Marketing Challenges Created by Intangibility

As a result of the intangibility of services, a number of marketing challenges arise that are not normally
faced when marketing tangible goods. More specifically, these challenges include the lack of services
inventories, the lack of patent protection, the difficulties involved in displaying and communicating the
attributes of the service to its intended target market, and the special challenges involved in the pricing of
services.

Lack of Service Inventories

Because of their intangibility, services cannot be inventoried. As a result, supplies of services cannot be
stored as buffers against periods of high demand. For example, physicians cannot produce and store medical
examinations to be used at a later date; movie seats that are not sold for the afternoon matinee cannot be
added to the theater for the evening show. Consequently, customers are commonly forced to wait for desired
services, and service providers are limited in how much they can sell by how much they can produce. The
bottom line is that the inability to maintain an inventory translates into constant supply and demand problems
for services. In fact, the lack of service inventories presents so many challenges to marketers that it has earned
its own name—perishability.

Services Lack Patent Protection

Due to their intangible nature; services cannot be patented. What is there to patent? Human labor and
effort are not protected. Firms sometimes advertise that their processes are patented; however, the reality is
that the tangible machinery involved in the process is protected, not the process itself. Therefore, and
important challenge faced by the lack of patent protection is that new or existing services may be easily
copied. Consequently, it is difficult to maintain a firm’s differential service advantage over attentive
competitors for long periods of time.

Services Are Difficult to Display and/or Communicate

The promotion of services presents yet another set of special challenges to the service marketer. The
root of the challenge is this: How do you get customers to take notice of your product when they cannot see
it? As an example, consider the insurance industry. Insurance is a complicated product for many people. As
customers, we cannot see it, we are unable to sample it prior to purchase, and many of us do not understand
it. Insurance seems to cost an awful lot of money, and the benefits of its purchase are not realized until some
future time, if at all. In, fact, if we do not use it, we are supposed to consider ourselves lucky. Why should
spending thousands of dollars a year on something the customer never uses make them feel lucky? To say the
least, due to intangibility, the task of explaining your product’s merits to customer is often challenging.
Services Are Difficult to Price

Typically, a tangible product’s price is often based on cost-plus pricing. This means that the firm selling
the product calculates the cost of producing the product and adds a predetermined markup to that figure. The
challenge involved in the pricing of services is that, due to intangibility, there is no cost of goods sold!
Ultimately, the primary cost of producing a service is labor. As an example, let’s say you are very competent in
the field of principles of marketing. Taking notice of your expertise in field, a student who is struggling with his
marketing assignments wants to hire you as a tutor. What would you charge per hour? What are your costs
involved?
 Possible Solutions to Challenges Caused by Intangibility

Over the years, marketing practitioners have implemented a number of strategies in the attempt to
offset or minimize the marketing challenges posed by intangibility. These strategies include the use of tangible
clues to help “tangibilize” the service, the use of personal sources of information to help spread word-of
mouth communications about service alternatives, and the creation of strong organizational images to reduce
the amount of perceived risk associated with the service purchases. Although marketers may not be capable
of totally eliminating the challenges posed by intangibility, strategies such as these have provided innovative
solutions for many service industries.

Utilize Tangible Clues

Given the absence of tangible properties, services are evaluated differently when compared to goods.
In many instances, in the absence of a physical product, consumers look to the physical evidence or tangible
clues that surround the service to assist them in making service evaluation. Tangible clues may include such
evidence as the quality of furniture in a lawyer’s office.

Utilize Personal Sources of Information

Because consumers of services lack any objective means of evaluating services, they often rely on the
subjective evaluations relayed by friends, family and variety of other opinion leaders. For example, when
moving to a new town and seeking a family physician, consumers will often asks coworkers and neighbors for
referrals. Hence, in purchasing services, personal sources of information become more important to
consumers than nonpersonal sources such as the mass media. Personal Sources of Information such as
friends, family and other opinion leaders are sources of word-of-mouth communications (aka: viral marketing)
that consumers use to gather information about services. One strategy often used to stimulate word-of-mouth
advertising is to offer incentives to existing customers to tell their friends about a firms’ offerings. Apartment
complexes often use the incentive of a free month’s rent to encourage tenants to have their friends rent
vacant units. Service firms sometimes simulate personal communication while using the mass media. Mass
media advertising that features customer testimonials simulates word-of-mouth advertising and can be very
effective. Examples include hospital advertisements featuring former patients who have successfully
recovered from major surgery and are now living normal and happy lives. Other examples include insurance
companies that feature victims of hurricanes, fires and earthquakes who are grateful for their insurance
protection when they needed it most. In more recent times, web based social networks have emerged as a
key sources of information as customers shares their personal experiences with a variety of service business.
Create a Strong Organizational Image

Another strategy utilized to minimize the effects of intangibility is to create a strong organizational
image. Because intangibility and the lack of objective sources of information to evaluate services, the amount
perceived risk associated with service purchases is generally greater than their goods counterparts. In an
attempt to combat the higher levels of perceived risk, some service firms have spent a great deal of effort,
time, and money in developing a nationally recognized organizational image. A well-known and respected
corporate image lowers the level of perceived risk experienced by potential customers and, in some instances,
lowers the reliance on personal sources of information when making service provider choice.

Utilize Activity-based Costing

Traditional cost accounting practices, which were designed to monitor raw material consumption,
depreciation, and labor, offer little in helping service managers understand their own cost structures. A more
useful approach, activity-based costing (ABC), focuses on the resources consumed in developing the final
product. Traditionally, overhead in most service firms has been allocated to projects based on the amount of
direct labor charged to complete the customer’s requirements. However, this method of charging overhead
has frustrated managers of specific projects for years. Activity-based costing focuses on the cost of activities
by breaking down the organization into a set of activities and activities into tasks, which convert materials,
labor, and technology into outputs. These tasks are thought of as “users” of overhead and are identified as
cost drivers.
 Marketing Challenges Created by Inseparability

The inseparability of nature of services poses a number of unique challenges for marketing
practitioners. First, in many instances, the execution of the service often requires the physical presence of the
services provider. As a result, service providers require different skill sets, such as interpersonal skills, while a
manufacturing worker may never actually interact with a customer. Second, the customer’s involvement in
the service delivery process presents a number of other challenges. Customers often dictate the type of
service to be delivered, the length of the service of delivery process, and the cycle of service demand. As a
result, customer involvement often jeopardizes the overall efficiency of the service operation. Third, services
are often shared experienced among a number of customers. Consequently, problems arise as customer
adversely influences one another’s service experience. Finally, inseparability presents a number of challenges
pertaining to the mass production of services. A single service provider can only produce a finite amount of
service.

The Service Provider Is Physically Connected to the Service

For the production of many services to occur, the service provider must be physically present to
produce and deliver the service. For example, dental services require the physical presence of a dentist or
hygienist, medical surgery requires a surgeon and in-home services such as carpet cleaning require a service
provider to complete the work. Because of the intangibility of services, the service provider becomes a
tangible clue on which at least is a part of the customer’s evaluation of the service experience becomes based.
As tangible clues, service providers are particularly evaluated based on their use of language, clothing,
personal hygiene, and interpersonal communication skills. Many service firms have long appreciated the
impact that public contact personnel have on the firm’s overall evaluation. For example, wearing uniforms or
conforming to dress codes is often required of service employees to reflect professionalism. Other service
firms such as restaurants often place their most articulate and attractive personnel in public contact positions
such as waiters, staff, host/hostess, and bartender. Personnel who do not have these skills and traits are often
employed in areas that are invisible to the consumer, such as the kitchen and dish room areas.

Customers Are Involved in the Production Process

The second defining characteristic of inseparability is that the customer is involved in the production
process. The customer’s involvement in the production process may vary from: (1) a requirement that the
customer be physically present to receive the service, such as dental services, haircut, or surgery; (2) a need
for the customer to be present only to start and stop the service, such as dry cleaning and auto repair; and (3)
a need for the customer to be mentally present, such as in participation in college courses that are transmitted
via the Internet. Each scenario reflects a different level of customer contact, and as a result each service
delivery system should be designed differently. Overall, as customer contact increases, the efficiency of the
operation decreases. More specifically, the customer has direct impact on the type of service desired, the
length of the service delivery process, and the cycle of service demand. Attempting to balance consumer
needs with efficient operating procedures is a delicate art.
“Other Customers” Are Involved in the Production Process

The presence of “other customers” during the service encounter is the third defining characteristic of
inseparability. Because production and consumption occur simultaneously, several customers often share a
common service experience. This “shared experience” can be negative or positive. The marketing challenges
presented by having other customers involved in the production process generally reflect the negative aspects
of their involvement. Restaurants once again provide an ideal setting for examples of negative events,
including smokers violating the space of nonsmokers and vice-versa, families with young children sharing the
same space with adult couples seeking a quiet dining experience, drunk customers interacting with sober
patrons and the occasional lovers’ quarrel that spills over into the aisles. Overall, the primary challenge
concerns effectively managing different market segments with different needs within a single service
environment. Such will be the case of cell phone use is eventually approved on airlines. Some passengers will
see the addition of this service as overwhelmingly positive while others will view it as noise pollution and
extremely irritating.

The Mass Production of Services Presents Special Challenges

One final obstacle presented by inseparability is how to mass produce services successfully. The
problems pertaining to mass production are twofold. First, because the service provider is directly linked to
the service being produced, an individual service provider can produce only a limited supply. Consequently,
the question arises: How does one provider produce enough service products to meet the demand of the
mass market? The second problem directly relates to the consumer’s involvement in the production process.
Consumers interested in a particular provider’s services would have to travel to the provider’s specific
location. For example, if a sports enthusiast would like to experience snow skiing in the desert, he or she
would have to personally travel to the Middle East to experience the wonders of Ski Dubai.
 Possible Solutions to Challenges Created by Inseparability

Similar to the solutions proposed for intangibility, marketing practitioners have developed a number of
strategies in the attempt to offset or minimize the marketing challenges posed by inseparability. These
strategies include: (1) an increased emphasis placed on the selection and training of public contact personnel
to ensure the right types of employees are in the right jobs: (2) the implementation consumer management
strategies that facilitate a positive service encounter for all consumers sharing same service experience: and
(3) the use of multisite locations to offset mass production challenge posed by inseparability.

Strategic Selection and Training of Public Contact Personnel

Contact personnel, unlike goods are not inanimate objects and, being human, they exhibit variations in
behavior that cannot be controlled the service process. Moreover, the attitudes and emotions of contact
personnel are visible to the customer and can affect the service experience for better or worse. Surly or
unhappy employees can affect the customers with whom they come into direct contact and other employees
as well. On the other hand bright, highly motivated employee can create a more pleasant service experience
for everyone who comes into contact with that person. As a result of the frequency and depth of interactions
between service providers and consumers, selection of service personnel with superior communication and
interpersonal skills is a must. In addition training personnel once they are on the job is also necessary.

Effectively Manage Consumers

The problems created by inseparability can also be minimized through effective consumer
management. The goal of effectively managing consumers that share a service experience is to minimize the
negative aspects and maximize the positive aspects of “other customers”. Separating smokers from
nonsmokers is an example of one way to minimize the impact of other customers. Sending a patient insurance
forms and information about office procedures before the patient arrives may help control the length of the
service encounter. Restaurant reservation systems may help smooth out demand created by an
overabundance of customers. Finally, providing delivery services may eliminate the need for many consumers
to be physically present within a service factory, thereby increasing the firms’ operating efficiencies and
improving delivery speed.
Develop Multisite Locations

To offset the effects of inseparability pertaining to challenges associated with centralized mass
production, service firms that mass produce do so by setting up multiple locations. Typical examples include H
& R Block accounting services. Hyatt Legal Services, Marriot Hotels, and a myriad of banking and insurance
institutions. Multisite locations serve at least two purposes. First, because the consumer is involved in the
production process, multisite locations limit the distance the consumer must travel to purchase the service.
Second, each multisite location is staffed by different service providers, each of whom can produce their own
supply of services to serve their local market. Ultimately, multisite locations act as factories in the field.
Without them, every consumer who desired legal services would have to travel a single location that housed
all the lawyers’ country in the country plus their clients for that day. Obviously, this is not practical or realistic.
 Marketing Challenges Created by Heterogeneity

The major challenges presented by heterogeneity translate into the fact that service standardization
and quality controls are difficult to achieve. Why is this so? Because of the inseparability characteristic
previously discussed, you now know that in many instances the service provider must be present to provide
the service. Firms such as financial institutions employ a multitude of front-line service providers. As an
individual, each employee has a different personality and interacts with customers differently. In addition,
each employee may act differently from one day to the next as a result of mood changes as well as numerous
other factors. As an example, many students who work as wait staff in restaurants frequently acknowledge
that the quality of interaction between themselves and customers will vary even from table to table. Hotel
desk clerks, airline reservationists, and business-to-business service personnel would respond similarly.

Possible Solutions to Challenges Caused by Heterogeneity

Solutions proposed to offset the challenges posed by heterogeneity could be considered complete
opposites of one another. On one hand, some service firms use the heterogeneous nature of services to
provide customized services. In this case, the service offering is tailored to the individual needs of the
consumer. The second possible solution is to develop a service delivery system that standardizes the service
offering—every consumer receives essentially the same type and level of service. Each of these opposing
strategies encompasses a different set of advantages and disadvantages.

Pursue a Customization Strategy

One possible solution to the problem created by heterogeneity is to take advantage of the variation
inherent in each service encounter and customize the service. Customization develops services that meet
each customer’s individual needs. Producers of goods typically manufacture the good in an environment that
is isolated from the customer. As such, mass-produced goods do not meet individual customer needs.
However, because both the customer and the service provider are involved in the service delivery process, it is
easier to customize the service based on the customer’s specific instructions.

Pursue a Standardization Strategy

Standardizing the service is a second possible solution to the marketing challenges created by
heterogeneity. The goal of standardization is to produce a consistent service product from one transaction to
the next. Service firms can attempt to standardize their service through intensive training of their service
providers. Training certainly helps reduce extreme variation in performance. However, even with all the
training in the world, employees ultimately will continue to vary somewhat from one transaction to the next.
One way to eliminate this variance is to replace human labor with machines.
 PERISHABILITY: BALANCING SUPPLY AND DEMAND

The fourth and final unique characteristic that distinguishes goods from services is perishability.
Perishability reflects the challenge that services cannot be saved, their unused capacity cannot be reserved,
and they cannot be inventoried. Unlike goods that can be stored and sold at a later date, services that are not
sold when they become available cease to exist. For example, hotel rooms that go unoccupied for the evening
cannot be stored and used at a later date; airlines seats that are not sold cannot be inventoried and added on
to aircraft during the holiday season when airline seats are scarce; and service providers such as dentists,
lawyers and hairstylists cannot regain the time lost from an empty client appointment book. The inability to
create an inventory presents profound difficulties for marketing services. When dealing with tangible goods,
the ability to create and inventory means that production and consumption of the goods can be separated in
time and space. In other words, a good can be produced locally in Asia and transported for sale in another
country around the globe. Similarly, a good can be produced in January and not released into the channels of
distribution until June. In contrast, most services are consumed at the point of production. Education is
consumed as it is produced; the same is also true for psychiatric services, religious services, and a host of
other service products.

Marketing Challenges Caused by Perishability

Without the benefit of carrying an inventory, matching demand and supply within most services firms a
major challenge. In fact, because of the unpredictable nature of consumer demand for services, the only likely
way that supply perfectly matches demand is by accident! For example as a manager, try to imagine
scheduling cashiers at a grocery store. Although we can estimate the times of the day that the store would
experience increased demand, that demand may fluctuate widely within any 15-minute interval. Now try to
imagine forecasting demand for a hospital’s emergency ward, an entertainment theme park or a ski resort.
Demand can be “guesstimated” but will rarely be exact. Clearly, consumer demand for many services at any
given time is unpredictable. The lack of inventories and the need for the service provider to provide the
service lead to several possible demand and supply scenarios.

Demand Exceeds Supply of Service Available

Within this scenario, consumer demand simply outpaces what the firm can supply, which results in
long waiting periods and, in many cases, unhappy customers. Business may be lost to competitors as waiting
times become too excessive for consumers to endure. Ironically, in cases of consistent excess consumer
demand, consumer may continue to attempt to patronize a firm out of curiosity and/or the social status
obtained by telling others of their experience. “We finally got in to see the show!”
Demand Exceeds Optimal Supply of Service Available

In many instances, the consequence associated with demand exceeding optimal supply may be worse
than when demand exceeds maximum available capacity. By accepting the customer’s business by beginning
the service (e.g., being seated on a busy restaurant), the firm implicitly promises to provide the same level of
service that it always provide regardless of the number of customers being served. For example, it seems that
airlines typically flights with the same number of flight attendants regardless of the number of tickets actually
sold. However, when demand exceeds optimal levels, the service provided is generally at inferior level a result,
customer expectations are not met, and customer dissatisfaction and negative word-of-mouth publicity
results.

Lower Demand than Optimal Supply Levels

As we discussed earlier, providing the exact number of grocery store cashiers needed at any given time
is a challenge for most store managers. One solution would be to staff each line with full-time cashier;
however, this strategy would result in an inefficient deployment of the firm’s resources. During times when
demand is below optimal capacity, resources are underutilized (e.g., cashiers are standing around) and
operating cost are needlessly wasted.

Demand and Supply at Optimal Levels

The optimal scenario is to have demand match supply. This scenario describes the situation in which
customers do not wait long in lines and employees are utilized to their optimal capacity. Because services
cannot be stored, a buffer to ease excess demand cannot be developed. Moreover, service providers are not
machines and cannot produce a limitless supply. Consequently, service demand and supply rarely balance.
Customers do at times experience lengthy waits, and service providers are sometimes faced with no one to
serve.
 Possible Solutions to Challenges Created by Perishability

Because service demand and supply balance only by accident, service firms have developed strategies
that attempt to adjust supply and demand to achieve a balance. The strategies presented below are possible
solutions to overcome the difficulties associated with the perishability of services. The first group of strategies
concerns the management of the firm’s demand. This discussion is followed by a second group of strategies
that focuses on managing supply.

Demand Strategy: Utilizing Creative Pricing Strategies to Smooth Demand

Creative pricing strategies are often used by service firms to help smooth demand fluctuations. For
example, offering price reductions in the form or “early bird specials” and “matinees” have worked well for
restaurants and movie theaters, respectively. Price-conscious target markets, such as families with children,
are willing to alter their demand patterns for the cost savings. At the same time, service firms are willing to
offer price reductions to attract customers during nonpeak hours, thereby making their operations more
efficient. By shifting demand to other periods, the firm can accommodate more customers and provide better
service during periods in which demand previously has been (1) turned away because of limited supply, and
(2) not served as well as usual because demand surpassed optimal supply levels.

Demand Strategy: Implement a Reservation System

Another common strategy used to reduce fluctuations in demand is to implement a reservation

system by which consumers ultimately reserve a portion of the firm’s services for a particular time slot. Typical
service firms that use reservation system include restaurants, hotels, airlines, rental car agencies, hair care
salons, doctors of all varieties, golf courses (tee times), and day spas. On the plus side, reservations reduce the
customer’s risk of not receiving the service and minimize the time spent waiting in line for the service to be
available. Reservation system also allows service firms to prepare in advance for known quantity of demand.
Consequently the customer and the firm benefit from improved service.

Demand Strategy: Shift Demand to Complimentary Services

Companies can also buffer the challenges associated with perishability by developing complimentary
services that directly relate to the core service offering. A lounge restaurant is a typical example of
complimentary service that not only provides the space to store customers while they wait, but also provides
the restaurant with an additional source of revenue. Similarly, golf courses often provide putting greens for
their customers as a form of complimentary service. Although free of charge to customers, the putting green
occupies the customer’s time, minimizing their perceived waiting time. The end result is more satisfied
customers. Other complimentary services that have been develop to help manage demand include driving
ranges at golf courses, arcades at movie theaters, reading materials in doctor’s offices, and television in the
waiting areas of hospital emergency rooms.
Demand Strategy: The Effective Use of Nonpeak Demand Periods

Developing nonpeak demand can also modify the effects of perishability. Nonpeak demand
development utilizes service downtime to prepare in advance for peak periods, and/or to market to different
market segments with different demand patterns. Consequently, nonpeak demand development can reduce
the effects of perishability in two ways. First, employees can be cross-trained during nonpeak demand periods
to perform a variety of other duties to assist fellow personnel (e.g., dishwashers may train to set up and clear
tables) during peak demand periods. In addition, although services cannot be stored, the tangibles associated
with the service (such as salads at a restaurant) can be premade and ready prior to the service encounter.
Advance preparation activities such as these free personnel to perform other types of service when needed.
Second, nonpeak demand can also be develop to generate additional revenues by marketing to a
different market segment that has a different demand pattern that the firm’s traditional segment. For
example, golf courses have filled nonpeak demand by marketing to housewives, senior citizens, and shift
workers (e.g., factory workers, nurses, students and teachers) who use golf course during the morning and
afternoon hours—traditionally slow periods during weekdays.

Supply Strategy: Utilize Part-Time Employees

In addition to managing consumer demand, the effects of perishability can also be minimized through
strategies that make additional supply available in times of need. One such supply strategy is the use of part-
time employees to assist during peak demand periods. Retailers have successfully used part-time employees
to increase their supply of service during the holidays for years. The advantages of employing part-time
workers as opposed to adding additional full-time staff include lower labor cost and a flexible labor force that
can be employed when needed and released during nonpeak periods. On the negative side, using part-time
employees sometimes causes consumers to associate the firm with lower job skills and lack of motivation and
organizational commitment. Such traits subsequently lead to dissatisfied customers. However, these
disadvantages appear most commonly in organizations that staff their operations with part-time workers on a
full-time basis, as opposed to those employing part-time employees only during peak demand periods.

Supply Strategy: Capacity Sharing

Another method of increasing the supply of service is capacity sharing, forming a type of service co-op
with other service providers, which permits the co-op to expand its supply of service as a whole. For example,
many professional medical service providers are combining their efforts by sharing the cost and storage of
expensive diagnostic equipment. By sharing the cost, each service firm can supply forms of service it may not
otherwise be able to provide because of the prohibitive costs associated with purchasing such equipment. In
addition, the funds saved through cost sharing are freed to spend on additional resources such as equipment,
supplies, and additional personnel, expanding the supply service to consumers even further. Surgery centers
and other medical group practices offer typical examples of capacity sharing in application.
Supply Strategy: Prepare in Advance for Expansion

Although the strategy of expansion preparation does not provide a “quick fix” to the supply problems
associated with perishability, it may save months in reacting to demand pressures, not to mention thousands
of dollars in expansion costs. In the effort to prepare in advance for expansion, many service firms are taking a
long-term orientation with regard to constructing their physical facilities. For example, one local airport
terminal was built with future expansion in mind. This terminal was built on a isolated portion of the airport
property, where no adjoining structure would interfere with future growth. All plumbing and electrical lines
were extended to the ends on both sides of the building and capped, making “hook-ups” easier when
expansion becomes a reality. Even the road leading to the terminal was curved in the expectation that new
terminal additions will follow along this predetermined pattern.

Supply Strategy: Utilization of Third Parties

A service firm can also expand its supply of a service through use of third parties. Service organizations
frequently use third parties to service customers and thereby save costs, personnel etc. Travel agencies are a
typical example. Travel agents provide the same information to customers as an airline’s own representatives.
This third-party arrangement, however it enables airline to reduce the number of personnel it employs to
make flight reservations and lets it redirect the efforts of existing personnel to other service areas. The cost
savings associated with using third parties is evidenced by the airlines’ willingness to pay commissions to
travel agencies for booking flights.

Supply Strategy: Increase Customer Participation

Another method for increasing the supply of service available is to have the customer perform part of
the service. For example, in many fast-food restaurants, customer participation means giving customers a cup
and expecting them to fill their own drink orders. In other restaurants, customers make their own salads at a
“salad bar,” dress their own sandwiches at the “fixing bar,” prepare plates of food at the “food bar,” and make
their own chocolate sundaes at the “dessert bar.”