketing of services need a different treatment because of the unique characteristics of services that distinguish them from tangible goods. These characteristics are intangibility, 16
inseparability, heterogeneity, perishability and ownership. The unit discussed their marketing implications and means of overcoming them. A number of classification schemes for services have been identified and discussed to provide strategic insights in managing them. The unit ends with the identification of the service marketing mix which includes product, price, place, promotion, people, process and physical evidence.
1.8 SELFASSESSMENT QUESTIONS

1) What do you understand by the term service? Describe the reasons behind the rapid 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 activity/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 participated 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 are all of the following, except: 1. Sampling difficult 2. Difficult to judge quality 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 Inseparability are all of the following, except: 1. Limited scale of operations 2. Geographically distributed market 3. Requires presence of performer 4. Direct sale Q.5: The marketing solution to the problems posed by service characteristic Intangibility are all of the following, except: 1. Use of brand name 2. Increase the 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 Inseparability 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 marketing 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 above Q.8: Which one out of the following is not the example of the services organisations where service provided is a tangible action directed at the customers bodies: 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: From 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 continuous and non-membership 3. Continuous and non-membership 4. Continuous and membership 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: Heineman), 1996. Hans Kaper, Piet Van Helsdinger and Wonter de Vries Jr, Services Marketing Management (New York: John Wiley), 1999. John E.G. Bateson, Managing Services Marketing, (III ed), (Oriando: Dryden Press), 1995. K. Douglas Hotfman John E. G. Bateson, Essentials of Services Marketing, (Orlando: Harcourt College Publishers), 2002. Payne: Essence of Services Marketing, (New Delhi: Prentice Hall of India). Ravi Shanker, Services Marketing: Text and Readings, (New Delhi: Excel Books, 2002). Teresa A. Swartz and Dawn Iacobncci, Handbook of Services Marketing and Management, (New Delhi: Sage),2000. Valarie A. Zeithaml and Mary Jo Bitner, 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 Donald, 1985, The Marketing of Services, Hinemann; London 2. Kotler, Philip, 1989, Marketing Management Analysis Planning and Control, Prentice Hall of India Private Limited: New Delhi. 3. Stanton, W.J., 1981, Fundamentals of Marketing, McGraw Hill; New York. 4. Batesou J, Do We Need Services Marketing, Marketing Consumer Services, New Insights, Report 75-115, Marketing Science Institute, Boston 1977. 5. Love 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).
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UNIT 2 ROLE OF SERVICES IN ECONOMY

Objectives
explain the International scenario regarding service sector and trends in service trade, understand how India is also becoming a service economy, employment in service sector, and the emerging national scenario on services, and identify key service sectors and discuss their present scenario.
Structure
2.1 2.2 2.3 2.4 2.5 2.6 2.7 Introduction International Scenario Service Sector in India Analysis of Specific Service Sectors Summary Self Assessment Questions Appendix : Service Tax in India
2.1 INTRODUCTION
The unit beings with an introduction on how globalization has given a boost to the services sector. Thereafter, the international scenario showing the contribution of services sector, as against agriculture and industry, to the GDP of various countries across the globe, has been described. This section also covers Service sector liberalization, role of WTO and the share of services sector in the world trade. The next section of this unit details the Indian scenario and the growth in specific sectors like, tourism, financial services, telecom services, health services and information technology. Services are extensively used by people day to day in all aspects of life. From education to entertainment, finance to fast food, travel to telephone, advertisement to amusement parks, market research to maintenance services, and retailing to recreationand so on. Today services are increasingly being used by corporate as well as household sector. The explosive 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 activities, had to be carried out to bring the war torn economies back to strength. This resulted in a number of new projects fuelling the demand for financial services. Today households as well as firms are demanding more services as well as services of increasing quality and sophistication. There are number of reasons for this growth in service sector which have been discussed in the previous unit (Unit 1). In addition to these factors, globalization has resulted in growth of service sector as well. Globalization of economies has led to an increased demand 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 providers 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 been increasing at a fast pace. As the economies shift from developing to developed 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 developed countries are also dominated by services. This trend of growing dominance of services has been so strong that some people term it as the Second Industrial 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 services and manufacturing are positively linked to each other. Micheal Porter in his book, The Competitive Advantage of Nations identified three distinct links between manufacturing and services as explained below: i) Buyer/supplier relationship: Many service industries have come into existence through the de-integration of service activities by manufacturing firms. An automobile manufacturer may outsource number of service activities like transportation, warehousing, marketing research, legal services, education and training of its employees, information processing etc. Service industries depend a lot on manufacturing firms for a significant share of their sales. ii) Services tied to the sale of manufactured goods: Sale of a wide variety of manufactured goods creates demand for associated services. The sale of consumer durables require ongoing need for servicing, sale of computers leads to demand for training services and after sales services, exports of 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 the previous one. The sale of certain services leads to demand for manufactured goods, for example sale of engineering or management consulting from a nation can lead to demand for equipment and other associated manufactured goods from that nation. 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 countries develop, the role of agriculture in the economy declines and that of services rises. Highly developed countries all have more than 50% of GDP and employment derived from services. A particular characteristic of the development of service employment over time is that it is less sensitive to business cycle fluctuations than other types of employment. The service sector comprises 80% of US employment, 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 study, 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 industry associations representing the EU, Australia, Hong Kong, and Japan called for urgent progress in the multilateral liberalization of trade in services. Trade in services also benefits developing countries greatly. The infrastructure of modern and growing economies and the gains made from liberalizing trade in services and agriculture are enhanced with open service sectors. The benefits of a modern services sector reverberate across an entire economy, touching
22
every product, idea and consumer. Modernizing services can help developing countries 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 agriculture 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, often with local partners. Access to modern services (financial, professional and infrastructure services, for example) is essential to growth and development in any country. WTO commitments are vital to attracting this investment. While the value of trade in services is well below that of merchandise trade, services account for a larger portion of virtually all the worlds economies; liberalization of services trade is therefore clearly in the interest of developing countries. (Source: http://www.esf.be/) Service Sector Role of WTO WTOs 134 trade ministers met in Seattle Summit (1999). The broad objective of the summit was to expand private markets by removing barriers to the global movement of goods, services, and capital, 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 and 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 targeting the proportion of gross domestic product that governments spend on public services. In many European countries, governments are spending more than 15 per cent 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, to 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. Procurement reform is a primary mechanism for opening up public services to international competition. European Commission proposals focus to unlock new potential markets by extending private firms involvement with public services and by creating contracting rules to ensure acceptable returns for investors. 2. Disputes Settlement Procedure The WTO disputes settlement procedure allows one member state to challenge the domestic laws of another and provides a mechanism for changing the ways in which governments regulate and subsidize public services. The US is committed to making mandatory a disputes system which outlaws subsidies and regulations which are not market-friendly. The next unit of this block discusses the issues related to international trade in services, the WTO, and India in detail.
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Leading Exporters and Importers in commercial services Besides the US most of the West European countries as well as Mediterranean countries are net exporters of 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 per 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 trade in services.
Table 2.2: World exports of commercial services by category, 2002

(Billion dollars and percentage) Value 2002 All commercial services Transportation 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 Netherlands Ireland Italy Hong Kong, China Belgium Spain Canada India Austria Singapore Above 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. Michael Porter, in his work The Competitive Advantages of Nations has suggested that nations exhibit strikingly different patterns of national competitive advantages in services as they do in manufactured goods. Table 2.4 shows pattern of international leadership in different service industries.
Table 2.4: Estimated leading positions of National Competitive Advantage in International Service Industries
Country USA
Leading Position in Industry Fast Food, Education and Training, Health Care Services and Hospital Management, Hotels, Car Rental, Accounting, Advertising, Commercial Banking, Money Management, Information, Trading, Entertainment Specialty Stores, 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 competitive advantage in merchandise has started to recede. However, for most developing countries service industries are at various stages of development ranging from low to intermediate. For most of these countries service sectors are recognized as strategic to their development and consequently, are subjected to intensive regulations. Ranging from architecture to telecommunications, financial to health services and beyond, services today are the largest and most dynamic component of 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, Indias service exports are recorded $ 20.70 bn, as against $ 4.60 bn in 1990, a growth of 350%.
Table 2.5: World Service Exports and Indias Share
Year
Total world Indias service Indias share in service exports exports in $ bn world services $ 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 countrys 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 sectors share in GDP has declined from 25.38 per cent to 21.8 per cent in 1990-91 and 2002-03 respectively. The agricultural sectors share has fallen from 30.93 per cent to 22.1 per cent in the respective years. The growth in the services sector has averaged 8.5 per cent during the period 1994-2000. Dr. Manmohan Singh, the then Union Finance Minister, in his budget speech for the year 1994-95 introduced the 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 service tax in India have been given in Appendix at the end of this unit. The rise in the service sectors share in GDP marks a structural shift in the Indian economy and takes it closer to the fundamentals of a developed economy. If the service sector bypasses the industrial sector, economic growth can be distorted. Service sector 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 sectors contribution in GDP has sharply risen and that of industry has fallen. But, it is equally true that the industrial sector too has grown, and grown quite impressively through the 1990s (except in 1998-99). Three times 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 industry 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 subdivided into several groupings. Figure 2.2 gives the major groupings and their relative 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 Engine
Indians eat out more than ever. They take their clothes to dry cleaners, their cars to mechanics, their dogs to veterinarians. They go to beauty salons for hair cuts. For home they hire maids, gardeners, plumbers, electricians, interior decorators and architects. Outside the home, school teachers, police officers and public servants contribute to their daily lives. Lawyers, accountants, stock brokers and insurance agents help keep finances and personal affairs in order. To maintain their health and well being they turn to doctors, nurses and dentists. All this and more is Indias service economy. One in every two Indians earns his livelihood by providing services. An INDIA TODAY ORG MARG poll shows that a majority 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, the financial, insurance, real estate and business services sector, employment increased to over. 46 lakh from 33 lakhs in this period. In the hotel and restaurant sector employment increased to 3.75 crore from 2.68 crore and in the transport, 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 is actively engaged in seeking full opportunities for free movement of natural persons on a temporary basis as non-residents across borders to enable it to supply services globally. India should explore all possibilities to export services which 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 quarrying Manufacturing Electricity, gas and water etc Construction Services 2001 27790 1433 954 6443 987 1138 16835 1991 26734 1447 1099 6333 945 1222 15689 1981 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 higher growth of employment in service sector is partly because with the growth of economy and technological developments, a smaller proportion of work force is needed 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 pattern 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 probably marks a watershed in the evolution of the Indian economy. Indias high capabilities in Information Technology, and its booming IT software exports which now account for 2% of the GDP, are well known. Indias health services, manned by highly qualified and experienced personnel, super-specialty hospitals specializing in both modern and traditional Indian medical systems like Ayurveda, Unani, and nature- cure supported by state-of-the-art equipment, are attracting patients from across the world, and constitute a significant segment of Indias services sector. Education is another field which is not only a huge segment of the services sector within the country, but also a foreign exchange earner by way of NRIs and foreign 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 growing 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 been providing varied consultancy and other services to the world. There is immense scope for India to undertake project and management consultancy, repair and maintenance work pre-publishing services, and R&D in various disciplines, and interested parties from across the world are welcome to tap these and other capabilities available in abundance in the country. The tourism industry in the country is well equipped, and also fast growing to offer
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tourists with diverse interests and means, all the services needed to make their visit memorable. India, as a subcontinent with varied geographical, climatic, ethnic, cultural, religious and social strands intertwined, India is a one-stop destination for any tourist wanting a kaleidoscopic experience of life in its entirety. We will now discuss some of the prominent service sectors in brief. The last two blocks of this course are devoted to sectoral applications of services marketing concepts discussed in the first three blocks. Hospitality and Tourism Tourism has become the worlds largest employer and this sector is one of the worlds 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 2003, registering a rise of 15.3 percent over 2002, while as many as 4.5 million Indians traveled abroad accounting for a rough 30 percent growth. The number of government 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 80,936. 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 data regarding this sector will be covered in Unit 12. Financial Services The role of financial services in stimulating and sustaining economic growth is well known. A distinct feature of Indian Financial System is the dominance of public sector institutions in practically all areas like banking, term lending and insurance. At the end of March 2002, 97 commercial banks, 196 Regional rural banks, 52 scheduled urban co-operative banks and 16 scheduled state co-operative banks were operating. One of the most important segments of the financial system is commercial 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 the opening of the banking sector to the foreign competition, and liberalized regulatory norms followed by RBI, the private banks have been using technological advances in every sphere of banking to up the performance levels. With an emphasis on retail finance and growing use of new technologies, Indian banks have repositioned themselves as universal finance solution provider with capabilities ranging from investment banking to project financing, and export financing on the corporate 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 Telecommunication sector has witnessed a total transformation throughout the world in the last two decades due to rapid technological advances. Today, an advanced telecom system is a necessity for a nations manufacturing as well as service industries. Consider for example, the growing use of telecom in services like banking, retailing, trading, health, education and transportation. At the beginning of the seventh five year plan in 1985, the then government decided to focus on improving the telecommunication sector and constituted the Telecommunication Board and the Department of Telecommunication (DOT) within the Ministry of Commerce to oversee operations, maintenance and development of telecom services. The emphasis on this sector increased further with liberalization initiative taken by government in the current decade. The plan outlay for telecom sector, which was 2.5 per cent of national plan outlay during the sixth plan, was increased substantially to 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 P 69 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 0I An P 85 n u lan 85 al P -9 la 0 n VI 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 million (Fixed including WLL-F) in 2003-04. Mobile telephony has brought about a revolution 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 2003-2004 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 economic Times healthcare 2001-02 report, Indias healthcare industry grew by 13 per cent 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 increasingly affluent and more consumer oriented middle class population of 100 million, who are seeking and willing to pay for a higher standard of healthcare. During 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 with huge capital investment has led to more competition and marketing efforts. With the growing population and other factors cited above, the health services are going to increase at a fast pace with more participation coming from the private sector. In Unit 13 we will be taking up details related to the health services sector. 31
IT and BPO The Indian IT sector has proved to be the countrys fastest growing segment, even in troubled times in the globally challenging economic environment of 2001-03. Outsourcing of IT requirements by leading global companies to Indian majors 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% from the previous year. Similarly, offshore project revenues grew by blazing 49%. Indian companies entered in to high value segments such as system integration, package implementation, IT outsourcing, and IT consulting. The revenue contributions by the US market continued to rise on account of the large number of ITES / BPO projects getting outsourced to India. The Indian ITES industry is estimated to 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 players have almost doubled their share in Indian software exports, growing by a phenomenal 90% in last financial year. ITES-BPO segment is projected to register a growth of 54% to clock revenues of US $ 3.6 billion during FY 2003-04. India continues to offer great value proposition for the ITES companies. Outsourcing to India has helped companies achieve 40-50 per cent cost savings. Companies are also able to generate higher free cash flows due to reduced investments in physical infrastructure, telecom and equipment. (Source: India Infoline)
2.5 SUMMARY
This unit explained the role of services in national economies and their significance in international trade. Services are used by individual as well as corporations. All the developed economies have more than sixty percent of their GDP contributions from the service sector. As the economies develop, the role of agriculture declines and that of service rises. The world exports of commercial services was valued at U.S. $ 1,570 billion in 2003 with U.S.A, U.K. Germany, Japan, France being the leading exporters while U.S.A, Germany, Japan, U.K. and Ireland were the leading importers. Indias service export stood at U.S. $ 20.7 billion in 2002. The share of services in Indias GDP is more than half and the growth in employment in organized sector has been greater in service sector. The unit also gave you brief details of hospitality and tourism, financial services, telecommunication services, health services and IT sector.
2.6 SELF ASSESSMENT QUESTIONS

1. Discuss the international scenario of role played by services sector in national economies. Do you feel India is following the trend displayed by developed economies in this regard? 2. Explain the trends in international trade in services and identify the key exporting and importing nations? 3. Select any three major service industries in India and explain the trends of growth in them.
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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 introduced the new concept of Service Tax and stated that There is no sound reason for exempting services from taxation, therefore, I propose to make a modest effort in this direction by imposing a tax on services of telephones, non-life insurance and stock brokers. Service Tax had been levied on the recommendations made in early 1990s by the Tax Reforms Committee headed by Dr. Raja Chelliah. The Committee also recommended charging of tax on services such as advertising, insurance, share broking and telecom etc. to begin with on the pattern of advanced economies. The basic objective of Service Tax is broadening the tax base, augmentation of revenue and larger participation of citizens in the economic development of the nation. Bringing services under taxation is not simple as the services are intangible and are provided by large groups of organized as well as unorganized service 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 administration 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 added more services to tax net by way of amendments to Finance Act, 1994. As of 2003, total number of services on which Service Tax is levied has gone upto 58 despite withdrawal of certain Services from the tax net or grant of exemptions (Goods Transport Operators, Outdoor Caterers, Pandal and Shamiana Contractors, and Mechanized Slaughter Houses). 2. SERVICES COVERED UNDER SERVICE TAX The provisions relating to Service Tax were brought into force with effect from 1st July 1994. It extends to whole of India except the state of Jammu & Kashmir. The services, 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 extended 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)
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8. 9. 10. 11. 12.
Custom house agents Steamer agents Clearing and forwarding agents Air travel agents 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. 1.4.2000) (exempted upto 31.3.2000 Vide Notification No.3/99 Dt. 28.2.99, reintroduced 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 abolished 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 dates as notified and indicated above. Government of India has notified imposition of service Tax on twelve new services in 1998-99 union Budget. These services listed below were notified on 7th October, 1998 and were subjected to levy of Service Tax w.e.f. 16th October, 1998. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. Architects Interior Decorators Management Consultants Practicing Chartered Accountants Practicing Company Secretaries Practicing Cost Accountants Real Estates Agents/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 Act2001, the levy of service tax has been 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 consultancy services Photography Convention Telegraph Telex Facsimile (fax) Online information 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 circuits Services
In the Budget 2002-2003, 10 more services have been added to the tax net which are 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 and 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 Service 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 listed below. The levy of service tax on these services is effective from 1st July, 2003. 1. Commercial vocational institute, coaching centres and private tutorials 2. Technical testing and analysis (excluding health and diagnostic testing) technical inspection and certification service. 3. Maintenance and repair services 4. Commission and Installation Services 5. Business auxiliary services, namely business promotion and Support services (excluding on information technology services) 6. Internet caf 7. Franchise Services The extension to following three service 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 services w.e.f. 14.5.2003. Service Tax is administered by the Central Excise Commissionerates 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 reliance on collection of tax, primarily through voluntary compliance. 3. SERVICE TAX REVENUE The Service Tax collections have shown a steady rise since its inception in 1994. They have grown almost to 10 folds since 1994-95 i.e. Rs. 410 crores (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 2002-03 Revenue Rs. Crores 410 846 1022 1515 1787 2072 2540 3305 4125 % Growth Base year 101 24 49 18 16 23 26 25 No. of Services taxed 3 3 6 18 30 27 26 41 51 No. 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).
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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 Indias prospects in this sector, to provide an overview of the GATS and recent developments in the GATS negotiations, and to discusses Indias broad sectoral as well as cross-sectoral negotiating strategy in the GATS negotiations and associated domestic reform issues 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 Indias Opportunities and Constraints in the Service Sector GATS: An Overview Negotiating Strategy and Domestic Reforms Summary Self Assessment Questions Further Readings References
3.1 INTRODUCTION
The service sector today encompasses a wide range of areas and activities. It extends beyond the traditional areas of finance, insurance, transport, communication, and tourism to new and dynamic areas such as software and information technology services, environmental, and consultancy services. Over the past two decades, 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 Indias 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 under the General Agreement on Trade in Services or GATS is thus of great significance as it provides India with a multilateral negotiating forum to address its trade 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 cent 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 advances in information and communication technology, the growing presence of multinational corporations and outsourcing of activities, and deregulation of services. According to the WTO, the value of commercial services exports grew sevenfold 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 increase over this same period. Between 1990-2000, world exports of commercial services 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 transactions, which have been rising rapidly in recent years. Activity 1 Select any one service out of Financial Services, Hospitality Services, Telecommunication Services 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 nonstorable. 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 characteristics of services trade in terms of its modes of delivery, geographic, and sectoral profile. A) Four Modes of Service Delivery Services can be traded through various forms and modes of delivery, including transborder data and information flows and movement of capital, labour, consumers, and goods embodying services. The GATS conceives of services as being traded through four modes of supply, namely: cross border supply (mode 1) consumption abroad; (mode 2) commercial presence; (mode 3) and; movement of natural persons (mode 4). i) Cross-border Trade: Mode 1 Cross-border trade is similar to the traditional notion of goods trade. 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 services 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 grown rapidly in recent years, in large part due to advancements in information technology and increased scope for transmission of information and transborder data flows. It grew faster than world GDP between 1985 and 1997. By 1997, cross border 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 $ 270 billion in 1985 to $890 billion in 1997. Even for countries with modest service exports, if one looks at indicators of relative specialization (ratio of mode 1 based services trade to total exports of goods and services), crossborder services trade features importantly. Given the growing potential for services trade via means such as e-commerce, telemedicine, and e-banking, mode 1 based services trade is likely to expand significantly in future. ii) Consumption Abroad: Mode 2 Consumption abroad refers to services trade where the consumer of the service moves to the country that produces the service, as in the case of tourism. Mode 2 refers mainly to travel services, as given in the BoP, although there is likely to be some underestimation due to reasons such as e-commerce which make it difficult 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 $ 430 billion, or 20 per cent of total services trade. Consumption abroad as measured by the travel services component of the BoP accounted for 1.5 per cent of world 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 establishment 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 direct investment. Mode 3 covers juridical persons and legal entities that share characteristics of corporations, joint ventures, partnerships, and representative offices and branches. In existing BoP statistics, commercial presence is recorded in the form of data on international FDI flows and income stocks in financial accounts. However, FDI information alone does not provide an accurate picture of the total value of operations by service firms overseas. For instance, if a foreign affiliate is treated as a resident in the host country, the value of its services is not recorded in the BoP. An important supplementary measure of mode 3 based services trade is provided by the Foreign Affiliates Trade in Services (FATS) statistics. The FATS collects both inward and outward information on commercial presence through indicators such as sales, employment, and value added of majority owned enterprises located in foreign countries. Inward FATS statistics deal with the value of services provided by foreign affiliates established in the home country while outward FATS statistics deal with the value of services provided by foreign affiliates owned abroad by residents of the home country5. Gross output 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 goods and services. iv) Movement of Natural Persons: Mode 4 This mode involves the delivery of the service through the temporary crossborder movement of service suppliers as in the case of software and construction services. There are two categories of such service providers, the self-employed and employees. The self employed are individual foreign service suppliers who go overseas on their own to supply services. Employees are foreign natural persons employed by service suppliers to provide services, where the employer could be from the home or third countries. At present, mode 4 based services trade is captured in the BoP accounts under 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 total 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 services trade is less than 4 per cent of the value of cross border trade in services. 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 who are temporarily abroad for more than one year, since by the BoP definition, such 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 classification given above:
Financial Services ..................................................................................................................... Hospitality Services ..................................................................................................................... Telecommunication Services ..................................................................................................................... Healthcare Services .....................................................................................................................
B) Geographic Profile Services trade is highly concentrated among a few developed countries and a few regions of the world. Developed countries account for 70 per cent or more of global services trade and this predominance holds across all four modes of supply. 6Developing countries are relatively 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 determining comparative advantage and the direction of trade and factor flows in services. C) Sectoral Composition Trade data on commercial services is collected in the BoP for three broad categories of services, namely. travel, transport, and other services. Based on available BoP statistics, transportation services account for about one quarter of total services trade, travel services for about one third, and other commercial services for the remaining 40 per cent. A look at the relative growth performance of the three sub sectors further indicates a shift in composition towards other services and away from transport and travel services, with 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, accountancy, technical, repair and maintenance, and other supporting services (many of which go unreported) account for 50 per cent of trade. Individual activities such as communication, finance, and insurance occupy a much smaller share of trade in this category. D) Data Issues in Services While existing data clearly indicate 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 statistics for the service sector. Such measurement problems and the resulting lack of comprehensive and accurate data on services are a major constraint to analysing services trade and investment flows.
3.3 INDIAS OPPORTUNITIES AND CONSTRAINTS IN THE SERVICE SECTOR

Over the past two decades, the service sector has replaced agriculture as the dominant sector in India. The service sectors share in Indias GDP has risen from 36 per cent in 1980-81 to around 56 percent in 2002-03 while the share of the primary sector has fallen over this period, from 38 per cent to 24 per cent. The share of manufacturing has remained stagnant at about 22 per cent of GDP.7 This aspect has been discussed in detail in the previous unit. India has witnessed considerable growth in service sector trade, particularly during 1990s. Net inflows of invisibles stood at $16 billion in 2002-03. Net invisibles receipts from non-factor services were an estimated $ 6 billion and net receipts from software services 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, respectively. Close to 80 per cent of this trade is in transport, travel, and other business services.9 The most notable expansion has been in the software services sector. Exports of software services have risen from a few hundred million US dollars in the early 1980s to around $ 9.6 billion in 2003-03 and are expected to reach $ 50 billion by 2008.10 Today, Indias presence as well as its future potential in the global software industry is well recognized, at home and abroad. In several other areas such as construction and engineering services, health services, telecommunications, and financial services, there is growing recognition in India and abroad of the countrys 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 of Indias Service Sector Trade Trade statistics for Indias service sector are highly aggregate in nature. BoP data are available for only a few services, including, travel, transport, insurance, and other business services including software services. Several categories, including important sectors such as communication, construction, finance, computer and information services, and personal, cultural, and recreational services, are not covered in Indias BoP statistics or are subsumed within broader categories, reflecting the problems in collecting information on specific service activities. Tables 3.1 show trends in the value of Indias service sector exports and imports.
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Table 3.1: Indias Services Trade (US $ million)

Items 1) Travel, net Receipts Payments Transportation, net Receipts Payments Insurance, net Receipts Payments Miscellaneous, net Receipts Payments Of Which : Software 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 12,224
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 Indias services trade has undergone a major expansion during the last few years. This expansion, however, has not been uniform across subsectors. The composition of Indias services trade has shifted away from traditional 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 structural change in Indias services trade mirrors the structural changes in global services 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 the growth in information technology and software services with their enabling impact on many business activities. However, as noted earlier, the BoP statistics should be interpreted with caution. The categories are very broad and heterogeneous. There is considerable overlap across activities and sectors and many services may be altogether excluded from Indias BoP statistics for lack of information and systematic compilation of data. The BoP figures also exclude FDI in Indias service sector, which is likely to result in under-representation of subsectors such 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 Indias service trade. Consumption abroad or mode 2 is an important mode of supply given the significant share of travel services in both services exports and imports. Cross border supply or mode 1 is also important given the recent growth in business process outsourcing and back office activities in India and the growing scope to deliver services cross border through electronic and telephonic means. India also relies heavily on movement of natural persons for its services exports, reflecting its comparative advantage in exporting labour-intensive services. The importance of cross border labour mobility is evident from the growing role of other business services in total services trade, since many of these professional services require movement of professional service 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 software services in overseas markets. It is difficult, however, to gauge the significance of this mode in Indias services trade since data on compensation of employees and on transfers and remittances and the usual proxy measures for mode 4 are not available separately for service activities and because there is no separation of temporary from permanent movement of labour. Nevertheless, if private transfers and remittances are any indicator of the importance of revenues from cross border 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 at $ 67 million and $ 367 million respectively. Through the 1990s, India has been a net recipient of labour income as indicated by positive net transfers, indicating the role of cross-border labour mobility in Indias services exports. On the import side, the main mode of interest to India is commercial presence, or mode 4. Data available from the RBIs Annual Report indicate that services receive a large 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 foreign equity norms in view of the need for major capital investments in many areas, the role of FDI in Indias services trade is likely to grow. Constraints to Indias Trade in Services There are many policy-related, infrastructural, and other constraints to Indias trade in services. On the export front, Indias exports of professional services are adversely affected by external barriers such as immigration and labour market regulations, recognition and licensing provisions, and discriminatory treatment with respect to taxes, subsidies, and government procurement policies. For instance, Indian professionals are subject to entry quotas, cumbersome administrative procedures for issuance of visas and work permits, wage parity requirements, economic needs tests, and nationality and residency conditions. In professions like health, architecture, and accountancy services, credentials of Indian professionals are not recognized in major countries due to the absence of mutual recognition agreements, which either requires them to undergo further training in the host country or restricts their scope of practice. Deficiencies in domestic standards of training and infrastructure and quality of manpower also affect Indias exports of professional services. On the import front, there are again numerous domestic regulatory barriers. For instance, Indias imports in key infrastructure services such as energy, banking, insurance, and telecommunications are constrained by restrictions on foreign equity participation, authorization and approval requirements, and restrictions on the scope of activity and form of legal entity. Such barriers not only affect competitiveness and efficiency in the sector concerned, but also have larger economy-wide implications for export prospects in other sectors, given their vital input role. For example, regulatory barriers in the air transport services sector affect Indias export potential in tourism services. There are also licensing and nationality based restrictions arising from regulatory capture in various professional services, which affect market access by foreign firms and individual service providers, consequently hurting quality, cost competitiveness, and the scope for technology and skill transfer in such services.
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3.4 GATS : AN OVERVIEW

One of the most significant achievements of the Uruguay Round of negotiations from 1986-1993, was to broaden the scope of world trade rules to cover services. Services negotiations were conducted on a separate track from those on goods, under the aegis of the Group for Negotiations on Services (GNS).11 The resulting agreement, GATS, establishes multilateral rules and disciplines to govern international trade and investment in services. Key features of the GATS The GATS is a comprehensive legal framework of rules and disciplines covering 161 service activities across 12 classified sectors. These include activities as wide ranging as telecommunications, financial, maritime, energy, business, education, environmental, 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 board to measures affecting trade in services. Some of the key provisions include obligations concerning transparency, domestic regulation, restrictive business practices, 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 countrys schedule of commitments. The third important element TS is a series of attachments including annexes to the agreement which pertain to sectoral specificities and Ministerial Declarations regarding GATS implementation. This three tier structure reflects the need to have: 1. General principles applicable to all services to advance overall liberalization in services; 2. National schedules to enable countries to proceed at their own pace in liberalizing services; and 3. Sectoral agreements to ensure that trade liberalization in some sectors is supported by the establishment of compatible regulatory regimes or modification of existing ones. The GATS defines services trade as occurring through four modes of supply, modes as discussed earlier. This modal breakdown addresses the complex nature of international transactions in services and the diverse forms in which services are embodied, in consumption, production, and distribution-related activities and in the form of goods, human capital, and information. It also brings into the purview of GATS, regulatory issues concerning investment policies and immigration and labour market legislation, hitherto outside the domain of the multilateral trading system. The GATS commitment structure and framework is distinct from that of other WTO agreements. Countries make commitments on market access and national treatment for specific sectors in sectoral schedules of commitments 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. Countries are free to decide which service sectors they wish to schedule, i.e., table for negotiations, and thus subject to market access and national treatment disciplines. The latter has also been termed as a positive list approach to liberalization. These market access and national treatment commitments are made for each of the four modes of supply, i.e., there are in all eight commitments per subsector or activity in both the sectoral and the horizontal schedules. In addition, countries
44
also specify in their schedules, the limitations and exceptions they wish to maintain which violate market access and national treatment, again by mode of supply. 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 additional limitations or qualifying conditions to their commitments. Under the market access obligation, a country must accord treatment to foreign service providers which is no less favourable than that provided for under the terms, limitations, and conditions specified in its commitment schedule. These limitations take the 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 natural persons who may be employed, the type of legal entity, and the extent of foreign 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 Conditions and qualifications on national treatment E.g., None other than tax measures that result in differences in treatment with respect to R&D services. Unbound for subsidies, tax incentives, and tax credits E.g., Unbound for subsidies. Approval required for equity stake over 25 percent. E.g., Unbound except for categories of natural 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 following: Intra-corporate transferees of executives and senior managers; specialist personnel 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 natural 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).
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The national treatment obligation requires a country to accord treatment to foreign service suppliers which is no less favourable than that accorded to its domestic service providers, except as specified in its limitations and conditions under its national treatment commitments. Typical violations of national treatment include differential treatment of foreign service providers in the case of subsidies, 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 specific 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 discretion to choose sectors for negotiations but also gives them the flexibility to decide the degree of liberalization which they wish to commit in these tabled sectors. GATS Commitments Liberalization has been limited thus far under the GATS. Given the discretionary nature of the commitment process, countries have typically not scheduled the more sensitive and regulated service sectors. More commitments have been forthcoming in sectors like tourism and software which are relatively open and unregulated as opposed to services like education, health, distribution, and transport where there may be equity, employment, and government monopoly related considerations. Moreover, even in sectors that have been scheduled, often 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, existing 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. However, 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, namely those associated with commercial presence and at higher skill and professional levels. Moreover, even these horizontal commitments have been subject to a large 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 interest of developing countries in exporting labour based services, especially through 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 legal services and even in sectors like financial services, which it did schedule, its commitments did not extend to subsectors like life insurance. Indias commitments are largely uniform across sectors and are more restrictive than existing policies, reflecting the fact that India did not try to address sector-specific interests 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 are subject to a foreign equity ceiling and local incorporation requirement. Overall, 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 in other countries given the limited liberalization in its key modes of interest, namely modes 1 and 4.
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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 implementation of these provisions. The request-offer process and India As of June 30, 2002, many countries have put forward their sectoral and horizontal requests to other member countries. Developed country requests largely reflect their interest in liberalizing capital-intensive sectors like telecommunications, financial, energy, and distribution services through improved market access commitments in mode 3, as well as their interest in improving transparency in regulation and in administrative procedures in developing countries. Requests by developing countries 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 independent and contractual service providers, who are de-linked from commercial presence. India has received requests from all major developed countries. The thrust of these requests has been to commit to full market access in a variety of infrastructure services like insurance, banking, telecommunications, and energy services and to reflect Indias FDI liberalization and regulatory reforms in these sectors in its commitments. Greater market access has also been sought for commercial presence and movement of intracompany transferees and business visitors in business services like legal and accountancy services. India has in turn made requests to all its major trading partners. These requests have mainly focused on Indias 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 streamlined GATS or service provider visa for intracompany transferees, business visitors, contractual service providers, and independent professionals for a uniform one year period. This visa would be distinct from normal immigration visas, so as to effectively separate temporary from permanent movement of labour. India has further proposed that entry quotas, wage parity requirements, social security taxes, economic needs test and other such restrictions be eliminated for those qualifying for a service provider visa. The GATS or service provider visa would be characterized by: i) ii) iii) iv) v) vi) vii) Strict time frame for issuance (2-4 weeks maximum); Flexibility in issuance on shorter notice for select categories of providers and border availability; Transparent and streamlined application process; Mechanisms to find status of application, rejection, requirements; Easier renewal and transfer procedures; Safeguard mechanisms to prevent entering 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 providers and improved enforcement of GATS provisions for facilitating entry into Mutual 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 India as it ensures liberal and predictable market access through cross border supply and thus for
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business process outsourcing and back office service exports by India. There is also some improvement in the offers on commercial presence, with removal of limitations such as economic needs tests and authorization/approval requirements and relaxing of limits on foreign equity participation. However, improvements in mode 4 have been very limited. A few offers, such as by the EU and Canada, cover new categories of service providers such as graduate trainees, independent professionals, and contractual service suppliers that are of export interest to developing countries like India. These offers also increase the length of stay and relax associated conditions on stay and entry. However, these offers still do not distinguish between temporary and permanent movement of labour. They continue to subject GATS related movement which is temporary to the usual immigration and labour market regulations which are applicable to permanent migration. Moreover, limitations in the form of entry quotas, differential taxes and subsidies, economic needs tests, and discretionary application of recognition norms continue to hold. Hence, so far, India does not have much to gain from the offers in this mode. It is expected that the offers would be finalized by the end of 2004 and would become part of a new round of WTO negotiations. Although the initial commitments to date show only marginal improvements in terms of market access and conditions of operation relative to the earlier Uruguay Round commitments, there has been much greater willingness on the part of developing countries to negotiate further 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 increasing market access for developing country service providers. This shift in position on services reflects the growing awareness of the significance of this sector to the countrys overall reform and liberalization agenda, its wider implications for growth and productivity, and the realized comparative advantage in selected services. Activity 4 Write your understanding of GATS in 50 words. ............................................................................................................................ ............................................................................................................................ ............................................................................................................................ ............................................................................................................................
3.5 NEGOTIATING STRATEGY AND DOMESTIC REFORMS

In order to benefit from the GATS negotiations, India needs to have a coherent external and domestic strategy. It needs to: (a) identify the countrys strengths, weaknesses, and trade potential and requirements in individual service sectors; (b) identify the concessions India would like to obtain in specific service sectors and from specific markets; (c) determine what it could concede in turn; (d) recognize the political economy constraints and limitations it would face in liberalizing services; and (e) identify the domestic reforms and measures it would need to implement to support its negotiating strategy. The thrust of Indias strategy 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 foreign direct investment. India should consider liberalizing its earlier commitments on market access and national treatment, keeping in mind needs such as capital infusion, technology upgradation,
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synergies with other sectors, and the larger economy-wide impact on efficiency and competitiveness. The commitments have to be framed in the larger context of ongoing regulatory reforms and liberalization in these sectors and must reflect policy intentions. Overall, it must: 1. Bind the status quo at a minimum so as to reflect the current regulatory environment and recent reforms, signal predictability of its policies, and reduce the scope for backtracking. 2. Expand the coverage of its commitments by including new subsectors and activities which were previously not bound, by including more sectors which were not previously scheduled, and by increasing the scope of the existing commitments by removing or relaxing various limitations. 3. Pre-commit to further liberalization so as to signal future intentions, particularly where the course of future policy and a timetable for phasing in has been declared and use the transition period to undertake necessary domestic measures on regulatory capacity and institutional frameworks. 4. Leverage across sectors by offering greater market access through FDI in sectors like insurance and telecommunications which are of interest to major developed countries like the EU and the US in return for improved market access under cross border supply and movement of natural persons for services like IT, health, BPO, and others where it has export potential. Indias strategy in the area of professional services has to be both outward and inward oriented since these are services where India has both export and import interests. Given its comparative advantage in labour and knowledgeintensive services, India needs to obtain more liberal commitments from key export markets, particularly for modes 1 and 4. In this regard, India needs to advance with its proposal on mode 4 through its developing 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 also facilitate the removal of social security taxes, economic needs and other necessity tests, and other restrictions. In addition, India would also need to insist on discussing issues relating to classification of service providers and transparency in administrative procedures. In view of Indias recent emergence as an outsourcing hub, its negotiating strategy also needs to put sufficient emphasis on liberalizing market access through cross border supply. Recently, India has proposed a horizontal formula for mode 1 whereby countries would make a full commitment in this mode across all sectors, barring those like financial services where there may be concerns of financial stability and fraudulent practices arising from unrestricted cross border flows of capital. This approach has been motivated by the protectionist backlash to BPO and back office services in developed countries and would help pre-empt future protectionism in the private domain by guaranteeing unrestricted market access under mode 1. Although India cannot challenge the latest US bill which bans offshoring of US government contracts, given the 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 market access implications of government procurement restrictions. As noted earlier, it would be Indias interest to advance the proposals on both modes 1 and 4 through a quid pro quo negotiating strategy of offering greater market access in sectors of commercial interest like banking and insurance through commercial presence for improved market access in these two modes. On the domestic side, India should also consider scheduling more professional service sectors and opening up these services to foreign commercial presence
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and service suppliers. Such an approach would be conducive to the needs of greater efficiency, competition, higher quality and standards in many of these services 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 private participation in such services. This would require liberalization of FDI policies, divestment of the governments share in related public sector enterprises, and creation of an appropriate regulatory structure to ensure transparency, fairness, and a level playing field without jeopardizing consumer and national interests. 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 addressed. Similarly, in the case of professional and manpower based services, India will not be able to realize its export potential unless it undertakes steps to improve quality, standards of training and infrastructure, and regulatory mechanisms to enforce standards. Investments in telecom infrastructure and supporting facilities and amendments to domestic laws and acts affecting competitiveness in such services may also be required. Activity 5 Talk to some corporate people from a service organization and ask them about their understanding of implications of GATS for India. Summarize your interviews in 50 words. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
3.6 SUMMARY
Service sector trade and investment are likely to grow rapidly in the coming years. The prospects for further liberalization of these flows are also promising given heightened awareness about the importance of a competitive and efficient service sector and much greater willingness on the part of governments across developed and developing countries to deregulate and liberalize services autonomously. The GATS framework provides countries with the opportunity to lock in their liberalization in the service sector. India is likely to emerge as an important player in both exports and imports of services. So far, India has taken a very cautious and conservative approach to the GATS negotiations. But if India is to realize significant market access gains in sectors and modes of interest, then it must also be willing to make substantial market access commitments in services and to overcome its defensive posture in these negotiations.

1. What are the four modes of service delivery? Explain by taking examples. 2. What is your understanding of GATS and its implications for India? 3. In what specific Services sector, India has core competence, which can be strategically exported. Give Justifications. 50

Chanda, R., Globalization of Services: Indias Opportunities and Constraints, Oxford University Press, New Delhi, 2002. Movement of Natural Persons and Trade in Services: 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, and R. Self, Liberalizing Mode 4: A Possible Approach, prepared for the UNCTAD Expert 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 Agreement 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, Washington, DC, 1995. IMF, Balance of Payments Statistics, Washington, DC, 1999. Karsenty, G., Just How Big are the Stakes? An Assessment of Trade in Services by Mode 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.), GATS 2000-New Directions in Services Trade Liberalization: An Overview, Centre for Business and Government, Harvard University and Brookings Institution Press, Washington, 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, Special Session, Proposed Liberalization of Movement of Professionals under the General 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. Stern and Sauve (2000) and Karsenty (1999). 4. Estimates for the different modes of supply were obtained from Karsenty (1999). The latest available estimates are for 1997 for such a mode-wise allocation of services trade. 5. There are differences, however, between the GATS and the FATS concepts of foreign affiliates and related 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 companies by primary activity. Since FATS proxies service products with total production of companies in service sectors and leaves out the value of service activities undertaken by
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companies in agriculture or manufacturing, it may result in some underestimation. At the same time, since the service sector also produces goods, FATS may overestimate the value of service activity. 6. Statistics on the geographic profile of services trade are from the WTO Annual Report (2000). 7. RBI Annual Report (2002-03). 8. Ibid 7. 9. IMF, Balance of Payments Statistics (1999). 10. Nasscom (2000). 11. During the course of the discussions, it was decided, however, that services would be part of a single legal undertaking, the WTO, and would be subject to the same principles, i.e., those of Most-Favoured Nation treatment, national 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 domain. 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 difficult to determine which activities can be covered by GATS and which are excluded. 13. Article VI on domestic regulation establishes disciplines to ensure that regulations such as qualification requirements, technical standards, and licensing procedures are based on objective and transparent criteria, are not more burdensome than required for ensuring the quality of the service, and do not constitute restrictions in themselves. Article VII on recognition which establishes procedures for mutual recognition of licenses, education, and experience and calls for equal opportunities to other countries to negotiate accession to bilateral or plurilateral mutual recognition agreements. Article III on transparency requires countries to establish enquiry points to provide specific information on laws, regulations, and administrative practices with bearing on services trade. There are also several safeguard type provisions which permit a country to introduce restrictions for BoP reasons or to safeguard public morals, law and order, consumer interests, security, and privacy.
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UNIT 4 CONSUMER BEHAVIOUR IN SERVICES

Objectives
After studying this unit you should be able to:

review the basic concepts of Consumer 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 Classification of Buyers Consumer Decision Making Factors Influencing Buyer Behaviour Search, Experience and Credence Quality Summary Self Assessment Questions Further Readings
4.1 INTRODUCTION
All of us buy different services for various reasons. One person may prefer to go to a restaurant for good food while the other may opt for an exclusive restaurant, for status. One person may prefer to read The Times of India early in the morning, while the other may prefer to read the same newspaper after coming back from the office. There are women who dont go to beauty parlors at all, whereas there are others who go regularly. Similarly, there are many such examples telling us that people show different behavior in buying and using different products and services. The discipline of marketing which helps in developing a deeper insight 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 buyer.
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 often for services, both individual or organizational, these roles are played by more than one person. For a marketing person, it is important to know who plays what role in the purchase decision, so as to adapt the service format and promotional efforts to these key players. 53
Conceptually, the consumer decision making roles are best exhibited by the following 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 decider 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 roles are played. These are: i) ii) Initiator: The person who has a specific need and 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 like 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 himself or not. He may instruct others to execute. It has been observed at times, more 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, hospital, 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 observed 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 more 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 household grocery items a housewife plays all the roles and makes the purchases. In organizational buying the dynamics of these six roles becomes much different and while selling to an organization due care should be taken in identifying who is playing what role. To summarize, let us take the example of a business traveler who is asked by his superior to visit a particular branch office. May be in this case the boss works as the initiator. The travel agency, which handles that companys travel booking, with its limited resources may work as a gatekeeper. The finance office may put restrictions on economy class and that too in the state run airlines, may work as influencer. The administrative division which makes the booking and handles the bills may become the buyer and finally the executive, who travels is the user, who was not left with any choice. Activity 1 You are the sales manager for credit cards in your bank and you have learnt that a company is setting up a branch office in your city. You are planning to make a visit for institutional sales. Identify the people you would come across and also the roles they are likely to play. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
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4.3 CLASSIFICATION OF BUYERS

Typically, buyers can be classified into two categories: Personal and Organizational. Personal buyers are those who buy a particular item for his or her own consumption 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 buyers is called organizational buyers. The organizational buyers are those who buy the goods or services for the organizational use. For example, a government department 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 persons 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 fall under influencers category. Because of large number of people working as influencers, 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 from price, quality, reliability, etc. As the complexity of the service offer increases, in B-2-B purchases, the importance of confidence in service supplier increases.
Consumer Behaviour in Services
4.4 CONSUMER DECISION MAKING

The consumers decision to purchase or reject a product or service is the moment of final truth for the marketer. It signifies whether the marketing strategy has been wise, insightful, and effective, or whether it was poorly planned and missed the mark. Marketers are therefore interested in the consumer decision-making process by which a consumer selects one alternative amongst the lot available. The 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 cultural concepts into an easily understood framework. The decision model has three distinct components input , process , and output. Input component of the model include firms marketing efforts (marketing mix activities) which communicate the benefits of the products and services to potential consumers and the non-marketing socio-cultural influences. Sociocultural influences include family, friends, social class, subculture and culture. The combined effect of firms marketing efforts, influence of family and friends, culture etc. affect what consumers purchase and how they use them. The process components deals with the consumer decision making which involves need recognization , prepurchase search and evaluation of alternatives.
Figure 4.1: Input, Process, Output Model of Consumer Behaviour
External Influences
Psychological
Purchase Post purchase Evaluation
Firms Marketing Efforts Socio-cultural Environemtn
Decision Making
Field INPUT PROCESS OUTPUT
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The decision making is affected by the psychological field i.e. the internal influences. 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 more comprehensive purchase model was suggested by Fisk3, who divided the purchase behavior into three distinct stages viz. Pre-consumption Phase, Consumption Phase (Service Encounter) and Post-consumption Phase. The first stage called the pre-purchase stage includes activities which take place before the actual purchase decision. These activities are typically called, problem/need recognition, information search on various alternatives and evaluation of alternatives to select the best of them. At this stage, the individual recognizes a need or problem whose 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 compared with the actual service delivery. This stage is therefore called the service 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 categories, 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 dirty, healthy and not sick, fed and not starved etc. A more acceptable and positive 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 better 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 are 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 buyers goals. To want a particular product or service is nothing but to have a preference 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 those wants which are related to permanent goals and the current wants are those reflecting 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 the 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, atmosphere, 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 executives, what decision process he is likely to go through? Discuss. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
4.5 FACTORS INFLUENCING BUYER BEHAVIOUR

There are a number of factors or variables which affect the buying behaviour. For example; people go on holiday during the vacation time so vacations become a variable. 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 exclusive 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 the buying decision. These factors can be classified into four major categories, namely: situational factors, buyers socio-cultural factors, personal factors and psychological factors. These have been summarized in the Figure 4.3 1. Situational Factors The situational factors influencing the buying behaviour are, the influence of time pressure in product and brand choice, the atmosphere of the retail outlet, occasion of purchase etc. For example, if you are traveling, then demand for lodging and boarding will obviously be there. 2. Socio Cultural Factors Buyers 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
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a) Cultural Factors: Children acquire from their environment a set of beliefs values, and customs which constitute culture. These beliefs, values and customs go deeper and deeper as a person grows. Therefore, it is sometimes said that culture 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 class, geographical location etc. This classification is significantly relevant from the consumer behaviour point of view. To elaborate, let us come back to our earlier example of people buying hospitality and tourism services. It has been observed 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 certain groups to which people look to guide their behaviour. These reference groups may guide the choice of a product but may not be the brand. Peer groups and the peer pressure has generally been observed to play an important role in the purchase of credit cards, cell phones, etc. The knowledge of reference group behaviour helps in not only offering substitutes but also in pricing and positioning them. It is important to note that there are negative reference groups also and some persons dont want to associate themselves with these groups. The negative reference 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 behaviour 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 greatly in knowing the buying process. Often family members play a significant role in the purchase of a particular service, for example its 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) Perceptions: It is the process by which buyers select, organize and interpret information into a meaningful impression in their mind. Perception is also selective in which only a small part is perceived out of the total what is perceptible. Buyers perception of a particular product greatly influences the buying behaviour. For example, if the buyers perception of a product is not positive it requires much harder efforts from the marketing or sales person to convince the buyer on the qualities of the product and thus suggesting him to purchase it. b) Attitude: An attitude is a learned predisposition to respond in a consistently favourable or unfavorable 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 indicating that attitudes manifest themselves in behaviour only under certain conditions. Knowing a buyers attitude towards a product without knowing the personal goals is not likely to give a clear prediction of his behavior. For example, someone may have a highly favourable attitude towards car insurance but stays away from buying it since he has no use for it, as he doesnt own a car. c) Motivation: Motivation is the driving force within individuals that compel them to action. This driving force is subconscious and the outcome of certain unfulfilled need. Needs are basically of two types. First, the innate needs
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those needs an individual is born with and are mainly physiological. They include 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/she grows and these needs are mainly psychological, like love, fear, esteem, acceptance etc. For any given need, there could be a variety of goals. The specific goal selected is dependent on the experiences, cultural norms and values, (apart from other characteristics) of the individual. Failure to achieve a goal generate two types of responses. First, called the defense mechanism, which includes withdrawal, rationalization etc. and second is called search for substitute. 4. Personal Factors a) Personality: Personality can be described as the psychological characteristics that determine how an individual will react to his or her environment. There are a number of dimensions (personality traits) against which an appreciation of an individuals personality can be developed. Each personality trait denotes two absolute points and a persons personality characteristics can be identified somewhere between those two absolute points, indicating the proximity to either of the two. Some of the traits are as follows: Personality Trait Rigidity Leadership Neuroticism Extroversion Dependability Achievement Behavioural Dimensions Rigid Flexible Leader Follower Stable Neurotic Extrovert Introvert Independent Dependent High achiever Low achiever
Let us examine how buyer behaviour is affected by the personality of an individual and for this we take the example of extroversion. Extrovert is a person who is more sociable, likes meeting people, making more friends, prefers to move about, careful about his appearances and doesnt like reading books or confining to the four walls of a room. On the other hand an Introvert is a person who prefers to 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 are purchased more by the extroverts than the others. b) Life Style: Lifestyle as distinct from social class or personality is nothing but a persons pattern of living and is generally expressed in his/her activities, interests and opinions. Some of the dimensions of life style are as follows: Activities Work Hobbies Entertainment Shopping Interests Family Home Job Fashion Media Achievements Life styles suggests differences in the way people opt to spend on different products differently. Life style variables (psychographics variables) help a firm to identify the Inner consumer or the feelings of the consumer about their products which needs to be stressed in advertising campaigns. Opinions Themselves Special issues Products Future
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c) Demographic Factors: Buyers demographic factors like age, gender, education, occupation, etc. also have influence on the purchase behaviour. These factors are very much significant in the study of behaviour of buyers. For example, fast food outlets are more patronized by the teenagers than the elderly persons- example 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 dimensions of the buyer will help you in understanding his needs and wants and also help you in integrating all those elements in your product offer which the consumer wants.
4.6 SEARCH, EXPERIENCE, AND CREDENCE QUALITIES

One of the most significant differences between goods and services is that in goods Search Qualities dominate while services are dominated by Experience and Credence 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 Television repair Vacation Legal services Automobiles Clothing Child care Auto repair Haircuts
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 determine before the purchase. This is more common in physical goods. For example colour, style, fit, feel, smell etc. The second is the experience qualities, which are the attributes which can only be determined after the purchase, or during the process of consumption. The third, is the credence qualities i.e. characteristics which the consumer can not evaluate even after the consumption, like auto repair or medial diagnosis. For example, it may be difficult for a patient to assess whether or not a hospital provided appropriate services. Such characteristics exist invariably in services. In nutshell, most goods are high in search qualities and most services are high in experience or credence qualities. Figure 4.3 gives a continuum of evaluation for different types of products based on search, experience and credence qualities. As services are rich in experience and credence qualities, the following important aspects related to consumer decisions making process need to be understood.
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Information Search: In the case of services, consumers rely more on personal sources 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 post purchase evaluation done in services is much higher that in case of goods. Some 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/independent and therefore lack the financial or marketing acumen to promote their offering. 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 evaluating quality are not available. Evoked Set of Alternatives: In services the customers 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 provider of a service in a given area. ii) The consideration set is small as very little information is available prior to purchase.
In case of Non-professional services the evoked set includes self provision of services. e.g. housekeeping, laundry etc.
Innovation Diffusion: Consumer adoption of innovations is much slower in case of services than in products. This is because consumers have to find a distinct 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 indivisibility does not allow trying the service before consumption. Perceived Risk: Consumers 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 provided by the same provider because a lot depends on the persons caliber and ability to customize it based on the need of the consumer. Another important reason is that unlike in goods most services do not come with guarantees/warranties. Brand Loyalty: Brand switching is lesser with services as compared to services. This is due to the following factors: i) Greater search and monetary cost associated with moving to another service provider. ii) Fewer substitutes are available for services. iii) The rapport that a consumer creates with a service provider prevents him from moving to a new provider as there is always a possibility that the new provider may not understand his needs as well as the previous one did. Attribution of Dissatisfaction: The provision of the service is based on the requirements stated by the consumer. As such he holds himself partly responsible if the service provided is not up to his requirements and hence complains less frequently. Perceived Control: The model proposed by Bateson emphasizes that consumers evaluate services control, they are able to exercise in a given situation. Perceived control theory is based on the premise that customers
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feel more satisfied with a service if they believe that they have greater control over the service delivery. This notion is useful when designing new services Similarly, 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 goods. Since the services are intangible, it is difficult to evaluate them before the 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 buyer behaviour for services is quite different from goods as services are rich in experience and credence qualities unlike goods, which are rich in search qualities.

1. In what ways the buying process differs between individual buyer and the organizational buyer? 2. What are the differences between search , experience and credence qualities? Explain with the help of examples. 3. Why do consumers of services perceive higher levels of risks associated with their purchases? Discuss with the help of examples. 4. Briefly describe the buying process taking the example of Home-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 Model for Services, in Donnelly and George, Marketing of Services, 1981 pp.191-195. 4. Valarie A. Zeithaml, How Consumer Evaluation Processes Differ Between Goods and 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, John A.Czepiel, Michael R. Solomon, and Carol F. Suprenanat, eds., The Service Encounter, (Health: Lexington Mass), 67-82.
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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 and Readings, Dryden, 1995 L.L. Berry and A. Parasuraman, Marketing Services : Competing Through Quality, The Free Press, 1991 D. Carson and A. Gilmore (eds.), Service Marketing- Text and Readings, Mercury Publications, 1996 D. Cowell, The Marketing of Services, Heinemann, 1996 W.J. Glynn and J.G. Barnes (eds.), Understanding Service Management, John Wiley and Sons, 1995 C. Groonross, Service Management 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. Lovelock, Services Marketing, Prentice Hall A. Payne, Essence of Services Marketing, Prentice 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 Perspective, Excel Books, 2002 T.A. Swartz, and D. Iacobucci (eds.), Handbook of Services 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 McGraw-Hill, New Delhi, 2003.

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MS-65
Block

UNIT 5 Product and Pricing Decisions UNIT 6 Place and Promotion Decisions UNIT 7 Extended Marketing Mix for Services 5 17 29
Services Marketing Mix

Prof. L.M. Johari FMS, Delhi University Delhi Prof. J.D. Singh IMI New Delhi Prof. 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 Jameshedpur Mr. Arun Shankar Citi Bank New Delhi Dr. V. Chandrashekhar Mahindra Days 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 India, Hyderabad Prof. Rakesh Khurana School of Management Studies IGNOU, New Delhi Prof. Madhulika Kaushik School of Management Studies IGNOU, New Delhi
Ms. Malabika Shaw AIMA New Delhi Mr. Saurabh Khosla Tulika Advertising Agency New 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 Khozikode Calicut Prof. B.B. Khanna Director School of Management Studies IGNOU, New Delhi Dr. Kamal Yadava Course Coordinator and Editor School of Management Studies IGNOU, New Delhi
Dr. Rupa Chanda IIM Bangalore
Print Production
Mr. A.S. Chhatwal, Asstt. Registrar (Publication), Sr. Scale, SOMS, IGNOU
June, 2004 (Revision) Indira Gandhi National Open University, 2004 ISBN-81-266-1263-0 All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other means, without permission in writing from the Indira Gandhi National Open University. Further information about the Indira Gandhi National Open University courses may be obtained from the Universitys Office at Maidan Garhi, New Delhi-110 068. Printed and published on behalf of the Indira Gandhi National Open University, New Delhi, by Director, School of Management Studies. Paper Used: Agro-based Environment Friendly Laser Composed by: ICON Printographics, B-107 Fateh Nagar, New Delhi-110 018
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BLOCK 2 STRATEGIC ISSUES

In unit 1 of the course you were introduced to the marketing mix for services. As you are now aware, in addition to the traditional 4Ps of marketing mixProduct, Price, Place and Promotion, marketing mix for services includes three additional elements - People, Physical Evidence and Process. In this block we will be discussing these seven marketing mix elements. Unit 5 on Product and Pricing decisions explains the concept of the service product, issues involved in developing new services offerings, service branding and positioning, and pricing of services. Unit 6 details out issues related to Place and Promotion decisions. In this unit different methods of distribution have been discussed alongwith the various elements of promotional mix. The last unit of this block covers the extended marketing mix elements of People, Physical Evidence and Process.

UNIT NOS. UNIT TITLE AUDIO PROGRAMME VIDEO PROGRAMME
BLOCK
1.

2.
5. 6. 7.

3.
8. 9. 10.
STRATEGIC ISSUES
4.
11. 12. 13. 14.
Financial Services Tourism and Hospitality Services Health Services Case Study: Serving the Global Indian Issues in Social Destination Marketing India Marketing of Health
5.
15. 16. 17. 18. 19.
UNIT 5 PRODUCT AND PRICING DECISIONS

Objectives
After studying this unit, you should be able to:
Define the service product concept , describe the various elements of the total service package and suggest how to go about developing a new service offering. Understand the concepts of service branding and positioning. Describe how characteristics of the services influence the pricing decisions. Discuss the pricing strategies that may be used to sell 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 Assessment Questions References
5.1 INTRODUCTION
In practice the core of marketing is considered to be the marketing mix. Neil Borden1, while quoting from an article of James Culliton2, wrote that a marketer is viewed as a "decider", or an "artist" or a "mixer of ingredients" who plans various means of competition. "He may follow a recipe prepared by others, or prepare his own as he goes along, or adopt a recipe to the ingredients immediately available, or experiment with or invent ingredients no one else has tried." If a marketer was a "mixer of ingredients", what he designed was a marketing mix. Borden further wrote that "it was logical to proceed from a realization of the existence 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 managements to produce a variety of mixes. It is the problems raised by these forces that lead marketing managers to exercise their wits in devising mixes or programmes to fight competition." As discussed in Unit1, the marketing mix in services includes 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 tangible component to which some intangibles like style, aftersales service, credit, etc., are integrated. In the case of services, on the contrary, the tangible component is nil or minimal.
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 offered to the target market. There are two important things to note. First, a service is a bundle of features and benefits and secondly, these benefits and features have relevance for a specific target market. Therefore, while developing a service product it is important that the package of benefits in the service offer must have a customer's perspective. Kotler3 has identified five levels of a product, as listed in Table 5.1. The example given in the table is that of a hotel. It is the core and the basic which might be the same for most of the competing products 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 fundamental benefit or service the customer is buying (Hotel : Rest / Sleep) Basic, Functional Attributes (Room; Bed; Bath) Set of attributes / Conditions the buyer normally expects (clean room, large towel, quietness) That meets the customers' desires beyond expectations(Prompt Room Services, and Check in / out, Music, Aroma) The possible evolution to distinguish the offer (all-suite hotel)
AUGMENTED PRODUCT
POTENTIAL PRODUCT
Activity 1 For any 3 brands of a particular service (say Hospitals), prepare a comparative 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 which includes core service, facilitating services and supporting services. The second level is that of an augmented service offering where accessibility, interaction and customer participations is given equal importance in delivering the service 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 relevance 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 services, tangible and intangible but there is a
main or substantive or 'core' service and around it are built the auxiliary or peripheral or facilitator services. It is important to note that facilitating services 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 services 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. For example, in a 500-room hotel the core service is lodging and room service, bell boy service is facilitating service, and health club, car rental are supporting 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 hotel, business center might be the supporting service, but in a business and convention hotel, the same service would be facilitating service. Figure 5.1: The Service 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, 1990
Nevertheless, it is important while developing the service product package to consider all the three levels of service: core, facilitating and supporting. 2. The 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 involve 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 augmented service offering. Here the suggestion is that issues related to the accessibility of the service, interaction with the service organization and consumer participation are also integral elements of the service product. Gronross identified the relevance of these issues in relation to the augmented services offering. The details are summarized in the Table 5.2. Some of these aspects are covered 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 and skills of personnel Working hours and time used in performing various tasks Location of service outlet Exterior and interior of service outlet Infrastructure, hardware, documentation The number and knowledge of consumers simultaneously involved in the process. Interactive communication between employees and customers Interactions with the physical and technical resources of the organization needed in the service production process Interaction with other customers involved in the process How well the customer is aware about the process of service delivery and his or her role How well the customer is prepared to share information How well 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 image enhances the service experience, and a bad image may even destroy it. Therefore, the issue of management of image through communication becomes an integral part of developing the service product. But the important point to note here is that 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 customer is more than adequate to neutralize the effect of your efforts of mass media advertising, media blitz and direct promotions. You will study more about communication in the next unit. Activity 2 For any service organization, identify all the levels of service offer, as suggested in the Gronroos model and also study 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 Benefit Concept: The service product which you offer in the market place must have its origin in the benefits which the customers are seeking. But the problem is that customers themselves may not have a clear idea of what they are seeking or they may find it difficult to express or it may be a combination of several benefits and not a single one. Over a period of time, the benefits sought may also change. This change in customers may come about by a satisfactory or unhappy experience in utilising the service, through increased sophistication in service use and 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 service which is being offered. A centre for the performing arts may offer entertainment and recreation. But within this broad framework, there can be specific choice paths for satisfying the entertainment objective, such as, drama, musical concerts, mime, poetry recitation, dance etc. Defining the service concept helps answer 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 specific shape and form to the basic service concept. To refer to the example of the centre for the performing arts, the service concept is to provide entertainment. The service offer is concerned with the specific elements that will be used to provide entertainment: drama, music, mime, poetry recitation, and dance. In the category of musical concerts the choice may be vocal or instrumental, with vocal 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, provision of air-conditioning, snack bar and toilets are the tangible items. The tangible 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 components. But in practice, he can control only the tangible components and lay down norms for the intangible components (e.g. maximum duration of recital, brief introduction before each dance item, etc.) Service Forms: In what form should the services be made available to the customers is another area of decision-making. Should 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 consumer 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, with a higher priced ticket for a well-known performance? Service form refers to the 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 withdrawal slip in which you fill all the particulars and hand it over to the clerk , 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)
waiters are the elements of the delivery system. The two main elements in a delivery system are the people and the physical evidence. The competence and public relations ability of a lawyer represents the 'people' component, while his office building, office door, letterhead, etc. are all elements of the 'physical evidence'. The physical evidence components have also been called 'facilitating goods' and 'supporting goods'. These are the tangible elements of the service and they exert an important influence on the quality of the service as perceived by the consumers. Figure 5.2 presents a graphical conceptualisation of the service product.
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: service elements (tangible and intangible) service forms (in what way and how) service 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 but 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 illustrates 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 Mixed Adults Swimming lessons Badminton, Tennis lessons Card rooms Billiards Facilities for parties & receptions Only women or men Beauty parlor/Massage facility Yoga/Judo Lessons Tournaments Kitty parties Business groups Conference rooms Secretarial assistance Video coverage
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The service or services which you offer must be targeted at specific market segment. 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 would 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 time. Activity 3 You have studied that a service product can be analysed at the level of the customer benefit concept, the service concept, the service offer and the service delivery system. Try to recapitulate the services that you have enjoyed, 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 important decisions. A well chosen brand name can provide a number of specific advantages to the organisation. These include suggesting product benefits, evoking feeling of trust, confidence, security and simplifying shopping. The American Marketing Association defines a brand as follows: 'A brand is a name , term, sign, symbol, or design, or a combination of these, intended to identify the goods or services of one seller or group of sellers and to differentiate them from those of competitors.' Though branding has received considerable attention from marketers and academicians, the main focus has been on physical goods rather than services. However, services branding has started to receive considerable attention lately. 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 memorability. Keeping in view the transition of Indian economy to one which is dominated by services, The Economic Times in its survey of India's most trusted brands has started including a separate category of service brands. According to its 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 Caf Coffee Day Taj Hotels Oberoi Hotels ITC Hotels 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
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of most trusted brands - 2003,the top services in different service categories were as given in Table 5.4 below. It is important to learn that brand can be a major determining element in the purchase of services and a means of adding differentiation. Service managers should keep their focus on branding and differentiation in order to avoid the shift to commodity status where competition is primarily on price and terms. On the other hand competition in speciality branded services is based on the other elements of the marketing mix including customer service, advertising, brand name etc. Service Positioning Positioning is the act of designing the company's offering and image to occupy a distinctive place in the target market's mind. This requires the companies to examine their markets, determine the structure and nature of markets segments. The various steps in determining a positioning plan include: i) ii) iii) iv) v) vi) vii) Define a market's segments Decide which segment to target Understand what the target consumers expect and value Develop a service which caters to these needs Evaluate consumer perceptions of competing services Select an image for the product matching the aspiration of the targeted consumers Communicate with the determined customers and make the product suitable available.
You will appreciate that service positioning involves three basic steps i.e. Segmentation, Targeting and Positioning . The market segmentation can be done on the basis of a number of variables like Geographic ( region, climate etc.), Demographic (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 selected services. Table 5.5: Price Terminology for Selected Services Terminology Admission Commission Fare Fee Interest Premium Rent Salary Tariff Tuition 12 Service Theatre entry Brokerage service Transport Legal service Use of money Insurance 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, the 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 used 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 is to calculate cost and greater the tendency towards nonuniform services, such as fees of doctors, management consultants, lawyers. In such cases, the price may sometimes be settled through negotiation between the buyer and seller. On the other hand, in services such as dry cleaning, the tangible component is higher, and 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 service the greater the freedom to fix the price at any level. Often the price may be fixed according to the customer's ability to pay. In such cases price may be used as an indicator of quality. The third characteristic to be kept in mind while determining prices is that in many services, the prices are subject to regulations, either by the government or by trade associations. Bank charges, electricity and water rates, fare for rail and air transport in India are controlled by the government. In many other cases, the trade or industry association may regulate prices in order to avoid undercutting and to maintain quality standards. International air fares are regulated by international agreement of airlines, sea freight fares may be regulated by shipping conferences. In all such cases, the producer 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-oriented pricing. In the former, the price may be regulated by the government or industry 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 competition or customer-oriented. In case of competition-oriented pricing, the price may be fixed at the level which the competitor is charging, or fixed lower to increase 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 sacrifices 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 important than monetary costs. The nonmonetary costs can be broadly divided into the following categories. i) Time Costs: Because services are inseparable, most of them would require direct participation of the consumer i.e. they involve time. The 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 only 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 monetary cost. ii) Search Costs: These involve the efforts put in by the consumer in searching information, finding out alternatives and evaluating them. Typically search costs are far greater in case of services as compared to goods. There are a number of reasons for this. Services being rich in experience and credence qualities are rarely displayed on shelves in service outlets for
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customers to evaluate them. Also in many services it is difficult to know the price in advance. iii) Psychic Costs: These include fear of not understanding or fear 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, customer may find the service product difficult to understand like various options in life insurance or difficult to use like ATMs, on line trading etc. As marketers you should not concentrate just on monetary costs alone as consumer make decisions 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) Pricing Strategies The pricing strategies that may be used to sell services are: a) Differential 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 is used to reduce the 'perishability' characteristic of services and iron out the fluctuations in demand. Differential price implies charging different prices according 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 pricing (balcony tickets are more expensive than front row seats) and houses in better 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 for 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 price which is quoted for a basic service to attract customers. A restaurant may offer a basic meal at a low price but one which includes no soft drink or sweet dish. Once the customer is attracted because of the initial low price he may be tempted to buy a drink or an ice-cream or an additional dish. Thus he may end up buying more than just the basic meal. d) Guaranteed Pricing refers to pricing strategy in which payment is to be made only after the results are achieved. Employment agencies charge their fee only when a person actually gets a job, a property dealer charges his commission only after the deal is actually transacted. e) High Price Maintenance Pricing strategy is used when the high price is associated with the quality of the service. Many doctors, lawyers and other
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professionals follow this pricing strategy. f) Loss Leader Pricing is one in which an initial low price is charged in the hope of getting more business at subsequently better prices. The danger is that the initial low price may become the price for all times to come. g) Offset Pricing is quite similar to diversionary pricing in which a basic low price is quoted but the extra services are rather highly priced. A gynecologist may charge a low fee for the nine months of pregnancy through which she regularly checks her patient, but many charge extra for performing the actual delivery and post-delivery visits. h) Price Bundling: Some services are consumed more effectively in combination with other services. When customer perceive value in package of services that are interrelated, price bundling 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, the pricing strategy of a service firm should also address the following issues:

Who should collect payment? (Organisation or a specialist intermediary) Where should payment be made? (Location of service delivery or a convenient outlet or customer'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, message 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 developing a new service were identified and discussed. These include developing a consumer benefit concept which should be translated into service concept. Service concept then helps the organisation in detailed designing of the service offer which is to be translated into the service delivery system. The unit also explained the issues related to service branding and positioning While determining the prices of services it is important to consider the perishability and intangibility aspects. Also, a number of services are subject to price regulations by the 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 suitable 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 pricing of services? Does characteristics of services influence their pricing? Discuss, taking each service characteristic, one by one.
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4. Think about some of the services that you use frequently, for example restaurant or out-door catering. From the lowest end eating out joint to a most exclusive restaurant you visited, identify how the price of these services are expressed? 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 of those services in which there is non-price competition. Identify reasons, thereafter, 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 answer the questions asked in the case.
5.8 REFERENCES
1. Neil H.Borden, "The Concept of Marketing Mix", Journal of Advertising Research, 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 : Practice Hall of India, 2000). 4. Christian Gronross, "Developing the Service Offering - A Source of Competitive Advantage," in C.Susprenant (ed), Add Value to Your Services, (Chicago : American Marketing Association), p.83, 1987.
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UNIT 6 PLACE AND PROMOTION DECISIONS

Objectives
The objectives of this unit are:

To examine how service characteristics influence distribution decisions. To identify the methods of distribution for service industries. To propose guidelines for advertising, sales promotion and other promotional 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 Distribution in Services Promotion Summary Self-Assessment Questions References and Further 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, Delivery and Coverage. Though it might be easy to understand these concepts for 'physical items', however we have examples of unsold or spare seats in Airlines sectors, unsold rooms in hotels and unsold table covers in restaurants. The service characteristics 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 services.
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 consumers. The inseparability characteristic of service such as those of doctors, teachers, consultants, mechanics etc. poses a distribution constraint since they are able to serve only a limited, localised market. The other characteristic of services which affects the distribution strategy is the fixed location of services such as universities, restaurants, and hospitals which necessitates the customer to 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. In deciding where to locate your service, you should raise the following questions as they would help you arrive at the right decision. i) How important is the location of the service to the customers? Will an inconvenient location lead to purchase 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 is the most critical factor. The
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answer is no in case of services provided by doctors and beauty parlors, where the 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 quality? iii) How important are complementary services to the location decision? Can the clientele be increased by locating services where complementary products or services already exist? Garages and mechanic shops located next to petrol stations are examples of complementary location decision. The second decision variable in the distribution strategy is whether to sell directly to the customers or through intermediaries. In case of services which are inseparable form the performer, 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 operate 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 service integration.
6.3 METHODS OF DISTRIBUTION IN SERVICES

Distribution in services can be broadly classified into two categories- direct sales and sales via intermediaries. The following table provides examples of both of these categories. Direct Sales
Sales via Intermediaries

Electronic channels e.g., ATMs, Online courses Franchisees e.g., McDonald's Quasi Retailing
Agents & Brokers e.g., travel / insurance agents

1) Direct Sales Direct sales has specific marketing advantages as they help in maintaining better control over how the service is provided or performed and also in obtaining direct feedback from 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 particular individual may be in demand or direct sale means limited geographic market coverage. a) Direct Sales Through Electronic Channel To overcome such problems companies are exploring possibilities of direct sales through electronic channels. The typical benefits the companies see in electronic distribution of services are:

Consistent delivery for standardized services Low cost Customer convenience Wide distribution
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Customer choice and ability to customize Quick customer feedback
Place and Promotion Decisions
Activity 1 Compare 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 name, 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 permitting the exploitation of such name, idea process or equipment and the goodwill associated his rights. c) The inclusion in the licence agreement of regulations relating to operation of the business in the conduct of which the licencee exploits his rights. d) The payment by the licencee of a royalty or some other consideration for the rights that are obtained. In service Industries franchises operate in the area of hotels, restaurants, car rentals, fast food outlets, beauty parlours, pest control, travel agencies, office services, packers and movers, couriers, business centres, etc. The advantages provided by a franchising arrangement are as follows: 1. There are usually training materials already developed, for both franchisees and their workers. 2. Expansion through franching can proceed quickly. 3. The franchiser need apply only minimal controls; it does not have to develop 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 franchisee is responsible for most of the cost control. 7. There is often less risk attached to franchise expansion than with the creation of new service ventures that may 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 operators 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 ironed out. c) Quasi Retailing The quasi-retail outlets, sell services rather than goods, like19
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. Also 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 many quasi-retail outlets in a centre can reduce the range of conventional retail store choice, if the quasi retail establishments are closed or otherwise. Arguments for Quasi-Retail are that many complement other retail businesses. For example users of facilities like banks and building societies may use shops selling goods on the same shopping trip. Service outlets can have imaginative window displays to encourage window shopping. There are some suggestions for quasi retail establishments to succeed. Firstly, they should encourage customers to travel longer distances, as the retail radius of the outlet might otherwise remain small. This 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: multiple theatre complexes and entertainment centers. The third suggestion which can 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 production cost. The fourth suggestion is to reduce the range of service offer at individual service outlets to match the market requirements and also to reduce the overheads. For example the Apollo Clinics are not the full service hospitals but they help in market coverage and delivery of services. There could be many more suggestions and therefore each service organization must evaluate how it can be benefited 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 main hospital in a particular region of the country? If no, then what relative advantages you see in "Quasi Retail Outlets" of the health care organization? ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... 2) Sales via Intermediaries To the extent the middlemen exist in a service channel, they are typically sales agents, brokers since there are no inventories to be purchased or distributed. Service Channel tends to be direct. Therefore, this Production/Distribution house should be located, to 'sell' whatever you have in the inventory where it is possible. Place decisions are therefore, all extra-corporate entities between producer and prospective users that is utilized 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 should be addressed before hand in deciding the distribution strategy involving intermediaries:

conflict over objectives and performance conflict over costs and rewards control of service quality empowerment versus control channel ambiguity
A service organization can develop an effective channel system if it helps the intermediary to develop customer-based service processes by providing the required support. Also through training it may develop the intermediary to deliver service quality and gradually move to a cooperative management system and controls. Keeping in view the characteristics of services and the potential management problems in retailing of services, as shown in Fig 6.1, there are distinct channel configurations, which one can notice in service sector. Rathmell has suggested the dominant channel configuration in the service sector where agents and brokers play 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 for a principal. His contract will define these provisions along with territorial rights, exclusivity and sales commissions. Broker: A broker is an independent intermediary between buyer and seller who bring parties together to facilitate the conclusion of sales contract. A broker may have continuing relationship for his client under a contract period; for which he may charge fee for assistance. Alternately, a broker may be for a special job to be undertaken. There are obvious benefits in distributing services through Agents and Brokers. Firstly, they help 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 service principals may lead to poaching in territories of others resulting in loss of control over pricing and other aspects of marketing. Activity 3 What services 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 together. 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 with the agents for goods and they are classified as brokers or sales agents. The example of this kind of channel is transportation (travel agents) and office or factory workers (employment agencies). However in some cases the agents may be trained 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 transferred. This type of channel is used for marketing insurance services, where a contact document exists as a physical and tangible representation of the services. Another characteristic of services is that the services are generally not delivered to the buyer and the creation of time and place utilities is a vital function in the services marketing. Irrespective of whether one uses agents or middlemen or direct sales channel the factor of location keeping in view the potential markets will be the most significant factor in channel selection decision. Duane 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 decision of many services. The problem of standardization and uniformity restrains the service organization to use middlemen to any great extent and limit the geographical area which the service organisations propose to reach and cover. This lays emphasis on the significance of good selection to attain maximum coverage at the market place. Banking organizations have started reliving this fact and introduced extension counters, mobile banking apart from opening branches in rural areas. Logistics in Services The field of logistics has not been recognized as an area of consideration for effective distribution of services, it could be the issue of locating a site for the new branch of a bank or delivering health care facilities or location of educational institutions, etc. In India these logistical problems are always overshadowed by the Government policy or interventions. There are guidelines suggesting that to open a single branch in any urban area, a nationalized 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 Health Centers have been opened but neither have they had the required staff nor the
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infrastructure. The significance of logistics is increasingly felt in the services sector as the field of logistic is gaining importance in the manufacturing industries.
6.4 PROMOTION
It is now established that there are clear differences in information usages between goods and services. First, the difference is that consumers of services are less likely to purchase without information than those of buying goods. Secondly, the consumer of services will prefer personal sources over impersonal sources of information. And thirdly, the basic characteristics of services have implications for communication strategy. For example, in hospitality industry the intangible 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 and representations of the service offer in the promotional material. Therefore, the above three differences influence the decisions with regard to with regard to (a) the communications objectives (b) target audiences and (c) planning of each 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 promotion mix for services may fall under one of the following: 1. Develop personal relations with client (personal relations might result in satisfaction, more than their service offer). 2. Make a strong impression of competency, honesty and sincerity (professional orientation to service transaction so as to win buyers confidence in sellers abilities to deliver the services). 3. Should be able to use indirect selling techniques (creating derived demand or act as a buying consultant). 4. Manage to maintain a fine image by positive word of mouth. 5. Packaging and customization. Activity 4 SBI has recently launched Credit Cards and Insurance services. What would be the possible advertising objectives for there services? ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... Target Audience While you are defining the objectives of your communication campaign, you should also be clear about the target audience. In service sectors there is a direct contact between the person who provides the service and the customers. Therefore, some amount of promotion should be targeted 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 handle 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 may not necessarily be the buyer or user but also the influencer, decider or user of the buying cycle.
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Planning the Promotion Mix i) Advertising: Advertising is any kind of paid, non-personal method of promoting by an identified organisation or individual. Certain services such as entertainment (cinema, theatre), passenger and freight transport (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 doctors, accountants, and lawyers, have rarely used advertising as a means of increasing their clientele. These groups have traditionally relied on word-ofmouth for attracting new customers. But this situation is changing and you can see advertisements in the daily newspapers giving information about the location and timings 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-director of a prestigious medical college or institution. Such messages help create a positive image and credibility. The Guidelines which can be kept in mind while promoting services are as follows: a) use simple, clear messages; b) emphasise the benefits of service; c) promise only that which can be delivered and do not 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 service. One other aspect which is of importance in designing an appropriate advertising strategy is the high level of consumer-organisation interaction required in 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 describing the company's services, activities and its areas of expertise b) creating a positive image for the company c) building a strong sense of identification with the customer by turning his needs, values and attitudes d) creating a positive background for the sales people to sell the services by providing all relevant information 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 performance of the service personnel and therefore the advertising in service industries should not only restrict itself to encouraging consumption, but also it should encourage employees to perform well. They proposed the following six basic guidelines to help design effective advertising programmes. The advertising should have positive effects on contact personnel. The advertising should capitalize on the word of mouth. The advertising should provide tangible clues to the customers. The advertising should make the service offering easily understood. The advertising should contribute to the continuity. The advertising should promise what is possible. ii) Consumer Promotions: Lovelock and Quelch, while listing the various objectives of promotion and types of promotions which a service provider can
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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 competition. They further suggested that unlike physical goods the varieties of schemes available as consumer sales promotion schemes are highly limited. For example, Sampling cannot be used frequently because of the cost of service. Premiums are frequently used to give an element of tangibility. Price/quantity promotion can help generating long term commitment from consumers e.g. group rates for hotels. Coupons are lesser in use. Refunds and future discounts not much in practice. Prize Promotions can be used effectively and add excitement and involvement. Activity 5 Identify promotions which you have recently seen offered by a. Commercial Banks b. Hospitals c. Retail Chains d. Multiplex Cinema Houses ............................................................................................................................ ............................................................................................................................ ............................................................................................................................ ............................................................................................................................ iii) Guidelines for Selling Services: Much has been written on the sales management, primarily in the context of product marketing. Johnson observed that for a service sales personnel the following do's and don'ts should be followed. 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 there 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 one 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 results. It is therefore important that a service sales person must make a strong impression of competency, honesty and sincerity. Thirdly, a service sales personnel has to use indirect selling techniques, as what he/she is promoting is an intangible. This can be done either by creating a derived demand or by playing the role 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 managing 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
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of time, a service seller is dealing with a host of services rather than one. Their thoroughness on each and ability to package them to suit each customer's needs would determine the success. In other words the ability of seller to customize the service offering is very important. Exhibit 6.1 Role of Non Verbal Communication in Service Encounters
The delivery of most services involves considerable interpersonal contact between service provider and customer. Interpersonal communication is especially important in the so-called "pure" services, where delivering the service involves a high degree of person-to- person interaction and no exchange of tangible objects. The nonverbal aspects of interpersonal communication - the form of communicating thoughts and emotions without using words- are at least as important as the verbal components in shaping the way a customer feels about his or her dealing with an employee. Customers who are complaining or seeking retribution are likely to pay particularly close attention to an employee's nonverbal communication. Nonverbal communication is also particularly important when customers attempt to evaluate services such as health-care and legal services, where quality is especially difficult for the average consumer to assess. The authors suggest that service 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 feedback and periodic reminders to staff about the importance of nonverbal communication. Offer voice training to employees who need it, so they speak with a voice which displays warmth and trust. Attempt to match employees' manner of dress with customers' expectations. For example, cool colours might be used when wanting to project an image of friendliness, poise and warmth, and warm colours to project an image of activity and excitement. Employees should normally dress formally in professional services and when interacting with upper-class customers. They may dress more causally when interacting with a lower-class clientele. Conduct periodic surveys to assess customers' perceptions of service employees' nonverbal 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 Encounters", Journal of Services Marketing, Vol. 14, No.5, 2000
iv) Public Relations and Publicity: In certain service industries it is not possible to use the conventional promotion tools with success. For example in advertising industry mass media advertising is really rare. There are some services where the size of the operation is not large enough that one can afford heavy promotional budgets. There are other who cannot afford to cope up with their existing 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 difficult to promote abortion services. Similar could be the case for open-heart surgery or other services. Arising out of these reasons the conventional promotional tools have a limited use. Duncan suggested that the services sector industries have to think about other promotional tools like public relations and publicity.
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There are very successful examples like a medical doctor specializing in eye care running his own clinic-cum-nursing home and organizing free eye camps in all over 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 give further boost to the promotion. Therefore promotional activities like community relations, event management, media blitz, corporate identity programmes have relevance and they should be used innovatively and effectively. v) Word of Mouth: Services being rich in experience qualities, word of mouth plays an important role in promoting services. Services are adopted, if not more, as much because of word of mouth communications as because of active promotion by marketers. However, people seldom pass on information about a product or service without some reasons. Managers who want to take advantage of word of mouth communication should make specific efforts in this direction. Given below are some suggestions for stimulating a positive word of mouth (apart from providing excellent service quality)
Offering a gift, discount or other reward to customers who bring in new customers. Asking customers who express satisfaction, to tell their friends. Running 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 Identify the role of PR for Delhi Police. Do you think any other communication tool can 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 electronic channels, franchising or retailing. Services can also be distributed through intermediaries like agents or brokers. Promotional issues are also unique in service industries and typically public relations takes a front seat, while advertising is more of 'corporate advertising.' The unit provides you guidelines on 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 context 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, rather than theirs own outlets? 4. What is the concept of Quasi Retailing? Identify at 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 intermediaries are important. 6. What guidelines you would follow for developing an advertising campaign for a service organization? Discuss by taking the example of a commercial bank or an insurance company. 7. It is been said that PR Tools are more relevant in service organizations. Discuss.
6.7 REFERENCES AND FURTHER READINGS

1. John M.Rathmell, Marketing in Service Sector (Cambridge Mass: Winthrop publishers), 1974, p.110. 2. Duane L.David, Joseph P.Guiltinan and Wesley H.Jones, Service Characteristics, Consumer Research, and the Classification of Retail Services, Journal of Retailing, Fall 1979, pp. 3-23. 3. Ravi Shanker, Distribution of Services, Managing Distribution, (New Delhi : Manas Publication), 1992, p.125 4. William R. George and Leonard L Berry :Guidelines for the Advertising of Services, Business 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 Modern Marketing, (New York : Mc Graw Hills), 1987. 7. Tom Duncan, A Study of How Manufacturers and Service Companies Perceive and Use Marketing Public Relations, (muncie, Ind :Ball State University), December 1985. 8. Philip Kotler, Megamarketing, Harvard Business Review, March-April, 1986, pp. 117-124.
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UNIT 7 EXTENDED MARKETING MIX FOR SERVICES

Objectives
The objectives of this unit are:

To introduce the extended marketing mix for services To describe the fifth P of the marketing mix called People and emphasize on the 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 significance 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 Readings
7.1 INTRODUCTION
For service industries, it was observed that the traditional marketing mix was inadequate 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 like manner so that the existing marketing tools can be applied. This was practically difficult. The second reason was that the marketing practitioners in the service sector found that the marketing mix does not address to their needs. They observed 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 cant be inventoried, patented or transferred. The third reason was that since services are basically different in comparison to physical products the marketing models 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 redefined. The marketing mix has extended beyond 4Ps for marketing of services. These additional Ps are added to meet the marketing challenges posed by the characteristics of services. Booms and Bitner though without any empirical work suggested 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 supplement the relevance of each of the 7 Ps. A detailed account of each of the additional 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 services are important because, A customer sees a company through its employees. The employees represent the first line of contact with the customer. They must, therefore, be well informed and provide the kind of service that wins customer approval. The firm must recognise that each employee is a salesman for the companys service. The importance of customers in services stems from the fact that most services imply active and involved customerorganisation interface. a) Service Personnel: Service personnel are important in all organisations but more so in an organisation involved in providing services. The behaviour and attitude of the personnel providing the service is an important influence on the customers overall perception of the service and he can rarely distinguish between the actual service rendered and the human element involved in it. How often have you had the experience of holding onto a telephone receiver after dialing for Assistance or Trunk Booking and receiving no response? What do you think has been the role/contribution of the telephone operators towards giving our telephone system the image which it has today? The case of telephone operators is still controllable because the telephone system presents a low contact organisation. High or low contact is 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 definition, restaurants, hospitals, schools represent a high contact organisation. The other important distinction of service personnel is between those that are visible to the customer and those that are not. In a restaurant, the waiters are visible 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 responsibility in maintaining relations with the customer. The rice dish which is not cooked properly is the cooks 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 customer will be an important determinant in the restaurant losing that customer forever 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 contact 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; and d) reducing the importance of personal contact by introducing automation and computerisation wherever possible. We will discuss these aspects in the next section on Internal Marketing (Section 7.3) 30
b) Customers: Customers are important because they are a source of influencing other customers. In the case of doctors, lawyers, consultants one satisfied customer will lead to a chain reaction, bringing in his wake a number of other customers. Thus as a marketing manager, your first task should be to ensure complete satisfaction of the existing customers. The kind of customers that you attract exerts an important influence on prospective customers. The prospective customer may 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 have and work towards providing your service organisation an image which will fetch you your future customers.
Extended Marketing Mix for Services
7.3 INTERNAL MARKETING

Although the discussion on significance of employees in the business activity started in mid-seventies the concept of internal marketing was introduced only afterwards. One school of advocates of this concept initially suggested that the employer should apply market research, market segmentation and traditional marketing activities like advertising in order to attract employees and make them perform in the desired way. Such traditional marketing efforts should be used internally. It was Gronross who suggested that internal marketing should be broader than the traditional marketing. He suggested that internal marketing should be viewed as a managerial philosophy. According to him, The internal marketing concept states that the internal market of employees is best motivated for service-mindedness and customer-oriented performance by an active marketing like approach, where 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 are the first internal market for the organization. a) Strategic and Tactical Objectives of Internal Marketing Gronrooss clarified that the basic objective of internal marketing is to develop motivated and customer conscious employees. If this is the case, then it has strategic as well tactical implications. His point of view has been summarized in Table 7.1.
Table 7.1: Strategic and Tactical Objectives of Internal Marketing Overall Objective Strategic Level Objective To develop motivated and customer-conscious personnel. To create an internal environment that supports customerconsciousness and sales-mindedness among the personnel through supportive:

Management methods; Personnel policy; Planning and control procedures.
Tactical Level Objective
To sell services, supporting services (used as means of competition), campaigns, and marketing 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 support 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 selling is needed internally, too.
Source: Christian Gronross, Internal Marketing: An Integral Part of Marketing Theory. In: J.H. Donnelly and W.R. George, Eds., Marketing of Services, (Chicago: American 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 dont meet customers expectations, then neither does the service. Investing in people quality in a service business means investing in product quality. b) Elements of Internal Marketing To realize its potential in services marketing, a firm must realise its potential in internal marketing-the attraction, development, motivation, and retention of qualified employees. Internal marketing paves the way for external marketing of services. The 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 perform their service roles excellently; 4. bring people together to benefit from the fruits of team play; 5. leverage the freedom factor; 6. nurture achievement through measurement and rewards; and 7. base job-product design decisions on research. 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 imaginative in how we compete for talent? Are we bold? Do we experiment and try new strategies? Do we use a variety of media? Do we use the right people to recruit and 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 that they can grab hold of and believe in? Do we have a reason for being that makes 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 people to perform excellently? Do we view skill and knowledge development as an investment 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 people why and not just how? Do we go beyond training and educate as well? Do we stress team play? Do our organizational structure, physical work environment, training 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 rather 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 employee 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 give all employees the opportunity to be recognized for their excellence? Do we listen to our employees? Do we use formal and informal research techniques to investigate their attitudes, concerns, and needs? Do we proactively solicit their input? 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: Competing 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 Organizational 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 marketed first to the intermediate customers who are the employees of the firm, more 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 vision, 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 success.
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 Employee dissatisfaction; customer poor service attitude
Narrow design of jobs to accommodate low skill level
Customer dissatisfaction
Employees become bored
Employees cant respond to customer problems
Minimization of pl Em selection effort Minimization of training

le yc rC er m me sto s to Cu
oy ee C yc le
Use of technology Emphasis on to control quality rules rather than service Payment of low wages
yc le
Cu
Source:
Source: Schlesinger and Heskett
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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 e r m e m sto Custo
Cy cle
Source: Schle
Source: Schlesinger and Heskett
It is clear from these cycles that proper selection, training and the development of employees ensures success (Schlesinger & Heskett, 1991). Implementation of such a strategy is fairly difficult task. It requires a service orientation which is more of a software to excellence. For service industries, personnel hold the key to success and the process needs sharing of values by every employee in the organisation. An implementation process for a hospital for example could involve the following six steps: 1. Overcome differences: CEOs need to create a compelling vision of the future for the board, medical staff, management team and support staff. 2. Identifying key strategic initiatives like realising physician and hospital financial incentives: Focusing on the complete range of health care, including prevention, diagnosis and recovery, making the hospital campus more user-friendly and tailoring ambulatory care program to consumer needs. 3. Remove the barriers: Once the CEOs have a strategic plan, they need to tackle organisational elements that will inhibit its success. For example, are there too many layers of management? Do incentives and compensation plans mesh with the strategic goal? 4. Identify information needs for decision making: Make sure that information 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 action, constantly assess its performance and ways that performance can be improved. 6. Empower and motivate your staff: This is the only way that total quality management can be fully integrated into every aspect of the hospital.
7.4 PHYSICAL EVIDENCE

Cleanliness in a doctors 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 the service (organisation) as perceived by the customer. The common element in these is that they all physical, tangible and controllable aspects of a service organisation. They constitute the physical evidence of the service. There may be two kinds of physical evidence: a) peripheral evidence b) essential evidence Peripheral evidence is actually possessed as a part of the purchase of service but by itself is of no value. An airline ticket, a cheque book, or receipts for a confirmed 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 significance. Peripheral evidence adds on to the value of essential evidence. In a hotel you may find a matchbox, writing pad, pen, complimentary flowers and drinks, which you may take away. These are representations of peripheral evidence. Such evidence must be designed keeping in mind the overall image which the organisation wishes to project and the reminder value of the evidence in its ability to remind the customer about the organisation. Whereas peripheral evidence is possessed and 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 and equipments etc. are constituents of the essential evidence. The essential evidence is a very critical input in determining the atmosphere and environment of the service organisation. Contrast the essential evidence of a five-star hotel (its long driveway, grand entrance manned by a liveried doorman, sophisticated decor of lobby) with that of a fast food outlet (with bright colours, loud music, and 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 evidence to build a strong association in the customers mind and also to differentiate your service from the competition. As a marketing manager it is your responsibility to manage the physical evidence in order to create the ideal environment for your service. You can do this in two ways: one by making the service more tangible, 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 (American Express, Diners, Visa, BOB, i.e., Bank of Baroda) and distinct looks of the card. Other ways by which a service can be made more tangible is by standarising 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 identification. Similarly, Indian Airlines 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 the hotel, food and transport facility they would be using to help the customers understand the concrete dimensions of the tour and thus reduce their anxiety arising out of uncertainty. Specific information about the various dimensions of the service should be provided to prospective customers . As a marketing manager you can help the customers to understand the service you are offering by stressing the organisation and customer relationship. Advertising agencies assign one account executive or a team to a particular client to help him identify with the agency.
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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 composite impression of ambience, design and social relationships. She accordingly termed these three factors as ambient factors, design factors and social factors. As summarized in Figure 7.3 the ambient factors relate to the background conditions 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 customers awareness. The social factors relate to interactive environment comprising of people.
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 factors which are important from the customers point of view: ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... Roles of Physical Evidence The primary role of evidence management is to support the organisations marketing programme by making it possible to manage both intended and unintended cues which can give adequate evidences to customers and thereby influence perceptions. Interestingly, the physical evidences also influence employees who interact with customers during the service delivery. Parsuraman et. al. identified six specific roles of evidence as represented in Figure 7.4.
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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, an 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 aimed at not only tangibalizing the message but also the service. Tangibalizing the service implies that tangibles associated with the service are emphasized in communication as if they themselves form the service. For example, DHL courier service is advertised with a visual of an airport showing a fleet of their aircrafts and Benz trucks. Alternately, you create tangible representations of the service to symbolize. For example, comfort in air travel can be tangiblized using comfortable seats with extra leg-space. This can also be emphasized in advertising. The second step of marketing communication, tools aim at tangibalizing the message by creative use of evidence in messages, by guaranteeing the service and by encouraging positive word of mouth. By tangibalizing the message the service organization makes the advertising message less abstract and more credible through the use of physical evidence. For example, Personal Point is giving physical evidences as regard to the weight loss of their customers. The other method of tangibalizing the message is to guarantee the service. For example, some of the private airlines emphasize on a higher percentage of on time arrivals and departures. Hart suggested that though warranties are effectively used in manufacturing goods quite successfully, they can equally be applicable in service industries. If the quality of the service and the service delivery of an organization are excellent, a service organization then can possibly guarantee it to gain competitive advantage. We will discuss the issues related to service guarantees in the next block. 37
The third method of tangibalizing the message is to create and encourage a favourable word of mouth. In service sector the consequences of selecting a wrong service supplier are invariably higher and as a result the customers invariably seek 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 service constitutes the process. In fast food outlets the process comprises buying the 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 operations 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 process of adding value or utility to system inputs to create outputs which are useful for the customers. Services can be described on the basis of the types of processes used in the delivery of the services. The three kinds of delivery processes that are applicable in case of service products are line operations, job shop operations and intermittent operations. Self-service restaurants and shops are examples of line operations. The consumer moves through logically arranged operations 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 consumers require a combination of services using different sequences, the job shop type of operation is more useful. Hospitals, restaurants and educational institutions usually have this type of delivery process. In a hospital, some patients need only consultation in the Out Patient Department, some others may need consultation as well as medication or X-ray, some patients require hospitalisation for surgery, medication or investigations. All these categories of consumers require a different combination of dishes. A college may offer courses for full-time students as well as for working people through correspondence. Intermittent operations are useful when the type of service is rarely repeated. Firms offering consultancy for projects use this kind of delivery system. Advertising agencies also use the intermittent delivery system since each advertising campaign requires a unique set of input factors. As a manager you are interested in optimising the efficiency of your organisation without sacrificing the qualitative aspect. Some 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 rearranged 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) Can 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 cannot be inventoried; therefore, it becomes essential to find out ways and means to handle peak load to optimize different customer needs with varied expertise levels within the service organization. In marketing management, operations management has been recognized as an integral function. In manufacturing sector, for example, logistics in distribution are vital to satisfy the customer needs. Similarly in services sector, where there is no tangible product, the operations management is vital to deliver satisfaction because here the operations management would decide how the process of service delivery would function, or in other words, the interactive experience that would deliver the service benefits to the consumers. Cowell identified that the issues in operations management or process management are many, as summarized in Table 7.3. However, the degree to which these issues are successfully managed would decide or determine not only the satisfaction 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 specifications 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 operations should be completed by agreed delivery promises within available resources and with their economic utilization. Planning and controlling the inventory of people and capacity. Quality standards are attained in each service system. Information flows into and out of service systems and ensures that operations are undertaken at specific tunes as per schedule. Anticipating demands and forecasting 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 which output may differ. Finally, each system includes the concept of deviation or tolerance standards in recognition that the processes are real time phenomena that do not conform perfectly to any model or description, but functions within a norm. Shostack further observed that in marketing literature no description on process is found although concepts, which relate to process like standardization and customization, are frequently mentioned. In her article Shostack described processes in two ways. 39
The first way is according to the steps and sequences that constitute the process and she termed it as complexity of process. The second is according to the exceptional latitude or variability of those steps and sequences, which she called divergence. Any service process is a combination of bothcomplexity and divergence. Analyzing the number can identify a services complexity and intricacy of the steps required and the degree of freedom inherent or allowed in a process step or sequence can be called its divergence. In reality there could be services where process can be of high complexity and low divergence. Such services are called standardized 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 phenomenon 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 summarized in Table 7.4
Table 7.4: Alternative Directions of Structural Changes
Strategic Options Reduced Divergence Advantages Uniformity would reduce cost, improve productivity and make distribution easier. Increase perceived reliability, uniform service quality and greater service availability. Disadvantages Inflexibility 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 margins 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 offering makes distribution and control easier. Perceived positively in the market provided it stands out. Higher complexity usually indicates a strategy to gain greater penetration in the market by adding more services. Increasing complexity can increase efficiency by maximizing the revenue generated from each customer. Reduced complexity can also be perceived as stripped down service. It can be competitively risky if other providers continue to offer a broader, more extensive full-service alternative. Too much complexity can be confusing as a result overall quality may fall. Highly complex service system may be vulnerable to inroads by competitors who specialize.
Reduced Complexity
Increased Complexity
One can observe that how changes in complexity and divergence influenced their market position. For managers in service industries, taking a structural approach can help increase their control over some of the critical elements of the service system management. Therefore, for marketers in service industries, process design may be a tool that can substantially increase their impact and role in marketing their services. 40
Activity 4 Compare the relative advantages and disadvantages of Conventional token 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 marketing to motivate the employees and interactive marketing to create skills in the service provides. The unit provided you an action checklist on internal marketing. The importance of internal marketing was highlighted using cycle of success and cycle of failure. The next element of extended marketing mix discussed in the 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 aspects involved in process management were outlined. These include process planning and control, operations planning, facilities design, scheduling inventory planning 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 matters in marketing of services? Discuss with the help of examples. 3. Can varied process management be followed in marketing the same service? Discuss by taking 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 employees attitude and behavior towards customers amongst the following organization. Do you see the significance of employees in servicing the customers better? Identity how a motivated employee can provide higher customer satisfaction in these organizations. a) Nationalized bank and a foreign bank operating 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 physical 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, (Chicago :American Marketing Association), 1981. Christian Gronross, The Internal Marketing Function,Strategic Management and Marketing in The Service Sector, Report No. 83104, (Cambridge : Marketing Science Institute), 1983. Christian Gronross, Internal 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 Management, No 16, p.241-247. Leonard L.Berry and A.Parsuraman, Marketing Services : Competing Through Quality, (New York : Free Press), 1991, pp.152, 171-172. G.Lyan Shostack, Service Positioning Through Structural Changes, Journal of Marketing, Vol 51, Jan. 1987, pp 34-43) A. J. Mcgrath, When Marketing Services 4Ps Are Not Enough, Business Horizons, May-June, 1986, pp.44-50. Leonard L.Berry and A.Parsuraman, Marketing Services : Competing Through Quality, (New York : The Free Press) p.94,1991. S.Majaro, Marketing in Perspective, (London : George Allen), 1982. Julie Baker, The Role of the Environment in Marketing Services: The Customer Perspective, in John A.Crepiel, Carole Congram and James Shanahan (eds), The Service Challenge: Integrity for Competitive Advantage, (Chicago : American Marketing Association), 1987, p.80. R.Doswell and Paul Gamble, Marketing and Planning Hotel and Tourism Projects, (London : Hutchinson), 1979. Christopher W.L.Hart, The Power of Unconditional Service Guarantees, Harvard Business Review, July-Aug, 1988 pp-54-62. 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.
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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 and Readings, Dryden, 1995 L.L. Berry and A. Parasuraman, Marketing Services : Competing Through Quality, The Free Press, 1991 D. Carson and A. Gilmore (eds.), Service Marketing- Text and Readings, Mercury Publications, 1996 D. Cowell, The Marketing of Services, Heinemann, 1996 W.J. Glynn and J.G. Barnes (eds.), Understanding Service Management, John Wiley and Sons, 1995 C. Groonross, Service Management 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. Lovelock, Services Marketing, Prentice Hall A. Payne, Essence of Services Marketing, Prentice 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 Perspective, Excel Books, 2002 T.A. Swartz, and D. Iacobucci (eds.), Handbook of Services 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 McGraw-Hill, New Delhi, 2003

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MS-65
Block
STRATEGIC ISSUES
UNIT 8 Service Quality UNIT 9 Managing Demand and Capacity UNIT 10 Customer Retention 5 24 38
Strategic Issues


Print Production
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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 quality has increased tremendously and a number of researchers have been working on it. In this unit you will be acquainted with a wide range of topics on Service Quality including service quality models and measurement of service quality. Unit 9, the second unit of this block, discusses management of demand and capacity. Because 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 last unit of the block titled Customer Retention highlights the importance of retaining customers for service firms and outlines issues related to customer retention and loyalty including service recovery and service guarantees.
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UNIT 8 SERVICE QUALITY

Objectives

define service quality, identify the reasons for a different approach to service quality, explain the determinants of service quality, understand service quality models and their application, understand the linkage between service quality and profitability, and measure service 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 Approach to Service Quality Service Quality Models Benefits of Service Quality to the Organisation Measuring Service Quality Communicating with Customers about Service Quality Case Study Summary Self Assessment Questions Further Readings
8.1 INTRODUCTION
Quality came to the service literature at the beginning of the 1980s. This is quite in contrast to the manufacturing sector wherein quality management has a long and rich history. In the twentieth century, especially the second half, increasing 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 1980s the interest in service quality has increased tremendously. One reason why service 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 explained 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 competitors in a world where establishing a long term technology based competitive advantage is becoming increasingly difficult. The conceptualization and measurement of service quality perceptions have been one of the most debated and controversial topics in the service marketing literature. The term Service Quality has been defined in different ways. Given below are some of the definitions : 5
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Service quality as perceived by customers, can be defined as the extent of discrepancy between customers expectations or desires and their perceptions (Zeithaml, Parasuraman and Berry,1990) Quality is whatever customers say it is, and the quality 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 superior 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 and all other judgments are irrelevant. Therefore, the ultimate aim of an excellent service quality system is to satisfy the customers need and go beyond to delight the customers. The principles and practices as applied to goods quality, are not sufficient for Service Quality. This is because of some basic differences between goods and services with regards to how they are produced, consumed and evaluated.
8.2 REASONS FOR DIFFERENT APPROACH TO SERVICE QUALITY

You may recollect the characteristics of services that distinguish them from goods, 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 predominantly intangible in nature. Since services are performances, acts and experiences, it is not possible to have exact specifications for them, unlike physical objects like automobile, machine tools, television set etc. for which exact specifications can be set and communicated. Further, services cant be tested prior to sale to determine its quality. That means services are low in search qualities- attributes that a consumer can determine before purchasing a product and stronger in experience qualities - attributes that can only be discerned after purchase or during consumption. Also, there are certain services which consumers find difficult to evaluate even after purchase and consumption i.e. credence qualities. (Please refer Unit 4 giving the continuum of goods and services high in search, experience and credence quality). Therefore, the criteria customers use to evaluate services is more complex, thereby increasing the difficulties of marketers. Another very important aspect requiring separate treatment of service quality is the inseparability aspect of services. The inseparability of production and consumption 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)
The interaction between production and consumption in services as shown in Figure 8.1 may be broad e.g. restaurants or air travel or it may be thin e.g. trunk call through telephone exchange. This nature of services whereby customer often has to be in service factory makes it difficult for service providers to ensure quality before service is rendered to the customers. This is quite opposite to goods where they are engineered, produced and quality
8.1:
Interaction of buyer and seller Service Encounter
Service Quality
Production GOODS
Consumption
Production
123456789012 123456789012 123456789012 123456789012 123456789012 123456789012
Consumption
SERVICES
controlled prior to sending them to customer for consumption. iii) Services are heterogeneous in nature. The service performance may vary

from producer to producer for the same service from customer to customer even with the same producer from day to day for the same producer
Therefore, ensuring consistent service quality 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 quality as highlighted by Pasasuraman, Zeithaml & Berry (1985):
Service quality is more difficult for the consumer to evaluate than goods quality. Service quality evaluations are not made solely on the basis of the outcome of service, they also involve evaluation of the process of service delivery. Service quality perceptions result from a comparison of consumer expectations with actual service performance.
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 received widespread attention and acceptance. The first is the Nordic perspective (Gronroos) which defines the dimensions of service quality in broad terms consisting of functional and technical quality. The second, the American perspective (Parasuraman, Zeithaml and Berry) uses five service quality dimensions. The two models are discussed in detail here below: Gronroos Model This model suggests that the quality 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 process related dimension i.e. how the process and service encounter are perceived. These two have been termed as technical quality and functional quality. For example, 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
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technical quality is acceptable, the process dimension, or functional quality, frequently may be more critical to consumers overall quality perception. Also, in certain cases the technical quality or the outcome may be difficult for the customers 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 much more than just the two dimensions of service quality. Good perceived quality is obtained when the experienced quality meets or exceeds the expectations of the customer, that is, the expected quality. This means that even if the experienced quality is good, the total perceived quality may still be low, if the expectations of the customers are very high or unrealistic. Conversely, the total perceived quality may be high even if experienced quality is not very good, if the customer has very low expectation. Fig 8.2 brings about the perceived service quality 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 doesnt only have an impact on the expected quality but also on perception of the quality experienced. It works as a filter i.e. if the image 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 of the technical and functional quality dimensions only, but rather by the gap between the expected and experienced quality. The expected quality depends on a number of factors like market communication, image, word of mouth communication, corporate image and customer needs, few of which are directly under firms control and others only indirectly controlled. Factors under firms direct control include advertising, direct mail, public relations, sales campaign etc. (i.e. market communication) whereas factors like image, word-of-mouth and customer needs are not directly under firms control but can be influenced. The marketers should understand from this not to overpromise. Delivering on promises is an important aspect of
perceived service quality. Also, it should be appreciated that customer expectations are not static but keep on changing over period of time. Activity 1 Consider the following services and identify the Technical Quality and Functional Quality elements a) Airlines b) Retail Banking savings account c) Hotels d) Health Care ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... Gaps Model of Service Quality Parasuraman, Zeithaml and Berry (PZB) have done extensive work in the area of service quality. According to them Perceived Service Quality can be defined as the extent of discrepancy between customers expectations or desires and their perceptions. Put simply, Perceived Service Quality = Perceived Service Expected Service.Based on their research work, they identified that customers consider five dimensions in their assessment of service quality, as given below: Reliability: Ability to perform the promised service dependably and accurately (example: flights depart and arrive on schedule). Willingness to help customers and provide prompt service (example : no waitings at the hospital). Employees knowledge and courtesy and their ability to inspire trust and confidence. (example : knowledgeable mechanics at auto service centre). Caring, individualized attention given to customers (example: specific type of room provided to the guest based on his previous stay, acknowledges customer by name). Appearance of physical facilities, equipment, personnel and written materials (example: seating and air conditioning 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 place it is absolutely essential for a firm to be reliable in order to attract customer 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 rich in credence qualities e.g. health services. Tangibles may be given great importance 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 customers requests, complaints or problems. PZB further focused on finding the deficiencies within companies that result in poor quality perceptions by customers. The reasons for gap between customers perceptions and expectations (Gap5 Customer Gap) were identified as :
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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 Customers (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 expectations. Service firms executive may not always understand what features connote high quality to consumers in advance, what features a service must have in order 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 right service designs and standards: A company might correctly perceive the customers needs but may not set a specificied performance standard. This may occur because management sometimes believes that customer expectations are unreasonable or unrealistic. Also availing of other factors like resources constraints, market conditions and/or management indifference may result in discrepancy between company perception of consumer expectation and the actual specification established for a service. 3. Provider Gap 3: Not delivering the service standards: This is the 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 variability in employee performances makes it hard to maintain standardized quality. Failure to match demand and supply, customers not fulfilling their roles and problem with service intermediaries may also result in creating this gap.
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4. Provider Gap 4: Not matching performance to promises: This is essentially a gap between what you deliver and your external communication. Media advertising and 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 expectations but lower perception of quality when the promises are not fulfilled. In order to bridge the gap between customers perceptions and expectations, the provider gaps 1 to 4 are required to be filled. The key contributing factors leading to Provider Gaps and strategies to reduce the gaps have been highlighted below.
GAP Gap 1
Service Quality
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 policies Failure to match supply and demand Customers not fulfilling roles Overpromising Ineffective management of customer expectations Inadequate horizontal communication

STRATEGIES TO REDUCE GAP Communication with customers Conduct marketing research Encourage upward communication

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 Communicating with customers
Gap 4

Avoid propensity to overpromise Increase horizontal communication Managing customer expectations
The Gaps Model thus helps in finding out the reasons for the quality problems and 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 customer delight. But how does it have a positive impact on the bottom lines of 11
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the companies. Broadly, this may be categorized into two parts. One is the improved 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 ability to retain existing customers, who feel satisfied with the service offering and become repeat customers. This would ultimately help in greater revenues and profits. In fact, the positive relationship between perceived quality and profitability has been documented empirically. Buzzell and Gale in The PIMS (Profit Impact of Marketing Strategies) Principles (Free Press, NY, 1987), have mentioned that in the long run, the most important single factor affecting a business units performance is the quality of its products and services relative to those of competitors. A quality edge boosts performance in two ways; in the short run, superior quality yields increased profits via premium prices and in the longer run, it is the more effective way for business to grow. Quality leads to both market expansion and gains in market share. PZB in their research have found out relationship between customers perception of the quality of service rendered by a company and their willingness to recommend the company to their friends. There was a dramatic difference between the quality perception of customers who would and those who would not recommend their service companies to their friends. The customers who showed their intention to recommend had a significantly high score of perceived service quality than those who mentioned that they wouldnt recommend (scores of - 0.5 and - 2.3 respectively). A summary of results of some of the researches which prove a positive relationship between service quality and profitability is given below. (Extracted from Zeithaml, Berry and Parasuraman, The Behavioural Consequences of Service Quality, Journal of Marketing, Vol. 60, April 1996, pp 31-46)
Companies offering superior service achieve higher than normal market share 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 Corporation of America found a strong link between perceived quality of patient care and profitability across its many hospitals. Improved service quality increases favourable behaviour intention and decreases unfavourable intention of customers. Behavioural intention can be viewed as indication that signal whether customer will remain with or defect from the Company. Ford Motor Company has demonstrated that dealers with high service quality scores have higher than normal profit, return on investment and profit per new vehicle sold. Positive and significant relation exists between customers perception of service quality and their willingness to recommend the company. Positive co-relation exists between service quality and repurchase intention and willingness to recommend.
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Rust, Zahorik and Keiningham have developed a model showing relationship between service quality improvement and profitability as shown in Figure 8.4. The model shows relationship between 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 quality and customer satisfaction and probably reduced costs. Increased customer satisfaction in turn leads to
8.4:
Improvement Effort Improvement Effort
Service Quality
Service Quality Improvement Service Quality Improvement
Perceived Qualityand and Perceived Service Service Quality Customer Satisfaction Satisfaction Customer
Word-of-Mouth Word - of - Mouth
Customer Retention Customer Retention Attraction of of New New Attraction Customers 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 customers attracted by positive word of mouth coupled with retention of existing customers result in higher revenues and market share. The increased revenues combined with the decreased costs, lead to greater profitability. The effect of word of mouth, which is difficult to measure in practical business situation, is thus shown 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 policy depends upon management commitment to the development and effective operation of a quality system. It should also provide sufficient and appropriate resources to implement the quality system and achieve the quality objectives. The resources include personnel as well as material resources. Human resources play an extremely critical role in service firms and therefore proper attention has to be given to employee motivation, training and development. Regular communication within the service organization should be a feature at all levels of management. The service organization should develop, establish, document, implement a quality system as a means by which stated policies and objectives for service quality may be accomplished. The quality system elements should be structured to establish adequate control and assurance over all operational processes affecting service quality. The quality system should emphasize preventive action that avoid the occurrence of problems while not sacrificing the ability to respond to and correct failures, should they occur. Services companies can also benefit by benchmarking which is defined as the continuous process of measuring products, services and practices against the toughest competitors or those companies recognized as industry leaders. This concept was originally developed in the manufacturing sector, but is now being used successfully in service sector as well.
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CEOs Views on Benefits of Service Quality OBEROI HOTEL CHAIN It you want to be ahead of your competitors, your quality has to be monitored all the time. In todays 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 charge a higher price because customers are willing to pay. The main objectives of the TQM drive is to achieve maximum possible customer satisfaction and employee satisfaction because only a happy staff member will go out of his way to offer satisfying 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 service quality results from a comparison of service expectations and actual performance. The SERVQUAL scale was first published in 1988 and has undergone numerous improvements and revisions since then. This scale was developed and validated using service providers in four service sectors : retail banking, credit cards, securities brokerage and product repair and maintenance. The developers of the scale acknowledge that the five service quality dimensions are general dimensions that relate to most of the services. It measures the service quality on the five service quality dimensions discussed earlier in this unit viz. Reliability, Responsiveness, Assurance, Empathy and Tangibles. Reliability largely concerns whether the outcome of service delivery was as promised. The other four dimensions relate to the process of service delivery or how the service was delivered. Servqual scores are expressed as the difference between expectations and perceptions i.e. it measures the gap between the service that consumer think should be provided and what they think actually has been provided. Respondents complete a series of scale, which measure their expectations on five service quality dimensions and subsequently, they are asked to record their perceptions of that companys performance on those same dimension. When perceived performance ratings are lower than expectations this is sign of poor quality; the reverse indicates good quality. Example: A) Expectation Statements (E) Strongly Disagree
Strongly Agree 3 3 4 4 5 5 6 6 7 7
The physical facilities at banks should be visually appealing Banks should give customers individual attention
1 1
2 2
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B)
Corresponding Perception Statements (P) Strongly Disagree

Service Quality
Strongly Agree 3 3 4 4 5 5 6 6 7 7
The physical facilities at XYZ Bank are visually appealing XYZ bank gives customers individual attention
1 1
2 2
Service quality scores would be expressed as P-E The original SERVQUAL instrument consisted of 22 statements covering the five service quality dimensions (4 questions 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 corresponding statements covering perceptions. Expectations and perceptions statements includes aspects like (i) equipments, physical facilities, appearance of employees, materials associated with the service like pamphlets or statements (tangibles) ii) timely provision of service, performing the service right the first time, meeting the promises, sincere interest in solving the problems (reliability), (iii) prompt service, willingness to help, employees never too busy to respond to customer requests (responsiveness), (iv) behaviour of employees instilling confidence, feeling of safety in transactions, employees having knowledge to answer the questions (assurance) and (v) individual attention to customers, employees understanding specific needs of customers (empathy). In addition to expectations and perceptions section the SERVQUAL contained a point allocating question which was used to ascertain the relative importance of the five dimensions by asking respondents to allocate a total of 100 points among the dimensions. The servqual instrument has been used extensively, with or without some modifications. Stevens, Knutson and Patton, based in the servqual instrument developed an interview schedule Dineserv.per for continual assessment of customers perceptions regarding service quality of restaurants and suggested that it could be administered every two to three months to 50 to 100 recent customers, selected at random. Exhibit 8.1 gives the details of the Dineserv.per interview. The SERVQUAL scale can be used i) ii) iii) iv) v) To determine a companys service quality along each of the five service quality dimensions. To find out relative importance of service quality dimensions as considered by the customer. To compute overall weighted SERVQUAL score, which takes into account the relative importance of each dimension as well. To track customers expectations and perceptions over time To compare a companys 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 have also identified problems in using the instrument as well as the gap theory methodology. Cronin & Taylor suggest that instead of measuring expectations and perceptions, measurement of performance alone would be enough for measuring service quality. They have suggested that the performance based scale developed (SERVPERF) is efficient in comparison with the SERVQUAL scale as it reduces by 50% the number of items that must be measured. 15
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Exhibit 8.1 The DINESERV.PER Interview

Introduce yourself, say that youre trying to measure the quality of the service at your restaurant, since youre 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 assigning a number from seven (strongly agree) to one (strongly disagree). If their feeling 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 dcor in keeping with its image and price range. 5) has a menu that is easily readable. 6) has a visually attractive menu that reflects the restaurants 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 dining 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 employees shift to help each other maintain speed and quality of service. 17) provides prompt and quick service. 18) gives extra effort to handle your special requests. 19) has employees who can answer your questions completely. 20) makes you feel 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 ingredients, and methods of preparation. 22) makes you feel personally safe. 23) has personnel who seem well-trained, competent, and experienced. 24) seems to give employees support so that they can do their jobs well. 25) has employees who are sensitive to your individual needs and wants, rather than always relying on policies and procedures. 26) makes you feel special. 27) anticipates your individual needs and wants. 28) has employees who are sympathetic and reassuring if something is wrong. 29) seems to have the customers best interest at heart. The first ten 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 Source: Steven, Knutson and Patton, Dineserv: A tool for measuring Service Quality in Restaurants, Cornell Hotel and Administration Quarterly, April 1995, p.59
While conducting surveys to assess the service quality it will always be beneficial to ask some additional questions on customer satisfaction and loyalty with regards to the service provider. The loyalty issue can be addressed by asking questions on the customers repurchase intention and also his likelihood or willingness 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 SERVQUAL 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
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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 individual service contact personnel. b) Complaint Solicitation and Analysis: Customers 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) Mystery Shopping: In this method outside research companies are used by the service organization who send people posing as customers in order to judge the service quality. 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, can be a very effective way of reinforcing service quality standards. d) Asking Customers: This involves asking customers directly what they would like to be done to increase the quality of service and their satisfaction. This can be very effective in business to business situation. This primarily concerns with the expectation 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 customers who are assembled to provide perceptions about a service over a period of time. e ) Intermediary Research: This form of research is useful in services where intermediaries form an important part of the service delivery process and have a major direct contact with customers. In such situation intermediaries can provide valuable feedback to the service firm regarding quality of service as perceived by the customers.
Service Quality
8.6 COMMUNICATING WITH CUSTOMERS ABOUT SERVICE QUALITY

Communication with customers involves listening to them and keeping them informed. The ISO standard brings about the various elements of an effective communication with customers. This involves :

Describing the service, its scope, its availability and timeliness of delivery. Stating how much the service will cost. Explaining the inter-relationship between service delivery and cost. Explaining to customers 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 service quality. Providing adequate and readily accessible facilities for effective communication. Determining the relationship between the service offered and the 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 organizations personnel and facilities. Also advertisements of the service should reflect the service specification and take account of the customer perception of the quality of service provided. The marketing function should recognize the liability, risks and financial implication of offering exaggerated or unsubstantiated claims for a service. It is here that importance of linkages between operations and marketing come into picture.
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Valarie Zeithaml suggests that communicating service quality begins with an understanding of the importance to customers of the various aspects of service quality. Isolating quality dimensions that are most important to customer provides a focus for advertising efforts. Some of the propositions developed by him regarding advertising for services include :
Focusing on the most important dimension of service quality will result in more effective communication than focusing on other dimensions. When marketing and operations interact to create external communications, customer expectations are more realistic than when these functioning do not interact. The more vivid the advertisement, the stronger the effect in influencing customer expectations about quality. Advertising that features actual employees doing their jobs is more effective in communicating excellence than advertising 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 companies and identify the service quality dimensions(s) being emphasized in them. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... A case study, titled Turnaround through Service Quality British Airways 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 importance 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 80s and known for its indifference to passengers to the highest profit making airline in the world in 90s and famous for its excellent quality of service, was truly remarkable and spectacular. During this period (80s & 90s) the airlines was privatized, the load factor consistently improved and the shareholders worth increased multifold. In a number of passenger surveys, BA was rated as the worlds best airline. So, what were the reasons for this extraordinary turnaround of an ailing airline 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 basically built on service. Some airlines made the mistake of thinking themselves as 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
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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 continuous 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 attributed to the policies and strategies initiated by Sir Colin Marshall, Chief Executive, who was appointed in 1983. The turnaround strategy revolved around a focus on its customers and an obsession with improving service quality. The airline recognized that instead of being in the business of flying airplanes, it was in fact in the business of satisfying passenger requirements. To be a truly customer oriented company required a lot of changes and initiatives to be taken ranging 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 outcome (safe and timely arrival) but also on the way in which the service is delivered i.e. the functional quality. BAs researches confirmed this, finding that a customers 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 perception of quality judged by the customers. BA recognized the important role which the employees play in overall success of the airline and major initiatives were taken for training, motivating the employees, to expose them to think about customer 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 80s was the PUTTING PEOPLE FIRST programme which was gigantic in scope. The aim of this programme was to involve each of the 30,000 employees (The number 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 effort a success and this can be gauged by the fact that Sir Colin Marshall himself attended 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 achieve consistent quality, every individual in the organization must believe that 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. CUSTOMER FIRST TEAMS were established whereby employees in small groups were encouraged to give their ideas for improving customer service. More than a hundred teams were set up and out of thousands of ideas generated, over 700 were followed through and implemented. BA, realizing the importance of internal marketing and the internal customers, organized a programme called A DAY IN THE LIFE in which employees from different departments appraised each other of their activities and functions. This gave a good opportunity to the employees to understand the working of each department and knowing each other better. Since services management requires a great deal of co-ordination between marketing and operations, this effort helped in achieving a finer fit between the two. Further a training course MANAGING 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 programmes, it was
Service Quality
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Strategic Issues
successful in dismantling the bureaucratic style of working and moving towards being a customer friendly airline. Simultaneously, BA put emphasis on building the infrastructure and tangible elements of service as well. This, together with initiatives 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 (Frequent Flyer Programme). Providing world class service went simultaneously with cost 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 of 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 also 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, marketing alliances and code share deals. Growth, expansion and use of technological developments were undertaken. All these were properly communicated to the customer. Saatchi and Saatchi developed a series of outstanding global TV commercials aimed at relationship marketing which helped in building BAs image as worlds favourite airline. The significant aspect of all its communication was the credibility. BA delivered what it promised to the customers. Conclusion BAs efforts in employee training, focus on internal marketing, business efficiency programme, customer feedback initiatives etc. all helped the airline in not only increasing profits but also improvement in all major areas - more on time arrivals and departures, fewer complaints, better inflight and ground services, better reservation and information services - i.e. an overall improvement in service quality. In fact, improvement in service quality was the focus of all the initiatives. The customer 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 they finish their journey on one of our aircrafts, that we have gone that extra mile for them, that we have delivered that extra drink, that extra smile, that extra piece of information.
8.8 SUMMARY
The unit described the concept of service quality to you. The term service quality can be described as the delivery of excellent or superior service relative to customer expectations. Because of some basic differences between goods and services with regards how they are produced, consumed and evaluated, service quality requires a different approach as compared to goods quality. You have also learnt the underlying themes of service quality that it is more difficult for the consumers 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 actual service performance. Two specific models of service quality, Gronroos Model and Gaps Model developed by Parasuraman, 20
Zeithaml and Berry have been discussed. Gronroos models suggests that the quality of a service as it is perceived by the customer has two dimensions, namely a technical 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 customers perceptions and expectations (customer gap). The five dimensions of service quality - Reliability, Responsiveness, Assurance, Empathy and Tangibles were also explained to you. This unit also explained to you the linkage between service quality and profitability. Servqual a scale to measure service quality has been discussed along with its possible applications. The final section of the unit give an illustrative case study of British Airways to demonstrate the importance of service quality in achieving success for an organization and highlights the ways and means by which it was achieved.
Service Quality

A) Objectives Type Questions i) Multiple Choice Questions 1) According to Gronroos, 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 describes which of the service quality dimensions? a) b) c) d) Assurance Empathy Reliability Responsiveness
3) The gap between expected service and company perception of consumer expectations can be because of a) b) c) d) poor service design failure to match demand and supply inadequate marketing research orientation overpromising
4) Which of the four service provider gaps can be closed in the marketing function 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 quality refers to the process. 6) Customers expectations are influenced by word-of-mouth, personal needs, past experience and external communication 21
Strategic Issues
iii)
Directions for questions 7-10. Given below are examples of specific questions raised by customers regarding different dimensions of service quality. Identify the 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 recognize me as a regular customer? 10) When there is a problem with my bank statement, does the bank resolve them quickly?
Answers 1) 5) 9) b True Empathy 2) a 6) True 10) Responsiveness 3) c 7) Tangibles 4) a 8) Reliability
B) Discussion Questions 1) 2) 3) 4) 5) 6) What do you understand by the term Service Quality? What are the underlying themes of service quality? Define the five dimensions of service quality. Give suitable examples of each dimension. Briefly 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 service provider gaps do you believe in the most difficult to close and why? Is good service 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 patronize or are familiar with.
8.10
1. 2.
FURTHER READINGS
Cronin and Taylor , Measuring Service Quality: A Reexamination and Extension, Journal 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, Zeithaml and Berry, A Conceptual model of Service Quality and its Implications for Future 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, Return on Quality - Making Service Quality Financially Accountable, Journal of Marketing, April, 1995, pp.58-70 Zeithaml, Berry and Parasuraman, The Behavioural Consequences of Service Quality, Journal of Marketing, Vol.60, April 1996, pp.31-46. Zeithaml 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 Perceptions and Expectations, Free Press, NY, 1990. Zeithaml V, Communicating with Customer about Service Quality in Service Management Effectiveness, Ed. Bowen, Chase and Cummings, Jossey Bass, San Francisco, 1990, pp. 369-383.
Service Quality
10.
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Strategic Issues
UNIT 9 MANAGING DEMAND AND CAPACITY

Objectives
After studying this unit, you should be able to
Explain the importance of managing demand and capacity for service organizations. Identify the demand patterns and their underlying reasons. Develop strategies for matching demand and capacity. Understand the concept of yield management. Provide strategies for managing customer waiting.

Structure
9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 Introduction Understanding Demand Patterns Strategies for Matching Capacity and Demand Yield Management Managing Customer Waiting 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 services 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 difficult or impossible for services marketers to do so. Therefore, many service businesses frequently find it difficult to match supply (capacity) and demand. At times there may be too much of demand (movie halls or restaurants on weekend evenings) and sometimes too little demand may exist (low weekend occupancies in business 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 low occupation for a business hotel on weekends is an irretrievable loss. Similarly 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 organizations bottom line through lost opportunity (when demand is greater than capacity) and through high costs (when demand is low in relation to fixed capacity resulting in under utilization of capacity) Zeithaml, Parasuraman and Berry conducted an exhaustive survey in U.S.A (in 1980s) covering 1,000 service firms to find out the extent to which problems reported to be associated with services actually presented problems for the sample firms. Out of the eight commonly cited difficulties 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 indicating no problem at all to 5 indicating a major problem). This problem received a score of 3.27 and another important finding was the absence of any significant difference across different types of services firms with regard to this problem.
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Perception of demand fluctuation as a somewhat serious problem appeared to be universal. A similar study conducted in India in 1996-97 with reference to passenger airline industry covering more than a dozen airlines operating in India revealed similar results. The problem area that the demand fluctuates, received a mean score of 3.66 with 60 percent of the airlines indicating a score of 4 to 5. The next highest score was 2.94 with regard to problem area that service quality is difficult to control. In this unit we will discuss various issued related to managing demand/capacity (supply) imbalances. Activity 1 Compare a service organization 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? ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
Managing Demand and Capacity
9.2 UNDERSTANDING DEMAND PATTERNS

A service organization with a fixed capacity may be faced with one of the following four conditions: 1. Excess demand: The demand exceeds the maximum available capacity. This results in some customers being turned away. Also, even for the customers receiving the service, the quality of service may get affected (refer service delivery gap in the gaps model discussed in the previous unit). This may happen because of overcrowding and/or overstretching of resources. 2. Demand exceeds the optimum capacity level: Optimum capacity refers to the best use of capacity from the perspective of both, customers and the company. In most of the cases 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 proper interaction. In the situation when demand exceeds optimum capacity, while no one is turned away, customers may perceive deterioration in the quality of service 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 and customers receives quality service. 4. Excess capacity : Demand is less than optimum capacity and therefore resources are underutilized. In certain cases this may also pose the risk that customers may have doubts about the service provider. All the above four possibilities have been given in Fig. 9.1. The capacity of the service organization includes physical facilities, equipments and human resources. The first step in finding out ways to manage demand and capacity is to understand the demand patterns and the factors which affect it. Better knowledge of demand patterns leads to better managerial decision making. The demand patterns may have a regular and predictable cycle or in some cases it may be largely random 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 Ideal 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), monthly, seasonal and/or yearly. Try to identify services which may exhibit these types 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 variation 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 discounts). Amusement parks have greater demand during weekends as compared to weekdays 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 so, then you must find out and analyze the causes of these cyclical demand variations. Do these happen because of seasonal change, employment schedule, salary dates, school vacations, public or regional holidays etc? A proper analysis of these causes will help you in devising suitable strategy for managing the demand fluctuations. b) Random Demand Fluctuations: At times the demand pattern may appear to be random with no apparently predictable cycle. Some degree of random variation in demand is faced by virtually all service firms. Although such variations cannot be predicted, marketers should nevertheless understand the underlying causes that typically cause them. For example bad weather may result in an unexpectedly 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 telecommunication services. A proper understanding of the underlying causes will prepare 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 analysis. Different segments of customers may reveal different patterns as well as causes. Such an analysis will help you in pinpointing underlying causes of demand fluctuations and in identifying certain
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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 discourage segments that are not profitable or are inconsistent with the service image, at least during peak periods. Once you properly understand the above issues you can suitably device strategies for matching demand and capacity. Activity 2 Select a restaurant in your neighborhood and find out its demand patterns and also identify the underlying reasons. ............................................................................................................................ ............................................................................................................................ ............................................................................................................................ ............................................................................................................................
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 organizations capacity constraints. The strategies to be adopted can be broadly divided into 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 Demand 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 capacity. 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 hotel for example may focus on weekend family entertainment and recreation package to cope up with low demand from business executives during weekends. A management institute may offer more management development programmes during the vacation period of its regular management programme students. However, as marketers you must ensure that by offering different types of services the image or positioning of the service firm is not diluted or confused. Increasing demand during slack period doesnt mean that you should take business from any segment that is available. Pricing: The demand curve suggests that quantity of product demanded varies 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 late night flights, movie theaters offer a lower price ticket for the morning show, hotels offer large discounts during off seasons and also higher than normal prices during say Christmas or New year, restaurants and many retail outlets offer happy hours wherein discounts are offered. Using price as an effective tool for managing
b)
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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 different 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 these segments have paid different prices. This requires putting in certain usage conditions (for example for availing low priced fares in airlines customers have to book in advance and there are higher cancellation charges) and/or providing value enhancement to higher paying customers. c) Place (Distribution): Many service firms modify their time and place of delivery as a strategy to match demand and capacity. Bank may change its timings on specific days or during specific period, finance companies use mobile vans for distribution and collection of forms, hospitals like Apollo have created satellite clinics to deal with routine consultations, tests and medical services. Promotion: You can also shift the demand by 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 availing the service during non-peak timings. They should also be properly informed about changes in product, pricing and distribution. This can be done by putting signages at the service outlets (like banks) or advertising. Service firms can also use sales promotion to manage demand. Many airlines offer free ticket for companion in the business class, some business hotels offer free stay for spouse during the weekend stay. Proper promotional strategy can help the service organization in shifting demand from high to low period as well as stimulating demand during low periods.
d)
Activity 3 Select any service organization and analyze how it uses it marketing mix elements to influence demand. ............................................................................................................................ ............................................................................................................................ ............................................................................................................................ ............................................................................................................................ 2) Strategies for Managing Capacity Managing capacity involves changes in different components of the resources 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 hire 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 Overtime: 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 overtime charges are generally at higher rates. Cross Training Employees: Cross training of employees results in a flexible capacity, wherein employees can perform several different jobs. Southwest Airlines strongly believes in this philosophy. The same
b)
c)
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employee may move from ticketing to gate counters. This helps in avoiding underutilization of resources and also increasing the efficiency of the employees. d) Scheduling: During peak demand periods people, facilities, and equipments are used at full capacity. However, facilities and equipments also require proper maintenance. This can be scheduled during periods of low demand. Similarly, for human resources, off-peak periods can be used for training purposes as well as for granting vacations.
In addition to the above, service firms can also meaningfully manage its capacity by increasing customer participation (customers can be used as productive resources e.g. self-service in restaurants), outsourcing, modifying the capacity (e.g. reconfiguring hotel rooms), renting facilities or equipments, and taking a subcontract 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)
Slack Demand/Over Supply

Educate customers to curtain usage during peak periods (through signages or advertising) Offer incentives for usage during non-peak periods Charge full priceno discounts or premium pricing Take care of regular customers first Hire part-time employees Keep employees overtime Cross train employees Outsource, rent facilities/ equipments
Modify service offerings Offer discounts, sales 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 employee vacations Take on subcontract work
9.4 YIELD MANAGEMENT

Yield management is a method for managing demand and capacity profitably by service organizations. It extensively uses computer based technology to study patterns in consumer behaviour in order to manage differential pricing. Yield management has gained widespread acceptance in airline and hotel industry. It helps a firm 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 organizations resources are being used to their full revenue generation potential. Yield can be increased by an organization by a properly planned differential pricing strategy. Yield management techniques 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 perishable, 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 example of an airline. It may not be in a position to sell all its seats at full prices. 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 incremental cost of taking additional passengers is low, airlines offer discounted / apex fares with certain conditions, in order to bring in more revenues and increase the yield. Same is the case with hotels.
Yield in case of hotel would be = room nights sold X actual average room rate room nights available X published room rate
Take a hypothetical example of a 100 room hotel with a rate of Rs. 2,000 per night i.e. potential revenue is Rs. 2 lakh per night. However, it doesnt get full occupancy at these rates and attract only 50% occupancy, resulting in a yield of 50 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. Selling 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 continuous basis so as to adjust to the changing market conditions as well as making use of greater information available about segment wise demand patterns. Managerial Implications Sherly Kimes in her widely quoted article Yield management A tool for capacity constrained service firms (Journal of Operations Management, Oct. 1989) has identified a number of management issues to be taken into account while implementing a yield management system. While yield management may give a firm competitive advantage, it could also result in the following :
Loss of competitive focus : As most yield management systems focus on maximizing revenue or yield, it may result in neglecting important issues like service quality. That is to say, short term profit maximization may over shadow long term competitive advantages. 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. Therefore, it should be properly structured to allow for some judgment on the part of the employees. Lack of Employee Training : A yield management system will require extensive training of all employees. They should understand its objectives as well as its operation and how its affects their jobs.
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Also in order to make the yield management successful a strong information system within the organization as well as commitment from the top management is essential.
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 phenomenon at hospitals, restaurants, banks, hair cutting saloons etc. In such situations waiting time becomes one of the key factors in consumers evaluation of service. While reducing waiting time is important for marketers, it is equally if not more, important to reduce the customers perceived waiting time. If a customers perceived waiting time is less, he will be more satisfied with the service. Thus service waits can be controlled by two broad techniques viz. Operations Management 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 cannot 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 facilities during non-peak hours. Fourthly, greater use of information technology can be made wherein customers can use telephone, computers, etc to conduct business. For example, banks can deploy ATMs, provide phone banking and internet banking to reduce pressure at the branches. Lastly, as marketers you can also differentiate 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 number 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 adopted. There are number of possibilities in this regard. Take for example the computerized railway reservation centres wherein there are multiplequeues and the customer has the option to join whichever queue he wants to and can also switch over 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 everyone. A slight variation of single queue system can be that each customer on arrival 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 than fifty thousand pilgrims visit the Sri Venkateswara Temple every day. Sarvadarsanam (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. This queue merges with the Sarvadarsanam queue at a fixed point and the darshan timings are the same as that for Sarvadarsanam. The Sudarsanam token system was introduced to minimize the waiting time for Sarvadarsanam, Special Darshan and other paid darshan/sevas. Some of its features:

The tokens are available free of cost at a number of convenient places in the town. The time for darshan is indicated on the token. Pilgrims can enter the Vaikuntam Queue Complex at Tirumala at the 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 pilgrims 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 line management has led to increased interest in managing the perceptions of wait experience. If you cannot control the actual wait duration, then control the customers perception of it. Maister has proposed following eight principles that you can use as service marketers to influence customers perception of waits and their satisfaction with waiting lines

Unoccupied time feels longer than occupied time. Preprocess waits feel longer than in-process waits. Anxiety makes waits seem longer. Uncertain waits are longer than known, finite waits. Unexplained waits are 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 operations 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 tolerable. 1) Determine the acceptable waiting time for your customers. 2) Since unoccupied time feels longer than occupied time, keep customers occupied by installing distractions that entertain and physically involve them. For example, television sets can be installed in the waiting areas, magazines or reading materials related to the service can be provided. Exhibit 9.2 provides an interesting illustration in this regard. 3) Provide waiting duration information i.e. information about the expected length of a wait and/or queuing information i.e. a consumers 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, waiting duration information appears to be a better choice than queuing information. However, in case of long waits, waiting duration information may be less effective then queuing information. Also providing queuing information is more important as compared to waiting duration information when service organization has difficulty in accurately estimating the length of wait or when the waiting line is not visible to customers. 4) If unexpected delays occur, explanation should be given to the customers. This helps in reducing uncertainty and customer irritation. The key is to impress upon the customer that he has not been forgotten. Simple things like providing a glass of water or a cup of tea to the waiting customer 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 of view and conducting activities that do not involve customer interactions out of the customers sight. 32 7) Try to reduce pre-service waiting by transferring some 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 information 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 overcoming many negative effects of waiting. Therefore, training and incentives / rewards for providing good service should be made.
Exhibit 9.2. Waiting in line : Experiment by Bank of America Bank of America through their review of data realized that there might be opportunities to reduce perceived wait times without reducing actual wait times. An earlier study by market researchers had also revealed (the study was conducted by intercepting some 1000 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 the summer of 2001 the bank installed television sets over the teller booths at one 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 branch lobby you will reduce perceived wait times by at least 15%. The results obtained were significant. After the installation of the T.V. sets the degree of overestimation of wait times dropped from 32% to 15% at the test branch. Before the implementation of this experiment, customers who waited longer than five minutes, significantly overestimated their waiting time by 32%. (Average actual time : 6.17 minute, Average perceived time : 8.16 min). After the installation of monitors 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 bank through a research also concluded that a branch with more than a thousand households 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 retention due to higher customer satisfaction. (Based on the study analysis that every one point improvement in banks customer satisfaction index added $1.40 in annual revenue per household and that the reduction in perceived wait times would translate into a 5.9 point increase in overall banking-centre customer satisfaction) Source: Stefan Thomke, R&D Comes to Service: Bank of Americas Path breaking Experiments, 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 concerning an amusement park. Also given are the comments and possible solutions to the problems 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 waiting lines. Before we move over to the case situation, let us fist take a brief look at the amusement park industry as such. The industry has it origin about 400 years ago in the Danish capital Copenhagen. In India the industry is in the growth 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 increasing willingness on the part of the customers to consider new forms of entertainment. Foreign companies like Universal Studio, Time Warner and Disney are eyeing the 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 Sammys Dreamland in Bangalore also coming up.
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Strategic Issues
Case Situation: The amusement park with a successful history was now facing problems. 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 mature 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 of 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 pay 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 help to up-sell the people who are already coming to the park. And by making it possible to spend less time in queues, the guest card will also attract a different 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 dont even think its a great experience for the preferred 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 scheme neither sides coming back commented an executive. A possible solution given to this was to separate the lines and limiting the percentage of special tickets issued on any given day. If the preferred guest card scheme was not implemented the park might be forced to raise price across the board. Before moving on to the next part, analyze the above situation and identify possible solutions. What Experts 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 service:
Creating two types of service at different prices will create problem for the park. Raise the admission price instead It makes good business sense to segment customers and to offer a different level of service-at a higher price-to those at the upper end of the market. The 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. Service differentiation 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 particular ride. A fixed number of seats may be allocated to reservation (say a third or a half) and then give the customers lining up an option to wait or to make ride reservation for later in the day.
ii)
Chief Marketing office of a leading bank:

iii)
A former CEO of large Airlines:

Some Practices in Successful Amusements Parks: Disney lands offer a form of reservation Fastpass by which guests may go 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 every four hours in order to ensure that the rides are able to accommodate both Fastpass and regular customers. Further, line management at Disney also involves continuously entertaining waiting customers and providing them with the information regarding the duration of their waits. Signs are posted at intervals in the queue, stating the expected time until service commencement. Because of Fastpass, rather than waiting in line, customers spend more money in the restaurant and shops. Dreamworld in Australia caters to both international as well as local customers. Considering different price sensitivities of local and international customers (while a Japanese couple will pay $78 - $39 per person entrance fees without hesitation as this is a small portion of their vacations, a local family of four looking for weekend entertainment may view $136- $39 adult charge and $ 29 charge for children amounts to a large portion of their entertainment expenses). Dreamworld offers a separate package to local customers involving yearly passes at much lower prices. It is a common practice for tourist attractions such as Dreamworld 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 amusement park industry by Rahul Sachitanand. Harvard Business Review, Nov. 2001, HBR Case 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 between 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 experience at amusement parks. Identify strategies adopted by the parks to manage demand (e.g. on weekdays vs. weekends, special package for specific customers groups etc.) and waiting lines. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
9.7 SUMMARY
This unit deals with issues related to managing demand and capacity in service organizations. Considering the fact that services are perishable, demand fluctuation is considered to be a somewhat serious problem for services marketers. A service organization with a fixed capacity may be faced with four different situations viz. excess demand, demand exceeding the optimum capacity level, demand and supply being balanced at the optimum capacity and excess capacity. The first step towards developing strategies for matching demand and capacity is to study the demand patterns and the underlying causes. The strategies for matching demand and capacity can be broadly divided into two categories changing demand to fit supply and changing supply to fit demand. These two strategies have been discussed in detail in this unit. Subsequently yield management technique for managing demand and 35
Strategic Issues
capacity profitably has been explained. Despite strategies for matching demand and 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 help 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 recommend to manage demand when it is too high? a. offer discounts b. bring the service to the customers c. offer incentive to customers for usage during non-peak times d. all of the above 2. Providing separate check-in lines for first class passengers by an airlines is an example of differentiating waiting customers on the basis of a. urgency of the job b. payment of premium price c. duration of service transaction d. none of the above 3. Which of the following is not true regarding waiting by customers? a. uncertain waits are longer than known waits b. unexplained 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 suffer due to crowding or staffing being pushed beyond their abilities to deliver consistent 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. ability 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, repairs 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 normally slow. This strategy is employed because service are a. perishable b. variable 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 the two? 2. Explain the significance of determining the demand patterns. Select any service organization of your choice and describe its demand patterns and its underlying causes. 3. Describe the strategies for matching supply and demand giving 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 organization.

Donald J Shemwell, Jr. And J. Joseph Cronin, Jr. Services Marketing Strategies for coping with demand/supply imbalances Journal for Services Marketing, Vol. 8, No. 4, 1994. Shirley Taylor, Waiting for Service: The relationship between delays and evaluation of services Journal of Marketing, April 1994. Sherlyl E. Kimes, Yield Management: A Tool for Capacity-Constrained Service Firms Journal of Operations Management, Vol. 8 No. 4, 1989. Karen Katz, Blaire Larson, Richard Larson, Perceptions for the waiting-in line blues: Entertain, Enlighten and Engage Sloan Management 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. Stefen Thomke, R & D Comes to Services: Bank of Americas Pathbreaking Experiments, Harvard 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.
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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 switching and ways of managing it, understand the need and importance of complaints handling, discuss strategies for effective service recovery after a service failure, 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 Assessment Questions Further Readings
10.1 INTRODUCTION
Ramesh walks into an empty PCO to make a phone call. He pulls out a crumpled piece of paper from his pocket and dials the number on it. The PCO owner cant help but listen in . Hello, is that Mrs. Gupta, I offer A.C. maintenance services and was wondering if you need someone to provide you the services this year. Oh, youve got someone who does that every year and youre happy with them. I see, says Ramesh solemnly. Theres nothing else needs doing that they dont do? OK, Well, maybe Ill call again next summer to see if youre still happy with them. Thanks, Mrs. Gupta says Ramesh, and puts the crumpled paper pack in his pocket. Ramesh walks out of the booth and heads for the door. The PCO owner stops wiping and says :My Dear Friend, I cant let you walk out without saying something. I was a salesman for twenty years and a good one. And I tell you, youll get nowhere making one call and giving up. You need a list of numbers and you work your way through them. Youll never get the work of Mrs. Gupta house or anyone elses with the attitude youve got. Thanks for the advise says Ramesh to PCO owner. But, its OK. Really. You see, I already do A.C. maintenance services at Mrs. Guptas house. (Based on an anecdote of Don Peppers at ecustomerserviceworld.com) Services marketers understand that having customers, not merely acquiring customers is crucial for service companies. There is a direct link between customer retention over a period of time and profitability and growth. Further,
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customer retention to a great extent depends on service quality and customer satisfaction. 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 of any service activity as mistakes are an unavoidable feature of all human endeavour and thus also of service delivery. Service recovery is the process of putting things right after something goes wrong in service delivery. Service marketing literature also suggests that offering well designed service guarantees help in attracting and retaining customers. This unit begins with a discussion on the importance of retaining customers for service firms. The unit further explains the details of a complaint management system and service recovery process. The last 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 services marketers. It is the cornerstone of a successful service. Generally, the longer a customer stays with a company the more that customer is worth. It influences employee and supplier loyalty as well, as people like to work for companies where customers are loyal. It also produces profits that influence share holder loyalty. In fact this all results in a positive spiral. Employee retention and loyalty results in high quality of services which leads to customer satisfaction and delight which makes the customer stay with the organization and increases its profitability which in turn brings employee loyalty. This sequence is shown diagrammatically 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 are 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 retaining 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 accustomed to it and once they are used to the service and are satisfied with a service provider, they tend to purchase more over a period of time. As they remain satisfied with a service provider they will spread a positive word of mouth, which is extremely effective in case of services for attracting new customers. Longer 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
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Strategic Issues
individualized services which may be difficult for the competitors to offer. Indian service companies are increasingly recognizing the importance of retaining existing 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 General Manager (Business World, 4 Nov. 2002). Considering the importance of retaining customers in service business, Reichheld & Sasser coined a term Zero defection. 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 conclude 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 opportunity of profitability with that individual. You must therefore understand the lifetime value of a customer. Consider a simple example of a telephone company. For example, if on an average customer pays Rs. 500 a month and stays with the 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 doubles. Therefore, it is important for all the employees within an organization to understand the lifetime value of their customers. Once they understand it, they will treat the customer accordingly and will focus on building relationship with the very people who keep them in business. The following is an interesting illustration of Southwest Airlines of U.S.A. Southwest Airlines is amongst the most profitable 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 its effort to keep employees informed, Southwest Airlines communicates the importance 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 think about how their individual behaviours influence customer service. The company 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 customer #75 came on board did a flight become profitable. The data on our annual profit and total flights flown to clearly illustrate how vital each customer is to our profitability and our very existence. When you divide last years annual profit by total flights flown, you get profit per flight : $179,310,000 (annual profits) divided by 624,476 (total flights flown) = $287 (profit per flight) Then, divide profit per flight by Southwests systemwide average one-way fare of $58 :
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$287 (profit per flight) divided by $58 (average one-way fare) = 5 (one-way fares 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 carried meant the difference between profit and loss of our airline. To take a step further, to have lost the business of only one Customer per flight would have meant a 20 per cent reduction in profit on that flight. Thats how valuable each Customer 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 understand what actions of service companies or their employees make customers switch from one service provided to another. Customers leave a provider for a wide variety of reasons. Consider when you were last dissatisfied with a service provider or changed a service provider. What were the specific reasons for your reaction? Was it because of perception of poor quality or failure of a service encounter? 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 service) c) Core service failure (service mistakes, billing errors) d) Service encounter failures (uncaring, impolite, unresponsive, unknowledgeable) e) Response to service failures (negative response, no response, reluctant response) f) Competition (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 controllable from a service organizations point of view. Some of the aspects to be examined 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 line strategies and strategies for management of demand and capacity (discussed in detail in Unit 9). Customer defection caused by unsatisfactory service encounters employee customer interactions can be reduced by proper training of employees, listening to customers and keeping the customers informed.
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Strategic Issues
Activity 1 Discuss among your friends and colleagues the reasons why they have switched service provider(s). Analyze whether something could have been done by the organization to prevent them from switching. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... For maintaining customer relationship you have to deliver quality services including service recovery and continuously monitor the relationship to find out customer satisfaction and loyalty. Another important aspect of keeping customers is the market segmentation. This aspect has been touched upon in Unit 5 of this course. Unless you properly segment your customers and understand their buying behaviour, expectations and perceptions, you will not be able to meet their needs and cant retain them. In an interview to Harvard Business Review , British Airways CEO Sir Collin Marshall highlighted the importance of segmentation for service business (HBR, Nov-Dec 1995). Even in a mass market business, you dont want to attract and retain everyone. The key is first to identify and attract those who will value your service and then to retain them as customers and win the largest possible share of their 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 than that of our competitors. Now-a-days the segments are becoming smaller and smaller to the extent that even for mass services we talk of segments of one i.e. individualized service. This is referred to as Mass Customization. Joe Pine in his book Mass Customization has suggested different approaches towards mass customization. The important thing to understand is that it is not required to individualize services right from design to delivery in order to be differentiated, rather it can be done in number of ways. For example, you can customize a standardized core by combining it with customized peripherals. A hotel while offering a standardized room may customize it to individual tastes by offering personalized stationary, providing room location based on customer choice , keeping the refrigerator stuffed with eatables as per customer choice . (You have to have a good customer database in order to do so). Another way is to create customizable services which can be customized by the customers themselves. This can be done when customers can combine different components or modules of a service product in unique ways suited to their individual requirements. Please note that service offerings themselves are standardized. The IGNOU management programme, for example, though 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, health care etc. Loyalty Programmes Loyalty programmes are often used in service industries like cellular companies, airlines, hotels, credit card companies, retail outlets etc. in order to build customer loyalty. They aim at locking on the consumer by rewarding him for patronizing a particular service for a period of time. In fact number of similar terms like relationship marketing programme, frequency programme, continuity programme, points programme and loyalty programme are often used interchangeably. One of the most visible form of loyalty programmes is the
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frequent flyer schemes offered by airlines which reward customers with a free flight on accumulating a certain number of points. Similarly, hotels award regular customers with points, which can be redeemed for free meals or stay. While loyalty programmes are primarily aimed at ensuring that a customer stays loyal and buys 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 retailer Shoppers Stop), Jet Privilege programme (of Jet Airways), Tajs 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 consequence 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, companies 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 Service recovery as a process that identifies service failures, effectively resolves customer problems, classify their root cause(s), and yields data that can be integrated with other measures of performance to assess and improve the service system. A good recovery can turn angry, frustrated customers into loyal ones. Further more, customers who have been successfully recovered not only remain loyal but 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 doesnt 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 provider is performing in the market place. When customers complain, two potentially positive 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 point 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 performance. Researches have shown that excellent complaint management service recovery can significantly influence customer satisfaction & loyalty. The service provider in order to improve solicitation of complaints should make it easy for the customers to get in touch. This can be done by providing multiple means of contact like toll free numbers, website, and customer contact point with service personnel. Further, these should be published on a continuous basis and the customers 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 complains 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 features : 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 system for
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Strategic Issues
lodging complaints, the less accessible it is to customers. c) Responsiveness: Complains need to be dealt with quickly. The quicker the complains are dealt with, the higher the customer satisfaction. A service provider who adopts customer focused approach invites complaints and indicates commitment to resolving complaints 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 causes and fixing them.
d) Customer-focused approach:
e) Accountability: f) Continuous improvement:
A good complaint management system must ensure that the complainant is kept informed, the staff understands the complaint processes, complaints are taken seriously, 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 to your letter (or no response) and its impact on you as a service customer. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... Robert Johnston has developed a conceptual model linking complaint management 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
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Source: Robert Johnson, Linking Complaint Management to Profit, International Journal of Service Industry Management , Vol. 12, Nov. 2001
the intervening variables i.e. satisfying and retaining the customer /employee and/or improving the product or bringing out process improvement. Financial benefits accrue from satisfying and retaining dissatisfied customers through service recovery, by using information from complaints to improve both operational and organization-wide processes and by satisfying and retaining employees. All this is contingent upon the organizations complaint culture. Activity 3 Contact any service 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 strategies 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 were 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 attendant not only did everything that was routine offered to have the customers garments cleaned or replaced and made sure that a customer relations representative contacted the customer later to demonstrate that we genuinely cared but also made special gesture by offering the passenger a complimentary choice of certain tax-free goods. (Source: Competiting on Customer Service: An Interview with British Airways Sir Colin Marshall, Harvard Business Review, Nov-Dec 1995) Hart, Heskett and Sasser suggest that service companies must become gymnasts, able to regain their 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 recovery 2) Break customer silence and listen closely for complaints 3) Anticipate needs for recovery 4) Act fast 5) Train and Empower employees 6) Close the customer feedback loop Let us briefly discuss the above strategies. Measure the costs: As services marketers you should not underestimate the profits lost when a customer departs unhappily. This has been highlighted in the earlier part of this unit as well. Once this is appreciated, it will get due attention as it is said that 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 compensate the customer , the tone of the response must signal the company regret.
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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. Anticipate Needs for Recovery: Service providers can look for the weak links or the areas which tend to be problem prone and address them in their service recovery strategies. Act Fast: Customers who complain want quick responses. The urgent resumption 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, Youre right, It, shouldnt have happened that way, all convey empathy for the customer. Also, symbolic atonements should be made. It can be money, flowers, a sorry note, free dessert by a restaurant, free upgrade in airlines etc. The speedy response to complaints /service failures requires appropriate system and procedures as well as trained and empowered employees. Train and Empower Employees: The organization must train the front line people and empower them. Simulated real life situations can be an effective way to develop recovery skills among employees. The company should empower the front line employees to act and should give them the authority, responsibility and incentives to follow with customer. Close the Loop: If a customer complaint leads to corrective measure the company should tell the customer about the improvement. Even if something cant be fixed, the company should explain it to the customer. Effective way of closing the loop include making timely telephone calls and letting the customer know that his suggestions might be implemented.
LEARN : Dissatisfied Customers Are Gold In every business, mistakes happen and customers get angry. But when a problem is fixed properly and stays fixed .. customers loyalty actually increases! Here are five steps you can take to not only resolve 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 attention. Active listening requires a lot of effort and cannot be accomplished when we are distracted. EMPATHIZE with your customers concerns. Let him know that you sincerely care about his problem even if you dont agree with his comments. APOLOGIZE even if you are not the cause of problem. When said sincerely, the words Im sorry can diffuse as much as 95% of most peoples anger. RESOLVE the problem. Let the customer know you are on his side and will do everything you can to help him get the problem resolved. If only an employee in another department can fix it, help make the transition smooth so the customer doesnt have to tell his story more than once. NOW is the time to address the problem. The faster a mistake is fixed, the more likely it is that the customer will give your company another chance.
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 feel great about the positive difference you made in that persons 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 loyalty, managing failures & defection in the concluding comments of his article Learning 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 the 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 you 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 requirements for car rentals and how your company might be able to serve us. I find myself needing to order for these services for a large international convention we are organizing in August 2004 and therefore decided to contact your company for information. Instead of obtaining information. I am totally frustrated. First 1 went to your website. Cool, I thought, I can click on the buttons and get information. Wrong, no help there. So I tried to e-mail you from that site didnt work. Additionally, there was no e-mail address on either letterhead or your website. My next 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. Ajay was a good choice, I thought, wrong. Hes out of the office, so I followed his instructions and pressed 222 for someone else-more voice mail. Okay, then I pressed 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 Ill 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., they 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 compared 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 services be returned back if something goes wrong? However, now more and more service firms are offering service guarantees which may take the form of a satisfaction 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 bank 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 may offer home delivery within a guaranteed time, say 30 minutes, failing which the customer may be given specified price-offs. A hotel may offer a unconditional satisfaction guarantee. Why offer a Service Guarantee? More and more service firms have started to realize that a good guarantee can act as a marketing tool for attracting customers as well as help in retaining customers. It also helps in cultivating and maintaining quality throughout an organization. Some of the benefits of an effective service guarantee are highlighted below. i) ii) Implementing a guarantee forces a company to focus on customers. Offering a guarantee provides employees with a service related goal and facilitates goal alignment between employees and the organization. It can also increase employee morale and loyalty. It encourages customers to complain and provides the opportunity to the organization to make amends, thereby retaining the customers. Invoking of guarantee by the customer guarantees important and immediate customer feedback. In the long run, analyzing information collected about why guarantees were invoked by customers can provide meaningful information for making improvements in service design and delivery. A well designed service guarantee can lead to increased service quality expectations, lower perceived risk and increased purchase intent. Service companies have a greater opportunity than manufacturers to differentiate themselves through a guarantee .
iii) iv)
v) vi)
Rust, Zahorik & Keiningham have brought about that a guarantee can be very profitable. 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.204
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The above figure highlights that with a guarantee, advertising is more effective, which attracts more customers.
Customer Retention
People invoking the guarantee come back which may 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 attracting more customers.
Features of a Good Service Guarantee A service guarantee can take the form of an unconditional guarantee of satisfaction or specific outcome guarantees allowing a company to spell out exactly which elements of the service it wants to stand behind. Unconditional guarantees are powerful and a companys promise to meet all of its customers expectations. For example, a hotel guarantee states if you are not completely satisfied, we dont expect you to pay. Specific guarantees, on the other hand , though smaller in scope, can still be quite powerful. For example a courier company offering a guaranteed delivery within 24 hours. Whatever may be the type of guarantee, there are certain features which make the guarantee effective. Hart summarizes them into following main characteristics. 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 standard 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 payout. Easy to Invoke and Collect: A good guarantee should be easy to invoke. Service marketers should understand that once poor service has been delivered, easy and quick settlement should be ensured
iii)
iv)
Activity 5 a) Identify a few service providers who offer a service guarantee. Evaluate these guarantees on the characteristics of an effective guarantee discussed above. ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... b) Critically evaluate the following service guarantee offered by a Delhi based multiple chain restaurant for its home delivery 30 MINUTES GUARANTEE 10% DISCOUNT ON DELAYED DELIVERY ORDERS* * DISCOUNTS 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 noted 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. Also there are situations which involve uncontrollable variables which cant be guaranteed by a firm. Another big hurdle for many service managers in offering guarantee 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 benefits derived from a strong guarantee. It may also becomes less meaningful to offer service guarantee if customers perceive little risk in the service or there is very small perceived variability in service quality among competitors. The following illustration highlights the benefits gained by M/s. Delta Dental (A Dental Insurance company from Massachusetts, U.S.A) through the implementation of an 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 percent 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 insurance and pays them, the employees of the organization, and the dentists. The guarantees 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 : THE GUARANTEE: Accurate and quick turnaround of ID card. A complete and accurate identification card for each subscriber will be mailed to the group or subscribers home within 10 business days. THE REFUND : $25 paid to the group per ID card. This 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 Massachusetts would send the group a refund of $12,500. Instead of saying we are sorry, making 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 with payouts of $1,359,668. On the I D cards they have had 2,543 occurrences and payouts of $89,925. They have added 570,000 new subscribers valued at $614 per subscriber since implementing the service guarantee. The value of these new subscribers 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 average of 92% (1987-1989)! Source: www.customer-service.com
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An interesting issue related to service guarantees is whether a firm with a reputation for outstanding quality offer a service guarantee? This is because with such 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 Singapore, 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. Benefits of a guarantee would also be positive, but less so for an already highly reputed firms. Therefore firms with a reputation for service excellence should carefully consider whether the costs of implementing a service guarantee are justifiable in terms of its market and/or operational impacts. Customer of even the best providers may prefer the certainty of an explicit guarantee over the uncertainty intrinsic in an implicit guarantee.
Customer Retention
10.7 SUMMARY
Retaining customers is of great significance for a service companys growth and profitability. The units explains the importance of keeping customers. As the customer stays with the organization he becomes profitable by increase in purchasing, reduced operating costs, price-premium and through referrals. There are a number of reasons why customers switch and most of these reasons are controllable for companys point of view. Providing excellent service quality, maintaining customer relationship and effective segmentation are key to building customer loyalty. The unit further discusses the significance of complaint management and key components of a good complaint management system. On receiving complaints or otherwise finding out a service failure the company should strive for an effective service recovery. For this the company should anticipate need for recovery, act fast, train and empower employees and close the customer feedback loop. The last part of the units deals with Service Guarantees. A good service guarantee helps in creating customer focus, increasing employee morale and loyalty, seeking customer feedback, creating differentiation, lowering customer perceived risk and increasing purchase intent. For a service guarantee to be effective, it should be unconditional, 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 create salad as per their own individual need is an example of a. customizing the service around an standardized core b. creating customizable service c. offering point of delivery customization d. all of the above 3. Customers are more profitable 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 most of which are not controllable from a companys point of view 5. Service recovery refers to the action taken by the service provider in response to a service failure. 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 retaining its customers? Discuss with the help of examples 2) Why do customers switch service providers? Can you do anything as a marketers to prevent the customers from switching? 3) What benefits do an organization derive in seeking customer complaints? Discuss the features of a good complaint management system. 4) Consider a service firm you are familiar with. Describe the importance of service recovery 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 Review, Jul-Aug 1988. Hart, Heskeet and Sasser , The Profitable Art of Service Recovery, Harvard Business Review, Jul-Aug 1990. Robert Johnston, Linking Complaint Management to Profit, International Journal of Service Industry Management, Vol.12, No.1, 2001. Reichheld & Sasser, Zero defections: Quality comes to services, HBR, Sept-Oct 1990. Reichheld, Learning from Customer Defections , HBR, Mar-Apr 1996. Susan Keavenly, Customer Switching Behaviour in Service Industries : An Exploratory Study, Journal of Marketing, Vol. 59, April 1995. Wirtz, Kum & Lee, Should a Firm with a Reputation for Outstanding Service Quality offer a Service Guarantee, Journal of Services Marketing, Vol. 14, No. 6. 2000.

52
MS-65
Block
SECTORAL APPLICATIONS-I
UNIT 11 Financial Services UNIT 12 Tourism and Hospitality Services UNIT 13 Health Services UNIT 14 Case Study: Serving the Global Indian 5 23 46 62
Sectoral Applications-I


Print Production
Printed at:
BLOCK 4 SECTORAL APPLICATIONS-I

In the first three blocks of the course we have covered the concepts and theoretical framework underlying services marketing. The remaining two blocks i.e. Block 4 and Block 5, are geared towards exposing you to the actual application of marketing concepts in diverse service sectors. In this block three specific sectors will be covered. Unit 11 is on 'Financial Services'. In the last couple of decades, India has witnessed a drastic change in the financial services sector. This 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 explains the reasons behind the rapid development of this sector and the variables affecting the demand and supply of the tourism products. It also discusses the marketing mix for hotels in detail. Unit 13 is concerned with the application of principles 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 financial service marketing and relates to various issues concerning the banking industry in India.

BLOCK
1.

2.
5. 6. 7.

3.
8. 9. 10.
STRATEGIC ISSUES
4.
11. 12. 13. 14.
5.
15. 16. 17. 18. 19.
UNIT 11 FINANCIAL SERVICES

Objectives
After studying this unit you should be able to :

familiarise with the range of financial services available in India, explain the consumer behaviour in the context of financial services, explain the product, brand and other elements of marketing 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 Financial Services Branding of Financial Products Channels for Distribution for Banking Pricing of Banking Products/Services Promotion of Banking Products/Services 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 consonance with the macro economic environment. Regulators like SEBI, RBI and the Government of India monitor for the suitable sustained economic growth in the economy. In the Indian financial system funds flow into the main economy for growth, from financial institutions, commercial banks, insurance companies, mutual funds, provident funds, and from non banking finance companies. Of course the deposits and shares are mobilized from supplier of funds like individuals, businesses and governments. Till early eighties, no one in the highly regulated banking/finance industry showed any inclination to innovate or market new financial products, given their respective roles as bankers or finance companies all offered absolutely the same products. Product development or innovation of financial products interestingly requires very little or no additional investment. But the downside 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 financial products available in the market:

Savings and Recurring Account Current Account Fixed Deposits Retail Loan Products 5

Commercial Loans Leasing and Hire Purchase Credit Cards Insurance Mutual Funds
Beside these, banks and finance companies provide a number of fee-based services such as merchant banking, issue management for raising equity from the market, foreign exchange advisory services etc. In this unit we will be focusing on marketing 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 mental process. For us to appreciate the complexity of the consumer's buying decision, we need to understand the variety of individual influences on consumer behaviour; the impact of environmental factors such as family, social, and cultural influences on the consumer; and how these components are integrated in the consumer's mind. A firm's marketing efforts interacts with non-commercial sources of information to stimulate the purchase decision process. This process is tempered by the individual influences on consumer behaviour, including motivation, personality, learning and perception. The process stops when the consumers lose interest or evaluates the product and decides not to make a purchase. If the purchase is 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 human beings are all individuals. Each behaves differently, thereby making mass consumer behaviour patterns we see everyday:
People vary in their persuability. Some are easily persuaded to do something; others are skeptical and difficult to convince. Some people have very 'cool heads' and control their emotions. Others are 'hot heads' and get angry easily. Some people are loner, whereas others need the security of a crowd. Many people are oriented towards the acquisition of material things while some people are motivated mainly by spiritual matters. Some people spend their money cautiously while others spend their money extravagantly.

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 consumers's buying decisions. To further complicate the marketer's goal of influencing 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, individual behaviour is inconsistent and difficult to predict from one day to the next. 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 behaviour. A man may say he brought a shirt because he needed it and it was at a discount of 30%. The real reason may be different. People often do not understand why they behave as they do. And if they do understand their true motivations, they may 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 how over a period of time. i) ii) Their preferences have been changed. Their buying 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 of 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 variable. 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 since then, been widely used as a segmentation tool. Because our age, income and family requirements, except for the basic necessities change over time, the family life cycle and identification of family needs over various stages of the FLC are useful inputs to the marketer. The family life cycle consists of 5 stages, the young bachelor stage, the full nest I, the full nest II, the empty nest and the solitary survivor stage. Expenditure priorities and need for money at different stages have interesting implication for the demand for various financial services. Table 11.1 gives you an idea of varying requirements of consumers for banking services. 7
Table 11.1: Family Life Cycle and Banking Needs Stage Young Bachelor Stage Financial Situation Few financial burdens, per capita income high,income low as compared to future prospects Home buying a priority, liquidity low, may have working couples situation Income stabilized. Good financial position. Mid career, comfortable position, money involving matters Banking Needs Credit Cards, auto loans, low cost banking services Mortgage, Credit cards, Overdraft saving accounts Housing and durables loans Home improvements loans Equity investment, certificate of deposits, money market deposit accounts, fixed or flexi-deposits, other investments services Social security services, few loan services, health insurance services
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 "Marketing 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 products, 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, Citibanks City schemes, Canara Banks Canschemes. Brand name is that part of the brand which can be verbalized e.g., Citihome, Canstar etc. Brand mark is that part of the brand which can be recognised but is not utterable e.g. the LIC folded hands symbol, Citibanks 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 practice of labeling more than one product with a single brand name e.g., Citibanks Citihome, Citimoble, and LICs Jeevan Dhara, Jeevan Akshayetc. The concept of branding of financial products offers several advantages. Brands command customer loyalty for the product. Each brand has a consumer franchise which can be used to its advantage. Financial products aim to attract the investors to bring his savings into the market. This is quite a delicate task because the investors money is involved. Most of the financial instruments are very similar. This is where the advantages of branding can be exploited. Branding can help in creating differentiation between the various financial products or public issues. Branding can also help to create some insulation from the competitors 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 safe. Branding, especially umbrella branding, helps the consumers to decide whether to buy a product when the new product quality cannot be determined prior to purchase. Another strong advantage of branding is that good brands help to build the companys corporate image. In umbrella branding, the advertising and promotion costs of subsequent products can be reduced considerably. This is because the brand-name recognition and preference is already there.
Branding of financial products has arrived in India in a big way. The first example 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 PetroChemicals Khazana, Deepak Fertilizers Mahadhan and others. Most of the major issues of 1989 were branded - Bindal Agros Goldmine, Usha Rectifiers Usha Lakshmi, Essars Steel Bonds and Larsen and Turbos L&T Vision. Banks too have gone in for umbrella branding in big way. For instance, we have a series of Canara Banks schemes like, Canpep, Canstar and Canstock, or, the series of Citibanks schemes Citione, Citihome, Citimobile. Even institutions like LIC have jumped on to the branding bandwagon with their schemes like Jeevan Dhara and 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 products benefits and qualities. Secondly, it should be easy to pronounce, recognise and remember. Third, it should be distinctive. There are a couple of things to be careful about while using umbrella branding. Spillover occurs when information about one product affects the demand for other products with the same brand name. Spillovers can be positive or negative. All products under the umbrella contribute to the brands reputation. This joint estimate of quality is used to evaluate product. The company cannot control all the information revealed about its product, nor can it precisely determine how information will be shared by its umbrella-branded products. For instance, if customers are dissatisfied by Citimobile this dissatisfaction can spillover to Citihome and other Citi schemes. Thus, it is imperative 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 have called it the line extension trap when the new products added to the brand does more damage to the previous products than good. Any new product should be consistent 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 should 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 confused but also begin to doubt the quality of the previous schemes. Developing a brand requires a great deal of long term investment especially advertising, promotion etc. It is quite an expensive proposition and hence is worthwhile mostly for large public issues or long term plans like a banks schemes. Nonetheless, the advantage 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 public issues as it is for toothpastes or cigarettes. Activity 3 Identify any financial services offered by bank, where an attempt was made to create a successful brand. Also identify the reasons, which make you think that it is a successful brand. ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
Financial Services
11.4 CHANNELS OF DISTRIBUTION FOR BANKS

The channels of distribution in financial services perform a number of key functions, 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 and product development.
In distributing financial services, firms employ a number of channels. The advantages of direct distribution channels for example branches, used to be lower operational costs and more efficiency. In comparison, the selling through indirect channels offers convenience to the customers and more impartial advice, as in the case of agencies. The Branch Network Banks major distribution outlets are their branches. The design and development of the branch network will be affected by :
Characteristics of the products importance of service quality, inseparability of the product, intangibility of the product. Customer needs convenience, operating hours, availability of ATM, telephone banking, home banking and so on. Environment factors legislation, development of information technology. 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 banks 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 branches can be difficult to enlarge when expansion is necessary.
Branch location and distribution As the roles and functions of financial services continue to grow in most countries, pressures are building up for more efficient distribution systems. 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 being decisive when choosing a financial organisation. Moreover, location decisions involves long-term commitment of resources and as such have implications on the long term profitability of the bank. In distribution of banking services the marketer is faced with a huge market that should be duly served. This market falls into two broad categories: 10
The mass (retail) market: Standard products, relatively inflexible in performance and cost, can be offered to this market. It spells out the requirements of geographical decentralization, standardized services, heavy advertising and promotion, attractive services and above all cost effective processes. The individual (corporate) market: This market constitutes single orders of sufficient size of importance to be profitable singled out for individual treatment. It requires individualized 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 places that often intimidated customers. All the staff used to work behind security 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 services 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 financial matters, opening of accounts, solve problems or answering queries. Though the importance of ATMs, telebanking and internet banking is increasing, branches still 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 months 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:
Financial Services
View transactions in their accounts, exchange messages with the officers concerned 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 answers. Request for funds transfer between accounts, issue stop payment requests and standing instructions and do deposit modelling Have on-line connectivity providing the customer with the ability to directly debit and credit the account without the banks 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 internet 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. What 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 the reasons for their non utilization. ..................................................................................................................... ..................................................................................................................... ..................................................................................................................... 11
11.5 PRICING OF BANKING PRODUCTS/SERVICES

No discussion on marketing mix for banking services can be complete without understanding the concept of pricing and its importance, in detail. Pricing can be strategically 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 (customers). 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, demand and competition in the market. Price in the eyes of the consumer is the evaluation of the total product offering which includes the brand name, package, product 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 market, 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 decisions link the marketing actions with financial objectives of organisations. Pricing 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 described as cost plus profit. Therefore, proper analysis of cost and proper decisions regarding profit level have direct impact on pricing decisions/strategy. Normally direct 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 affect the profit level adversely. 2) Market Share- The customer acceptance is reflected by market share of a product and is an indicator of acceptability of price. 3) Competition- To face the competition, prices can be lowered to maintain sales or in the absence of it, prices can be revised but stable prices help in maintaining 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 and price level.
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B) Pricing Methods I) Market based pricing system In order to understand consumers based inputs on pricing system, we should also take into account the market related pricing systems which adopt one or more of the following approaches: i) ii) iii) iv) i) Perceived value pricing Psychological pricing Promotional pricing Skimming Perceived value pricing: This is based on the belief the consumers have 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 value, 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 quality. 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). Sometimes instead of giving a 20% discount, the price per unit per-se will be constant (uncharged) but it is advertised that on purchase of 4 units one unit will be free. iii) iv) Promotional Pricing: This is used for promoting high level of sales or to clear excess stock which although is with a reduced profit margin. Skimming: This strategy is to skim and cream i.e. adopting a high price approach. When the product is new and innovative and in a monopolistic or less competitive market, the price will be higher (like in mobile phones) which can be progressively 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) Managerial pricing III) Competition Related Pricing Strategies The competitive pricing means pricing to compete with the leader in the market with respect to the price. It can be either to set higher price initially and then to offer discounts known as discount pricing or to significantly increase sales volume by competing with 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.
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The promotion efforts include the marketing communication through

Advertising Sales Promotion Personal Selling Publicity Banks internal communication process, etc.
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 only advertisements but a Banks conscious communication efforts towards integrating its marketing strategies with business plans. Promotion thus means the Banks well organized, planned and goal oriented communication efforts which must be in congruence with its overall business goals and objectives in the desired market area keeping specific needs of customer in mind. In the service industry like Banking, 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 all the difference between two Banks in marketing context. Promotion can thus mean communicating with the buyers (customer), in order to strengthen his attitudes that are favourable to the (Banks) sellers offering and to change his attitudes which are unfavourable to the sellers. This presupposes ensuring that such buyers become satisfied customers of the Bank, now or later. a) Advertising Although advertising is a very effective and most frequently used promotional tool in marketing of banking services, it is desirable to measure the effectiveness (impact) of an advertisement campaign. For this there cannot be any one criterion to assess the effectiveness. Normally below mentioned methods are used to measure effectiveness of advertising: 1) Usage Measurement: This is done through measuring business growth, interviewing consumers. 2) Measuring Recalls: This can be either unaided recall or aided recall which assesses the extent to which advertisements are retained in customers mind. 3) Psychological Measurement: This can be measured through interviews. 4) Attitude Measurement: This is done through structured interviews or attitude scales. 5) Measuring Awareness: This is done through YES/NO type questionnaires. The success of advertising affects successful launching of product/schemes, customers positive response of increase in business share. This can reflect in the business figures like Deposits, Advances, Profitability, etc. and the comparison of pre and post advertisement figures can reveal the visible effect of advertising campaigns. It can thus be summed up that effective advertising is the technique of creative communication. It ensures co-ordination and application of various batches of the art and profession to achieve a pre-determined end i.e. to communicate a message to the public in general or to the desired segment of public/market in particular. Advertising is significant both as a social and economic force.
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Advertising serves as a mouthpiece for the organisations objectives to be made public. In simpler words, advertisement makes use of communication process with inbuilt psychological and sociological contents which influence the buyers behaviour in advertisers favour through a process cycle of stimuli, response, motivation and reward. Activity 5 Carefully look through bank advertisements on the television and newspapers. What are the major themes that have been used to promote the banks? List these themes. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... Do the promotion efforts vary? How? i) With the type of Bank i.e. public, private or 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 often co-ordinated with other selling efforts. As the name suggests, sales promotion is a collective name given to all measures used to promote the sales. Any sales 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 demonstrated to facilitate buyers decision to buy that product. In a controlled economy and market if the competition is low or less, sales promotion may not be necessary if there is only one seller and many buyers but in a competitive market place, the importance of sales promotion cannot be undermined. In Indian context in general and in marketing of banking services in particular during the launching of product, sales promotion is an important task. Before deciding the sales promotion 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 advantages and disadvantages of the product. Only after ensuring the market demand and specific needs of customers, the product/scheme has to be launched with full details made available to staff before hand to promote this product in a better way.
Financial Services
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ii) Market information: This means knowing who will buy the product, when he will buy and why he will buy? This gives an idea about the probable market share and enables to decide promotion (selling) strategy to specific segment of the market. This also enables the seller to decide on the advertising through proper media keeping in view the specific needs of the potential buyers. iii) Reaching the customer: After ascertaining the market and ensuring proper product knowledge to all concerned; when its time to reach the customer, the campaign has to take into 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 quantity, 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 both existing and potential buyers (customers). Well informed and well-trained staff at the counter, eager to explain the schemes to the customer using smile, courtesy and proper communication process can ensure successful sales promotion through personal selling, within the branch, across the counter. The pro-active approach of the staff and projecting a harmonious image of the bank taking keen interest in customers interest can do wonders to boost the image and increase business of the bank. Seminar, exhibitions, deposit mobilization-month/fortnight, branch anniversary etc. are some of the other special sales promotion measures taken by banks. The sales promotion is very important instrument which smoothens the process of selling a product to the customer successfully. A well thought strategy of sales promotion, like planned advertising, should be looked at as an investment and not just another expenditure. Sales promotion is a bridge between advertising and actual selling in the field. Like the sum 2 + 5 = 5, when proper advertising 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, the 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 publicity for some mistakes/flaws or inadequacies in giving service. The publicity handouts 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
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iv)
be prepared/sent well in advance of the function/event. Publicity normally is not paid for by the organisations. It comes through good liaison with press reporters, journalists and column writers. Good public relation strategy usually compliments publicity to boost the banks image.
Financial Services
Publicity does the job of reducing ill effects of bad news and also increases positive effect of goods news if properly backed by proper public relations. e) Internal Communication Thus far we have seen the various promotional measures that are required in the communication process to achieve the corporate goals and objectives of the banks. In order to supplement such external communication measures, 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, objectives and targets during the financial year. The expectations of the CMD are conveyed with respect to corporate goals using past data and changes in economy and business environment appealing to the managers/staff to realistically assess the business potential in the common area of their branches and to arrive at revised 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 exercise largely depends on the realistic assessment of past data and realistic targets set. The utilization of the top-bottom communication ensures positive feedback/response from bottom to top. Besides business plan exercise, internal communication also involves: 1) House Journals 2) Circulars 3) Corporate objective/Business 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 the potential market and raise per capita life premium. The need for marketing insurance services also arises due to following factors: The insurance products have a distinct feature where benefits of the product comes at the later date and at times after a considerable time. The demand unlike consumers products is not inbuilt. Among the financial services too the insurance sector gets the least priority as other investments avenues provide immediate yields. In case of life insurance the case is further complicated as in India people have belief, traditional culture and religious background and tendency to leave everything to fate. This happens specially in rural areas. The rural market is still untapped. The insurance sector is yet to exploit this segment which have vast potentialities. 17
The concept of proper financial planning, taxation and investment is still lacking among the middle class strata. Over the period of time the L.I.C. have come out with multipurpose better yielding attractive terms insurances policies which certainly 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 insurance have wide scope for marketing as small and medium business entrepreneurs 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 vast and thereby marketing of insurance services needs a re-look. There are number of impending changes that are likely to make this sector more dynamic. The Insurance 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 sector. a) IRDA aims at promoting the regulating professional organizations connected with insurance and re-insurance business. b) The insurance sector is thrown open to private and corporate sector. This will certainly expand the business dimensions. c) There is also a move to specify the percentage of life insurance business as well as general insurance in rural and social sector. d) With the increased spirit of investment education and awareness there are already indications of increased participation. e) The yield on other avenues of investments such as banks, other financial institutions, mutual funds, capital market have come down and almost at par with insurance investments. This trend will further enhance the scope of marketing insurance services. f) Service standards are bound to improve and insurance premium should come down once the insurance reforms takes place. 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 interrelated. i) Though the market of general insurance is smaller in comparison to life insurance nevertheless the scope of growth is ample. j) The Budgetary provision have provided additional tax saving opportunity to certain specified insurance products such as pension policies. This will give further fillip to marketing strategies. Activity 6 Against the backdrop of recent opening up of the insurance sector, what do you think are the marketing implications for nationalist providers like LIC and GIC? .......................................................................................................................... .......................................................................................................................... .......................................................................................................................... ..........................................................................................................................
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c) Strategies for Effective Marketing Selling of services are different from goods in that, they are sold before production and consumption take place. Goods are purchased first then sold and consumed. Services also have particular characteristics such as their intangibility and variability where they are difficult to standardize. This makes it more difficult for customers to evaluate them (especially when they have no understanding of the service being provided and are relying on professional competence). This assumes significant importance in case of insurance services. Opening of insurance to private insurers has potential of increasing sales in different segments because of: 1) Sophisticated and knowledgeable selling by qualified agents, 2) Cost effective products, 3) Increased use of Family Package policies (A good product-mix) i) ii) iii) iv) Widowed mothers Un-married mothers Single parent family Multipurpose products
Financial Services
However to augment the business in this sector and exploit huge resources available in the markets, effective marketing strategies will have prominent role. The majority of insurance business is undertaken by the agents nominated for the purpose. They have crucial role in mobilising the business. Therefore their professional approach to consumers assumes significant importance. The following aspects 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 Average Life Span in our country, the number of aged persons are on the increase every day. Therefore, the financial problems of longer retired life are no less than those of early death. In future insurance market of Annuity and Pension plans is going to expand significantly. ii) Restructuring of national economy has brought in its wake many Voluntary Retirement Schems. The employees affected from these schemes form potential group of pension or Annuity Schemes. Product Knowledge: 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 draw 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 prospects. 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 whether held by his company or outside agency. He should make it a habit to read daily the material connected with his profession. Consumer Orientation: A customer is always right because he is the cause of your profession. You are for him. There may be many agents who are interested in him. Why he should be interested in you only? Here lies the
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secret of your skills of salesman. Therefore, an agent has to so establish himself 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. The 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. Activity 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 feedbak, note the kind of problems customers may face while collecting policy claims. 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 give a different shape to marketing practices for various kinds of insurance services. We may mention the possible out come benefits as under: a) Banking services, insurance selling and fund management are inter related synergies. Therefore insurance selling by banks are mutually beneficial to banks and insurance companies. Banking products offer insurance product through the banking channel will complement banking. b) With the entry of corporate sector with sophisticated technology, the quality of services will improve significantly and so is the cost effective products. This will certainly widen the market horizons. c) The regulations and controlling measures by IRDA would provide protection to investor. d) The professional training institutes will also have important contribution in training the personnel and thereby sharpening their professional skills. It will have positive development on marketing of insurance services. e) There is also a need to expose institutional structure more particularly in the marketing segment to rural and semi-urban areas. The efficient and well organized marketing strategies will bring more number of investors to insurance services and large population 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 prime importance for organisations. The financial sector is also recognizing the increasing importance of new products. Due to the rapidly increasing level of international competition there is a growing need for product innovation in banking and insurance
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Financial Services
products. The service characteristics of intangibility and inseparability raise a number of issues related to new service development. The main problem regarding intangibility is that people cannot feel, see or touch the product being developed, which means that people should work closely together in the development process. Prototype is hardly possible. Intensive communication is needed between the people involved in developing the new services, maybe even more than would be the case in manufacturing. The simultaneity of production and consumption (inseparability) warrants strong customer and user involvement in the process. Becoming more innovative requires alterations at the deepest levels of the organisation. They key changes that are required to become more innovative are concerned with the organisational structure, the underlying values and beliefs and information technology. An important issue in becoming more innovative in the financial services is to designate explicitly a place for product development. Also, considerable attention has to be given to changes in the value system of the organisation. Generally, banks and insurance companies are diffused with stability. Employees 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 innovations potential of many banks and insurances companies
Source: Patrick Vermeulen, Managing Product Innovation in Financial Services Firms, 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 believes in selecting and consuming financial products and services. In order to be able to manage their marketing effectively, marketers of financial services must understand why and how people believe, so that the pricing, distribution and communication of the organisations offer can be profitably offered to its target markets. Apart from needs and perceptions, a number of individual variables like consumer learning, their personality and self concept as well as group variables like family culture, sub-culture, reference groups and society affect buyer behaviour. The key elements in determination of the marketing strategies for financial 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 the needs and wants of the selected target group and the organisation services offer such that the exchange process results in value creation for the consumer and the organisation. Once the organisation, looking at the needs of the target market determines what is sold to whom (decision on the service product), the pricing, promotion and distribution will be easier to determine. In practice, the determination of these elements involves a thorough understanding of buyer preferences 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 mix to meet the needs of the target market better than its competition can. In this unit you have been explained in details the branding, pricing, distribution and 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 operational difficulties encountered so far in effective marketing will altogether have a new look henceforth due to large number of players in the market. The professional skills to mobilize the business will have key role in competitive environment. With the increased participation by various segments, the role of other institutes will also increase considerably. Need and strategies for effective marketing 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 services 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. Explain briefly various methods of pricing financial products. 5. Define Promotion. What should be a Good Promotion Blend, for marketing banking services? 6. Explain with the help of examples how effective marketing can be useful in enhancing the insurance business.
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UNIT 12 TOURISM AND HOSPITALITY SERVICES

Objectives
After going through this unit you should be able to :
describe the nature of tourism as a service industry and identify the participants in the tourism process, discuss the factors governing tourism supply and demand, apply the various segmentation criteria to the tourism market, identify the levels of demand for hotels, 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 Factors Governing Tourism Demand and Supply Segmentation in the Tourism Market The Hotel Market The Hotel Product Hotel Pricing and Distribution Communications Extended 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 needed 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 is often defined as an individual spending at least 24 hours away from home for the purposes of pleasure, holiday, sports, business or family reasons. Tourism is one the major industries today, with over 720 million tourist traveling annually. 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 activities which together produce the tourism product. We find involved in the tourism product development, three major subindustries. They are: (a) tour operators and travel agents; (b) accommodation sector (hotelling and catering); and (c) passenger transportation. According to international estimates, a tourist spends 35% 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 generation, in addition to the consumer motivation, is also heavily dependent upon powerful persuasive communication both at the macro (country) level and the micro (enterprise) level. The 23
participants in the process of this service business can be illustrated by the Figure below (Figure 12.1). Figure 12.1: Element of International Tourism Industry
Travel demand influenced by:
Tourist Industry Intermediaries

Travel destination influenced by:

rising incomes increased mobility improved transport education marketing
travel agents tour companies hotel companies transport companies
historical connections accessibility nature of tourist product search for foreign exchange
Source: John Lea, Toursim and Development in the Third World, Routledge, Chapman and 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 located 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 destination in order to consume the product. Technology today provides the opportunity of some assessment of sorts, through net generated images and rich information. While these do provide some basis for evaluation, only the actual transaction of the service act would lead to realistic assessment of the product. 5) The major players in the tourism market include a number of intermediary companies. Some of them transnational in character, some of them exhibit vertical integration, both backward and forward, acquiring interests in all major sectors in this service industry. Quite common is the existence of loose coalitions between intermediaries 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 physical characteristics of a destination and the infrastructural as well as managerial 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 sophisticated tourism promotion. The economic, social, and technological determinants of tourism demand include high and rising incomes, increased leisure time, good-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 labour right from 1930 onwards has reduced the number of working hours per week. Changing 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 resulted in a larger number of people having longer periods of leisure which could be allocated to travel. c) Mobility Better transportation and communication services have made the world a smaller place, and have brought both exposure and awareness 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 people to economically plan and execute trips aboard. d) Growth in Government Security Programmes and Employment Benefits The growth in government security programmes and well entrenched policies of employee benefits mean that quite a large number 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 targeted it as their key area of operation, developing a whole range of services to cater to the needs of the business travelers. f) Tourism Motivation Even if the people have the time, the money and the mobility to travel, tourism will not occur unless people have the motivation to take a trip. Motivation to travel may spring 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 selfesteem, need for recognition as well as the need to know and understand, and the need 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 not be able to decipher why. All too often tourism marketing is focused on advertising to the want and not addressing the underlying need. If such needs can be established 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 return 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 underlying motivation can be unearthed, and the extent measured, it would be possible to design tourism effort more effectively.
Tourism and Hospitality Services
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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 reasons for travel. Valerie Smith gave an interactive typology of tourists stressing 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 favour special, individually tailored trips to exotic places. Offbeat: These are filled with a desire to get way from the usual humdrum life Unusual: Visitors who are looking forward to trips with peculiar objectives such as physical danger or isolation. Incipient Mass: A steady flow, travelling alone or in small organized groups using some shared services. Mass: The general packaged tour market, leading to tourist enclaves abroad. Charter: Mass travel to relaxation destinations which incorporate as many standardized, developed world class facilities as possible.
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, progressively, 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 different people. Thus tourism could be : i) Recreational: One of the commonest forms, the objective of travel here is to relieve the tensions and strains of work, involves 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 who actually acquires a new spiritual centre as a result of the travel experience.
ii) iii)
iv) v)
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A different way of looking at tourists is by analyzing them psychographically. Plag felt that psychographically all tourists can be viewed as being spread along a continuum. At one end are allocentric tourists who want an independent vacation experience and at the other end are psychocentrics who become part of the mass tourism market. According to Plag, different type of tourists are attracted to different tourist destinations depending upon their position between the two extremes of the continuum. The new destinations generally appeal to the small number of allocentric adventurous tourists, who prefer to fit in the local culture and consequently make few demands. As the destination gains popularity, it loses its charm for the allocentric who moves away to untouched locales. The destination draws most of its tourists from the midcentric section now. As the destination gives way to larger and larger number of arrivals, it goes through another change and becomes dependent upon foreign investment and manpower. The psychocentrics 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 initially 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 show 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 countries for the development of their industry. Some governments may wish to maximize income from the industry by encouraging mass tourism with a minimum of local contact (as in case of beach resorts in Mexico). Others may wish to make their tourist trade upmarket to gain the same benefit from a smaller number of top spending 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 village accommodation and hotels. The Tourism Products and the Supply Factors The supply factors, as the mix of destination, facilities and services is usually called, 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 reason of cultural or sociological destinations (music, art, folk lore). b) Transport: Tourism growth is closely related to the supply and extent of development in transport systems. Certain third world destinations and certain locations within these countries are rendered in an advantageous position, by easy access to the world air routes. c) Accommodation: A critical component of the supply factor, accommodation can be further divided into commercial sectors (hotels, guest houses, holiday camps) and private residences or evencamping/canvassing sites. d) Support and auxiliary services: Cover a large array of supporting services such as shops, restaurants, banks and medical centres. e) Physical and communication infrastructure: 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 government 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 of 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 industry hotels, tour operators and travel agents, and airlines. Using this criterion segments have been identified as travel for business, vacation, convention, personal emergencies, visits to relatives and other types. The different elements in tourism marketing mix are then tailored to suit the different demand elasticities of these segments. Table 12.1 gives an idea of the tourism market as segmented by purpose of travel, along with their major market characteristics. Other bases sometimes used to segment Tourism Market are:
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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 influenced 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 reasonable 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 important 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 different benefits from the tourism experience, benefit segmentation consists of identifying the benefits that the tourist might be looking for in a given product class, identifying the kind of tourist who might be looking for each benefit and defining the tourist destination which come closest to delivering each benefit. The objective here is to find sizable groups of people all seeking same benefits from a tourism product. Once different benefit segments have been identified and grouped, each segment can then be measured in terms of volume of consumption, 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 demand for tourism and then tailor or package the product to these demands. For example, travel agencies and tour operators market differently to ordinary families seeking a relatively cheap summer holiday than to swingers (young unmarried, fun-loving people seeking up-to-date destinations and hedonistic living) c) Distance traveled: As a generalization, long distance travelers comprise the larger and more profitable segment in the tourism market while nearer travelers may be seen as representing the low margin high traffic consumer groups. Marketers depending 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. The market for the hotel will be served according to what is provided, how it is provided, and for how much. At a managerial level, it is relevant to conceptualise the demand for the hotel sector at both the primary and secondary levels, to be 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 exist so far, and arising from people who do not normally use hotel facilities, or from people who do not use the hotel facilities in particular area. Futuristic demand 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 per capita income (green revolution areas, new industrial complexes), increase in population, changing social systems and habits, etc.
ii.
Secondary level
i.
ii.
A new hotel introduced in a particular segment of the hotel market may eventually be able to exploit all these levels of demand. It is essential that there should 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 an investment appraised on 10 to 15 year basis, the
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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 with its primary and secondary divisions, contains some or all of the potential buyers of hotel accommodation, as shown in Table 12.3, which may sometimes overlap. There may well be more types according to the geographical, economic, industrial, and social characteristics of the location of each hotel. Similarly, for food and beverages, each segment of the hotel market contains varied categories of potential buyers of catering services which may also sometimes overlap.
Table 12.3: Potential Buyers for Accommodation and Catering Services Accommodation

Transit tourists, passing through the particular location. Terminal tourists, for whom the location represents end of a journey. Traveling businessmen. Visiting personnel, i.e., business or industrial employees for whom travel is an occasional 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 areas patronising the hotel either by impulse of intentionally planned for meals, refreshments, etc. Organisation and societies consisting of members acting in unison. Local business customers who patronise the hotel due to local industrial or commercial activity. Meeting and conferences organised by agencies from outside 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 beverage, recreation and health, shops, car rental service, apart from others. But of all these, the accommodation and food and beverage components are the primary ones. 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/ SLEEP) BASIC, FUNCTIONAL ATTRIBUTES (ROOM; BED, BATH) SET OF ATTRIBUTES/CONDITIONS THE 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 component of the hotel product requires a clear identification of the type of clientele the hotel wishes to attract and serve. Regardless of star categorisation, as customers tend to graduate from one star category to another, accommodation can be either of the luxury type almost regardless of the price, or the economy type providing 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 groups either on business or on pleasure. However, once the hotel property has been constructed to serve identified and specific customer segments, the possibility of variation is severely restricted. Admittedly, the economy type property cannot be moved up into a luxury one without considerable expense and time although a reversal from the luxury to the economy class is more feasible and less problematic. To tide over the above difficulties, hotel architects, the world over, are now designing properties with as much flexibility as possible to make multipurpose adjustable public rooms feasible. In the case of a hotel where such flexibility 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 greater scope for flexibility. Qualitative differentials can be very wide and would range from high class a la carte high-price menu restaurants with complete table 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 hotels own kitchens or from outside is another area 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. Hence their experience of the hotel product will condition their future relationship with the hotel and the patronage afforded. Table 12.4 below gives the various ways in which accommodation and food service products can be augmented.
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Table 12.4: Hospitality Product Augmentation Accommodation Reservation system convenience Reservation system simplicity Acknowledgement of reservations Lift attendants Room service Standard of housekeeping Courtesy Procedures for handling overbooking Information service Customer recognistion Credit provision Baggage handling Pet/child care Provision for disabled Group accommodation Discounts on club referrals, etc. Cleaning/laundry Courtesy care Willingness to bill later Food and Beverage Speed of food service Ordering convenience Telephone Advance orders Order-taking table staff Complaints procedures Advance reservations Reliability of food/beverages quality Customer advice on wines Provision of special foods Cooking to order Acceptance of credit cards Variations in portions Home deliveries Extent of non-available menu items Fiber /calorie information Provision of doggy-bags Function-catering facilities Quality of table appointments Entertainment 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 identify those services which may create a competitive differentiation for both types 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 prices during the peak and lean seasons; group rates; contract rates for airline crew; special conference rates or special concessions to attract customers etc. However, by and large, hotel pricing tends to follow or conform to pricing standards applicable to the particular city area or resort, to competitive hotels, to the amount of traffic being generated in the hotel location, tourist location, international or national conference venue, and so on. Nevertheless, hotel pricing 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, specially 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 industry (airlines, railways,
32
roadways, shipping lines), travel agents and tour operators, national and state tourism organisations, shopping and entertainment providers. In sum, those services which provide certain other facilities to the traveller or the tourist which are bought when accommodation and food are assured. Some interesting features of hotel distribution need critical examination. The first is cooperative distribution which operates in passing on traffic overflow from one hotel to its neighbour, on a reciprocal basis, without affecting regular business with the main intermediaries in the distribution system such as travel agents; tour operators; airlines and special business clientele. The second is the increasing development of franchising. Franchising may take various forms but it basically involves making available to the franchisee (the beneficiary) of a service, system that is designed and controlled for quality standards by the franchiser. The franchisee gets 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 training provided by the franchiser. In the process, he improves his own operational image and efficiency. The franchiser also benefits as his investment is not required in the franchisees properties. At the same time, the franchisers distribution system is expanded and the franchisee is well motivated to succeed in his own business. Hotel distribution is, thus, an important element of the marketing mix. Activity 3 Identify the role of a travel agent in marketing hotel services airlines. ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
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 communications are either direct or indirect. The direct communications are through personal selling, advertising, sales promotion and direct mail. Appropriate messages are conveyed to those who are potential buyers of the hotel product and those 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 hotels include public relations and publicity, both of which may or may not form a part of the hotels marketing communication programme but may function independently. The major elements of the hotel communication mix thus are mass media advertising, direct mail, sales promotion, public relations, and publicity. 1) Advertising Hotel advertising is an effective and, generally, a long-term effort to inform the customer about the existence of the property, giving details about the location and types of facilities offered. Advertising is also aimed at influencing the attitude of the customer to bring about his acceptance of the particular service offered. Informative advertising is necessary for a new hotel or a hotel offering 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 target audience, unlike sales promotion where the hotelier is aware of the identity of the target. The purpose of advertising is indeed the same as the purpose of communication it aims to inform and persuade the consumer or the travel trade to change, to influence their attitude towards the advertisers product or organisation. Effective advertising not only gains the attention of the prospective guest, advertising will be the first introduction of the area, location and the hotel itself. The success of this introduction will invariably depend upon the impressions made. To ensure that this impression is favourable, all advertising should have the touch of quality or class. A flavour of showmanship and originality in concepts are required to make advertising efforts effective, distinctive, interesting and compelling. Further, to meet the competition, effective advertising must stand out as superior to competing advertisements, which, in turn, need an effective advertising campaign. In the hotel industry, planning the advertising campaign is very important as the hotel product has certain unique characteristics: it being highly intangible cannot be exhibited; it is normally purchased in advance 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 representations of the hotel product rather than the actual product in the market-place. Additionally, if the hotel product in the market-place can only be promoted on the strength of these descriptions and representations, then its competitive position is a direct result of the quality of those descriptions and representations. Therefore, the advertising campaign should be planned carefully and well in advance. The rationale behind identifying the target audiences and creating proper message is that there is a need to differentiate marketing communication or advertising approach to different target audiences. Market segments are different because 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 reasons. Hence, while making an attempt to communicate with different target segments, there should be a differentiated communication approach. In communicating with the travel trade a hotel must provide the facts and figures in simple language whereas a consumer may like to listen to evocative language. While communicating with the prospective hotel guest, it is essential to identify psychological motivation and try to motivate the prospective hotel guest through a message which promises a benefit a benefit that will satisfy the guests psychological or other needs. The hotel product facilities and services can be advertised against a number of areas, as there are different market segments, as mentioned below:

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Conventions, conferences and meetings Room occupancies Reservations for various hotel facilities Good eating and top class food Family dinner Dining, dancing, and discotheques Bar and permit rooms Buffets, special dinners, and lunches Sophisticated entertainment Popular entertainment Weddings and special accommodations Festival and parties
The objective of advertising in hotel industry vary from image building to immediate sale. One may advertise keeping more than one objective or a mix of objectives 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 potential guest/customers to visit the hotel Obtain enquiries through mail/telephone on a priority 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 Publicise unique selling points of the hotel location, atrium or special architectural features and any other specific feature which would attract attention Support regular travel/tour agent in selling the hotel To create awareness or interest in Facilities/services available. Individual facilities (rooms, suites, pool, bar, health club, etc.) Group of facilities, e.g., specialty restaurants, etc. Special facilities/services, e.g., CCTV, audio-visual equipped conference hall, full office-cum-secretarial services with internet, STD telephone, fax, etc. create awareness or interest in Benefits to be gained by patronizing hotel: Specific, e.g., tangible, psychological, aesthetic Financial e.g., prices, discounts, credit, etc. Quantitative, e.g., portions, size of guest rooms, private balconies, etc. Qualitative, e.g., guest room climate control, wide range of items on menu To create awareness or interest in Versatile advantage of hotel. Mini- Frigidaire in guest 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 and private dining room Wake-up call-cum-appointment reminder device in guest room create awareness or interest in Resources behind the hotel. Stand-by generator for uninterrupted power supply Water purification system: Drink from bathroom tap Take a tour of our kitchen: latest equipment Meet our managers: quality of service-oriented staff effectively counter wrong impression created by: Competitors Media Public Opinion educate guests/customers on: Conveniences Atmosphere and general finesse New facilities/services provided create favourable image of hotel: Good employer Good corporate citizen Role in the community Foreign exchange earner Developing and supporting ancillary-supplier industries/business
To
To To To To
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Determining and Creating Specific Advertising Message With a penetrating knowledge of the consumers wants and the products qualities, the hotel or the hotel organisation (or the advertising agency on behalf of the hotel or hotel organisation) has the background to create messages that will interpret the want-satisfying qualities 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 advertising 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; to know answers to the requirements of the potential customers. The conference buyer, for example, needs certain specific information of particular interest and importance to him. So when a hotelier communicates with the conference buyer through 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 its communication. How high your conference halls are? Whether the ceiling is flexible? It is important because if the ceiling is low and the conference buyer wants to have audio-visual presentation that may not be possible. The conference buyer would also be interested in the configuration of seating arrangement how many people can see the platform? How many people can see the screen on which some audio-visual presentation may be projected? Information regarding secretarial services, computers, stenographers, typing, simultaneous interpretation, details of technical equipments, audio-visual projector, overhead projector, slide projector, sound amplifiers, microphones, TV sets, CD players, computers etc. would also 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 about the rest of the hotel or hotel organisation, so the advertisement copy must provide information regarding location of the hotel and how attractive it is, whether conference can be held during a particular time of the year or throughout the year, transport facilities, other services, track record with other conference buyers, prices, etc. In a nutshell, one can say that while advertising it is necessary to remember what your advertising job is, what your hotel product is, what are the requirements of potential customers and what are the answers to the requirements 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, either past or anticipated, for advertising expenditure. This takes no account of the real need for advertising. In fact, it may be essential to advertise heavily when 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 advertising anticipating additional business. This is a very subjective approach and 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 advertising. This would be an acceptable decision if necessary information was available as to how responsive the demand was to advertising expenditure. Very few companies can arrive at a sound investment decision approach of this
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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 competition, individual units will aim to spend as much on advertising as their competitors do, resulting in an increase in the industrys costs without any corresponding 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 advertising, as part of the promotion element in the marketing mix, can be clearly identified to inform by answering the following four questions. First, is advertising used to inform or persuade the customer, or is it to consolidate or reinforce the existing customer-acceptance of the hotel? Second, is the information to be conveyed through advertising general in nature or for promoting a special facility or service? Third, is the advertising to reach habitual or impulse buyers, the customer himself or his influencing agent, existing or new customers, local, national or international customer? Lastly, what will be the overall effect of 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 magazines, radio/TV or cinema, direct mail or handouts and beam the correct advertising message to the appropriate audience. 2) Sales Promotion Sales promotion is aimed 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 which stands to benefit, i.e., room sales or food and beverage sales, has to be clearly identified and a promotion drive which will bring about the desired increase 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 special 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 second, as an ongoing permanent activity/function. Irrespective of these distinctions one can clearly identify three groups of activities under sales promotion: trade promotions; consumer promotions; and displays. Trade promotions are schemes which are generally intended to induce or persuade the travel trade or the distribution 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 the hotel industry. Trade promotions are, therefore, schemes which are intended to 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 promotions are schemes to persuade the consumer, i.e., the potential hotel guest or the user of hotel services, to buy a particular hotel product or service, at a particular point of time. Consumer promotions should be understood as the first definition of sales promotion schemes which are defined in terms of time and are finite. The third group of activities which include product display and related point-ofsale material, i.e., posters, show cards, display units, etc., help keep in perspective the view that one cant obviously display the actual hotel product or service at the point of sale and so one has to depend on the descriptions and representations of the actual product.
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Forms of Travel and Tourism Consumer and Trade Promotion Schemes: Hotel promotion, as individual schemes, more often than not are cooperative schemes, i.e., they depend upon one or more of the other sector(s) of the travel and tourism industry. Some schemes can be set up and operated by a hotel but a great deal of promotional 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 industry. In Table 12.6 different types of sales promotion methods have been listed. The list is neither exhaustive nor are the examples given for each type of promotion 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 dependent on the cooperation of other sectors, namely, airlines, transport operators, travel agents, tour operators or allied sectors.
Table 12.6: Forms of Travel and Tourism Consumer and Trade Promotion Schemes Type of Promotions 1. Price-off Promotions Example Special terms for specific clients 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 for the price of two; family plans; children free if accompanied by parents; special introductory prices, etc. Coupons entitling the holder to special terms, e.g., discounts at shopping centres, discounts for petrol, free excursions and sightseeing tours, free use of hotel recreation facilities, etc. Prizes awarded to consumers winning special contests, e.g., free holdings/stays. Prizes awarded to travel trade winning special contests, e.g., free holidays/stays, or other articles, 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. Offered to retailers/wholesalers for achieving specified sales volumes, e.g., bonuses, override commissions, quantity or volume discounts, etc. Money-back guarantees in case of cancellation of flights, tours failures, bad weather, etc. Purchase of tours on installment payment basis, normally extended by travel trade organisations with bank affiliations Travel now, Pay later schemes, etc. Acceptance of payment by credit card. Allowance or financial assistance given to a tour operator 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
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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 quiet weekend, because business people go home. How a hotel should go about for generating additional business, because anything extra that one gets is really worthwhile. The hotel or hotel organisation can contact the people to organise fairs, exhibitions, fashion shows, cultural sessions, etc., during these days. And one can contact them either personally or through direct mailing. To generate more 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 anniversary. This gives an aura and finesse to the hotel. It also ensures permanent customer and future business. Travel sales promotional efforts help in developing good relations with the travel trade and may help in getting favourable publicity. Some of the hotels give free tickets to their guest for sound and light shows conducted in their hotels. This promotional effort helps in developing and cementing good guest relations. Some of the beach resort hotels whose business depends on sunshine can give such type of guarantees to their guests during the off-season. 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. Some 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 schemes it can offer. ............................................................................................................................ ............................................................................................................................ ............................................................................................................................ 39
3) Public Relations Public relations can never be some kind of special sugar that can be sprinkled or coated on a sour or difficult situation to make it taste sweet or comparatively functionally easy. Public relations, as a marketing communication function, aims to supplement the total communications/promotional effort by helping to create and enhance a favourable image of the hotel or the hotel organisation; 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 organisation. 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 genuine and dont attempt to oversell. Public relations ought to be a sustained ongoing affair and it should be harmoniously integrated into the total promotional effort. When it comes to operational levels, public relations must be distinguished 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 organisation and therefore strategies should be evolved to exercise healthy relations 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 relations. Media Relations: Hotels also deal with the media, with the press and with electronic media, in other words, with the mass media. Hotels need mass media either for their own sake because they are opinion leader, also because they influence public opinion, or they want to reach some other group through the media. This 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 hotel organisation and indeed any organisation in the tourism industry. Relations with Government Agencies: These are the authorities with whom the best of relations, 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 operation of the hotel or hotel organisation. Community Relations: There is also the community within which the hotel operates. This is important from the point of view of a hotel and therefore, there is a need for community relations. The question of community relations is very important for certain hotels that are located 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 spending pattern of the community within which the hotel operates. In an underdeveloped 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 around 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 relations. 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 be 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 contact with the customers; an industry which depends on the personalised and qualitative aspects of the product. Hence, unless one can generate the fullest enthusiasm, highest loyalty, high sense of motivation, and pride in the organisation, ones effort to create consumer satisfaction may very well be
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frustrated. So another area to exercise good public relations is employee relations. 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 varies, depending on factors such as the size of the organisation and community within which it operates; the product; types of services or faculties offered; the type of target market segment, etc. Some of the public relations activities all 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 removing guest dissatisfaction through prompt handling of complaints, correcting the 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 organisation. Establishing a customer or travel trade correspondence function to answer enquiries about any matters regarding the hotel or hotel organisation. Getting feedback and creating/developing promotional material, advertising appeal, or total advertising campaigns, sales letters, direct mail material, etc. Training of employees to provide prompt, pleasant, courteous, accurate and friendly service to anyone who contacts the hotel organisation personally, on phone or through correspondence. Assisting the managers and employees of the various departments of the hotel in improving their own communication and public relations efforts so that their is an air of efficiency. Working with the personnel in advertising (can be the advertising agency), sales promotion and personal sales to create consistent, effective, honest and persuasive messages for all of the hotel or hotel organisations publics. Establishing open communications with other organisations, government agencies, travel agents, tour operators and community leaders on matters relating to the organisation and its economic, environmental and social impact on the country, local community, and individual consumers. Conveying to society that the organisation is listening, reacting, adjusting, and progressing 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 established in a hotel or a hotel organisation. Some of these objectives may appear to be quite broad in their content and scope for operational purposes. If, however, 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 aspect of marketing communication is publicity which is the promotion not necessarily created by the organisation and usually generated by the media. Thus, publicity is not a marketing function like marketing research, product planning, distribution system, advertising, sales promotion, public relations, etc., which are the marketing activities/techniques. Publicity is rather an objective of public relations as through good public relations one tries to get publicity and generate publicity. News media in every community do look upon industries, hotels and other business for news. This occurs because every enterprise has an important and even direct bearing on the social, economic and sometimes political life of the community. Newspapers present news of public interest to the readers.
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Bad publicity is mostly the result of lack of information and often an indifferent attitude towards the press. Hence newsworthy information should be made available to the press. It is in the interest of the organisation to supply this information because it shows a willingness to cooperate. An indifferent attitude may unfortunately result in damaging coverage through an article, review or appraisal of a situation or condition; or even an unfavourable report that will adversely affect the image and the business of the hotel. A willingness to share the news with the media will help a great deal in handling those situations where wrong 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 services 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 services is physical evidence which includes servicescape as well as other tangibles. Tangibles are those objects and physical clues which might represent the service. For example dress code of staff, etc. The servicescape relates to the setting in which the service is delivered. Servicescape issues are particularly significant in all services where customer goes. (You may be aware that services can be classified into three broad categories. First are those service organisations where customer goes. Like, we go to a hotel, hospital, bank, restaurant, health club, etc. The second is those service organisations which go the customer. For example, an AMC provider goes to the customer to service the computer hardware. The third type of service organisation are those in which neither the customer goes 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 exterior Exterior design Signage Hotel gate area Landscape Parking Surrounding environment Facility interior Interior design and equipments Lobby and other waiting areas Interior of rooms Room size Types of specialty Restaurants Pool area Layout of the various facilities Air quality/temperature Other Tangibles Business cards Stationery Billing statements Reports Employee dress Uniforms Brochures Internet/Web page
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The second element of the extended marketing mix is people. In the service organisations 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 employee 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 maintained. Some hotels have identified alternate options to reduce the labour cost. For example, most hotel guests expect bed-tea and, therefore, room service staff requirements are very high. Some hotels provide electric cattle, tea bags, sugar 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 identified for reducing the man-power costs while maintaining the quality of services. Integration of information technology is one such method. The third element of extended marketing mix is the service delivery process. There cant be any compromise 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 well in the market place only on the efficiency in service delivery and high quality. Activity 5 a) Compare the servicescape and tangibles of two hotels in your city; one should be at the higher end and the other on the lower. ..................................................................................................................... ..................................................................................................................... ..................................................................................................................... b) Also study the relative importance of those aspects in marketing hospitality services. ..................................................................................................................... ..................................................................................................................... .....................................................................................................................
12.9 MARKETING CONSORTIUM OR COOPERATIVES

There is need for cooperation among the small and medium independent hotel operators due to increase in the pressure put on them by chains and also by the travel and tourism industry as a whole like, airlines getting into hotel and travel trade; tour operators getting integrated, etc. So, the marketing of the hotel product 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 similarity 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 budget tourist or group of tourists. The rationale behind getting together is naturally 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 the other hand, if hotels join together they can afford to send their sales representative to the travel agents to sell their hotels abroad. Further, this cooperation can be extended to referrals and recommendations also. 43
The other form of cooperation for hotel marketing is called area marketing. Area marketing could be a cooperative of independent hotels in an area or destination all 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 tourist segments and their main marketing characteristics. Subsequently marketing issues related to hotels have been discussed. Some of the key decisions relating to hotel marketing are: the products, the price or tariffs, distribution and marketing 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 sales 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 activities are undertaken separately, it is necessary to undertake an interrelated approach so that messages conveyed through personal selling, advertising, sales promotion, public relations and publicity are not at cross-purposes. These may tend to confuse rather than clarify the single important communication of the hotel, which is the product the hotel offers to the customers it wishes to serve on terms that are both acceptable to the customers and economically viable for the hotel. In the ultimate analysis, the marketing communication effort generates a conviction and confidence whether the hotel is worth patronising or not. It is, therefore, 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 discuss the factors responsible for growth of tourism industry. 2. What is a hotel product? 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 applicable 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 Heterogeneity of Service, each time you visited, affect your satisfaction levels? Would you recommend some practical tips for standardisation? Also identify the marketing communication mix of the above hotel and recommend improvements in it. 44

Apte, G. Service Marketing, Oxford University Press, 2004. Bukart, A.J. and S. Medilik, Tourism Past, Present and Future, Hienemann London, 1975. Kotas, R. (ed), Marketing 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.
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UNIT 13 HEATH SERVICES

Objectives

describe the types and segments 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 understand 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 Considerations 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 sellers market. The demand far outstrips the supply. As in case with any other product or industry in a sellers market, the 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 marketing approach. However, there will be changes in the near future towards acceptance of marketing activities as an essential part of health care organisations, though not as much as in developed countries (where demand/supply conditions and purchasing powers are totally different from ours). The major reasons necessitating a shift towards marketing approach in India are:

In certain market segments, competition is becoming more intense. More consumer awareness. Setting up of Corporate Hospitals. Increasing purchasing power. Need to attract limited available specialists.
In India, where medical care infrastructure is inadequate compared 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 utilization of available facilities as well as prevention of many diseases, thereby easing 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 two : a) Government owned b) Privately owned / commercial The Government (both Central and State) has a network of institutions at primary, secondary, and tertiary levels. These include sub-centers, primary health centers, community health centers, rural hospitals and dispensaries in rural areas, sub-divisional and divisional hospitals , medical college hospitals and specialised hospitals. One important government health care scheme is the Employee State Insurance scheme designed for industrial workers. The scheme is mainly financed by contributions from employers and employees in the implemented areas. The scheme provides both medical benefits as well as cash benefit like sickness benefits, disablement benefit, maternity benefits etc. During the last couple of decades a lot of private nursing homes, diagnostic centres and specialty hospitals have come up in urban areas, with their major market being middle and high income group people. The healthcare market has also witnessed the emergence of Corporate Hospitals in India. Apollo Hospitals, a Rs. 10.24 crore public limited venture opened at Chennai on September 18,1983 has the distinction of being the first corporate hospital in the country. Medical care is now emerging as a big industry in the private sector. This has resulted in some competition and better availability of advanced technologies/super specialties, which were so far available in western countries only. Since large investments are required for setting up of such hospitals, it was beyond the scope of an individual and the most viable alternatives was to have corporate hospitals. However, most the these recent developments are again mainly targeted at middle and high income groups. Raju and Joshi have classified the health care needs in India into three main categories: 1) Emergency Care: As the name suggests, this is required in situations of dire necessity like accidents, fire, stroke etc. These are the situations when the survival of the patient is in question. 2) Routine Care: This refer to periodic patient visits to the medial professional involving checkups and for ailments where meeting a doctor is essential but an immediate meeting is not critical. 3) Elective Treatment: This is a medical procedure that a patient chooses to undertake on his or her own initiative. These include Life Stage Treatments (associated with events which people typically 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 activities that people undertake to improve their Self, boost their image e.g. cosmetic surgeries, weight reducing treatments, hair implantation etc.). Life Style Treatment 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 similar services among different providers of medical and health services is indicative of the differential practices that are being used to arrive at the ultimate price for various services.
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The pricing strategy for any given serivce, medical services included, depends on three basic fundamentals. These are costs, value and competition. The costs represent 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. Costs 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. Consumers perception of value of a given service would thus set the upper limit beyond which prices cannot be set. Between these two limits service organisations may have the freedom to charge whatever prices they determine, but for the presence of a third variable, the competition. 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 your competitors charge for a similar service will limit your freedom of setting prices between the two limits provided by the costs and the consumers concepts of value. The prices being charged by the competition would thus determine the actual level at which prices for a given treatment or service may finally be set in between these two limits. To recapitulate the three basic variables that are fundamental to any pricing decision are:

how does my consumer define value for a given 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 appreciation of what role does price play in the customers decisions to avail a given medical service or health plan. Health providers must, therefore, have a clear idea about how their prospective client population perceive prices and price changes of various medical services offered by them. The three basic ways, in which pricing for hospital/clinical/medical services differ from pricing for goods are the issue of customers knowledge of prices, the role of prices in indicating quality of services and the issue of non-monetary costs. a) Prices of Hospital Services and Customer Knowledge: How important is price to the customer when he/she tries to select a particular hospital/ practitioner for a particular treatment? Do customers have any idea at all about the costs associated with such services? Do customers really have clear awareness about the exact prices they would be required to pay for a given treatment before they decide to avail of a given treatment? Let us briefly look at these issues and their implication for pricing of health services. To take a simple exercise, ask adult people around you a few questions 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 canal operation, or a 48
simple tooth extraction? What is the price one is likely to pay for a bone setting process after a fracture and so on. You will find that few people will be able to answer accurately on the basis of their memory alone, because clear ideas about 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 prospective 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 phenomenon. Health services are intangible, and can be offered in a variety of configurations with variation in accompanying services. Hospitals, therefore, are able to create a number of permutations and combinations of a given treatment package, 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 provided), patient particulars may vary and necessitate price variation (complexities, age, medical condition), the level of services may vary (single vs. double room, patient to nurse ratio etc.) Few hospitals would offer exactly the same features 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 medical 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, customers individuals needs also result in different prices being charged. Previous history, general medical condition, age related health complications etc. may often determine the course of action that would need to be taken for a given patient, final prices, therefore, may also be a function of individual needs of different patients. It is also comparatively difficult to gather accurate pricing information of all comparable hospitals, because unlike retail outlets displaying prices on their merchandise, prices of health services are not really displayed except for routine services and consultation charges. It must now be clear to you that prospective customers often possess inaccurate information about prices of health services. The implication of the fact for your pricing strategy are important. The first implication is that consumer uncertainty 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 hospitals 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 sometime for his initial treatment, prices become an important criterion for repurchase of the service as the customers knowledge of the service costs has now become more accurate. b) Prices and Quality of Health Services: One of the interesting 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 quality. In case of goods, the tangible nature of the product and the possibility of 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 services which are intangible, such pre-purchase assessment is difficult. Research shows 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
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surrogate indicators of service quality. Wherever pre-purchase assessment of quality is not easily assessable high prices in the consumer mind get associated with high perceived quality. Medical services are among the services which are high on credence qualities, where evaluation of service quality even after experiencing a given service (for example a by pass surgery) is difficult to make. In such 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 coverage and/or meeting the competition, prices must be set to convey an appropriate and desired quality image. c) Costs other than the Monetary Cost: There is an increasing realisation on part of service providers that apart from the monetary cost, customers have to bear several non monetary costs also while availaing a given 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 hospital subsystems registration, specific tests and of course the doctors. For any given 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 surgery require the customers to go through a lot of information search to identify the best possible alternative offers are comparable, one variable may include apart 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 customer. Sensory costs are the other class of costs that may make a difference. Unpleasant sounds, noise, crowds are some of the sensations that most people are uncomfortable with. In hospitals that are located in crowded or squalid neighbourhoods, or are overcrowded customers may have to bear these costs. If there are alternatives 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. For health services, one of the most potent costs are the psychic costs not understanding the service, fear of uncertainty, fear of undesirable consequences like pain, disability or loss of control are very important in the customers 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 valuation 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 selecting the hospital they chose. From the former, try to find out, why inspite of high price, was their choice made in favour of this hospital. How does their answer reflect the concepts studied above? ............................................................................................................................ ............................................................................................................................ ............................................................................................................................
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13.4 IMPLEMENTING THE PRICING POLICY: STRATEGIC CONSIDERATIONS

In addition to variables like costs, demand and competition and the considerations of your own objectives in arriving at a pricing figure, there are certain issues which demand decision before you can implement and administer a pricing strategy. Lovclock has clearly focussed on these issues in terms of key questions that must be addressed while determining the pricing strategies. The following discussion 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 service provider, however, would need to decide upon the relevant costs that must be considered while arriving at the pricing decision. Is the hospital trying to cover only the variable costs or all the costs, whether it has decided to allocate a share of the fixed costs across all priced services and is seeking to get them also covered? Is there a way in which costs of fixed goods such as land and building can be spread over all services or over a period of few years? Should the hospital have a basic package of core services priced at a certain level and then keep on adding to the price depending upon the combination of value added services availed along with the core service? Answers to these questions would depend 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 cater to, you would also need to assess the prospective customers sensitivity to prices. While for a lot of health services, because of their necessity and expediency nature, customer do not display high levels of price sensitivity, yet for frequently availed routine services like medical checkups, ultrasounds, dental fillings etc. wide price differential may make customers go to alternative providers unless they are supported by superior value through accompanying services. Price discounts should be carefully used. All discounts affect the overall total revenue to the organisations and reduce the contribution margin from each transaction. While offering specific price discounts to attract a given segment may create marketing opportunities in new segments, heavy discounting may actually interfere 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 understanding the customer reluctances to stay in a hospital over weekends some hospitals offset the dip in weekend utilisation of operating and post-operating services 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. Since people rarely carry an absolute figure in their mind as the price for a given 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 psychological pricing is used. Hospital administrators on the other hand and sometimes customer 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
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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 stay on a per day basis in the hospital) or on the basis of resources consumed (additional nurses hired for round the clock care). Different establishments also vary in their practices as to whether they should bill each element of the treatment separately or charge a single package price for the whole transaction. It is however a good practice to have a price figure for each service element, even though the policy is to quote a package price to the customer. iii) Where should Payment be Made: You must clearly indicate the payment procedures in terms of whether 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 that. Increasingly consumers today are using their credit cards to make payments, where customers simply give their card number and ask for their account be billed 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 medical 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 may need to be allocated or services brought in, expensive resources may need to be 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 completely sure as to what costs the treatment will actually entail, the complication 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 inputs 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 prices 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 some 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 institutionally decide, how much information on prices is to be communicated and how? Should 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 pricing information needs to be institutionally taken and then clear unambiguous communication of prices needs to be managed. To define the term in the most comprehensive 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 value, it must be clear to you that the larger the gap between perceived total benefits and perceived total costs, the greater is the value that the customer would perceive in a given service. To enhance this perception of value in a given price category, therefore, as a provider of health services you may follow two alternative strategies or follow a combination of both. Value can be enhanced by increasing 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
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(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 are very relevant. If the provider can manage to reduce some of these costs, he can alter the customers perception of value of his own service. What you must appreciate is that while comparing alternative providers of health services, customers use this perception of net value i.e. the difference between perceived benefits and perceived costs, rather than just the figure of monetary prices. You must, therefore, consider carefully the perceived benefits that are associated with your hospital services and the perceived costs that the customer has to bear, before arriving at a monetary price figure for your services. Activity 3 Based on your knowledge of practices regarding communication of prices by clinics/hospitals, 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 on 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 quality 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 expectation is related to the response to the illnesscure. The process of achieving this end is characterized by the delivery of service experience care. As health care services are rich in credence qualities and, therefore, the technical outcome is dfficult to evaluate, consumer would tend to make the assessment of the technically complex cure dimensions on the basis of the more familiar care experience. Gabbott and Hogg suggest that evaluation of the clinical aspect of the service is particularly complex for individual patients but the impact of it upon overall satisfaction is unquestionable i.e. if the patient considers the medical response to have been inadequate, aspects of care cant compensate sufficiently to result in overall satisfaction. However, given the difficulties in adequately evaluating cure and the investment that a patient has in believing in the doctors 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 delivery. Recollect the five dimensions of service quality developed by Parasuraman, Zeithaml and Berry as discussed in unit 8. Let us apply them to the health care services. Reliability: Ability to perform the promised service dependably and accurately (example doctor keeps the appointment on schedule, diagnosis prove to be accurate). Responsiveness: Willingness to help customers and provide prompt service (example no waiting, doctors willingness to listen). Assurance: Employees knowledge and courtesy and their ability to inspire trust and confidence (Example reputation, credentials and skills. 53
Empathy: Caring individualized attention given to customers (Example acknowledging patient as a person, remembers previous problems, patience). Tangibles: Appearance of physical facilities, equipment, personnel and written materials (Example 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 the assurance dimensions. Visible evidence of degree, honours and awards and special certifications may give new customer confidence in a professional service provider. Raju and Joshi suggest that the hospitality level offered by the healthcare 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 procedure, as well as assuring that the hospital would provide all the requisite services prior to and after the treatment. Also patients from different strata of society are starting to have differing expectations from hospitals about the level of service they should be provided while being treated. Some providers have, therefore, developed capabilities for providing differential levels of service at regular, premium and luxury levels. For this health care providers should use research techniques to map out the consumer decision making process and the relative importance consumers assign to expertise and hospitality. The next logical step would be to understand service features that relate to consumer perceptions of expertise and hospitality. Finally, the provider should understand the cost implications of making changes in these features and their relative impact on consumer choice and revenues. Poor service quality can be caused by a number of factors. These include organisationss lack of understanding of customers expectations; not selecting the right service design and standards; inability or unwillingness to meet the standards i.e. not delivering as per the service standards; not matching performance to premises. To provide quality services, an organisation should 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 the objective and systematic process of gathering, analyzing and interpreting data relevant to a specific situation or problem facing an institution). However, as hospitals increasingly have adopted a marketing orientation, they are choosing to use marketing research to help them understand marketing problems and opportunities. Loubean and Jantzen (1998) conducted a survey of 230 hospital executives in USA to assess the kind of marketing research activities being conducted by hospitals. Hospitals administrators reported that satisfaction surveys of both inpatients and outpatients are the most widely used research applications with more than 80% of the respondents reported usage of these two methods within the last year. Of the surveyed respondents 48% performed a competitive analysis of other institution within the last year and 78% performed the analysis within the last 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 hospitals best values because, if done properly, it leads to better decision making. Hospitals should develop and fund annual research activities. Activity 4
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Talk to different consumers of health care services and determine the relative importance of the five service quality dimensions as perceived by them.
........................................................................................................................... ........................................................................................................................... ........................................................................................................................... Internal Marketing and Service Quality As you would have noticed earlier in the service marketing triangle (unit 1) that internal marketing plays a critical role in services marketing. Also 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 be 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 Rosenbluth; owner of a chain of successful travel agencies, in his book titled The Customer Comes Second wherein he argues that a companys first focus should be on its employees. Only when people know what it feels like to be first in someone elses 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 demand high levels of personal contact between the service provider and the customer, no marketing plan can be considered complete unless it includes strategies for reaching and winning over its internal customers. He further goes on to define internal marketing as the application of marketing, human resources management and allied theories, techniques and principles to motivate, mobilize, co-opt and manage employees at all levels of the organisation to continuously improve the way they serve external customers and each other. Effective internal marketing responds to employee needs as it advances the organisations missions and goals. The activities involved in internal marketing income competing for the talent, training employees, empowerment, knowing employee needs, good internal communication, measuring and rewarding quality. You will study more about some of these aspects in the section on Human Resources Mangement.
Knowledge is empowering. When customers and visitors ask, the employees know what is going on and why. They feel they are the hospital, rather than answering. They tell me nothing! If you dont tell them, if they dont know, then distorted rumours start circulating. Worse yet, they feel excluded and not a true part of the hospital. Employees, in general, are well motivated and want to do well. Further more, no one knows the job better than individual employees themselves. Therefore, if you create an environment in which they feel comfortable enough, knowledgeable enough, about the business to feel that they own the business in a sense, they will contribute providing, of course, that their capacity to contribute is enhanced 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 elements of marketing mix i.e., promotion. Few goods or services, despite being well developed, 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 opinion or elicit a response. The various elements of promotional mix are advertising, sales promotion, public relations and personal selling. However, in this section we are going to focus on word of mouth communication, since in case of services, especially services which involve
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some amount of uncertainty or risk (like health services), consumers tend to rely 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 becomes 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-person 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 mouth reduced and since either effort will likely require marketing expenditures, what results can be expected. Besty and Madeline have highlighted a number of issues regarding w.o.m. communication in health care marketing: i) Word of mouth is more effective than advertising. And in the health care field, the difference is even more striking than in other purchase categories. The effectiveness of word of mouth applies across the board in terms of the kinds of responses marketers traditionally seek. Word of mouth communication not only increases awareness and knowledge, but is also persuades and lead to action, such as actually choosing the provider one has heard about. Favourable w.o.m. communication cant overcome personal negative experience. Health care organisations should encourage its employees, 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 source of word of mouth communication is listening. Word of mouth increases as the level of satisfaction increases. An emotionally positive experience with a health care provider increases w.o.m. and satisfaction which in turn, raises the odds that w.o.m. will be positive. A marketer, therefore, has an opportunity to enhance 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 emotional negatives, even if these goals involve serious trade-off. Consumers of medical 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 greater effort than marketers in other industries to make complaining easy and acceptable.
ii)
iii) iv)
v)
vi)
Activity 5 Find out the information acquisition activities undertaken by consumers for selecting a health care provider. .......................................................................................................................... .......................................................................................................................... .......................................................................................................................... .......................................................................................................................... Advertising Though advertising is not being used substantially by hospitals in India, it can be a significant means of communication to the customer. Clow suggests that by incorporating the five dimensions of service quality (discussed earlier in this unit) assurance, reliability, empathy, responsiveness and tangibles into their advertising, health care providers can increase the level of perceived quality and thereby reducing the perceived risk. To be effective, health care 56
advertisements must contain one or more of these dimensions in the form of headlines, copy or captions. Pictures and drawings can also be used. To prevent clutter and confusion, an advertisement should focus on only one or two clues; more can 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, treatment and prevention of heart diseases in India. It has been truly a quantum leap in the cardiac care field of health care in India. Heart disease is recognised as one of the worlds largest killers. In India, the incidence of heart disease is rising at an alarming rate. As compared to western countries, the type of coronary artery disease in India differs in its patterns. Even the age of onset of coronary artery disease is much lower so that many Indians are getting heart attacks at as young an age as 30 to 40 years. It has been proved that adequate preventive measures and early detection is extremely successful in reducing the incidence of heart attacks. Since the research data generated in the West is not totally applicable to the causes and factors of heart disease in India, in-depth investigation on a national level is vital, so that our own environment, dietary, socio-economic, ethnic factors, etc. can be modified to reduce heart attacks in our 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 abroad. Today, an open heart operation inclusive of all hospital costs, an attendants 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 continued after-care as well as cardiac patient being in his or her own environment and among his or her relatives. The costs of other services like angiography, angioplasty, 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 and develop any function or service which can provide a competitive edge. As a result, 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 India, to some extent, feel uncomfortable in selling hospital services. This is due to our culture and heritage. This need not be so. Patients need education. They 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 following can be used effectively in this regard :
patient educational folders and leaflets which are interesting to read and absorb, well-illustrated using Indian scenarios. regular patient clinics in satellite towns to educate and inform and 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.
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spread of insurance idea. health clinics and camps in companies, colleges, schools, and similar organisations. informing physicians, primary and secondary health 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 to get More Patients 1. Put yourself in your patients shoes: It is a basic and commonsensical concept . Sometime should be spent every day thinking from the patients point of view. It may be difficult but it will mean more sales of hospital services.

Listen to the patients Ask questions from them Do something extra for each 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 action. It is his money and he can spend it where he likes or the way he likes. Technicians 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. Many hospitals have succeeded without proper medical facilities, none without proper technicians. Employees with average intelligence and initiative, when treated with respect and dignity as individuals, given training and motivation will turn out to be good technicians. 3. Continuous communication with the patients: Communication with the prospects and the patients is the core of good marketing. How 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 themselves clearly. In our country with so many festivals for Devis and Devtaas, a health provider has several excuses to send a postcard to his patients. The postcards 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. When does a hospital becomes patient oriented? As soon as the facility starts rendering, through thoughts and actions, the best possible service to each of its patients. 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 hospital where they will be given the best possible attention. Also a big hospital does not necessarily make more profits than a great hospital. 5. Patient oriented polices and procedures: A hospital exists so long as the patients keep on coming. Hospital policies and procedures, even if they have
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been given by the best business management professor, are suicidal if they inconvenience the patients. 6. Patients must be given the best possible services: Patients should be given USA - Unique Service Advantage and once they get it, they will become repeat patients and bring more patients. It simply means some extra and individual care to show that the business of patients mattes a lot for the hospital. 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 patients get answers to their problems is a better mousetrap than a hospital where the patients problems dont get solved. Patients are not impressed by the carpets, chrome and chandeliers (3Cs) in the hospital. Patients will flock to that hospital which follows a more helpful attitude. The 3Cs wont help if they are shown the rules and regulations whenever they come with problems. A health provider should not 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 welcome 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 like 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 of 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 the long run also ensures that the patients are encouraged to lodge complaints and each complaints is fully investigated. 9. Each of the employees should visit patients: In a health facility , every employee does something directly or indirectly 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 their patients, as least, not away form the hospital. In the hospital , a selling atmosphere should be created wherein every employee gets an opportunity to market the services. 10. Checking with patients about employees attitude: Why customers (patients) quit?

Health Services
1% Die 3% Move away 5% Form other friendships 9% For competitive reasons 14% Because of product dissatisfaction 68% Quit because of attitude of indifference towards customer by some employees
Notice the last line carefully. A continuous follow up , therefore, should be done with the patients to find out 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
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from a distance. It is only when we touch the bush to pluck the roses that we get pricked by the thorns too. And every hospital must learn how to handle difficult patients with extra care. A difficult patient is like a dark cloud with a silver lining. He presents an opportunity in disguise to test the hospitals orientation to him. Fortunately, patients are people and the rule of 80:20 applies to them 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. Dissatisfied patients are best teacher: One can never please 100 percent of patients, 100 percent of the times and 100 per cent of the days. If one can do so it is either a sellers market or he is a genius or he is not taking takeable risks. Generally for an average hospital one-third of patients are very satisfied, another one-third are reasonably satisfied and the balance one third are not fully satisfied and, in fact may be 10 percent are fully dissatisfied. These dissatisfied patients should be searched for and once they are located, one- third of the problems are solved. Close attention should be paid to every word they say and it should be noted down. This conveys that personal interest is being taken in the matter. The objective is not to win the argument but to come to an agreement that satisfies a dissatisfied patient.
13.8 SUMMARY
Application of marketing concepts in health care services in India is gaining widespread importance. This has happened because of a number of changes taking place like setting up of corporate hospitals, growing consumer awareness, increasing 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 pricing for goods. The various strategic considerations in implementing the pricing policy have also been explained to you. For health care marketers it is crucial to 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 uncertainty or risk from customers point of view, word of mouth communication plays an important role.

1. Why is pricing for health services unlike the pricing of a product? What difficulties can be envisaged while pricing health services? Discuss with the help of examples. 2. Pricing strategy includes much more than determining what to charge. 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 services? 4. Discuss the importance of word of mouth communication for health care services. 5. What changes do you envisage in the Indian health care market with the 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 Consequences, Marketing Health Services, Chicago, Vol. 15, Issue 3. Clow, K.E. (1995) Advertising Health Care Services, Marketing Health Services, Chicago, Vol. 15, Issue 2. Engelberg, M. and Neubrand, S. (1997) Building Sensible Segmentation Strategies 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 Incidents to Understand Service Evaluation in the Primary Health Care Context, Journal 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) Service Management and Marketing, Lexington Books p. 37-39. Loubean, P.R. and Jantzen, R. (1998) Marketing Research Activities in Hospitals, Marketing Health Services, Chicago, Vol. 18, Issue 1, p. 12-17. Rabkin, M.T. and Avakain, L. (1992) Participatory Management at Bostons Beth Israel Hospital, Academic Medicine, Vol. 67, May, 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. (1996) Services Marketing, Harper Collins College Publishing. Zeithaml, V.A., and Bitner, M.J. (1996), Services Marketing, McGraw Hill International, p. 117-122. Zeithaml, V.A., Parasuraman A. and Berry, L.L. (1998) Delivering Quality Service: Balancing Customers Perceptions and Expectations, Free Press, NY. Zeithaml, V.A., Parasuraman A. and Berry, L.L. (1985) Problems and Strategies in Services Marketing, Journal of Marketing, Spring, p. 33-46.
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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 Sector, examine different products being offered in retail as well as corporate segments 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 Bank Organisation Structure of ICICI Bank The Global Growth Strategies of ICICI Bank 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 banks next big platform- globalization. He feels that it is impossible to reach to the clients everywhere across the world physically for providing the financial services, so it will be strategically sound to leverage the relationships with other banks in serving the global consumer. The success of the bank in the domestic market is largely credited to the customer orientation, high quality of customer service, innovative financial product introductions and active involvement in serving 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 the bank is an indicator of becoming a global financial service provider. ICICI bank 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 properties 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 in 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 data available from public domain and interviews conducted in the bank by the author. This case is not to illustrate effective or ineffective handling of administrative situation.
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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 sheet. The subsidiaries in Canada and England have already used 70 million USD of this capita. They are also toying with an idea that some of the representative offices 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 capital. 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 the bank as a representative office offshore branch before they are permitted to be a subsidiary of the parent company. ICICI banks biggest business was in the area 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) contributing one third of the banks business in the coming five years (by 2008). Mr. Bhargav 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 birds eye view on the banks 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 improving efficiency in the process of financial intermediation; these reforms have facilitated greater choice for consumers, who have become more discerning and demanding, compelling banks to offer a broader range of products through diverse distribution channels. The traditional face of banks as mere financial intermediaries has since altered and risk management has emerged as their defining attribute. The Indian financial system is identified with two set of institutions viz. regulators and intermediaries. Regulatory Institutions are statutory bodies assigned with the job of monitoring and controlling different segments of the Indian Financial System (IFS). These Institutions are given adequate powers through the vehicle of their respective Acts to enable them to supervise the segments assigned 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 interests. At present, there are two regulators directly connected to Indian financial system. They are Reserve Bank of India and Security and Exchange Board of India. Intermediary financial institutions include banking and non banking financial institutions. The banking financial institutions participate in the economys payments mechanism, i.e., they provide transaction services, their deposit liabilities 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 reserve requirements, can advance credit by creating claims against themselves. Other 63
financial institutions can lend only out of resources put at their disposal by the savers. Financial institutions are the primary source of long term lending for large projects. Conventionally, they raised their resources in the form of bonds subscribed by RBI, Public Sector Enterprises, Banks and others. With the drying up of concessional long term operations funds from the Reserve Bank in the early 1990s, financial institutions have increasingly raised resources at the short end of the deposit market. The Banking Segment in India functions under the regulation of Reserve Bank of India. This segment broadly consists of commercial banks and co-operative banks. Non-banking Financial Institutions carry out financing activities but their resources are not directly obtained from the savers as debt. Instead, these Institutions mobilize the public savings for rendering other financial services including investment. All such Institutions are financial intermediaries and when they lend, they are known as non-banking financial intermediaries (NBFIs) or investment institutions. Some of the major non-banking financial 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, decentralized, and relatively small-sized financial intermediaries. Most work in different, miniscule niches and make the market more broad-based and competitive. While 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 financial services companies (NBFSCs). The commercial banking structure in India consists of two major set of players scheduled commercial banks and unscheduled banks. The scheduled commercial banks constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes 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 Banks (SCBs). As at end-March 2002, there were 296 Commercial banks operating in India. This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67 scheduled co-operative banks consisting 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 improving efficiency in the process of financial intermediation, enhancing the effectiveness in the conduct of monetary policy and creating conditions for integration of the domestic financial sector with the global financial system. The first phase of reforms had an approach of ensuring that the financial services industry 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 structure (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 products. While deregulation has opened up new vistas for banks to augment revenues, it has entailed greater competition and consequently greater risks. Cross-border flows and entry of new products, particularly derivative instruments, have affected significantly on the domestic banking sector, forcing banks to adjust the product mix, as also to effect rapid changes in their processes and operations in order to remain competitive in the global environment. These developments have facilitated greater choice for consumers, who have become more discerning and demanding compelling banks to offer a broader range of products through diverse distribution channels. The traditional face of banks as mere financial intermediaries 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, corporate can get loans and avail of other services, while individuals can bank and borrow. To convert itself into a universal bank, an entity has to negotiate several 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 brand such as ICICI or HDFC. In universal banking, large banks operate extensive networks of branches, provide many different services, hold several claims on firms (including equity and debt), and participate directly in the corporate governance of firms that rely on the banks for funding or as insurance underwriters.
14.4 ICICI BANK LTD

ICICI Bank is Indias second-largest bank with total assets of about Rs. 1 trillion and a network of about 540 branches and offices and over 1,000 ATMs. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital, asset management and information technology. ICICI Banks equity shares are listed in India on stock exchanges at Chennai, Delhi, Kolkata and Vadodara, the Stock Exchange, Mumbai and the National Stock Exchange 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 financial system has been the merger of the ICICI with ICICI bank, which helped them move towards the universal banking. The management was of the view that the merger of ICICI with ICICI Bank would create the optimal legal structure for the ICICI groups universal banking strategy. The merger would enhance value for ICICI shareholders through the merged entitys access to low-cost deposits, greater opportunities for earning fee-based income and the ability to participate in the payments system and provide transaction-banking services. The merger would enhance value for ICICI Bank shareholders through a large capital base and scale of operations, seamless access to ICICIs strong corporate relationships built up over five decades, entry into new business segments, higher market share in various business segments including fee-based services and access to the vast talent pool of ICICI and its subsidiaries. 65
In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, Shareholders 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 groups financing and banking operations, both wholesale and retail are integrated as single entity.
14.5 RETAIL BANKING BUSINESS OF ICICI BANK

Retail banking is a key element of ICICIs growth strategy. With upward migration of household income levels, increasing affordability of retail finance and acceptance of use of credit to finance purchases, retail credit has emerged as a rapidly growing opportunity for banks that have the necessary skills and infrastructure to succeed in this business. ICICI Bank has capitalized on the growing retail opportunity in India and has emerged as a market leader in retail credit. The dimensions of the retail strategy include innovative products, parity pricing, customer convenience, strong processes and customer focus. Cross-selling of the entire range of credit and investment products and banking services to customers is a critical aspect of ICICIs 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 customized solutions to meet the varying credit needs of the Indian consumer. ICICI Bank is one of the leading providers of mortgage loans, two-wheeler loans, commercial vehicle loans and personal unsecured loans, and continues to maintain leadership in automobile finance. ICICI Banks total retail disbursements in fiscal 2003 are approximately Rs. 200 billion. Retail credit constituted 18% of ICICI Banks balance sheet at March 31, 2003, compared to only 6% at March 31, 2002. Cross 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 auto loans and about 25% of credit cards issued. In May 2003, ICICI Bank acquired the entire paid-up capital of Transamerica Apple Distribution Finance Private Limited (TADFL), which is renamed as ICICI Distribution Finance Private Limited (IDFL). IDFL is primarily engaged in providing distribution financing in the two-wheeler segment. The acquisition is expected to supplement the Banks retail franchise, especially in the two-wheeler segment.
Retail Deposits
During fiscal 2003, ICICI continued its focus on retail deposits. This has reduced its funding cost and has enabled it to create a stable funding base, with over 4.7 million deposit customers. Following a life stage segmentation strategy, ICICI Bank offers differentiated liability products to various categories of customers depending on their age group (Young Star Accounts for children below the age of 18 years, Student Banking Services for students, Salary Accounts for salaried employees, Roaming Current Accounts for businessmen, Private Banking for high net worth individuals and Senior Citizens Accounts for individuals above the age of 60 years). ICICI Bank has further microsegmented various categories of customers in order to offer products catering to specific needs of each customer segment, like defence banking services for
66
defence personnel. This strategy has contributed significantly to the rapid growth 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 million debit cards and 1.0 million credit cards. Its multi-channel distribution strategy provides its customers 24%7 accesses to banking services. This distribution 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 volumes of customer transactions to these channels. Seventy percent of customer induced 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 offered through multilingual screen ATMs include bill payments and prepaid mobile card recharge facility. ICICI bank is also planning to share the network with other key players in financial services market to give a wider access to its customers.
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 Banks Internet banking customers can also pay their bills 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 cross-sell. ICICI Banks 1,750-seat call centre, the largest domestic call centre in 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 center uses state-of-the-art voice-over-Internet-protocol technology and cutting-edge desktop applications to provide a single view of the customers relationship.
Mobile Banking
ICICI Banks mobile banking services provide the latest information on account balances, previous transactions, credit card outstanding and payment status and allow customers to request a cheque book or account statement. ICICI Bank has now extended 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 successfully developed a robust model for distribution of third party products like mutual funds, Reserve Bank of India (RBI) relief bonds, and insurance products, with market leadership in these areas. This model also allows it to
67
meet all customer needs by offering the customer the complete basket of financial 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, tailored to meet their requirements, while diversifying its revenue streams and generating adequate return on risk capital through risk-based pricing models and proactive portfolio management. Its focus in the financial year 2003 is on technology-driven enhancement of delivery capabilities to offer improved service levels to clients. It set up centralized processing facilities for back office operations 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 services through ICICIebusiness.com, a single point web-based interface for all corporate products. The portal enables clients to conduct their banking business with ICICI Bank through the Internet in a secure environment. ICICI Bank offers online foreign exchange and debt securities trading services. A dedicated product and technology group develops and manages back-office processing and delivery systems. Dedicated relationship groups for corporate clients and the government sector focusses on expanding the range and depth of its relationships in these sectors. In the corporate segment, it focusses on leveraging its relationships to expand the range of products and services to channel finance, transaction banking and non-fund based products. ICICI Bank has strong relationships with several large public sector companies and state governments and it is leveraging these relationships to expand the range of transaction banking services. It has already been empanelled for collection of sales tax in eight states. It continued to focus on corporate lending transactions including working capital finance to highly rated 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 strategy. 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. ICICI Banks dedicated structured finance, credit and markets group, with expertise in financial structuring and related legal, accounting and tax issues, actively supports the business groups in designing financial products and solutions. This group is also responsible for managing the asset portfolio by structuring portfolio buy outs and sell-downs with a view to increase the risk-adjusted return on the 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 robust growth in this segment and is working with state governments and agribased corporate 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 institutions and banks and international multilateral and bilateral institutions and banks, and proprietary trading. Further, the treasury leveraged its strong relationships with financial sector players to provide a wide range of banking services in addition to its liability products. In fiscal 2003, the balance sheet management 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 positions more liquid by selling illiquid loans and substituting them with marketable securities. The focus of trading operations was active, broad-based market making in key markets including corporate bonds, government securities, interest-rate swap and foreign exchange markets. A focus area in fiscal 2003 is the delivery of market solutions to corporate clients in various areas such as foreign exchange, fixed income and swaps. There is a significant increase in both the volumes 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 quotes for many corporate debt papers, thereby increasing the liquidity and depth of the market. Effective fiscal 2004, it has restructured its treasury operations to separate the balance-sheet management function (which now forms part of the finance group), the corporate markets business (which has been integrated into the structured finance, credit & markets group) and the proprietary trading activity (which is now housed in a separate proprietary trading group).
14.7 ORGANIZATION STRUCTURE OF ICICI BANK

ICICI Banks organizational structure is designed to support its business goals, and is flexible while at the same time seeking to ensure effective control, supervision, and consistency in standards across business groups. The organization structure is divided into five principal groups namely Retail Banking, Wholesale Banking, Project Finance & Special Assets Management, International Business and Corporate Centre.
The Retail Banking Group comprises ICICI Banks retail assets business including various retail credit products, retail liabilities (including own deposit accounts and services as well as distribution of third party liability products), and credit products and banking services for the small enterprises segment. The Wholesale Banking Group comprises ICICI Banks corporate banking business including credit products and banking services, with dedicated groups for corporate clients, Government sector clients, financial institutions and rural and micro-banking and agri-business. Structured finance, credit portfolio management and proprietary trading also form part of this group. The Project Finance Group comprises our project finance operations for infrastructure, oil & gas and manufacturing sectors. The Special Assets Management Group is responsible for large non-performing and restructured loans.
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The International Business Group is responsible for ICICI Banks international operations, including its entry into various geographies as well as products and services for non-resident Indians (NRIs). The Corporate Centre comprises all shared services and corporate functions, including finance and balance sheet management, 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 total revenue from the international business operations by the year 2008. There are four alternative strategies available for ICICI bank to provide financial services to the global Indian. The first strategy is to build a regional base in neighboring countries like Nepal, Bangladesh and Sri Lanka. Some of the banks have followed this strategy in the past. Standard Bank had used this strategy to expand its business in Africa, but the neighbours around India are not economic powerhouses for which the opportunity to grow in these markets are limited. The second strategy is to enter growth markets aggressively through the process of acquisitions. Mr Rana Talwar of Standard Chartered Bank followed this strategy by buying banks in Asia and Latin America. There is a risk involved in the acquisition process in the foreign country from two points. The legal procedures for acquisitions 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 higher 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. The 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 business as its core competency for entering in to new markets. The complex financial 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 financial 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 growing 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 nations can be serviced from Singapore. There are also traditional business interests 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 establish the offshore subsidiaries. Similarly selected market coverage may limit the scope and image of the bank as a global financial service provider. Mr. Dasgupta has to consider other issues. ICICI bank is still the number two bank in the 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 market for international operations. HSBC bank moved out of Hong Kong when it had a substantial position in the domestic market for international shores. Many financial 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 telecom. 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 make 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 business proposition with a mix of portfolio management to mortgages rather than ordinary 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 cheaper 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 has 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 environment. 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 not sure which one. One thing he was sure about the future of the International operations. ICICI bank is going to concentrate on India related business in all these places rather than competing with global players with higher financial muscles 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 strategic alternatives available for Mr. Dasgupta to serve the Global Indian Consumer? 3. What do you mean by originate-and-sell-down strategy? 4. Explain the financial 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 global? Give your reasons.
14.10 APPENDIX
ICICI Bank: Sales and Profit Analysis Operating Profit 723.70 867.00 1465.10 2908.70 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 Income 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 DEPOSIT RATIOS Demand Deposit of Total Deposits Saving Deposit of Total Deposits Time Deposit of Total Deposits Deposits within India as % to Total Deposits 15.11 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 76.95 100.00 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 Profit 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 Employee 1,749,960.13 11,285,851.51 5,096,576.92 8,021,214.71 40.28 8.83 3.42 6.26 120.39 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 Home Loans Home Search Online Stock Investment Customer Service Tax queries answered Donate2India Money2India IPO Account for Returning Indians Mutual Funds GI Bonds Rupee Savings Account High interest Fixed Deposits Debit cum ATM card ICICI Bank Bonds Credit Credit NRI Service Investments Cards Demat
Product Mix Width (Personal Finance)

Mobile Banking Banking Alerts Credit Card Alert
Banking
Loans
Savings Account
Home Loan
Fixed Deposit
Personal Loan
Easy FD
Car Loan
Recurring Deposit
Two Wheeler Loan
Private Banking
Commercial Vehicle Loan
Roaming Current Account
Loans against Securities
Young Stars
Farm Equipment Loans
Bank@campus
Construction
Salary Account
Office Equipment
Women
Medical
EEFC (Exchange)
Consumer Durables and
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 finance International Banking Services Agri business business
Product Mix Width (Corporate Finance)

Corporate & Structured Finance Working Capital Financing Auto Loan Receivables Credit Card Receivables
r
Central Government Collecting Bankers Securities Treasury Bills (T-Bills) Initial Public Offer (IPO) Funding GDR/ADR/Euro Issues and arbitrage Debt Trust & Retention Account Services INR Agency Clearing Services Cross Border Trade Services Escrow & Paying Bankers
Transaction Banking
Treasury Solutions Invesment Solutions
Cash management services
Forex markets
General Banking
Bond markets
Trade finance
t
Repos/Reverse Repos Bonds and Debentures Bank Guarantees Clearing & Settlement Bankers
Commodity markets Call Money/Notice Money, Term Money and Fixed Deposit
Lending rates
Fertilizer Subsidy Receivables Export Receivables
n
Inter Corporate Deposits Certificates of Deposit Commercial Paper Bills Rediscounting Scheme (BRDS) Temporary Overdrafts Intra Day Funding DVP Funding Overdraft Against Shares
SGL settlements through Constituent account with ICICI Bank
Dealer financing EPC Contract Financing Investment Monetisation Trade financing (long term) (REIT) / (REMIC) structures Brand financing Vendor financing, Transporter financing
PROFIT AND LOSS ACCOUNT Schedule I. INCOME Interest earned Other Income Profit on sale of shares of ICICI Bank Ltd held by erstwhile ICICI Ltd TOTAL II. EXPENDITURE Interest expended Operating expenses Provisions and contingencies TOTAL III. PROFIT/LOSS Net profit for the year Profit brought forward TOTAL IV. APPROPRIATES/TRANSFERS Statutory Reserve Transfer from Debenture Redemption Reserve Capital Reserves Investments Fluctuations Reserve Special Reserve Revenue and other Reserves Proposed equity share Dividend Proposed preference share Dividend Interim dividend paid Corporate dividend tax Balance carried over to Balance sheet TOTAL Significant Accounting Policies and Notes to Accounts Cash Flow statement Earning per share (Refer Note B.9) Basic (Rs.) Diluted (Rs.) 19.68 19.65 11.61 11.61 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 Deposits Borrowings Other liabilities and provisions TOTAL 1 2 3 4 5 9,626,600 63,206,538 481,693,063 343,024,203 170,569,258 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 31.03.2002
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 Contingent liabilities Bills for collection Significant Accounting Policies and Notes 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 17,744,682 110,118,817 358,910,797 470,348,661 42,393,443 41,546,611 1, 041, 063, 011 394,465,858 13,234,184
18
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MS-65
Block
SECTORAL APPLICATIONS-II
UNIT 15 Educational Services UNIT 16 Professional Support Services: Advertising Agencies UNIT 17 Telecommunication Services UNIT 18 Product Support Services UNIT 19 Case Studies 5 21 31 47 59
Sectoral Applications-II


Print Production
Printed at:
BLOCK 5 SECTORAL APPLICATIONS-II

In the previous block (Block 4) we have discussed marketing issues related to three specific service sectors namely financial services, hospitality and tourism services 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 characteristics in the context of education, marketing strategy issues, and planning of the marketing mix for education. Unit 16 on Professional Support Services relates 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 positioning 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 and service quality parameters. You will appreciate that services marketing is not only relevant to services sector but to goods manufacturers as well. Unit 18 titled 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 first case presents an interesting study on customer expectation and customer orientation in an insurance company. The second case relates to service concept and distribution aspects.

BLOCK
1.

2.
5. 6. 7.

3.
8. 9. 10.
STRATEGIC ISSUES
4.
11. 12. 13. 14.
5.
15. 16. 17. 18. 19.
UNIT 15 EDUCATIONAL SERVICES

Objectives

classify education as a service along the various classification schemes; describe the marketing implications of service characteristics in the context of educational services; analyse the issues to be addressed in service strategy formulation for education; discuss the service mix elements for educational services and draw generalisations for design of educational service; apply the concepts developed for pricing, promoting, 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 Education 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 that formal education begins at the school age and depending upon the choice, vocation and circumstance of the persuants, matures into intermediate and higher levels of learning including professional and specialised fields. Apparently, benefits sought from higher and professional or vocational courses are more tangible or measurable in terms of entry qualifications to a chosen profession, certification to enable practicing a profession or relative ease of access to a suitable form of livelihood. Not attempting to cover the marketing of education per se, the 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
Without making specific commends about any particular discipline, the unit deliberately 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 education as a special case of marketing of services. Interestingly, the need to market their services has not really been felt by the education sector, as educational institutions, be they colleges or Universities or institutions catering to specific fields like ours, have faced more demand than they could cope with. For specialised fields like management and computer education, where attractive market potential has increasingly caused more and more institutions to be set up, competitive situation is changing. Even the institutions facing heavy demand have been confronted with the question of being able to choose the desired target customers, and therefore face issues like product differentiation, product extention, diversification and service integration. There is a basic concern with building 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 marketing concepts, relevant to marketing of education. Before going into the subject of education services marketing it is important to understand the concept of education as a service. Going by the AMA definition services are those separately identifiable, essentially intangible activities, which provide want satisfaction and are not necessarily tied to the sale of a product or another service1. 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 service buying transaction. Education as a service, then, can be said to be fulfilling the need for learning, acquiring knowledge-providing an intangible benefit (increment 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 but 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 array of services according to some chosen variables. One of the simplest schemes classifies services as consumer, intermediate and industrial service. Education is 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 service, though packages of industrial training are also designed for the organisational customers. On the basis of the way in which services have been bought, education, depending upon the type and level can be classified both as a shopping service and as a speciality service. Swan and Pruden have suggested that establishing whether service is bought for instrumental motives (i.e. as a means to an end) 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 instrumental function, but there is always a category of customer from whom education and the pursuit of knowledge are expressive motives. Another classification scheme categorises services as equipment based and people based services, depending upon which resource is primarily used in the production of the service.3 By its very nature, education is essentially a people
based service though some service delivery systems may make heavy use of technology and equipment. Services have also been classified on the level of personal contact as low contact or high contact services.4 Recent developments in open and distance learning systems have successfully countered the challenge of constantly maintaining high levels of contact, by creating specialised kinds of user friendly course material and using multi-media technology to gain access to students. Shostack, who in her studies has stressed the intangibility characteristic of services has classified services on the bases of dominance of tangibility/intangibility, along a continuum of a pure tangible product with high tangibility dominance to a pure service with intangibility dominance.5 Accordingly education can 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 service, impossible to touch, see or feel. Evaluation of this service however can be obtained by judging service content (curricula, course material, student workload, constituent faculty) and the service delivery system. The consumer, based on these evaluations, has a number of alternative choices before him and may make selection on the basis of his own evaluation referrals, opinions sought from others and of course a brand or corporate image of the organisation providing education. 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 distinction of intangibility into palpable and mental intangibility, has implications for the marketing of the educational services.6 For reasons of both mental and palpable intangibility:
Education cannot be seen or touched and is often difficult to evaluate: It is therefore, imperative to build in service differentaition in the basic product to enable competitive positioning. Precise standardisation is difficult: For educational packages of same levels and bearing similar certification (e.g. B.A., B.Sc., and B.Com. degree programmes, postgraduate commerce and science programmes, management diploma and degree programmes) across universities and colleges, it is often difficult to bring about standardisation of course design as resources/needs/objectives of different institutions may differ. Institutions like Universities, though, try to manage equivalence in standards through Boards of Studies which are generally inter-university bodies. Technical education is sought to be standardised through bodies like the All India Council for Technical Education. Interestingly, the lack of standardisation also opens up the marketing opportunity of creating highly differentiated, need based course packages, suited to chosen target groups of customers or serving specialised/localised needs. Education as a service cannot be patented: This feature implies that courses designed or developed at one institution can be replicated and offered at other institutions. It also implies that as far as the service product features are concerned, all advantages of a given competitor have an essentially perishable character. Only those discernible strengths which have their basis in the people 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 designers and providers in the field of education, the following pointers to marketing planning emerge: i) Focus on account of intangibility should increasingly be 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 by the institution. Education, like most other pure services, should be tangibalised so that the beneficiary has some physical evidence to show for his achievements. Certifications for various levels of attainment, citations and separate certificates 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 practiced. Concerted efforts at building up organisations reputation through performance as well as through skillful use of communication tools would need to be carried 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, education displays this characteristic which results in certain features.
Production and consumption are simultaneous activities: This is true of most conventional teaching institutions where face to face teaching necessitates simultaneous production and consumption. Open and distance learning systems which make substantial use of technology, however, have made it possible for production and consumption of the service to be carried out at different times-the use of audio-video units and preparation of course materials sent to the students across the consumer population, are designed to meet the challenge posed by the perishability character 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 lecture scheduled to be delivered, cannot be stored, if there are no students enrolling for the course or to attend the lecture. This factor opens up the challenge of managing the service in the face of fluctuating demand. Nearly all universities at one time or the other have faced the problem of overstaffing, when certain disciplines went out of vogue, like pure sciences and post graduate courses in languages. The marketing implications of perishability necessitate that a better match between supply and demand for educational packages would need to be made. 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 towards the use of marketing research techniques for service development (designing the 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 offered because the institutions have available expertise in an area or it is something 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.
3. Inseparability Services are also characterised by the factor of inseparability in the sense that it is usually impossible to separate a service from the person of the provider. In the context of education, this translates into the need for the presence of the performer (the instructor) when the service is to be performed and consumed. This necessarily limits the scale of operations to the number of instructors available, it also means that the distribution mode is more often than not direct in the sense that no intermediaries are involved; the transfer of knowledge is directly from the provider to the learner. As noted before, open learning systems have overcome the characteristic of inseparability by incorporating the teacher into the material and bringing about a separation between the producer and the service. A direct marketing implication of this inseparability 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 design specifications can be minutely standardised and followed, the standards of services, educational services included, would depend upon who provides the service and how. This heterogenity of performance renders service offers for the same 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 the faculty resource person. That, perhaps, is not even a desirable goal in education, 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 quality 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 monitoring 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 placement programme, the absorption of the institutions product in the job market, or the performance of the pass-outs at other competitive examinations. 5. Ownership Ownership or the lack of it also characterises service. In the context of education, the customer only buys access to education, or derives the learning benefit from the services provided. There is no transfer of the ownership of tangibles and intangibles which have gone into creation of the service product. Payment of fees (price for the service) is just the consideration for access to knowledge and for the use of facilities for a given tenure. Activity 1 Study a few educational institutions around you, if possible let these include a University, a professional institution and a private college. How do these institutions address the issue of standardisation of services? Do the processes to achieve standardisation vary with the type of institution? ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
15.4 MARKETING STRATEGY AND EDUCATION

It has been pointed out in almost all studies on the subject of services marketing that strategic management and marketing strategy for each organisation needs to be unique in itself as it is organisation and situation specific. Some directions for marketing strategy for education may, however, be drawn keeping in mind the special characteristics of education as an intangible dominant, people based, high contact consumer service. These are outlined below. 1. 2. The dominantly intangible nature of education service may make the consumers choice of competitive 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 relocate themselves to avail of the service. Perishability may prevent storage of the service product and may add risk and uncertainty to the marketing of education, specially in the event of fluctuating demand for courses/instructors/disciplines.
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 overall objective of the organisation it is essential to define what business we are 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 developing professional skills? Are we in the business of creating special skills or preparing people for a specific vocation? Or are we there to provide basic knowledge 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 identify what it holds to itself as the organisational mission and overall objective. Who are our customers and what benefits do they seek? Identification of target markets and understanding the needs of customers, as well as the criteria they use to make choices, represents an important step in marketing strategy formulation. For an educational institution, the task translates to determining what is the nature of the benefits sought by its set of customers. Are they merely seeking a certification, or development of a specific kind of expertise or is accumulation of knowledge the real value sought? Since the purchaser of the educational service is primarily buying the expertise or knowledge he believes that the institution 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 choose between competing institutions. A study in the Indian context, for managment education, reveals that some of the criteria used by students to choose between 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 expertise, e) width of specialisation offered, f) infrastructural facilities, and 10 g) fees.
ii)
Identification of criteria used to differentiate between competing offers may lead institutions to lay emphasis on developing competing strengths and creating perceived differences between their offers and the competitors offer. Activity 2 Talk 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 the programme/institute to find out how well the service product design and delivery at the institute are capable of delivering these benefits sought. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... iii) How can we build or defend own competitive position? Every organisation has to consider an entry strategy into a market and then creation and protection of a competitive position. Though a number of alternative positioning choices are possible for educational institutions, task of positioning is a slightly more 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 position is to build up strong service differentiation which can generate a clearly focused organisational and product image in the consumers mind. Examples can be found in the case of NIIT which identified the need for computer education and training 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 update their knowledge, organisational customers needing customised packages and so on. Another example is that of Indian Institute of Management, Ahmedabad, which through development and nurturance of highly specialised faculty resource and excellent industry interaction has built up formidable barriers to competition. These 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 needs and wants of the consumer population change, existing course packages or delivery systems may cease to satisfy them. A preemptive approach to education planning suggests that satisfiers to such needs be preemptively developed and offered before the need really becomes apparent to the consumers themselves. Since education to an extent, represents a derived demand dependent upon the final demand for desired qualifications for employment, changing job scenarios, industry requirements and consequent need for qualifications may be one indicator to watch, for 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 package concepts and weeding out old and unprofitable services shoud not be designed. Activity 3 Identify educational institutions in your area which can be termed highly successful. What are the ingredients of their competitive strength? ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
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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 the mix into the most effective combination of the components at any point of time. 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 elements of services marketing. We shall mainly concentrate on the aspects of the service product and promotion, as concepts of process and people have been integrated in the concept of the augmented service product. Considerations of price and 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 very outset of deciding the service product, to outline the distinction between what an educational institution offers in terms of its service and what benefit does its larger population derive from it. Central to the idea of a service product, are the consumer benefit concept, the service concept, the service offer and the service delivery system. While the consumer benefit concept defines what benefits do consumer derive from a particular educational package offered, the service 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 very basic stage of the design of the education offer, marketing orientation suggests that the offer should be fashioned as a response to the identification of the consumer benefits sought. According to Groonroos, the service concept has to be defined at two levels8. The general service concept refers to the essential utility being offered (a computer training organisation offers solution to the problem of keeping up to date information flows within the organisation) while at the 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 entails:

developing the service concept, developing a basic service package, developing an augmented service offering and finally, and managing image and communication.
(As explained in Unit 5 also) As already noted, the service concept defines 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 are needed to fulfill the needs of the target market. Extending this to the education 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 of three elements. These are:

the core service, the facilitating service (and goods), and the supporting service
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The core service is the reason for being in the market. A management institute exists because it equips people with skills and abilities to manage organisations. Faculty expertise and the accumulated experience at the institute represent the core resource for supplying this benefit. However, in order to make it possible for students to avail these services, additional services are required. A registration and admission service, class schedules, counselling service, enabling students to make relevant specialisation choices, and library facility are required so that the students are facilitated in deriving the benefits of the core service 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 not adequately provided, the core benefit cannot be consumed. Sometimes tangible goods are also required to avail the benefit of the core service. Course material, in the form of books and prepared course notes, instruction manuals, computers, 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 basic service package is the supporting services. Like facilitating services, they are also auxiliary to the core benefit but their objective does not lie in facilitating 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 offers. An efficient placement cell in the above mentioned example, high quality residential facilities, good network of exchange relationships with business organisations, do not facilitate the learning process but add value to the service offer by adding to the utility derived from the total offer. From a managerial viewpoint, it is important to make a distinction between facilitating and supporting services. In order to effectively access the core package, the facilitating services are necessary and the service package would collapse, if the facilitating services are not provided. The marketing strategy directive that can be developed here is that for highly intangible core service products like education, facilitating services should aspire to attain a quality level which enables them to become 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 services 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 whole 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 Product integrates the concept of service process with the services offer. Three distinct elements which along with the basic offer go into the creation of the augmented 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 upon:
The number and skills of the persons associated with providing the core, facilitating, and supporting service. Office hours, class and seminar schedules, time used for other services 13

Exterior and interior of offices, classrooms, facilities. Tools, equipments, study materials etc. The number, quantity and aptitude levels of students involved in the learning process.
The interaction between the service provider (the University) and its customer can be in terms of :

Interaction with resource faculty (their expertise, skill, attention, attitudes) Interaction with other service interfaces (admission, evaluation, students inquiries, students welfare office, office staff, hostel wardens and proctors. Reception-attitudes and willingness of response, accurate answers.) Interaction with the physical environment (space, cleanliness, maintenance, noise levels) Interaction with accessory service system (waiting line for admission, results, enquiries, payment receipts etc.) Interaction between students and, Interaction of the various subsystems with each other (faculty, facilities, office personnel, other service departments).

Customer participation 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 student participation in the above and allied activities. Specifically the aspect of student participation that are relevant are :
Are students knowledgeable enough to identify their need or problem, and to exercise choice options offered by the University? Are they reasonably aware of the time and flexibility dimensions offered 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 augmented 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 Services
Interaction
Consumer Participation Source: Groonroos, C. Services Management and Marketing, Lexington Books, Lexington 1990.
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In planning the total educational package offer, therefore the focus of the concern is not the course alone, the package has to be seen as a total offer along with 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 service offering can be effectively created and positioned. Activity 4 For the following products, on account of your familiarity with them identify the core service, the facilitating and the support services, in each case : (a) the university/college that you attended for your degree level; (b) the training programmes offered to various cadres in your organisation; (c) the distance learning programme that you are undergoing now. ................................................................................................................... ................................................................................................................... ................................................................................................................... ...................................................................................................................
2. Pricing of the Education Service

Pricing decisions for the service offer are of a major importance and shoud ideally 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, medical 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 controllable by the marketer, instead it becomes a subject matter of public policy, where political, environmental and social considerations take priority over purely economic considerations. Prices may be based on the ability to pay (fee structure relating to parents income in case of Universities) or some socially desirable goals (total fee exemption for women candidates in states like Rajasthan and Gujarat). Autonomous institutions also subject themselves to formal self regulation of price for example, the institutions like AICWA, and AICA are subject to institutional regulations relating to fee structures which they decide for themselves. 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 fields where demand far exceeds supply, prices charged depend upon economic condition, consumer feelings about prices, buyer need urgency, competition in the market place, level of demand etc. Heterogenity of services and different pricing considerations used by different types of institutions make price a less important determinant 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 drawn from product marketing is that the more unique the education service offer, the 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 consumers willingness to pay may also be utilized for the education service. The practice of charging different fees for the sponsored 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 Services Offer The objective of promotion in education services is akin to its role in other marketing endeavours. Accordingly, the basic objective that promotion as a marketing tools is expected to play for marketing of education would include:
Building awareness of the education offer package and organisation providing it. Creating and sustaining differentiation of the organisation and its offer from its competitors. Communicating and portraing the benefits to be provided. Building and maintaining overall image and reputation of the service organisation. Persuading customers to use or buy the service. Generating detailed information about core, facilitating, supporting and augmented service offer. Advising existing and potential customers of any special offers or modifications or new service offer packages. Eliminating perceived misconception.

Educational institutions however, have not been able to use promotional tools effectively because of certain perceived notional barriers. Some of these barriers are: i) Most educational institutions are product oriented rather than market or student oriented. They perceive themselves as producers of certain educational programmes, rather than as satisfiers of certain learning needs. This lack of marketing orientation, keeps those managing educational institutions from realising and exploiting the role that promotion could play in attaining their organisational objectives. Professional and ethical considerations may prevent the use of certain forms of promotion. Established educational institutions may regard the use of mass media advertising and sales promotion as being in bad taste. The nature of competition in case of educational institutions like Universities, technology and management institutes 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 purposes. What has to be realised however, is that even such institutions need to use promotion for image creation and to sustain as well to maintain a secure market position, and to improve the quality of customers (students) seeking their services. The nature of consumer attitudes regarding education and their perception of mass media information sources may sometimes preclude the use of intensive promotion. For making their choices regarding a particular institution or a course package, prospective students rely mostly on subjective impressions of the institution, or use surrogate indicators of quality like the providers reputation or image. They also tend to rely heavily on word of mouth referrals rather than published literature or material supplied by the institution.
ii)
iii)
iv)
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Due to some of the above considerations, as also because of prevailing industry tradition, 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 marketing of services indicate that the reluctance towards using mass media advertising or sales promotion is partly due to the inherent psychological barrier and partly due to the misunderstood role of these tools. Restrictions on advertising for several professional services are being slowly relaxed. Growing competition and the threat of losing market shares has awakened many a institution to realise the importance of mass media tools like advertising for organizational as well as service offer promotion. Some guidelines that can be used while applying this powerful tool for generating awareness, interest and enrollment are summarised below: a) Create Clear, Simple Messages The real challenge in advertising educational 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 sought, advertising for the educational product should emphasise the benefits to be provided rather than the technical details of the offer. c) Make Realistic, Attainable Promises Education by its very nature is a high reliability service, where expectations are high. Unfulfilled promises create dissonnance. Promises in terms of performance of services therefore should be realistic. d) Build on Word of Mouth Communication and Referrals As noted earlier, non marketer dominated sources in case of education marketing may be more important to the consumer. Educational organisational should therefore build upon the importance of word of mouth communication by
persuading satisfied consumers to share their sense of satisfaction with others; directing ad campaigns at opinion leaders; and encouraging potential consumers to talk to existing consumers.

e) Provide Tangible Clues In terms of certification, records of attainments and past success figures, provide the prospective target population with tangible clues to enable them to make choices. 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, international 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 organisation and its association with the desired values. 17
4. Place Decision and the Education Service In most cases the educational services represent the single location and direct distribution processes with no intermediary between the producer and the consumers of the service. The learning process is usually accomplished by the user of the service going to the service provider. However, because of buyer need urgency and the nature of the utility derived, accessibility and convenience for educational service location are not as critical a factor as in case of, say, a banking service. Depending upon the competitive situation, the factors that have marketing implications in terms of location 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 accessibility and convenience in service choice decision? Are competitors finding alternative ways to reach to the markets? (for e.g. distance learning in education) Can some competitive advantage be gained by developing alternate/different norms of service location and delivery? How do flexibility, being technology or people based, affect the educational service offer in terms of flexibility in location and relocation? Is there an obligation on part of the institution to be located in a convenient site? (e.g. public health education centres, family planning training centres, vocational training centres etc.) How critical are complementary services to the location decision? (Transport to and fro, residential and canteen facilities and so on)
b)
c) d)
e)
Answers to issues like the above underline the critical importance of the location decision and may result in more systematic approaches than in the past. Activity 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 for market cultivation? ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
15.6 CONCLUSION
In the present era, it is not natural resources or natural wealth which distinguish an affluent society from a backward one, it is the accumulation and development 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 services offered to them. It is important, then, in order to be able to satisfy these needs and wants effectively, that a marketing orientation be applied to the conceptualisation, design and delivery of educational service. This is even more imperative in a developing country like India, where resources are scarce and a better match between needs and services provided needs to be attained. Education 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 they use to exercise choice. The key to better delivery of the education
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service is not that it is performed by people but that it is performed for people. People therefore represent the starting point for analysis to precede conceptualising 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 socio-economic context.

1) What are the marketing implications of intangibility, inseparability, perishability and heterogenity for education services? Discuss with the help of suitable examples. Using the criteria of different benefits sought by target customers, how can educational institutions build or defend competitive positions. Use examples 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 general service concept and specific service offer for a) A computer institute b) An in-house training programme for sales personnel c) Refresher courses for senior executives 4) What are the implications of core, facilitating and supporting services for marketers of education? Discuss the concept of an augmented service products with the help of examples from the educational services. The interaction between the provider of an educational service and its customers can be at various levels and in different forms. Describe the components of this interaction for any educational institution of your choice. What are the major promotion objectives that an education service provider may seek? Are these objectives in any way different from those sought by product marketers? Comment. Identify the major barriers to effective use of promotion by educational institutions. What steps do you suggest could be taken to overcome these barriers? Evaluate the criticality of the location decision for educational service. Does the significance of location decision vary over types of educational services? Justify your answer with the help of examples.
2)
3)
5)
6)
7)
8)

1) 2) 3) Kotler, Philip, Marketing for Non-Profit Organisations (Englewood Cliffs, N.J., Prentice Hall, 1982). Wilson, Aubrey, The Marketing of Professional Service (London : McGraw Hill 1972). Gummersson, Evert, Toward a Theory of Professional 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 Marketing, 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 Strategic 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., Marketing 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 Marketing of Services. William Heinemann, London, 1984.
8) 9)
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UNIT 16 PROFESSIONAL SUPPORT SERVICES : ADVERTISING AGENCIES

Objectives

evaluate the importance of marketing applications to advertising agencies; apply the general concepts of marketing, to advertising industry; identify the various styles of growth in the context of advertising agencies; discuss the content of growth strategies for advertising agencies; explain the positioning and competitive strategies for advertising agencies.
Structure
16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9 Introduction Application of the General Concepts of Marketing to an Agency Setup Agency Growth : Its Style and Content Agency Positioning How Does Strategy Vary with the Size of the Client? How Does Strategy Vary According to Size of Agency? Conclusion Self Assessment Questions Further Readings
16.1 INTRODUCTION
The growth of study of modern medicine around 1700 witnessed a movement from panaceas to specific diagnosis and the search for specific remedies against specific ills. Similarly the study of services marketing can benefit more by concentrating on specifics, focussing at smaller sub-groups of services business and identifying what can be done with the marketing variables in each of these fields. With the advertising business in India growing rapidly, with many new small agencies 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 stronger than ever before. If advertising is looked upon as the brand building activity, then future brands need to be invested in by studying the marketing of professional 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. Identifying the style & content of agency growth. Understanding Agency Positioning & Strategy.
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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 configuration, valuation, symbolisation & facilitation. In an advertising agency scenario this includes the design of the advertising services package, whether the services offered are inhouse or from freelancers, the range of services offered and the intensity of service offering of each of the services in the range. Valuation is the media commission earnings of an agency which are fixed at 15% (until an agency offers unethical discounts). However, valuation of other services in its package can vary as can its art charges. Symbolisation is what the agency is perceived as by its target audience. Alternate sysmbolisation alternatives can include positioning by size, by creative talent, by auxiliary services, by markets etc. Facilitation has more to do with accessibility of service and ease with which client can tap each of the service offerings of the agency. The production 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 Ps deal with the preparation of the service, they are as important as the other 4Ps. 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 characteristic of the service industry. Consumers can influence not only accessibility of a service but also communication about it. A dissatisfied consumer, research proves, will influence a large number of people to abstain from using the service. 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 ingredients so that the consumer knows exactly the type of product he is going to consume. 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 the clients problem may well lie with the three other Ps (Product, Price, Place), than 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 clients problem lie in the area of promotion, the solution may demand market research or it may need a direct marketing campaign instead of media releases. Hence a good client servicing person in an advertising agency can not be given a predetermined product to sell. iv) Service : Where Product Quality needs Renewal on Every Purchase : While all products produced by a factory may meet predetermined 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 purchase. Because a service has to be created every time the customer demands it, there is a production consumption interaction while the demand is being fulfilled. As service is usually given personally, the interpersonnel dynamics between the people offering the service and the consumer has to be nurtured so that the renewal of the service meets certain norms of both service quality and consumer satisfaction. In advertising, agencies giving good creative inputs may also be changed by clients because servicing may not be able to create a positive experience in the clients mind. The production consumption interaction in such a case does not meet clients
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demand of service quality, hence consumer dissatisfaction is expressed. An appreciation 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 physical ownership rights existing on the offering to the customer, no transfer of ownership can take place as in a tangible product. Also, unlike a physical product, they cant be evaluated easily by taste, smell, feel etc. While the agencys output may help to sell physical products (sometimes services too) of the client, the agency 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 be considered as selling time and space on the air and in the press. Evaluation of 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 way 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 business philosophy of a good agency defines its growth, as a dependent variable of the clients growth. Thus the primary task of an agency is to make its clients products grow. In the long run when planning for growth of the agency, it becomes very important to develop skills that nurture and foster the growth of the client organisatioin.
Though physically agencies may execute artworks, write copy, produce films, plan for media buying and provide routine servicing to clients, this is 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 product development and planning, understand, participate in and may be, even influence 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 may 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 organisations.
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 need 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 professional services. These firms dislike thinking of themselves as businessmen, instead state that they are motivated by service. They think of marketing as a salesmans job and look down on business solicitation. They believe that their good work will get more clients. Hard Sell Marketing : Hard sell marketing is at the opposite end of the spectrum to minimal marketing. It reflects a total sales orientation, offering price discounts, bad mouthing competition, offering referral commissions and indulging in practices bordering on violating professional codes of ethics. This approach forgets like any sales oriented approach, that there is more to business than attracting clients. Marketing involves a discipline of identifying and cultivating a market, choosing targets, developing services, formulating plans etc. Professional Marketing : This approach to marketing of professional services is in consonance with the professional code of ethics. Such an approach involves:
planning for long-range marketing objectives and works out strategies to match; training staff to improve the efficiency and effectiveness of marketing and personal selling; allocating time and budget to support marketing activity; 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 strategies may include service or market sepecialisation. Specialisation in any particular service/range of services may give and agency a cutting edge with clients who are looking for those services. Similarly specialising in certain type of markets (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 Study the advertising scene in India by looking at agency profiles reported in magazines like A & M, Business Today, Business India, etc. Analyse the patterns of agency growth to give examples of minimal marketing, hardsell marketing and professional marketing. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
16.4 AGENCY POSITIONING

One way of defining Positioning of an advertising agency could be: Bringing the right people together and making them work effectively for a brand. This is an incomplete definition for it ignores the consumer benefit approach or the clients point of view. Clients have specific needs when searching for agencies. Agencies have more strengths in certain areas. Symbolisation (or positioning) is the value added dimension agencies give to these strengths so that the client perceives them as fulfilling his specific needs.
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Positioning by Size
A client may be looking at a big or a small agency. The positioning statement for a big agency includes full infrastructural back up, many branches, the ability to think and act big, benefit of experience of handling many product categories etc. Positioning staement for a small agency includes flexibility, personalised service and 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. However its positioning may be decided by the strength it creates in one particular area.
Creative oriented : The client may be looking for agencies which are capable of delivering strikingly different creative output. This positioning can cut 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 different creative output very suitable in product categories where technology has matured and no distinct product advantages exist. A client may need to bank upon creative to create a communication difference. Marketing input oriented : Some agencies may have strengths of having good brand thinkers. This, then, becomes the point of differentiation for the agency. Clients, too, may look for such agencies with whom they can discuss marketing strategies. The benefit offered by this positioning to the client is a better interpretation of the marketing concept into advertising. Others : Other alternatives could be based on talent in the agency. For example an agency may be able to offer good servicing input, another may have excellent media planning skills etc.
Positioning by Auxiliary Services Agencies can position themselves by offering additional services like in-house market research services. Further alternatives are Direct Marketing, Public Relations etc. These package of services can help give and agency the extra edge with clients whose usage level of such services are high. The synergy of advertising with market research or direct marketing is the consumer benefit offered by agencies choosing this positioning alternative. Positioning by Markets It is possible for an agency to position itself by markets, too. Some agencies in India specialise in public issue advertising. Their positioning in this segment is so strong that few consumer 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 undertakings. This is another example of specialisation by markets. It is possible for agencies to specialise in industrial products advertising or retail advertising. Positioning by Price Though professional code of ethics do not allow any discounting practices on media commission earnings, some agencies position themselves by offering discounts to clients.
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Activity 3 Look at the advertising agency that you studied for Activity 1. Can you analyse the positioning the agency has sought to achieve? What are the alternative positions for this agency, looking at its infrastructure, resources and markets? ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
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 and the brand. Different expectations from agency in enterpreneurial, medium size and dominant brand positions are discussed here. a) Client: Enterpreneurial Agency Task: Nurturing of new brand, Create positioning When the client is young and small and is launching a new product, this is an enterpreneurial phase for the client. 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 usually bring low levels of billing, an agency must devote time to their needs which are usually unique and require an enterpreneurial decision making streak in the agency as well. Quick decisions and quick reflexes of an agency are critical as enterprenuerial marketing is like guerilla warfare. Such tactics, if backed by sound marketing thinking at client/agency end usually lead to success and rising brand shares. The basic agency task is however to create a brand positioning strategy for the client. Quick responses of client and agency as they fine tune the positioning in the market place are critical. The demands from various departments of the agency for an enterpreneurial client are as follows:
Servicing: Personalised to the enterpreneur. Decision Making: Quick, based on gut feel.
Servicing person: Should be senior, capable of thinking on his feet. Must have knowledge of Account Planning. Media Planning: Should focus on low cost, unconventional media. Account Planning: Should be capable of evaluating if clients gut feel meets marketing logic. Creative: Client Focus: Should never let the focus shift from the brand positioning in the flood or ideas coming in. In early enterpreneurial phase may be survival. Agency should understand this.
b) Client: Medium Size Agency Task: Strengthen brand positioning to build brand leader. Two scenarios are discussed here: i) When clients 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,
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the agency for its next phase of growth may have to alter its style as the client 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 more variables in mind, which, at an enterpreneurial risk-taking stage may have been ignored. The basic agency task here is to sterngthen brand positioning to build a brand leader. ii) When market growth is faster than clients growth rate. Where a medium-size brand has been dormant for a long period of time in a market which 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 the brand an active player again. Repositioning of a brand becomes the major brand building task of the agency. The client should be motivated to relook at pricing and distribution strategies by the agency. The focus for different departments of the agency for a medium size client are as follows:
Servicing: May be personalised still. But agency should meet second line marketing 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 Account Planning recommendations, to dilute focus on gut feel only. Media planning: Has to think of using mass media judiciously. For building brand leaders, Media Dominance Strategy has to be worked out.
Account planning: Should be the key agency focus so as to heighten brand positioning or to repositiona slow moving brand. Creative: Client focus: To make brand distinction totally different from others, it should use media differently or design 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 only 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 attacking strategies. Competitors strategies have to be preempted and defensive mechanisms worked out. Aggressive strategies at this stage may drain more financial resources than they can generate. The brand positioning has to be guarded here against 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. Clients marketing has to participate in this. Creative: Media Planning: Client focus: Defensive strategy for brand position. Focussed for those target audiences which competitors are planning to tap. In other media, reminder level to be maintained. Defensive for brand position and share, offensive for competitive threats.
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Viewing the above analysis according to the stage of the product life cycle of the product would generate the following conclusion: A. Create Brand Positioning Enterpreneurial needs in servicing, planning & execution. B. Strenghten Brand Position Account planning needs dominant. Or If brand not moving well: Reposition it. C. Guard Positioning Maintenence for dominant brands. Activity 4 Select an agency which caters to several clients. Analyse theAgency Task with respect to each type of client. How would you say the task varies between clients, if at all. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
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 enterpreneurial, where the agency should have an ability to select clients whose products have a USP which is capable of becoming a benefit, highly desirable to a particular target audience in the market. At this stage, agency strategy involves a search 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. However, 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 specialised services. Clients, irrespective of size, needing strengths in certain service areas would find such agencies useful. For example, agencies having good studio facilities could cater to clients who have needs of printing or other work requiring high quality artwork. In case a small agency has a large brand, its revenues become largely dependent on the brand. This is both a constraint and an opportunity. The constraint is that the brand portfolio of the agency is very narrow. Hence the agency could become overdependent on the brand. Such dependence may hamper giving professional advice, especially when it is unpleasant for the client. The opportunity is that the success of the brand is the key of the agencys success. If the agency realises this fully and establishes a healthy professional 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 agencys major brands market and a subsequent financial involvement 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 into leaders. It should have a balanced client mix. With more than a couple of brand leaders bringing the front, half a dozen or more, major brand players in their market and a handful of small clients who have a potential for becoming leaders tomorrow. The advantage of the medium size agency is clear. it is neither too big to be unaffected by a change in any clients health neither is it too small to avoid offering comprehensive advertising services. Its product portfolio, should consist of todays bread winners who are some large brands as well as tomorrows bread 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 statement) is that it is not too big for its clients to lack personalised agency attention. Neither is it too small to avoid investing in full fledged infrustructural 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 as a leader. This can be done by setting industry standards. A leading agency, for 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 help in creating better training facilities to train professionals for advertising. This creates goodwill as many students may move to client organisations. It also 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 and other agencies. Hence a large agencys client list reads like a whos who of brands. The advantages of such a scenario are obvious. The disadvantages need looking at. Due to the size of such agencies, it becomes unviable to handle brands which generate turnovers below a certain size. This leads the innovator enterpreneurs who are creating new product categories and attacking new markets to look elsewhere. It therefore makes eminent sense for large agencies to set up smaller sister agencies who can not only handle such clients but can also pick up competitive brands to the parent agencys brands. The latter is identical to a multi branding strategy 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 perceived 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 such a positioning stance. Usually the anit-thesis positioning of the smaller agency is better servicing, more time for client etc. The positioning also reflects itself 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 dynamic situation where every output of the agency is different from the previous one. The production consumption interaction not only calls for direct
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distribution but is the prime determinant of the output. Advertising is a business of managing people: clients, on one hand and agency personnel on the other. The key task is to maintain enthusiasm and a desire for excellence among all of them. Advertising is a game of bringing out the differences among two products, and creating a USP for a brand. An agency must develop this ability to make a difference for a brand and therefore for itself. That is what successful agency positioning and agency growth are all about. An agency, in the final analysis is known by the brands it builds.

1) 2) 3) How do the marketing mix elements relate to advertising agencies? Explain by giving specific examples. What is the significance of service characteristics like non-standardisation, perishability and intangibility for ad agencies? Explain in detail. Contrast the minimal marketing, hardsell marketing and professional marketing approaches in the context of ad agencies. Which of them do you consider most relevant looking at the advertising scene in India today? What do you understand by Positioning? What are the positioning alternatives for ad agencies? Explain with the help of examples. How do strategies and client focus vary according to the type of client and the agency size? Illustrate your answer with suitable examples.
4) 5)

1) 2) 3) Maister David H., Professional Service Firm Management, 4th ed., (Boston, MA: Maister Associates, 1989) Wilson, Aubrey, The Marketing of Professional Service (London : McGraw Hill, 1972) Philip Kotler and Paul N. Bloom, Marketing Professional Services (Englewood Cliffs, N.J. : Prentice-Hall, 1984).
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UNIT 17
Objectives
TELECOMMUNICATION SERVICES

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; describe 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 Sector in India Tariff Issues Sector Dynamics and Implications for Firm Level Competition The Changing Market Structure Service Quality Summary Self Assessment Questions 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. There have been far reaching developments in Information Technology (IT), consumer 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 provide for widespread spillover benefits to other sectors of the economy. The first 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, Radio 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 bottlenecks and push the liberalization process forward. The policy maker for Indias telecommunications sector is the Ministry of Communications and Information Technology, which operates through two government bodies the Telecom Commission and the Department of Telecommunications (DoT). The Telecom Regulatory Authority of India (TRAI) is an independent regulator that reports to Parliament through the Minister. The Telecom Commission performs the executive and policy-making function, the DoT is the executive and policy-implementing body while the TRAI
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performs the function of an independent regulator. Secretary, DOT, is the exofficio Chairman of the Telecom Commission.
17.2 GROWTH OF TELECOM SECTOR IN INDIA

Telecommunications was not perceived as one of the key infrastructure sectors for rapid economic development during the formative years of the Indian economy. The relatively low levels of investment in this sector affected the quality, quantity and range of services provided. In 1998, number of phone connections per 100 persons in India was 2.2 while the world average was 14.26 (World Telecommunication 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, the global wireless revolution has been the principal growth engine in India. For the provision of basic services (fixed line), the entire country is divided into 21 telecom circles, excluding Delhi and Mumbai. Bharat Sanchar Nigam Limited i.e. BSNL (erstwhile Department of Telecommunications (DoT)) provides basic services in the 21 telecom circles, while Mahanagar Telephone Nigam Limited (MTNL) serves Delhi and Mumbai, which are two metro license areas. Table 17.1 shows the list of basic services operators in India , while Table 17.2 presents the subscriber base corresponding to each operator. BSNLs market share has increased from about 80 per cent to 84 per cent between March, 1997 and March, 2003, while the share 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 Maharashtra A.P., Delhi, Gujarat, Karnataka, TN Gujarat, AP, Bihar, Delhi, Haryana, HP, Karnataka, Kerala, MP, Mah., Orissa, Punjab, Rajasthan , TN, UP(E), UP(W), WB Punjab Rajasthan Name of Service Provider Department of Telecommunications, now BSNL MTNL Bharti Telenet Ltd. Tata Teleservices Pvt. Ltd. (earlier Hughes Ispat 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 the 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 distance services, but DoT maintained its monopoly on inter-circle National Long Distance (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 entry 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 controlled 84.8%, MTNL 10.6% and other private operators 4.6% of the fixed service market.
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 35,932,877 MTNL 3,012,324 3,406,740 Nil Nil Nil Nil Nil Nil 3,653,913 13,980 6,070 Nil Nil Nil Nil 4,031,624 91,967 22,110 26,713 Nil Nil Nil 4,327,158 115,212 69,599 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 of 3% over the previous year, during the same period the mobile services including 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 trends 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, millions, 1990-2010
Mobile hashas overtaken Mobile ov ertake n fixed-lines in iCambodia, fixed -lines n Ca mb odia, Finla nd, I tal Korea y, K orea Finland, Italy, Mobile subscribers to to Mobile s ubscri bers ov ertake fixed-line overtake fixed-line worl dwibefore de be fore 20 05? worldwide 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. 1999-2010 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 structural changes in the telecom sector including the move towards unified licensing it is more than likely that this will happen earlier. Private participation in the cellular-mobile market in India has been very successful. Eight cellular licenses, 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 classified as category A, B and C based on market characteristics and telephony potential in diminishing order of attractiveness). For two circles, Jammu and Kashmir, and Andaman and Nicobar Islands, no bids were received, while for West Bengal and Assam, only one bid each was made. A list of existing cellular operators and their area of operation is provided in Table 17.3. The subscriber base crossed 3.5 million
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by the last quarter of 2001, at the end of March, 2003 it reached to about 13 million 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 December 2003 in terms of market shares were Reliance (21.9%), Bharti (19.34%), BSNL (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 Category 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 Bharti BPL RPG Bharti BPL Hutch IDEA Bharti BPL Escotel Spice Comm Escotel Escotel ADL ADL IDEA Reliance Bharti Reliance Reliance Operator 2 Hutch HMTL Bharti Hutch IDEA IDEA Bharti Spice Comm Aircel BPL ADL Hexacom Reliance Reliance Reliance Reliance Operator 3 Operator 4 MTNL MTNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL BSNL Batata Bharti Hutch Reliance Bharti Bharti Hutch Hutch Bharti Bharti Escotel Bharti Bharti Escotel Escotel Bharti Escotel -
Table 17.4: Subscriber Base Cellular Services Category All Metros A Circle B Circle C 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 March '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 7,941,766 9,698,299 7,402,067 1,112,273 26,154,405
Source: www.coai.com
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Activity 1 Visit the website www.coai.com and find out the market positions of the various cellular service providers. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
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 mechanism to facilitate competition. An essential ingredient of transition from a protected 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 competitive environment. In basic telecom, for example, a major departure in pricing of services involves cross-subsidization. Cross subsidization involves providing 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 BSNLs (then DoT) revenue was due to only 13 percent of the subscribers. This can be estimated by calculating the cumulative distribution of subscribers and revenues from Table 17.5. For example, 2.7% of subscribers contributed 46.1% of revenue. The next 2.5% of subscribers contributed 9.8% of revenue, implying that 5.2% of subscribers contribute 55.9% of revenue and so on. One reason for this was the very high price of long distance calls compared to local calls. 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 compared 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 the telephone for only local calling.
Table 17.5: Revenue Contribution by Different Subscriber Groups Share of Total Subscribers 2.7 % (those making more than 10,000 call bi-monthly) 2.5 % (those making between 5001 and 10,000 call bi-monthly 7.9 % (those making between 2,001 and 5,000 calls bi-monthly) 14 % (those making between 1,001 and 2,000 calls bi-monthly) 21.3 % (those making between 501 and 1,000 calls bi-monthly) 51.7 % (those making 0 to 500 calls bi-monthly) The Contribution of These Subscribers to Call Revenue 46.1 % 9.8 % 13.4 % 11.6 % 10 % 8.1 %
Source: Telecom Regulatory Authority of India (TRAI). 1999, Telecommunication Tariff Order.
Traditionally, BSNL (DoT earlier) tariffs cross-subsidized the cost of access (as reflected by rentals) by domestic and international long-distance usage charges. In order to promote desired efficiencies, re-balancing of tariffs is a necessity, and, therefore an important policy issue. Re-balancing of tariffs involves reducing tariffs that are above costs while increasing those below costs. Thus, re-balancing implies a reduction in the extent of cross-subsidisation in the fixedservices sector. Such a rationalization is required as a condition precedent to
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the conversion of a single operator system to a multi-operator one. A small proportion of the subscribers account for a major share of call revenue, and these subscribers would be the subject of competitive churn when private sector operators enter the market. For example, Hughes teleservices (now TATA) targeted the high revenue paying subscribers when it entered the market in Mumbai and made attractive offers to corporates and potential clients in the rich districts of Nariman point and Colaba. Similarly, Bharti in Madhya Pradesh acted likewise in the cities 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 entrants 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 tariffs have to be reduced for the services that are priced much above cost (e.g., long distance and international calls), tariffs for below-cost items need to be increased. Such a re-balancing exercise is common when preparing the situation for competition. Otherwise, competition will result in a decline in above cost prices without any compensating charge in the below cost prices. Cost-based prices restrict the possibility of cream skimming by operators. The methodology of specifying tariffs included the following feature to impart flexibility. For certain services, TRAI specified particular tariff levels while for several others it allowed forbearance. Forbearance is a feature that permits service providers to set their own tariffs without approval from the regulator. Usually it is a practice 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 always be provided to the customer. In addition, the service provider is left free to provide any alternative tariff package. Since the standard tariff package is always available to the customer, any alternative tariff package has to be better in order to attract any customer. Therefore, the standard tariff package provides a minimum guarantee to the customer. In one sense, it specifies the peak expenditure level for the customer, with the alternative tariff packages being attractive 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 tendency in telecom markets to provide different tariff combinations for various baskets of services. Thus the standard tariff package could be viewed as a ceiling tariff, with operators free to provide alternative tariffs that were below this 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 reduced and rentals were increased. The methodology clearly included license fee as costs and showed that a high license fee translates into higher tariffs. Standard 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 packages which resulted in lower tariffs. The possibility of giving alternative tariffs provided a means of addressing several concerns. Over time, with greater competition in the market, tariffs for long distance calls and for cellular mobile have seen dramatic declines within such a framework. The reduction in tariffs has 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 telecom market is emerging with very strong competitive pressure.
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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 provided, based on the digitisation of all signal-transfer technology. As the manner in which signals are transferred from one location to another becomes common, it is possible for a service provider in one segment of telecommunication, say network television services, to perform the functions of another, say, the local phone company. Efforts to maintain barriers across such segments will eventually be overwhelmed by technology. Regulation will follow convergence rather than the other way around. Convergence will eliminate the existing barriers between different 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 for 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 were issued for private sector participation in basic services. In January 1995 tenders (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 Rajasthan TN U P (E) U P (W) WB Mumbai Kalkatu Delhi Chennai Number of Basic players 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 November 1994. In December 1994 tenders were invited for 19 circles apart from 4 metros. In most of the circles/metros two operators began service, making the market 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 above demonstrates that the telecom sector in 1997 was dominated by the government owned monopoly, with a few private operators in the cellular mobile segment. Teledensity was low and prices were relatively high. Although the market had been opened to competition in the basic and cellular segments, the structure remained 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 divided into DTS (Department of Telecom Services) for service provision and DoT for policy making. In the year 2000 DTS was corporatised as BSNL, which is the name under which it operates today. Until June 2001, there were only 6 private operators in operation apart from BSNL (operating all over India except Delhi and Mumbai) and MTNL (operating in Delhi and Mumbai). During this period, existence of private operators did not provide adequate competition to force down prices. There was virtually no competition in Basic services. As on 31st December 2003, share of private operator in basic service market was less than 5%. Licence for 3rd Cellular operator was granted to the Government owned service providers, BSNL & MTNL. MTNL started its Cellular services in 2001 while BSNL started its services 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, MTNLs 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 also started service along with BSNL in the year 2002. As one would expect, the entry 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 in the market, costs and extent of competition, TRAI decided to introduce forbearance 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 market structure has also undergone a significant change. Unlimited entry of new players has been allowed in basic, NLD, ILD, ISP and infrastructure businesses. Cellular mobile has upto 4 operators in each service area. As a result of these changes, the sector presents a very different picture from the one that obtained in 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 operators 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 business. One early casualty is going to be the most conventional way of looking at the 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 significant presence across the value chain. The Tata Group, Reliance Infocom and Bharti Televentures have announced plans to emerge as integrated telecom companies offering end-to-end services to customers. Hutchison, on the other hand, appears to be focused on cellular services, with no stated intention of entering other businesses. The VSNL acquisition has catapulted the Tata Group to the leading position among private Indian telecom players. With a 100 per cent share in the lucrative ILD business, a leading share in Internet services, and a favourable NLD license, VSNL fits in perfectly with the groups plans of providing integrated telecom solutions. The Tata-VSNL team will now embark on its next challenge - ensuring a smooth transition at VSNL and integrating business plans for ILD, NLD and Internet/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 and some may be subjective. While different methods may result in different estimates, 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 depending 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 telecom is the widespread use of multi part pricing i.e. a fixed monthly rental for access to the service and a variable charge depending upon usage and the nature of calls. Moreover service providers have attempted to segment the market according 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, TRAI did a study on trends in tariffs for Fixed, Cellular and WLL (M) services. The following graph shows the results of that study.
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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 the minimum tariffs prevailing in the market at various points of time for average local usage of 400 minutes (outgoing + incoming). As stated above, tariff decreases have been an unmistakable feature of the telecom market in India over the last few years, although different analysts could come up with different estimates depending on the methodology adopted for the purpose. b) Innovations in Tariff offerings Technological progress has blurred the boundaries between different platforms for access services. Thus, competition is not only within the service but also between the services, viz, cellular and WLL (M). One manifestation of this competition has been examined in the previous section on tariff declines. Another is the frequency of change in tariff plans offered by operators. Not only is 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 subscribers is pass; customer retention has become vital. c) Bundling of services Another interesting change in the sector is the multiple licenses owned by a single company. As stated earlier, India has issued separate licenses for Basic, Cellular, NLD, ILD, ISP services. In view of the fact that a single operator has acquired multiple licenses and can thus offer multiple services, one of the innovations that have occurred relates to bundled offers. An integrated operator (Integrated operator means that one business house possesses cellular or basic i.e. access, NLD, ILD and ISP license. This enables the service provider to offer end-to-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 offers are described below.
CUG (Closed User Group) : Forming a group of customers where the calls within group are either not charged or are charged very low and the calls made outside the group are charged higher. Friends and Family : Unlimited free talktime to a selected number for a cost of a fixed monthly charge.
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Free VAS (Value Added Services): such as SMS, CLIP free with certain tariff plans. Unlimited usage free: Tariffs with high monthly rental and unlimited free usage. This may attract the high callers and this type of packages also ensures a minimum ARPU (Average Revenue per User) to the service provider. Zero Rental: Packages with no or zero rental and high calls charges. This type of package may attract very low users, who want to own a phone but use it very rarely. Prepaid plans 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 fullest. Plans to lock customers for a longer period of time: Tariff plan for minimum commitment of 3 years. Although it provides a facility to the customer to exit 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 low monthly cost ranging between Rs. 70 to Rs. 150, customer can receive any number of calls. Also if someone wants to make outgoing calls, he can use VCC (Virtual Calling Card). It is a perfect substitute of pager or may be one step ahead.
The 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 immediate gainers are the consumers, especially users of mobile. Activity 2 Try to find out examples of bundling in other industries (sectors) in India. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
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 service (QOS) to be provided by the service provider and ensure the Quality of Service 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 could argue that in a competitive environment, Regulator need not bother about QOS Parameters 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 comments and open house discussions, TRAI issued a QOS Regulation on 5th July, 2000 both for Basic as well as Cellular Services. This Regulation has laid down benchmarks for various QOS parameters with the following objectives: 41
i)
Create conditions for customer satisfaction by making known the quality of service 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 time to time and to compare them with the norms so as to assess the level of performance. To generally protect the interests of consumers of telecommunication services.
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 telephone after registration of demand for exchange areas declared on demand : 100% within 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 Completion Rate within a local network: >65% Metering and billing credibility: Not more 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) Additional facility : < 24 hours Percentage of repeat faults: <1%
ix)
QOS Parameters for Cellular Services On similar basis QOS Regulation have been laid 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 down 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% Percentage of connections with good voice quality : >95% Billing complaints per 100 bills issues: <0.1% Percentage of billing complaints resolved within 4 weeks: 100% Period of all refunds/payments due to customers from the date of resolution of 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 services provided by the service providers (for the period Oct. Dec. 2003) following issues emerged. a) The basic services being provided are not upto the desired standards. The situation is particularly bad in respect of provision of new connection within 7 days, number of faults per 100 subscribers per month, time taken to repair faults, and time taken to shift connections and closures.
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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 service. 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 available on TRAIs 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 parameters given in this section. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
17.7 SUMMARY
This unit gave you an overview of fixed line and cellular mobile industry in India. 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 prevailing in the industry. Issues related to pricing (tariffs) have been discussed in detail. The unit ends with the service quality parameters relevant to telecom service providers.

1. 2. 3. 4. Discuss the major trends in the growth of telecom sector in India during the last few years. What are the important issues that should be kept in mind while deciding on the pricing issues for telecom services? Explain the nature of competition prevailing in the telecom industry in India. What are its implications for the telecom firms? What is bundling? Why do you think bundling has emerged as an important aspect of customer pricing, especially in context of telecom service provision inIndia. Do you think bundling is always in customer interest? Give Reasons. What are the service quality parameters for basic telecom services 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 Bids invited for radio paging services in 27 cities Bids invited for cellular mobile services in four metro cities National Telecom Policy announced Radio paging, V-SAT data services, electronic mail services, voice mail and video text services opened to private providers DoT guidelines for private sector entry into basic telecom services in the country Eight cellular licensees for four metros finalized after over two years of litigation 1995 DoT calls for proposal to operate basic, cellular telecom services and public mobile radio trunked (PMRT) services DoT receives bids for basic, cellular and PMRT services Most cellular operators in circles sign license agreements DoT announces cap on the number of circles basic operators can roll out services in. Licensees selected for five circles. 1996 After setting reserve prices for circles, DoT invites fresh bids for basic services in 13 circles Five successful bidders short-listed for providing basic services 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 guarantees for its four circles. Challenges in court DoT move to encash guarantees. Three more companies move court against DoT move to encash guarantees. 1997 Telecom Regulatory Authority of India (TRAI) formed. First basic telecom service company signs license and interconnect agreements with DoT for Madhya Pradesh Second basic service provider signs basic telecom license pact for Gujarat TRAI quashes 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 regional hub project Internet Policy cleared; license agreement for basic services in Maharashtra also becomes operational Basic service licensees for Andhra Pradesh and Punjab sign basic telecom agreements with DoT. 1999 TRAI Issued First Tariff Order. New Telecom Policy announced. TRAI Issues First Regulation on Interconnection and Usage Charge Conditions for migration to revenue sharing from fixed license fee regime issued Cellular operators allowed the use of any digital technology;MTNL given a license to provide cellular mobile service under these flexible technology conditions. 2000 Ordinance promulgated divesting TRAI of adjudicatory role. TDSAT created to settle disputes between licensor and licensee. Appeals against TRAI decisions to be heard by TDSAT. TRAI implements second phase of tariff re-balancing
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Policies announced for easier entry/operation of new service providers in the various sectors, e.g., VSAT, PMRTS, Radio Paging, Unified Messaging, Voice Mail Government has allowed the setting up of international gateways to private internet operators Guidelines for Issue of Licence for National Long Distance Service Guidelines for Issue of Licence for Cellular Mobile Telephone Service 2001 Guidelines for Issue of Licence for Basic Telephone Convergence Commission of India Bill laid in Parliament. Open competition policy announced for International Telephony Service Usage of Voice Over Internet Protocol permitted for international telephony service First License for National Long Distance service signed Launch of WLL(M) services by Basic service provider in the market 2002 Guidelines for Issue 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 providers to notify their Reference Tariff plans TRAI introduces the Reference Interconnect Offer (RIO) regulation TRAI introduces Regulation on Quality of Service For VOIP Based International Long Distance Service 2003 TRAI introduces the Telecommunication INTERCONNECTION USAGE CHARGES (IUC) Regulation TRAI leaves NLD sector left under forbearance subject to a ceiling tariff TRAI leaves ILD sector left under forbearance TRAI mandates Basic Service Operators (BSO) to be non-discriminatory in provision of Infrastructure facilities to ISPs TRAI gives its recommendations on unified licensing for basic and cellular mobile services TRAI gives its recommendations on WLL(M) Issues Pertaining To TRAI Based On HONBLE TDSATS Order TRAI Forbears Basic Service Tariffs Except Rural Tariffs
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Appendix 2 : Key Features of NTP 99 Some of the notable advances marked by the NTP 99 are as follows:
Speeding up competition in long distance, including usage of the existing backbone network of public and private entities in Rail transport, Power and Energy sectors for data (immediately) and for domestic, long-distance voice communication when the latter is opened to competition from January 2000. This increases the scope for entry of a new category of infrastructure providers or carriers carrier. Fixed Service Providers (FSP) shall be freely permitted to establish lastmile linkages to provide fixed services and carry long-distance traffic within their service area without seeking an additional licence. Direct interconnectivity between FSPs and any other type of service provider (including another 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 Offices (PCOs), wherever justified, into Public Teleinfo centres having multimedia capability like Integrated Services Digital Network (ISDN) services, remote database access, government and community information systems etc. Transforming, in a time-bound manner, the telecommunications sector to a greater competitive environment in both urban and rural areas providing equal opportunities and level playing field for all players. Strengthening research and development efforts in the country and provide an impetus to build world-class manufacturing capabilities. Achieving efficiency and transparency in spectrum management. Commitment to restructure 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. Permission for resale of domestic telephony. Clarity regarding number of licenses that each operator may be granted. (This could lead to consolidation of industry operators over the long term). Emphasis on certain other issues including Standardisation, Human Resource Development and Training, Disaster Management and Change in Legislation.

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UNIT 18
Objectives
PRODUCT SUPPORT SERVICES

understand the concept of product support services; describe the different categories of product support services; 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 Support Services Classification of Product Support Services Goal of Product Support Services: 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 services which is important for goods as well as services marketers. After sales Service 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 service oriented organization every one is accountable for the customer satisfaction. It is the job of every marketer to create satisfied customer. In many organizations product support service or customer service is a department or a section where customers with complains are guided for a reactionary solution to the problem 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 part of the corporate culture .It should be the fundamental aspect of a business philosophy 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 customers to the stores where as poor customer service takes them away from the store and the brand. The product support service is a value-added service to match the customer expectations. It is also necessary to know what consumers value in the product support services. They can be grouped as quality, availability, knowledge of the people with whom they work, ease of doing business, support services, 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 element of price in a post purchase situation. So though the performance of the product support service staff one can also increase the profitability and profit potential of the organization. There are various myths about product support services and their lesser relevance in the Indian context. They are because Indian marketers think that good customer service is time consuming. The research speaks otherwise. It
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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 serving 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. There 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 always prudent to benchmark against evolving customer service expectations than benchmarking against competitors in the industry. In a surplus demand market, the marketer does not care for the concept of customer service as he realizes that the customers are going to come to them anyway. A strategic outlook to the business 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 requirements. Develop appropriate products and services to meet those needs which are consistent with your business strategy and profit objectives. Match the product to the needs, with appropriate prices, channels of delivery, presentation and communication to the consumers. Develop and maintenance a continuous service process 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 what constitutes after sales service and how are they satisfied with their products ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
18.2 CHARACTERISTICS OF PRODUCT SUPPORT SERVICES

Most companies in manufacturing and service business offer their customers a package 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 differentiation that separates successful firms from the also-rans. Performing well in service delivery requires modern marketers to understand.

What action and reaction consumer expect from the organization. Grouping of these actions in to core and 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 expectations for performance and value within the constraints of a price that will allow the service provider to have an allowable profit.
The concept of an augmented 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 we 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 product, representing customers minimal expectations, It includes pricing, delivery, appearance of facilities and personnel, personality of the service people and so 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 becomes accustomed to specific augmentations, these may eventually turn to the expected product level. The area encircling the outermost concentric band is called the potential product. Which consists of everything potentially feasible to attract and hold customers in contrast to the augmented product that means everything 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, service frequency and preflight, in-flight and post flight services. The aircraft, food and drinks that are served are tangible. By highlighting the tangible components marketers can determine whether the organization is tangible dominant or intangible dominant. The performance of each service influences the quality of the others, the product support services should contribute to the over all service perception. It is necessary to obtain information about consumers over all satisfaction on core as well as split services. Management must decide what is the right 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 period 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 categories. Product Support Services
Information
Consultation
Ordering
Hospitality
Safekeeping
Exceptions
Billing
Payments
1.
Information: New customers and prospects need information to make decisions about a product. They want to know what product will best meet their needs. The existing customers also need information regarding the usage, maintenance of the product during the life of the product. The prospects in on line buying also need information that will guide them to move to the site that will provide information to them. Traditional ways to provide information is through the support literature, 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 messages. 49
2.
Consultation: Providing information suggests a simple response to customers questions. Consultations involve dialogue to probe customer requirements and then develop a tailored solution. The services under consulting covers advice, auditing, personal counseling, tutoring and training in product usage, managing or technical consulting. The solution selling approaches by software measures is an example of technical consulting in software markets. Order Taking: Once the selling process 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 card companies and clubs. A reservation is a special type of order taking which entitles customers to a special type of order taking. Examples include the airlines, cinema halls, and restaurant tables. Hospitality: Certain service requires customers to enter the service factory and stay there till service delivery is complete. Well-managed businesses try to treat the customers as guests. Examples of hospitality elements include greeting, food and beverages, toilets and wash rooms, bathroom kits, waiting facilities and amenities, including lounges, waiting areas, seating facility, weather protection, magazines, entertainment and newspapers, transportation and securities. Airlines, Service stations, personal service providers follow this kind of an orientation in business. Safekeeping: While visiting a service site customers want assistance with their personal possessions. Unless certain care taking services are provided, they might find the support services infeasible. The examples of safekeeping include provisions for the coatrooms, 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 services of this nature may include packaging; pick up, delivery, assembly, installation, cleaning and inspection. Customers buying consumer durable are also looking for safekeeping in the form of maintenance and warranty and whether they can purchase the maintenance contract as a part of insurance. Exceptions: It includes a group of services that fall outside the routine of the normal service delivery. The exceptions include special request where individual or corporate customer may request some degree of customized treatment that requires a departure from the normal operating procedures. Advance requests include personal concerns related to stages in life cycle or personal disabilities. Problem Solving involves situations when normal service delivery fails to run smoothly as a result of accidents, delays, equipment failures or customers experiencing difficulty in using the product. Handling of complaints/suggestions/complements requires well-defined procedures. When the consumer wants to express dissatisfaction, offer suggestions for improvement, or pass on compliments, it should be easy for the customer to do so and the service provider should be able to respond at the earliest to these problems. Restitution is the process by which the customers are redressed. Customers expect to be compensated for serious performance failures. This compensation may take the form of repairs under warranty, legal settlements, refunds, an offer of free service in the future or other forms of payments in kind. Billing: It is common to almost all services unless the service is provided free or as a part of the deal. Inaccurate, illegible or incomplete bills offer an opportunity to disappoint customers. Billing should be also done timely so that it will result in faster payments. Various forms of billing procedures exist including verbal billing practices to machine driven billing procedures
3.
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and online billing procedures. Different kind of billing services include periodic statement of account activities, invoices for individual transactions, verbal statements of amount due, machine display of amount due, selfbilling by the customer and the online billing. 8. Payments: A bill requires a customer to take action on payment either on personal basis or through the bank advice. Customers expect ease and convenience of payment including credit when purchasing goods. The payment elements include self service, direct to payee or intermediary, automatic deductions from financial deposits and control and verifications. The self service include exact change in machine, cash in machine with change returned, insertion of prepayment cards, insertions of tokens, electronic fund transfer, mail a check. Direct to payee or intermediaries include cash handling and change giving, check handling, credit charge, debit card handling, coupon redemption, tokens and vouchers etc. Control and verification include automated systems like machine-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 mature 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. In a competitive environment, with frequent new product introduction, merely meeting expectation may not be sufficient Organizations that challenge themselves to exceed rather than meet expectations are more likely to pleasantly surprise their customers, cement loyalties, and invest in developing new products and processes that enhance customer value. The exceed definition is compatible with the definition of customer satisfaction meeting the customers stated and latent requirements. Customer expectations are a function of the past experience with the companys products and competitors products and communication messages from the company and its competitors. If expectations are hard to match then performance is much more within the companys control for managing customer satisfaction level. The organization first identifies the components of product or service performance that are especially valued by its target customers and then deliver superior satisfaction on those dimensions. Activity 2 It is said that most of the Indian organizations provide very poor quality of after sales service. Make it a point to visit 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 managers by asking a question what is the meaning of customer satisfaction for their organization and how do they measure it with their customers. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... 51
Quality is a concept related to the attitude of the customers and their comprehensive evaluation of the product support services. It is built up from a series of evaluative experiences of the service delivery of the organization to the customers. The quality of a product support service can be only accessed after the service 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 personnel. Customer satisfaction with service quality can be defined by comparing perceptions of service received with expectations of service desired by the consumers. When the expectations exceeded, service is perceived to be of exceptional quality and also to be a pleasant surprise. So dimensions of service quality refers to process quality as judged by consumers during service and output quality judged after a service is performed. Parasuraman, Zeithaml and Berry suggested that the criteria used by consumers that are important in molding their expectations and perceptions have five dimensions viz. Reliability, Assurance, Responsiveness, Empathy and Tangibles. These have been discussed in detail in Unit 8 on Service Quality. There are four key factors that can influence a customers expectations, which may help customers in shaping their expectations of a support service
Word of Mouth Communication: This is the communication that flows from one person to another in a social loop and helps in formulating service quality perceptions. Personal Needs and Preferences: The relative importance that the person gives to the product support service as an essential part of the offer also influences the service perception Past Experience: The customer expectations also depend upon past experiences with the service provider of the customer. External Communications: External communication like advertising, public relation and other publicity tools also influence the quality of service perception
There are various issues involved in the quality of product support service productivity. The managerial task is to transform the service inputs in to outputs, to bring a balance between the productivity of services and quality of services. If the productivity will increase then there is a chance that the quality will be compromised. Productivity helps to keep the costs down as lowering prices helps in building the 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 gaining competitive advantage particularly in a commodity market where every product looks similar. It also helps in increasing customer value that contributes towards improving the bottom line. The quality of the product support service is measured by three parameters. They are efficiency, effectiveness and productivity. Efficiency is a comparison to a standard, which is usually a time-based phenomenon that explains how long the employee, takes to perform the service function. Effectiveness is the degree to which the firm is meeting its goals where as productivity 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 customers expected supports services against the perceived services as a routine feed back process. Zeithaml, Parasuraman and Berry developed a model which suggest that customers becomes dissatisfied when their perceptions about service performance dont match their expectations and the model explains five gaps that can lead to customer dissatisfaction. The Gaps Model has been explained to you in Unit 8 (Block 3).
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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. ........................................................................................................................... ........................................................................................................................... ........................................................................................................................... ...........................................................................................................................
18.5 SUMMARY
In this unit we have essentially looked in to the issue of product support services for the organizations. The complete product solution constitutes an intangible component to augment the physical product in the form of product support service. The objective of any product support service is to create a satisfied and loyal set of customers who will rebuy the product as well as get involved in cross 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 delivering higher quality. There are various types of product support services like information, ordering, hospitality, safekeeping, exceptions, billing and payments. These services help in building higher level of customer satisfaction. The level of satisfaction largely depends on the type and quality of services provided to the customer. Research has identified five key and independent dimensions of service quality. They are reliability, responsiveness, assurances, empathy and tangibility of services. A service provider has to give attention to these dimensions failing which there can be service quality delivery gaps.. A suitable understanding of the service quality gaps can help a manager to develop strategies to maintain service quality and achieve greater customer satisfaction.

1. 2. 3. Describe the concept of product support services? What is the importance of these services for marketers of tangibles? What are the various kinds of product support services? Discuss with the help of examples. What is the goal of any 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 market. The company markets a wide variety of products in the market. It started as 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 and markets a range of products starting from the locks to refrigerators, edible oil, office equipments and furniture, manual and electronic typewriters, store wells and computers in Indian market. The company has a sister concern which concentrates in to soaps only and is a leading player in the Indian soap market. They manufacture and market both washing soaps and bathing soaps. The company has its headquarter in Mumbai, the commercial capital of India. 53
Mr Chintamani Rao is the CEO of the computer and office equipment division. Recently the company has conducted a study and has identified that multinationals and some Indian joint ventures are making inroads in to its office equipment and furniture 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 typewriter market, be it electronic or manual but due to rapid adoption of computers, the 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 equipments for this emerging market segment in Indian market. They started an ambitious program to become the market leader in the office equipment and computer business 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 support 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 manufacturers. Taking quality and customer satisfaction as the strategic goal and undertaking cost reductions, restructuring of the organization and introduction of 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 tactical. 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 product support service and consumer satisfaction program or modify any of the existing programs for better service delivery. The Office Computer Market In India The penetration of personal computers in Indian market has been very slow at the household level. The total sales were confined to the upper class Indians. Various factors are attributed to this phenomenon. The disposable income level of average Indian, the concentration of the purchasing power in urban centers, the level of adoption of computer education in the school and college curricula, the career opportunities in the filed of computers, application of computers and computer related technology in the business domain are some of the factors that contributed to the poor penetration of personal computers at the household level. However there was a big change happening in the business area. Companies were eager 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 the Indian market through both organic and inorganic route. There were takeovers and buyouts in Indian markets where the multinationals were buying Indian companies with substantial business presence for inorganic growth. Large corporate houses were either undergoing joint ventures or increasing their market presence by expanding and restructuring their organizations to suit to the liberalized competition. These kinds of anthromorphic changes made the companies to invest substantially in information technology infrastructure. There were two kinds of investments seen in the organizations viz. huge investments in procuring the hardware and also for procurement of software.
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Market Segments and their Characteristics It was this kind of investment on hardware where DBCL saw an opportunity to grow with its office equipment and computer business. The total market for office equipment was largely divided in to three 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 providing 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 the concept of product support services. So local small time vendors who were doing assembly of components and selling computers at a lower rate and providing after 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 markets. The mid tier consisted of offices whose requirements were more than ten but less than twenty-five personal computers. These business houses were conscious about 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 customers. There were low end players like Zenith, Piramals in western Indian market, Monosoft 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 advantage in these markets for the medium operators where their brand name did not play any role. The top tier consisted of large corporate houses who were going for a large scale investment and information technology restructuring in their organizations, not only by buying hardware but also investing substantially on software, operating systems, servers and solution providers like SAP and other supply chain and customer relationship management software. The companies were investing 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 that 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 operations. The companies were looking for quality product support services as the key differentiation in business due to high level of commoditization in the hardware product market. Profit margins in this market were quite high, so also the demands of product support services. Many companies were providing different kind of warranty schemes also to attract the customers including onsite service by the vendors. DBCL looked in to this market for quality hardware provider because 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 competitive. At the low end were the unbranded local players who were providing excellent support services due to the small market size and closeness with the customer and the price advantage. On the mid segment the customers were bargain hunters 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 purely 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 the market was quality conscious and was mostly dominated by players like IBM, Compaq, Apple, Dell, LG, Samsung, HCL and of course DBCL. The customers were more sensitive to services and valued the quality and type of service as the key differentiator before making a purchase decision.
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DBCL saw an opportunity to grow in this market and regain its market share but Mr Chintamani from his market visits was not sure about the perception of customers 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 provide the computer related products to the existing customers who are using DBCL products 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 marketing computers. He had a faint idea that the customers dont 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 research on these issues and in order to get a neutral view contacted Prof Tapan K.Panda (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 research 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. Historically the low wend of the market was serviced by the dealers and distributors and 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. So the priorities for the company in its new vision statement was to achieve a higher return on investment, market share and customer satisfaction. The earlier customer 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 discussions platforms in the organization. He issued a set of guidelines and requirements to make customer satisfaction as the key goal of the organization, to all its operating units. Operating units were asked to prepare their own strategies to achieve the goal of customer satisfaction through voluntary quality circles. He insisted that a common and uniform measure should be used across the country for measurement of customer satisfaction. The units were allowed to conduct their 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 from the current level on all the dimensions of quality. The top managers were trained to become quality leaders and role models for the subordinates on service behavior to the customer. They should personally take the lead and satisfy customer requirements and resolve customer complaints by themselves. It was also the responsibility of all the executives in the hierarchy to develop a responsive mechanism and attitude at each level towards customer problems. Each customer interaction was treated as an opportunity to enhance the experience of customers with DBCL. Customer relations groups were initiated at each level to have direct customer contact and do the follow up for finding out reasons of customer dissatisfaction and to resolve customer objections at the earliest. The perceived benefits of the customer relations groups were to
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stay closer to the customers, having a cross functional outlook to customer issues and having a closed loop process to identify problems, to conduct a root cause analysis, and provide recommendations for avoidance and elimination of the customer problem. The staffs at the local level were empowered to take collective action for enhancing customer satisfaction. Attempts were also made to establish customer support teams for post sales follow up and customer complaint management systems across the organization. The customer satisfaction were measured by the external customer satisfaction data collected through a mail questionnaire method from the customers who had obtained services in a month time from the service personnel and internal quality workshop improvement programs done at various levels of the organization. The external data collection was done through periodic survey, new establishment surveys, opinion of the decision makers as well as that 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 bench marking the processes and standards set for the purpose. All the research results were made available to the service employees to build their awareness and commitment 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 in DBCL has brought very good results but he was planning to take the strategy further and delight the customer by outsmarting the competitive benchmarks through the introduction of a new customer guarantee program. This satisfaction guarantee program will lead to greater customer satisfaction and higher loyalty rate among 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 with a guarantee program that will be difficult for the competitors to compete. (You may also refer to Unit 10 wherein issues related to service guarantees have been 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 is 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 better 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 in the next deal. The third option is a product performance guarantee in which the 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 then the customers can trade it in for full credit towards any other product as desired 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 cost very heavily to the company. Yet Mr Chintamani was sure that the board will definitely approve the idea that quality of the customer service should be the
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differentiator in the market where customers are quality conscious and market is slowly moving towards commoditization. It is the over all experience of the solution and not the physical features of the product that will drive the brand value and business profit in the future. IIMK conducted research for DBCL on the above propositions. They conducted both qualitative research through focus group and in depth interview of the existing customers and a personal survey in selected cities of India having corporate headquarters of large concerns. Some key issues came out of the study that include the credibility of a guarantee program. Customers are of the opinion that any body can offer a guarantee program but customers 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 in delivering it to the customers. The length of the guarantee is also an important factor. If the guarantee is for a year or two then in a durable like computers and office equipments, it is treated as a sales plea. If it is offered for a longer period of time then the customer must be indirectly paying a premium for the purchase. For the service guarantee, the time taken to respond to the customers problem and the down time of the machine at the customers point will be the deciding 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 service through paying the cash back to the consumers than solving the problem. Again 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 customers. The product performance guarantee should be provided at the customers request than by the company policy and company should not ask any questions for the same 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 dropped the idea of money back guarantee as it shows a lower commitment to the service quality and he also decided against the product fit as it was not preferred by customers. A guarantee program should not be a replacement program. It should 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 left 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. He has to suggest what kind of customer guarantee program DBCL should offer to the market. Questions 1. 2. 3. 4. What problem DBCL is facing in this case? What factors have contributed to such a situation for the company? Evaluate the options available to Mr. Chintamani for developing the customer guarantee program? Should 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 suggestion a successful strategy in building customer loyalty and goodwill for DBCL?
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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; provide suggestions for decision making in relation to the main and attendent issues 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 complaints he did? How do you interpret the difference between the accounts rendered 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 Insurance 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 perspective 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 as the Regional Manager, he called a meeting of all Divisional and Branch Managers, to share his views on Challenges for Insurance Industry. Since then, all was going fine until he received an angry letter (Exhibit 1) from Mr. Chawla who was disgusted 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 reply came back (Exhibit 2). After reading the observations made by the ABM he raises his head and wonderswho is right? Where should the company draw the line on compensation and service? What is the best way to handle cases of complaining customers? He thinks for a while and then reacts. He has a few challenges ahead. EXHIBIT 1 The Regional Manager ABC Insurance Company Ltd. Chandigarh. Sir, I am angry, frustrated and a disappointed ex-customer of your company. Prior to the recent set of events, which have really put me off, I viewed your company to be the best. Hence, although your companys Branch Office is far off from my place I opted doing business with you. Not only have I insured my
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vehiclesa car and a scooterwith your company, but am also a holder of your household and mediclaim policies. It all happened this way: July 28: Your Development Officer, Mr. R.K. Singh came to my place and informed me that the insurance policies 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 also 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 to Chandigarh on 6th evening I enquired from my son about the cover note of my renewed policy. I was told that he has not received any policy or a cover note from Mr. R.K. Singh. August 7: On August 7 I rang up your branch office and enquired for Mr. R.K. Singh. I was told that Mr. Singh is in the field and the Branch Manager is on one month leave ending on August 30. The same day my son met with an accident. Although he escaped unhurt, my scooter was badly damaged. As Mr. Singh 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 enquiring whether my vehicles were insured on the 30th of July or not, he very apologetically informed me that although the policy was drawn on the 30th of last month it could not be delivered, as he was extremely busy with his sisters marriage. I thanked 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 loss. 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. August 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 did he not send the surveyor in the last three days? Anyway, he assured me that the surveyor will visit my place the same evening and the surveyor did come. August 20: I called the Assistant Branch Manager from work and enquired about the progress made in my case. I was told that the surveyor has not yet submitted his report. 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 the report but has informed him that the loss is to the tune of Rs. 800/-. You know sir, I was shocked. I was shocked because any one could look at my scooter and 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 issue 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 promised to get the surveyors report by then. I agreed to it.
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August 28: Instead of attending to my office I reached the branch office at 10.30 AM sharp only to be told the ABM is away to the Regional Office and shall be back 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 ABM was not there. I left a message for him that he should speak to me on 25468 the moment he is back. No call came from the ABM. August 29: Instead of going to my office I again visited your branch office and fortunately met the ABM. I expressed my displeasure at the treatment meted to me at his hands the day before. Shockingly, 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 problem of claim assessment. Sir, is it the way that your company treats customers? If he could not get the surveyors report by then and could do nothing about my problem 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 saidI could meet the Branch Manager as he was joining on the 31st but he will also not be able to do anything about it. Your ABM was so unprofessional, that he also remarked that all customers estimate their losses on the higher side. What did he mean by this statement? 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 nothing else but walk out of his office, with a hope to meet the Branch Manager on Monday 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 contact him the day after. September 3: I called the Branch Manager from work. He informed me that the actual loss assessed by the surveyor is Rs. 1,300/ and not Rs. 800/. I blessed my stars. Thank God, something was moving in the positive direction. 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 asked 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 the 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 ABM. Your ABM informs me that the claim could not be settled as it had to be reassessed.
Case Studies
Sir, I lost my temper and enquired your ABM about the whole reassessment businessOffice confidentials can not be shared with customers was your ABMs reply. Helpless and frustrated as I wasI left his office telling him that if he wants my business back hed better contact me. Sir, that was more than two weeks ago and I havent heard from your ABM. I 61
am outraged at this entire episode, by the way your company treats its customers, by ABMs conduct, by the lack of communication and by the ridiculous system of working 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 work, 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, This is in response to your letter requesting detailed information on customer complaint of Mr. Rajesh Chawla. I read Mr. Chawlas letter and reviewed the whole case. I am convinced that this office made all efforts to set things right for Mr. Chawla, although he may not accept it. Nevertheless, should you feel that we have fallen short of companys 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 make you aware of some mitigating circumstances which I can share only with you and not with the customer. Unfolding these shall help you understand the case more accurately and fully. 1. That the customer received the covernote of his insurance 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 lapse we have instructed the Development Officers accordingly. Although, the company should not appoint surveyors of customers choice, after years of experience we 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. Chawlas loss on the following grounds. a. Mr. Chawla expressed his wish to our Development Officer (Mr. R.K. Singh) that if possible Mr. Jaiswal 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. Jaiswal to complete the survey early and to the customers satisfaction. 3. Why Mr. Jaiswal could not perform survey on August 8, 9, and 10 (Fri, Sat and Sun) needs some explanation.
2.
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On August 8, the day Mr. Chawla intimated Mr. Singh (Development Officer), about the accident I called Mr. Jaiswals 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 left clear instructions with her for Mr. Jaiswal that he has to perform a survey the moment he is back. I also left Mr. Chawlas address with her. As a follow up measure when I rang up Mr. Jaiswals residence on Aug 9 (holiday) I learnt that he shall be back from Pathankot only by Monday
morning. At this, I could have appointed some other surveyor even on a holidaybut 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. Chawlas gripe concerns 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 Divisional and Branch Managers the following day at 10 am, in your office. As I was acting BM then, I had to set prioritieseither to attend the meeting or to attend to Mr. Chawla. I chose the former as it was your first day in office as Regional Manager 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. Chawlas contact number nor was he listed in the telephone directory. Hence, I could do nothing 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 delayed 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 telephone 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 closed by then. Sir, as you can tell from the tone of Mr. Chawlas letter, he is a very 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 27. 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 conversation with Mr. Jaiswal that he expects the loss to be to the tune of Rs. 800/ to Rs. 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. Necessary 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 companys standing policy. As Mr. Jaiswal was black listed as a surveyor by our regional office on October 1 we have sent all pending claims assessed by Mr. Jaiswal for reassessment. Mr. Chawlas letter has several misstatement of 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 about his problem of claim assessment. My statement was Although we do not interfere with the surveyors 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. Jaiswals 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 losses 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 confidentials can not be shared with customers. My statement was although there is nothing confidential, we do not generally share such information with customers. Above all, I made it clear to Mr. Chawla that Mr. Jaiswal is blacklisted.
Case Studies
5.
6.
7.
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7.
Agreed, I have maintained silence for two weeks since his last visit to our office. This is because I strongly believed that: a. Mr. Chawla just did not want to see mehe 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. Hence, I felt it would be better that the BM comes back from his training and sorts out the issue.
If Mr. Chawla is unhappy with the idea of reassessment and delay in his claim settlement, I can suggest nothing to rebuild his confidence in us. His demand to recover 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 we also not protect the interest of the company? Should we mind losing business of 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 the service process, as applicable to the service in question; analyse the issues of distribution and delivery as relevant to this service. After going through the case you are expected to define the basic issues in the case; analyse the information given in the case to attempt the following.

Discussion Questions 1) Comment upon the service offer as conceptualised by Mr. Narayanan. How are the issues of service product standardisation and service quality addressed by the service concept? Suggest possible launch strategy for Dosa King. Evaluate the price and distribution strategies decided by Mr. Narayanan. Do you think he should go ahead with the franchising option? Give reasons for your answer. How do you assess the success of this service concept? What do you think would be a better course of action for Mr. Narayanan, allowing Dosa King machines to be operated from established restuarants or insisting upon separate booths independent of the restaurants.
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 Masala Dosa outlets serving a standardised, economically priced masala dosa in a fast food environment.
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Starting with this concept, he conceptualised a machine that would manufacture dosas automatically. A company was registered under the name and style of Indian Food Fermentations Limited and work commenced upon developing the automatic Dosa Maker. A year later, after over 5000 man hours of R & D effort, a machine was evolved 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 dollop of masala would drop onto the dosa and the dosa would be automatically folded 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 and supplied to the numerous outlets all over India. The company plans to give the dosa making machines on lease to franchisees all over India and eventually also enter markets in the Gulf and SE Asia where large Indian ethnic communities exist. A promotion is planned on a co-operative basis with the franchisees. Mr. Narayanan 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 100 outlets in selected cities by mid 1992 and to enter about 50 towns with a network of 500 outlets by end 1993. Now Mr. Narayanan is wondering which market/town he should select for his test marketing. He also has to decide whether he should give higher priority to launching Dosa King franchise in Metros or mini Metros or whether he should go first to state capitals and other large to medium cities. 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 more, he felt a dosa was not as much of a fun or speciality or eating out food in the South as in the rest of India. Recently, Mr. Narayanan was beset with another dilemma. Although the Dosa King machine requires only a 8 sq. ft booth for operating 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 restaurant or allow his machines to be operated from established restaurants.
Case Studies
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MARKETING OF SERVICES
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Strategic Issues
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Indira Gandhi National Open University School of Management Studies

MARKETING OF SERVICES: AN INTRODUCTION

Marketing of Services: An Introduction

Course Preparation Team*

Course Revision Team (2004)

Dr. Rupa Chanda IIM, Bangalore

Printed at: Akashdeep Printers, Darya Ganj, New Delhi.

MARKETING OF SERVICES : AN INTRODUCTION

Marketing of Services: An Introduction

MS-65: MARKETING OF SERVICES Course Components

MARKETING OF SERVICES: AN INTRODUCTION

SERVICES MARKETING MIX

UNIT 1 MARKETING OF SERVICES : CONCEPTUAL FRAMEWORK

Marketing of Services: An Introduction

1.2 THE CONCEPT OF SERVICE

Table 1.1: List of Selected Services

Marketing of Services: Conceptual Framework

Marketing of Services: An Introduction

1.3 REASONS FOR GROWTH OF THE SERVICE SECTOR

Table 1.2: Reasons for Growth of Service Industries

Marketing of Services: Conceptual Framework

Reasons 1 Increasing affluence

More leisure time

Higher percentage of women in labour force Greater life expectancy

Greater Complexity of products

Increasing complexity of life

Greater concern about ecology and resource scarcity

Increasing number of new products

1.4 CHARACTERISTICS OF SERVICES

Marketing of Services: An Introduction

Salt Soft drinks Detergents Automobiles Fast-food Cosmetics outlets

Intangible Dominant Tangible Dominant

Investment Consulting Teaching management

Marketing of Services: Conceptual Framework

Marketing of Services: An Introduction

Cannot be stored. Problem of demand fluctuation

Customer has access to but not ownership of facility or activity.

Source: Cowell, Donald, The Marketing of Services. Heinemann, London.

Marketing of Services: Conceptual Framework

1.5 SERVICES CLASSIFIED

Nature of the Service Act Tangible Action People

Car rental Pay telephone Restaurant

Marketing of Services: An Introduction

Marketing of Services: Conceptual Framework

1.6 THE SERVICES MARKETING MIX

Figure 1.2: The Marketing Mix for Services

Range Quality Brand name Warranty Post Transaction service

Location Accessibility Distribution channels Distribution coverage

Advertising Personal Selling Sales Promotion Publicity Public relation

Marketing of Services: An Introduction

Internal Marketing Enabling the Promise

External Marketing Setting the Promise

Providers Interactive Marketing Delivering the Promise

Marketing of Services: Conceptual Framework

1.8 SELFASSESSMENT QUESTIONS

Marketing of Services: An Introduction

1.9 FURTHER READINGS

Marketing of Services: Conceptual Framework

Marketing of Services: An Introduction