Chapter 2: Fundamental Differences Between Goods and Services

CHAPTER 2: FUNDAMENTAL DIFFERENCES BETWEEN GOODS AND SERVICES

"It is wrong to imply that services are just like goods ‘except’ for intangibility. By such logic, apples are just like oranges, except for their ‘appleness.’”

G. Lynn Shostack

Chapter Objectives:

This chapter discusses the basic differences between goods and services, the marketing problems that arise due to these differences, and possible solutions to the problems created by these differences.

Learning Objectives:

After reading this chapter, you should be able to

1. Understand the characteristics of intangibility, inseparability, heterogeneity, and perishability.

Simply stated, intangibility means that services have no substance and therefore cannot be touched or evaluated like goods. Inseparability refers to the interaction and physical presence of the service provider and the consumer throughout the service experience. The heterogeneity of services pertains to the variability that is inherent in the service delivery process. Perishability refers to the service provider’s inability to store or inventory services. Services which are not used at their appointed time, cease to exist.

2. Discuss the marketing problems associated with intangibility and their possible solutions.

Since services are intangible, the marketing problems that arise include: (1) it is difficult to easily display or communicate the properties of services to consumers; (2) prices are difficult to set; (3) services are not patentable, thus they are easily copied by competitors; and (4) services cannot be stored for future use. Solutions suggested to minimize the problems associated with intangibility include: (1) utilizing tangible clues to influence customer perceptions of service delivery; (2) developing promotional plans that emphasize personal sources of information as opposed to nonpersonal; and (3) developing the organization's image to reduce customer levels of perceived risk.

3. Describe the marketing problems associated with inseparability and their possible solutions.

The marketing problems associated with inseparability are directly related to: (1) the service provider's face-to-face interactions with the customer; (2) the customer's involvement in the service delivery process; (3) the impact of "other customers" that are sharing the service experience with each other; and the difficulty involved in the centralized mass production of services. Suggested solutions to minimize the impact of inseparability include: (1) the careful selection and thorough training of public contact personnel; (2) a variety of strategies which may be used to manage customers to enhance their service experience; and (3) the use of multi-site locations to increase the convenience of the service firm to the customer and to overcome the difficulties associated with centralized mass production.

4. Explain the marketing problems associated with heterogeneity and their possible solutions.

The primary marketing problem associated with heterogeneity is that standardization and quality control are difficult for the service firm to provide on a regular basis. The chapter suggests that standardization may be achieved via automation--replacing human labor with machines. In contrast, many service firms are taking advantage of the variability that is inherent in service delivery by offering customized services. The tradeoffs associated with customer preferences with standardization and customization include price, speed of delivery, and consistency of performance.

5. Identify the marketing problems associated with perishability and their possible solutions.

Due to the characteristic of perishability, it is not possible to inventory services. Due to the lack of an inventory, the only time that demand truly matches supply in the service sector is by accident. Strategies utilized to minimize the impact of perishability include strategies to increase supply and/or alter demand. Strategies which increase the supply of service include utilizing part-time employees, sharing capacity with other service providers, making preparations in advance with regards to future expansion, utilizing third-parties, and increasing the amount of customer participation during the service process. Strategies to alter demand include developing creative pricing strategies, utilizing reservation systems, developing complementary services, and developing nonpeak demand.

6. Consider the impact of intangibility, inseparability, heterogeneity, and perishability on marketing’s relationship to other functions within the service organization.

Marketing plays a very different role in service-oriented organizations than it does in pure goods organizations. The concept of operations being responsible for producing the product and marketing being responsible for selling it, cannot work in a service firm. The invisible and visible parts of the organization, the contact personnel and the physical environment, the organization and its customers, and the customers themselves are all bound together by a complex series of relationships. Consequently, the marketing department must maintain a much closer relationship with the rest of the service organization than is customary in many goods businesses.

Opening Vignette: GEICO and the Gecko

One company that has excelled in the insurance sector is GEICO. The company was based on the idea that if it could lower costs by focusing on specific target markets, the company could charge lower premiums and still be profitable.
Contributing to the company’s success has been the introduction of the GEICO “gecko”. The gecko with his English voice has become a recognizable tangible symbol and an advertising icon for the company.

Lecture Outline:

I.Introduction

A.Marketing educators felt the marketing of services was not significantly different from the marketing of goods.

B.However, specific differences are primarily attributed to four unique characteristics – intangibility, inseparability, heterogeneity, and perishability.

II.Intangibility: The Mother of All Unique Differences

- a distinguishing characteristic of services that makes them unable to seen, felt, tasted, or touched in the same manner as physical goods.

Intangibility is the primary source from which the other three characteristics emerge.
For example a good [described as object, device, and thing] such as purchasing a pair of shoes, you can

Pick up the shoes

Feel the quality of materials

View specific style and color

Sample the fit

Verses a service[described as deeds, efforts, and performances] such as purchasing a movie ticket

Entitles the consumer to an experience

Subjectively evaluated

Retain the physical ownership of only a ticket stub

Marketing Problems caused by Intangibility
Lack of service inventories
Lack of patent protection
Difficulty in displaying or communicating services
Difficulty in Pricing Services

No cost of goods sold

Possible Solutions to Intangibility Problems
The use of tangible clues
-the physical characteristics that surround a service to assist consumers in making service evaluations, such as the quality of furnishings, the appearance of personnel, or the quality of paper stock used for an insurance policy.
The use of personal sources of information to help spread the word about service alternatives
-Personal sources such as friends, family, and other opinion leaders that consumers use to gather information about a service
-Nonpersonal sources such as mass advertising that consumers use to gather information about a service
The creation of strong organizational images to reduce the amount of perceived risk associated with service purchases.
-Organizational image is the perception an organization presents to the public, and if well-known and respected, lowers the perceived risk of potential customers making service provider choices.
Table 2.1 Intangibility:
Summary of the marketing problems and possible solutions

III.Inseparability

-a distinguishing characteristic of services that reflects the interconnection among the service provider, the customer involved in receiving the service, and other customers sharing the service experience
-critical incident is the interaction between customer and service provider

Marketing problems caused by Inseparability

Physical connection of the service provider to the service
Tangible clues, particularly the use of language, clothing, personal hygiene, and interpersonal communication skills
Face-to-face interaction with customers makes employees satisfaction critical
Involvement of the customer in the production processes
Customer’s involvement may vary
requirement that the customer be physically present to receive the service, i.e. dental service or a haircut
A need for the customer to be present only to start and stop the service, i.e. dry cleaning and auto repair
A need for the customer to be only mentally present, i.e. participation in a online college course
Customer’s impact the type of service desired
The cycle of demand, i.e. customers go to restaurants primarily during breakfast, lunch and dinner hours
The length of demand, i.e. customers ask more questions and/or need more attention
Customer’s present in the service factory
Concerns about the appearance of the service factory itself
Involvement of other customers in the production process
Several customers often share a common service experience
This “shared experience” can be negative or positive
Primary challenge concerns effectively managing different market segments with different needs within a single service environment
Special challenges in mass production of services
Individual service provider can produce only a limited supply
Customers interested in a particular provider’s services would have to travel to the provider’s location

Possible Solutions to Inseparability Problems
Increased emphasis placed on the selection and training of public contact personnel to ensure that the right types of employees are in the right jobs
-A case in point is UPS. The company is virtually 100 percent employee owned.

-Selection and training is a strategy that minimize the impact of inseparability by hiring and educating employees in such a way that the customer’s service experience is positive and the employees are properly equipped to handle customers and their needs

Implementation of consumer management strategies that facilitate a positive service encounter for all consumers sharing the same service experience

-Consumer Management is a strategy service personnel can implement that minimizes the impact of inseparability, such as separating smokers from nonsmokers in a restaurant

Use of multisite locations to offset the mass production challenges posed by inseparability

-A case in point is Lenscrafters (an eye-care service firm) with over 850 locations.

-Multisite locations is a way service firms that mass produce combat inseparability, involving multiple locations to limit the distance the consumers have to travel and staffing each location differently to serve a local market
-factories in the field is another name for multisite locations

Table 2.2 Inseparability:
Summary of the marketing problems and possible solutions

IV.Heterogeneity

Chapter 2 Fundamental Differences Between Goods and Services1

-a distinguishing characteristic of services that reflects the variation in consistency from one service transaction to the next

A.Marketing problems caused by Heterogeneity

Standardization and quality control are difficult to achieve
Services are often provided by different providers within the same location
The mood and skills of a single provider differ from day-to-day

B.Possible solutions to Heterogeneity Problems

Customization develops services that meet each customer’s individual needs

-taking advantage of the variation inherent in each service encounter by developing services that meet each customer’s exact specifications

-Downside of providing customized services

Customers may not be willing to pay the higher prices
The speed of service delivery may be an issue
Customers may not be willing to face the uncertainty

Standardization

-reducing variability in service production through intensive training of providers and/or replacing human labor with machines

3. Table 2.3 Heterogeneity:

Summary of the marketing problems and possible solutions

V.Perishability

-A distinguishing characteristic of services in that they cannot be saved, their unused capacity cannot be reserved, and they cannot be inventoried

A.Marketing problems caused by Perishability

Matching supply and demand is a major challenge
Higher demand than maximum available supply
Higher demand than optimal supply level
Lower demand than optimal supply level
Demand and supply at optimal levels

B.Possible Solutions to Perishability Problems

Demand Strategies
Creative Pricing-pricing strategies often used by service firms to help smooth demand fluctuations, such as offering “matinee” prices or “earlybird specials” to shift demand from peak to nonpeak periods.
Used to target specific groups such as senior citizens, children and their parents (families), and college students
Price incentives to use the company’s web site
Reservation Systems-a strategy to help smooth demand fluctuations in which consumers ultimately request a portion of the firm’s services for a particular time slot.
Typical service firms that use reservation systems include restaurants, doctors of all varieties, golf courses (tee times), and day spas.
Advantage of a reservation system
Reduce the customer’s risk of not receiving the service
Minimize the time spent waiting in line for the service to be available
Allow service firms to prepare in advance for a known quantity of demand
Disadvantage of a reservation system
Someone must maintain the system, which adds additional cost to the operation
Customers do not always show up on time or sometimes fail to show up at all
Offer to the customer an implied guarantee that the service will be available at a specified time, thereby increasing the customer’s expectation
Development of Complementary Services-services provided for consumers to minimize their perceived waiting time, such as driving ranges at golf courses, arcades at movie theaters, or reading materials of doctors’ offices.
Development of Nonpeak Demand-utilizes service downtime to prepare in advance for peak periods, and/or to market to different market segments with different demand patterns.
Can reduce the effects of perishability
Employees can be cross-trained during nonpeak demand periods to perform a variety of other duties to assist fellow personnel during peak demand periods
Can be developed to generate additional revenues by marketing to a different market segment that has a different demand pattern than the firm’s traditional segment

Supply Strategies
Part-time Employee Utilization-employees who typically assist during peak demand periods and who generally work fewer than 40 hours per week
Advantage of employing part-time workers
Lower labor costs
Flexible labor force that can be employed when needed and released during nonpeak periods
Disadvantage of employing part-time workers
Causes consumers to associate the firm with lower job skills and lack of motivation and organizational commitment
Capacity Sharing-a strategy to increase the supply of service by forming a type of co-op among service providers that permits co-op members to expand their supply or service as a whole.
Advance preparation for Expansion-planning for future expansion in advance and taking a long-term orientation to physical facilities and growth
Utilization of Third Parties-a supply strategy in which a service firm utilizes an outside party to service customers and thereby save on costs, personnel, etc
Increase in customer participation-a supply strategy that increases the supply of service by having the customer perform part of the service, such as providing a salad bar or dessert bar in a restaurant
Table 2.4 Perishability:

Summary of the marketing problems and possible solutions

C. The Role of Marketing in the Service Firm

1. The different components of the service organization are interwoven.

2. Marketing staff must maintain a much closer relationship with the rest of the service organization than is customary in many goods businesses.

VI.Summary

The major differences between the marketing of goods and the marketing of services are most commonly attributed to four distinguishing characteristics-intangibility, inseparability, heterogeneity, and perishability.

DISCUSSION QUESTIONS:

1. Briefly describe how the unique service characteristics of intangibility, inseparability, heterogeneity, and perishability apply to your educational experience in your services marketing class.
Intangibility means that services lack physical substance and therefore cannot be touched or evaluated like goods. Services marketing class is an educational experience. Inseparability reflects the interconnection between service providers and their customers. The professors of services marketing classes engage in face-to-face interaction with their students, who are directly involved in the educational experience. Heterogeneity pertains to the variability inherent in the service delivery process. The services marketing class has variability from semester to semester, student to student, and professor to professor. Perishability refers to the service provider’s inability to store or inventory services. Services (like services marketing class) that are not used at their appointed time cease to exist (missing class).

2. Why is the pricing of services particularly difficult in comparison with the pricing of goods?

Typically, products' prices are often based on cost-plus pricing. This means that the producing firm figures the cost of producing the product and adds a markup to that figure. The challenge involved in pricing services is that there is no cost of goods sold. The primary cost of producing a service is labor.

3. What strategies have the insurance industry utilized in its attempt to minimize the effects of intangibility? Of the companies that have actively attempted to minimize the effects, have some companies done a better job than others? Please explain.

Tangible clues are the physical evidence that surrounds the service. In the absence of a physical product to evaluate, consumers look for tangible clues to base evaluations. Insurance firms have attempted to minimize the effects of intangibility by using tangible clues in their advertising such as Prudential's "piece of the rock." Yes, some companies have done a better job. Answers will vary. Other uses of tangible clues include the appearance of personnel, the office decor, and the quality of paper used to produce insurance policies and company brochures.

4. Discuss the implications of having the customer involved in the production process.

The customer's involvement in the service production process is an operation's nightmare. Customers influence the type of demand, the cycle of demand, and the duration of the service production process. However, on the positive side, since service customers are part of the process they can often produce some of the service themselves, thereby, increasing the amount of service that can be provided by a single provider. Due to consumer involvement, service factories must be built with the consumer's presence in mind.