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Indira Gandhi

National Open University MS-65

School of Management Studies Marketing of Services


Marketing of Services: Conceptual Framework 5
Role of Services in Economy 20
International Trade in Services, The WTO, and India 37
Consumer Behaviour in Services 53

Marketing of Services:
An Introduction Course Preparation Team*
Prof. L.M. Johari Dr. V. Chandrashekhar Prof. J.B. Nadda
FMS, Delhi University Mahindra Days Hotels & Goa University
Delhi Resorts, Bangalore Goa

Prof. J.D. Singh Ms. Sudha Tewari Mr. M. Venkateswaran

IMI Parivar Seva Sansthan Transportation Corporation of
New Delhi New Delhi India, Hyderabad

Prof. P.K. Sinha Mr. Pramod Batra Prof. Rakesh Khurana

IIM EHIRC School of Management Studies
Bangalore New Delhi IGNOU, New Delhi

Mr. Amrish Sehgal Ms. Rekha Shetty Prof. Madhulika Kaushik

Bhutan Tourism Dev. Corpn. Apollo Hospitals School of Management Studies
Bhutan Madras IGNOU, New Delhi

Mr. D. Ramdas Ms. Malabika Shaw Mr. Kamal Yadava

Management Consultant AIMA School of Management Studies
New Delhi New Delhi IGNOU, New Delhi

Prof. M.L. Agarwal Mr. Saurabh Khosla

XLRI Tulika Advertising Agency
Jameshedpur New Delhi

Mr. Arun Shankar Mr. Sanjeev Bhikchandani

Citi Bank Sanka Information Pvt. Ltd.,
New Delhi 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 Dr. Tapan K. Panda Prof. B.B. Khanna
Course Editor IIM, Khozikode Director
IIFT, New Delhi Calicut School of Management Studies
IGNOU, New Delhi

Prof. Madhulika Kaushik Dr. Rupa Chanda Dr. Kamal Yadava

School of Management Studies IIM, Bangalore Course Coordinator and Editor
IGNOU, New Delhi School of Management Studies
IGNOU, New Delhi
Prof. Rajat Kathuria
IMI, New Delhi

Print Production
Mr. A.S. Chhatwal, Mr. Tilak Raj Ms Sumathy
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June, 2004 (Revision)

© Indira Gandhi National Open University, 2004


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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 India’s negotiating strategy and
domestic reforms. The last unit of the block gives details of consumer
behaviour in services.

Marketing of Services:
An Introduction


Course Components




1. Marketing of Services: Conceptual Framework

2. Role of Services in Economy
3. International Trade in Services, the WTO, and India
4. Consumer Behaviour in Services


5. Product and Pricing Decisions

6. Place and Promotion Decisions
7. Extended Marketing Mix for Services


8. Service Quality
9. Managing Capacity/Demand
10. Retaining Customers


11. Financial Services Issues in Social Destination

12. Tourism and Hospitality Services Marketing India
13. Health Services Marketing of Health
14. Case Study: Serving the Global Indian Services


15. Educational Services

16. Professional Support Services: Advertising Agencies
17. Telecommunication Services
18. Product Support Services
19. Case Studies
1. Is the Customer Always Right?
2. The Case of Dosa King.

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.

1.1 Introduction
1.2 The Concept of Service
1.3 Reasons for Growth of the Service Sector
1.4 Characteristics of Services
1.5 Services Classified
1.6 The Services Marketing Mix
1.7 Summary
1.8 Self Assessment Questions
1.9 Further Readings
1.10 References

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 world’s
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 5
Marketing of Services: wide array of services found in the metropolitan cities in India compare
An Introduction
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.”


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 Insurance, Banking, Finance

Electricity Banks
Water Supply Share and Stock Brokers
Law Enforcing, Civil, Business, Professional and
Administrative and Defence Services Scientific Activities
Police Advertising
Army Marketing Research
Air Force Consultancy
Navy Accountancy
Judiciary Legal
Civil Administration Medical
Municipal Services Educational
(Sewage, maintenance of roads Research
parks and public buildings) Maintenance and Repairs (of
plants, machinery and equipment)
Transport and Communication Computer Programming
Railways (Passenger and Freight) Employment Agencies
Air Transport (Passenger and Freight) Leisure, Recreation
Post and Telegraph Cinema, Theatre
Telephone and Telecommunication Clubs, Gymnasiums
Broadcasting (All India Radio) Restaurants, Hotels
Telecasting (Doordarshan) Video Game Parlors
Distributive Trades Self-improvement Courses
Wholesale Distribution Miscellaneous
Retail Distribution Beauty Parlors
Dealers, Agents Health Clubs
Domestic Help
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
Marketing of Services: for consumption both within and outside the restaurant. Today this restaurant is
An Introduction
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) The need or want that these services satisfy.
ii) The nature of services which these organisations are providing.
iii) How the services of these organisations are differentiated from those of
their competitors?


Manufacturing industries grew because they produced tangible goods which
satisfied people’s 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 Marketing of Services:
Conceptual Framework

Reasons Types of services required

1 Increasing affluence 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.

2 More leisure time Greater demand for recreation and

entertainment facilities, travel resorts,
adult education and self-improvement
3 Higher percentage of women in Greater demand for crèches, baby
labour force sitting, household domestic help

4 Greater life expectancy Greater demand for nursing homes

and health care services

5 Greater Complexity of products Greater demand for skilled

specialists to provide maintenance
for complex products such as air-
conditioners, cars, home computers.

6 Increasing complexity of life Greater demand for specialists in

income-tax, labour laws, legal affairs,
marriage counseling, employment

7 Greater concern about ecology and Greater demand for purchased or

resource scarcity leased services, car rental, travel,
resort to time sharing rather than
ownership basis.

8 Increasing number of new products The computer-sparked development

of such service industries as
programming, repair and time

Source: Schoell, K.F. and J.T. Ivy, 1981 “Marketing : Contemporary Concepts and Practices,“
Allyn and Bacon; Boston.


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

Marketing of Services: Intangibility
An Introduction
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

Automobiles Fast-food
Cosmetics outlets

outlets Advertising
agencies Airlines
ment Consulting Teaching

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.
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
physically present to provide the service, the beautician has to be available to Marketing of Services:
Conceptual Framework
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.
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.
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.
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 product’s 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
Marketing of Services: manager must understand the nature of the five characteristics of services and
An Introduction
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 Implications Means of overcoming


1 Intangibility Sampling difficult. Difficult Focus on benefits. Use brand

to judge quality and value names. Personalise service.
in advance. Not possible Develop reputation. Increase
to patent or have copyright tangibility (e.g. its physical
Relatively difficult to representation)

2 Inseparability Requires presence of Learn to work in larger groups.

performer/producer. Work faster. Train more service
Direct sale. Limited scale performers
of operations.
Geographically limited

3 Heterogeneity Difficult to standardise Careful selection and training of

quality. personnel. Define behaviour
norms. Reduce role of human
element. Mechanise and
automate maximum possible

4 Perishability Cannot be stored. Problem Better match between supply

of demand fluctuation and demand by price reduction
in low demand season

5 Ownership Customer has access to but Stress advantages of non-

not ownership of facility or ownership such as easier
activity. payment scheme.

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 ...........................................................................................................................
........................................................................................................................... Marketing of Services:
Conceptual Framework


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 Services Directed At

Tangible Action People Possession
Services directed Directed at goods,
at peoples bodies Physical possessions

Healthcare, Salons, Transportation

Restaurants, Laundry/Dry
Transportation cleaning Lawn care
Intangible Action Services directed Services directed
at peoples minds. at intangible assets

Education Banking
Broadcasting Legal Services
Information Insurance
Museums Accounting

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 Membership Non Membership
Continuous Insurance Police protection
Education Public highway

Discrete Theatre seat subscription Car rental

commuter tickets Pay telephone
Marketing of Services: 3. How the Service is delivered
An Introduction
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 Availability of outlets
and Organisation
Single site Multiple site
Customer goes to service organisation Theatre Bus Service
Fast Food Chain
Service organisation comes to the customer Lawn care Mail delivery
Pest control Emergency auto repair
Customer and organisation transact business Credit cards Telephone company
at arms length Local TV station 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
14 private services on the other hand include the whole gamut of service designed
for and consumed by customers as individuals for e.g., restaurants, beauty care Marketing of Services:
Conceptual Framework
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.


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 P’s added to the traditional mix. These are:
People All human actors who play a part in service
delivery and thus influence the buyer’s perceptions;
namely, the firm’s personnel, the customer, and other
customers in the service environment
Physical evidence 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.

Figure 1.2: The Marketing Mix for Services



Range Level Location Advertising Training Environment Polices

Quality discounts, Accessibility Personal Discretion Furnishings Procedures
Brand Allowances Distribution Selling Sales Commitment Colour, Mechanisation
name Commissions channels Promotion Incentives Layout Employee
Warranty Payment Distribution Publicity Appearance Noise levels customer
Post terms coverage Public Inter Facilitating involvement
Transaction Consumer’s relation personal goods Flow of
service perceived behaviour Tangible clues activities
value Attitudes
Quality/ Other
Price customers
relationships Degree of

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,
Marketing of Services: Process The actual procedures, mechanisms and flow of
An Introduction
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 offerings—is 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 doesn’t 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


Internal Marketing External Marketing

Enabling the Promise Setting the Promise

Providers Customers
Interactive Marketing
Delivering the Promise

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 can’t be
supported in the absence of any one of the sides.

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,
inseparability, heterogeneity, perishability and ownership. The unit discussed Marketing of Services:
Conceptual Framework
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) 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
4) Briefly discuss the services marketing mix and the services marketing
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
Marketing of Services: Q.6: The marketing solution to the problems posed by service characteristic
An Introduction
“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
customer’s 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
1. 4 2. 2 3. 3 4. 2 5. 3 6. 1
7. 1 8. 3 9. 4 10. 2 11.2


Adrian Palmer, Principles of Services Marketing, (New York: McGraw Hill),
Christian Groonross, Service Management and Marketing, New York. John
18 Wiley, 2000.
Christopher H. Lovelock, Services Marketing: People, Technology, Strategy, Marketing of Services:
Conceptual Framework
(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. 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
4. Batesou J, “Do We Need Services Marketing”, Marketing Consumer
Services, New Insights, Report 75-115, Marketing Science Institute, Boston
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).

Marketing of Services:
After going through this unit you should be able to:
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.

2.1 Introduction
2.2 International Scenario
2.3 Service Sector in India
2.4 Analysis of Specific Service Sectors
2.5 Summary
2.6 Self Assessment Questions
2.7 Appendix : Service Tax in India

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 recreation…and 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
It is quite obvious from Figure 2.1 that while the role of agriculture has been Role of Services in
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.

Figure 2.1: The growing importance of service sector in

100 industrial societies

% of Output and Employment



1700 1800 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.

Marketing of Services: iii) Manufactured goods tied to the sale of services: This link is reverse
An Introduction
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.


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)

Country Services Industry Agriculture
Denmark 71 26 3
France 71 26 3
Germany 68 31 1
India 50 25 25
South Korea 54 41.6 4.4
Russia 59.6 34.6 5.8
Nigeria 35 20 45
Switzerland 64 34 2
U.S.A 80 18 12
Taiwan 67 31 2

Source: The World Fact Book 2003,

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
22 of a modern services sector reverberate across an entire economy, touching
every product, idea and consumer. Modernizing services can help developing Role of Services in
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
world’s economies; liberalization of services trade is therefore clearly in the
interest of developing countries. (Source:
Service Sector — Role of WTO
WTO’s 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.
Marketing of Services: Leading Exporters and Importers in commercial services
An Introduction
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 Share Annual percentage change

2002 1995 2002 1995-00 2000 2001 2002
All commercial services 1570 100.0 100.0 4 6 0 6
Transportation 350 25.2 22.3 3 7 -1 4
Travel 480 33.7 30.6 3 4 -2 4
Other commercial services 740 41.1 47.0 6 7 2 9

Source: WTO

Table 2.3: Leading exporters and

importers of other commercial services, 2002

($ bn and percentage)

Share in world
Value exports/imports Annual percentage change
2002 1995 2002 1995-00 2000 2001 2002
United States 141.2 16.0 19.1 11 5 4 6
United Kingdom 84.1 8.2 11.4 13 5 -1 15
Germany 54.7 7.7 7.4 3 -3 4 20
Japan 37.4 7.8 5.1 1 16 -8 3
France 34.3 7.2 4.6 -3 1 2 9
Netherlands 28.7 4.1 3.9 1 -3 21 11
Ireland 23.4 ... 3.2 ... ... ... 23
Italy 23.4 4.4 3.2 -2 -5 20 2
Hong Kong, China 21.1 2.5 2.9 10 17 0 5
Belgium 19.8 ... 2.7 ... ... ... ...
Spain 19.0 1.7 2.6 12 8 15 15
Canada 18.7 2.5 2.5 11 9 -2 -5
India 18.1 0.5 2.4 41 38 28 12
Austria 17.8 3.0 2.4 3 8 6 0
Singapore 17.2 3.5 2.3 -1 14 2 6
Above 15 560.0 ... 75.7 ... ... ... ...
United States 86.2 8.5 12.5 13 12 8 11
Germany 65.3 10.6 9.5 5 -2 8 -1
Role of Services in
Japan 48.4 10.6 7.0 0 -4 -1 1 Economy
United Kingdom 34.9 4.4 5.1 10 8 -4 8
Ireland 34.8 ... 5.1 ... ... ... 14
Italy 30.9 5.7 4.5 0 1 14 5
France 30.6 5.9 4.4 -2 -6 10 16
Netherlands 30.0 4.2 4.3 5 7 10 9
Spain 21.7 2.4 3.2 10 2 10 14
Austria 21.4 2.9 3.1 6 5 5 12
Canada 21.0 3.2 3.1 8 6 2 -4
China 17.1 2.5 2.5 2 1 12 24
Belgium 17.0 ... 2.5 ... ... ... ...
Korea, Republic of 15.4 2.0 2.2 10 26 -6 9
Sweden 12.4 1.5 1.8 11 7 6 0
Above 15 485.0 ... 70.7 ... ... ... ...

Source: WTO

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 Leading Position in Industry

USA Fast Food, Education and Training, Health Care
Services and Hospital Management, Hotels, Car
Rental, Accounting, Advertising, Commercial Banking,
Money Management, Information, Trading,
U.K. Specialty Stores, Auctioneering, Advertising, Trading,
Money Management
Switzerland Trading, Commercial Banking, Money Management
Italy Design Services
Germany Money Management

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.

Marketing of Services:
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, India’s 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 India’s Share

Year Total world India’s service India’s share in

service exports exports in $ bn world services
$ bn exports
1990 807.01 4.60 0.57
1991 844.83 4.90 0.58
1992 960.79 4.90 0.51
1993 943.40 5.00 0.53
1994 1052.63 6.00 0.57
1995 1192.99 6.80 0.57
1996 1250.00 7.00 0.56
1997 1313.43 8.80 0.67
1998 1321.43 11.10 0.84
1999 1333.33 13.20 0.99
2000 1435.00 17.60 1.20
2001 1460.00 20.40 1.40
2002 1540.00 20.70 1.30

Source: WTO

The share of services in the country’s 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 sector’s share in GDP has declined from 25.38 per cent to 21.8 per
cent in 1990-91 and 2002-03 respectively. The agricultural sector’s 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 sector’s 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

It is true that, in India, the service sector’s 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
growth rate of GDP. Thus, the service sector has grown at a higher rate than Role of Services in
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, Financing, Community, Construction

Restaurants, Insurance Real Social and 5.3%
Transport and Estate and Personal Services
Communication Business 13.8%
24.3% Services 12.7%

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 India’s 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
Marketing of Services: Table 2.6: Employment in organized sector by industry division
An Introduction

(Figure in ‘000)

For the year ending March 31, 2001 1991 1981 1971
Total 27790 26734 22879 17473
Agriculture etc. 1433 1447 1321 1074
Mining and quarrying 954 1099 948 586
Manufacturing 6443 6333 6047 4761
Electricity, gas and water etc 987 945 718 481
Construction 1138 1222 1161 1019
Services 16835 15689 12684 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


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. India’s
high capabilities in Information Technology, and its booming IT software exports
which now account for 2% of the GDP, are well known. India’s 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 India’s 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

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
tourists with diverse interests and means, all the services needed to make their Role of Services in
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 world’s largest employer and this sector is one of the
world’s 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

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 Foreign Tourist Arrivals Earnings (US$ Billion)

1980 0.80 1.40
1990 1.71 1.51
1996 2.29 2.96
2001 2.54 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
Marketing of Services: Table 2.8: Saving Deposits with Commercial Banks (Rs. Crores)
An Introduction

Year Indian Banks Foreign Banks Total

1995-96 99347 2514 101861
1996-97 112570 2875 115445
1997-98 136770 3194 139964
1998-99 160889 3836 164725
1999-00 187173 4727 191900
2000-01 217452 5530 222982
2001-02 272119 6988 279107
Source: India

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 nation’s 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 % of National Plan Outlay

450 14
400 12
Rs. 8
200 6
50 2
0 0

n u lan 1



an 2











VI n 8


n u lan

n u lan


















30 Source: The India Infrastructure Report, Vol. III, 1996, p. 115

The number of fixed lines has increased from 5.8 million in 1991-92 to 42.58 Role of Services in
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
Fixed including 41.48 42.58 3
Mobile including 13.00 33.58 160
Cellular and
Gross Total 54.48 76.16 40

Source: TRAI

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, India’s 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 1992 1991 1981 1971 1961

Hospitals 15.1 13.7 11.2 6.8 3.9 3.1
Hospital Beds 870 835 810 569 349 230
Doctors 484 411 394 269 151 84
Primary Health 22.4 20.7 20.4 5.7 5.1 2.6
Nurses 566 385 340 154 81 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.

Marketing of Services: IT and BPO
An Introduction
The Indian IT sector has proved to be the country’s 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

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)

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. India’s service
export stood at U.S. $ 20.7 billion in 2002. The share of services in India’s
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.


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.

Role of Services in
2.7 APPENDIX Economy


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 1990’s 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

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).
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
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)

* (part of CBEC website) 33

Marketing of Services: 8. Custom house agents (15th June, 1997)
An Introduction
9. Steamer agents (15th June, 1997)
10. Clearing and forwarding agents (16th July, 1997)
11. Air travel agents — (1st July, 1997)
12. Tour operators (exempted upto 31.3.2000
Notification No.52/98,
8th July, 1998, reintroduced w.e.f.
13. Rent-a-Cab Operators (exempted upto 31.3.2000 Vide
Notification No.3/99 Dt. 28.2.99,
reintroduced w.e.f. 1.4.2000)
14. Manpower recruitment Agency (1st July, 1997)
15. Mandap Keepers (1st July, 1997)

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. Architects
17. Interior Decorators
18. Management Consultants
19. Practicing Chartered Accountants
20. Practicing Company Secretaries
21. Practicing Cost Accountants
22. Real Estates Agents/Consultants
23. Credit Rating Agencies
24. Private Security Agencies
25. Market Research Agencies
26. 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 Act’2001, 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. Scientific and technical consultancy services
28. Photography
29. Convention
30. Telegraph
31. Telex
32. Facsimile (fax)
33. Online information and database access or retrieval
34. Video-tape production Role of Services in
35. Sound recording
36. Broadcasting
37. Insurance auxiliary activity
38. Banking and other financial services
39. Port
40. Authorised Service Stations
41. 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. Auxiliary services to life insurance
43. Cargo handling
44. Storage and warehousing services
45. Event Management
46. Cable operators
47. Beauty parlours
48. Health and fitness centres
49. Fashion designer
50. Rail travel agents.
51. 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 café
7. Franchise Services

The extension to following three service was given in the Budget 2003-04 as
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,
Marketing of Services: Ministry of Finance, Government of India. The unique feature of Service
An Introduction
Tax is reliance on collection of tax, primarily through voluntary


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 Revenue % Growth No. of Services No. of % Growth

year Rs. Crores taxed assessees
1994-95 410 Base year 3 3,943 Base year
1995-96 846 101 3 4,866 19
1996-97 1022 24 6 13,982 187
1997-98 1515 49 18 45,991 228
1998-99 1787 18 30 1,07,479 133
1999-00 2072 16 27 1,15,495 7.45
2000-01 2540 23 26 1,22,326 5.91
2001-02 3305 26 41 1,87,577 53
2002-03 4125 25 51 2,32,048 24

Source: (Part of CBEC website).

After studying this unit you should be able:
to outline recent trends in service sector trade and investment flows with
particular focus on India’s prospects in this sector,
to provide an overview of the GATS and recent developments in the GATS
negotiations, and
to discusses India’s 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.

3.1 Introduction
3.2 Global Trends in Services
3.3 India’s Opportunities and Constraints in the Service Sector
3.4 GATS: An Overview
3.5 Negotiating Strategy and Domestic Reforms
3.6 Summary
3.7 Self Assessment Questions
3.8 Further Readings
3.9 References

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 India’s
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.


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.
Marketing of Services: The growth in service sector output and employment has also been
An Introduction
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
38 3.1 per cent of world GDP and 13 percent of total world exports of goods and
services. In value terms, it increased threefold during this period, from US $ International Trade in
Services, the WTO, and
270 billion in 1985 to $890 billion in 1997. Even for countries with modest India
service exports, if one looks at indicators of relative specialization (ratio of
mode 1 based services trade to total exports of goods and services), cross-
border 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
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 cross-
border 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 39
Marketing of Services: small relative to those associated with other modes of supply. Mode 4 based
An Introduction
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,
conceptual, and methodological difficulties in measuring this sector. There are International Trade in
Services, the WTO, and
major discrepancies between national income accounts and balance of payments India
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.


Over the past two decades, the service sector has replaced agriculture as the
dominant sector in India. The service sector’s share in India’s 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, India’s 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 country’s 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 India’s Service Sector Trade

Trade statistics for India’s 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 India’s 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 India’s service sector
exports and imports.
Marketing of Services: Table 3.1: India’s Services Trade (US $ million)
An Introduction

Items 1990-91 1995-96 2000-01 2002-03

1) Travel, net 1,064 1,546 294 -438
Receipts 1,456 2,713 3,168 3,029
Payments 392 1,167 2,874 3,467

2) Transportation, net -110 -158 -1,257 - 3

Receipts 983 2,011 1,913 2,544
Payments 1,093 2,169 3,170 2,547

3) Insurance, net 23 36 135 57

Receipts 111 179 257 371
Payments 88 143 122 314

4) Miscellaneous, net 161 -1,405 2,990 6,511

Receipts 1,986 2,411 12,875 18,735
Payments 1,825 3,846 9,885 12,224

Of Which :
Software Services, net N.A. N.A. 5,750 8,863
Receipts N.A. N.A. 6,341 9,600
Payments N.A. N.A. 591 737

Source: RBI Annual Reports (

The data clearly indicate that India’s services trade has undergone a major
expansion during the last few years. This expansion, however, has not been
uniform across subsectors. The composition of India’s 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 India’s 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 India’s BoP statistics for lack of information and systematic
compilation of data. The BoP figures also exclude FDI in India’s service sector,
which is likely to result in under-representation of subsectors such as
communications, transport, and financial services where FDI plays a greater

Using the mode-wise classification of services trade, all four GATS modes
appear to be important in India’s 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
subsector within this segment is software services which relies on cross border International Trade in
Services, the WTO, and
movement of software service providers to provide on-site and customized India
software services in overseas markets. It is difficult, however, to gauge the
significance of this mode in India’s 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 India’s services exports.

On the import side, the main mode of interest to India is commercial presence,
or mode 4. Data available from the RBI’s 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 India’s services trade is likely to grow.
Constraints to India’s Trade in Services
There are many policy-related, infrastructural, and other constraints to India’s
trade in services. On the export front, India’s 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 India’s’ exports of professional services.

On the import front, there are again numerous domestic regulatory barriers. For
instance, India’s 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 India’s 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.

Marketing of Services:
An Introduction 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 country’s 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
also specify in their schedules, the limitations and exceptions they wish to International Trade in
Services, the WTO, and
maintain which violate market access and national treatment, again by mode of India
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 Conditions and

on market access qualifications on
national treatment
Horizontal Cross-border “None” E.g., “None” other
commitments supply than tax measures that
(i.e., across all result in differences in
sectors) treatment with respect
to R&D services.
Consumption “None” “Unbound” for
abroad subsidies, tax
incentives, and tax
Commercial E.g., “Maximum foreign E.g., “Unbound” for
presence equity stake of 49 subsidies. Approval
percent” required for equity
stake over 25 percent.
Temporary entry E.g., “Unbound” except E.g., “Unbound”
of natural persons for the following: except for categories
Intra-corporate transferees of natural persons
of executives and senior referred to in the
managers; specialist market access column.
personnel subject to
economic needs test for
stays longer than one
year; service sellers for
upto three months
Specific Cross-border E.g., “Commercial presence E.g., “Unbound”
commitment supply is required”
E.g., Consumption E.g., “None” E.g., “None”
Architectural abroad
Commercial E.g., “25 percent of senior E.g., “Unbound”
presence management should be
Temporary entry E.g., “Unbound, except as E.g., “Unbound,
of natural persons indicated in Horizontal except as indicated in
Commitments Horizontal

Source: Hoekman in (eds.) W. Martin and A. Winters (1995).

Marketing of Services: The national treatment obligation requires a country to accord treatment to
An Introduction
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

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. India’s 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
46 modes 1 and 4.
GATS 2000 Negotiations International Trade in
Services, the WTO, and
Talks resumed in GATS 2000 as mandated during the Uruguay Round and are India
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 labour-
intensive 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 India’s 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 India’s 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) Strict time frame for issuance (2-4 weeks maximum);
ii) Flexibility in issuance on shorter notice for select categories of providers
and border availability;
iii) Transparent and streamlined application process;
iv) Mechanisms to find status of application, rejection, requirements;
v) Easier renewal and transfer procedures;
vi) Safeguard mechanisms to prevent entering permanent labour market and
vii) 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
Marketing of Services: business process outsourcing and back office service exports by India. There is
An Introduction
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 country’s 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.


In order to benefit from the GATS negotiations, India needs to have a coherent
external and domestic strategy. It needs to: (a) identify the country’s 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 India’s 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,
48 keeping in mind needs such as capital infusion, technology upgradation,
synergies with other sectors, and the larger economy-wide impact on efficiency International Trade in
Services, the WTO, and
and competitiveness. The commitments have to be framed in the larger context India
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.

India’s 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 knowledge-
intensive 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 India’s 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 India’s 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
Marketing of Services: and service suppliers. Such an approach would be conducive to the needs of
An Introduction
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
government’s 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.

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


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.
International Trade in
3.8 FURTHER READINGS Services, the WTO, and
Chanda, R., Globalization of Services: India’s 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,
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,
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.


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
Marketing of Services: companies in agriculture or manufacturing, it may result in some
An Introduction
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.

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.

4.1 Introduction
4.2 Decision Making Roles
4.3 Classification of Buyers
4.4 Consumer Decision Making
4.5 Factors Influencing Buyer Behaviour
4.6 Search, Experience and Credence Quality
4.7 Summary
4.8 Self Assessment Questions
4.9 Further Readings

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 don’t 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


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.

Marketing of Services: Conceptually, the consumer decision making roles are best exhibited by the
An Introduction
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
i) Initiator: The person who has a specific need and proposes to buy a
particular service.
ii) 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.
iii) Gatekeepers: The person or organization or promotional material which
act as a filter on the range of services which enter the decision choice
iv) 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.
v) Buyer: The person who makes the actual purchase or makes bookings
for a service like travel, hotel room, hospital, diagnostic lab, etc.
vi) 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.

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 company’s 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.
54 ...........................................................................................................................
Consumer Behaviour in

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 influencer’s 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.


The consumer’s 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 firm’s marketing efforts (marketing mix
activities) which communicate the benefits of the products and services to
potential consumers and the non-marketing socio-cultural influences. Socio-
cultural influences include family, friends, social class, subculture and culture.
The combined effect of firm’s 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

Firm’s Post purchase
Marketing Evaluation
Efforts Decision Making


Marketing of Services: The decision making is affected by the psychological field i.e. the internal
An Introduction
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

On the other hand, wants emerge from the buyer’s 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.
Activity 2 Consumer Behaviour in
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.


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, buyer’s 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

Personality, life
Perception, Buying style, other
attitudes, Decision demographic
motivation factors like; age,
gender, occupation

Culture, Reference Groups,


Socio-Cultural Factors
Marketing of Services: a) Cultural Factors: Children acquire from their environment a set of beliefs
An Introduction
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,

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 don’t 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 it’s the teenage children who influence the parents to decide on a
destination and middle aged buy more of insurance services than the younger
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. Buyer’s perception of a particular product greatly influences the
buying behaviour. For example, if the buyer’s 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 buyer’s 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
doesn’t 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
58 unfulfilled need. Needs are basically of two types. First, the ‘innate needs’
those needs an individual is born with and are mainly physiological. They Consumer Behaviour in
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 individual’s personality can be developed. Each
personality trait denotes two absolute points and a person’s 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 Behavioural Dimensions

Rigidity Rigid—————–––––––– Flexible
Leadership Leader————————– Follower
Neuroticism Stable————————–– Neurotic
Extroversion Extrovert———————– Introvert
Dependability Independent——————– Dependent
Achievement 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 doesn’t 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 person’s 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 Interests Opinions

Work Family Themselves
Hobbies Home Special issues
Entertainment Job Products
Shopping Fashion Future

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. 59
Marketing of Services: c) Demographic Factors: Buyer’s demographic factors like age, gender,
An Introduction
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.


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 Most
goods Services

Easy to evaluate Difficult to evaluate


Restaurant meals

Television repair

Root canal

Medical diagnosis


Child care

Legal services

Auto repair

High in search High in High in credence

qualities experience 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
Information Search: In the case of services, consumers rely more on Consumer Behaviour in
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. Mass communication conveys very little about experience qualities.
ii. Most of the service providers are local/independent and therefore
lack the financial or marketing acumen to promote their offering.
iii. Shared advertising is rare as the producer and retailer are the same
in services.
iv. 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
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 person’s 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
Marketing of Services: feel more satisfied with a service if they believe that they have greater
An Introduction
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.

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.

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,
J. Bateson, Managing Services Marketing: Text and Readings, Dryden,
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,
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,
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.

Indira Gandhi
National Open University MS-65
School of Management Studies Marketing of Services


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

Services Marketing Mix
Course Preparation Team*
Prof. L.M. Johari Dr. V. Chandrashekhar Prof. J.B. Nadda
FMS, Delhi University Mahindra Days Hotels & Resorts Goa University
Delhi Bangalore Goa

Prof. J.D. Singh Ms. Sudha Tewari Mr. M. Venkateswaran

IMI Parivar Seva Sansthan Transportation Corporation of
New Delhi New Delhi India, Hyderabad

Prof. P.K. Sinha Mr. Pramod Batra Prof. Rakesh Khurana

IIM EHIRC School of Management Studies
Bangalore New Delhi IGNOU, New Delhi

Mr. Amrish Sehgal Ms. Rekha Shetty Prof. Madhulika Kaushik

Bhutan Tourism Development Apollo Hospitals School of Management Studies
Corpn. Madras IGNOU, New Delhi

Mr. D. Ramdas Ms. Malabika Shaw Mr. Kamal Yadava

Management Consultant AIMA School of Management Studies
New Delhi New Delhi IGNOU, New Delhi

Prof. M.L. Agarwal Mr. Saurabh Khosla

XLRI Tulika Advertising Agency
Jameshedpur New Delhi

Mr. Arun Shankar Mr. Sanjeev Bhikchandani

Citi Bank Sanka Information Pvt. Ltd.,
New Delhi 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 Dr. Tapan K. Panda Prof. B.B. Khanna
Course Editor IIM Khozikode Director
IIFT, New Delhi Calicut School of Management Studies
IGNOU, New Delhi

Prof. Madhulika Kaushik Dr. Rupa Chanda Dr. Kamal Yadava

School of Management Studies IIM Bangalore Course Coordinator and Editor
IGNOU, New Delhi School of Management Studies
IGNOU, New Delhi
Prof. Rajat Kathuria
IMI, New Delhi

Print Production
Mr. A.S. Chhatwal, Asstt. Registrar (Publication),
Sr. Scale, SOMS, IGNOU

June, 2004 (Revision)

© Indira Gandhi National Open University, 2004


All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any
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2 Printed at:
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 mix-
Product, 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.

Services Marketing Mix MS-65: MARKETING OF SERVICES
Course Components




1. Marketing of Services: Conceptual Framework

2. Role of Services in Economy
3. International Trade in Services, the WTO, and India
4. Consumer Behaviour in Services


5. Product and Pricing Decisions

6. Place and Promotion Decisions
7. Extended Marketing Mix for Services


8. Service Quality
9. Managing Capacity/Demand
10. Retaining Customers


11. Financial Services Issues in Social Destination

12. Tourism and Hospitality Services Marketing India
13. Health Services Marketing of Health
14. Case Study: Serving the Global Indian


15. Educational Services

16. Professional Support Services: Advertising Agencies
17. Telecommunication Services
18. Product Support Services
19. Case Studies
1. Is the Customer Always Right?
2. The Case of Dosa King.

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.

5.1 Introduction
5.2 The Service Product
5.3 Developing New Service Offerings
5.4 Service Branding and Positioning
5.5 Pricing
5.6 Summary
5.7 Self Assessment Questions
5.8 References

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.


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. 5
Services Marketing Mix 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


1 CORE BENEFIT The fundamental benefit or service the
customer is buying (Hotel : Rest / Sleep)
2 BASIC PRODUCT Basic, Functional Attributes (Room; Bed;
3 EXPECTED PRODUCT Set of attributes / Conditions the buyer
normally expects (clean room, large towel,
4 AUGMENTED PRODUCT That meets the customers' desires beyond
expectations(Prompt Room Services, and Check
in / out, Music, Aroma)
5 POTENTIAL PRODUCT The possible evolution to distinguish the offer
(all-suite hotel)

Activity 1
For any 3 brands of a particular service (say Hospitals), prepare a comparative
table of all the 5 product levels.

Brand 1 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 Product and Pricing
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


Accessibility Service
of the Facilitating Supporting
Services Services Services



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.

Services Marketing Mix Table 5.2: Elements of Augmented Service Offer

Accessibility of – Number and skills of personnel

the Service – Working hours and time used in performing various
– Location of service outlet
– Exterior and interior of service outlet
– Infrastructure, hardware, documentation
– The number and knowledge of consumers
simultaneously involved in the process.
Interaction with service – Interactive communication between employees and
organization customers
– Interactions with the physical and technical
resources of the organization needed in the service
production process
– Interaction with other customers involved in the
Customer participation – 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
– How well the customer is willing to share
information or use service equipment

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.


In order to develop a service product, as a manager you will have to follow
the following stages:
i) the customer benefit concept;
ii) the service concept;
iii) the service offer; Product and Pricing
iv) service forms, and
v) the service delivery system

i) 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.
ii) 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
iii) 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.)
iv) 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.
v) 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 9
Services Marketing Mix 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 Concerned with what general
Level 2 benefits will the service offer

Translated into

Level 3 Service Offer Concerned with greater detailed

shaping of the service concept
decision on: service elements
(tangible and intangible)
service forms (in what way and
service levels (quality and
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

Table 5.3: Examples of Range of Service

Customer Groups
Children Mixed Adults Only women or men Business groups
Swimming Swimming Beauty parlor/Massage Conference rooms
lessons lessons facility
Badminton Badminton, Yoga/Judo Lessons Secretarial assistance
lessons Tennis lessons
Indoor games Card rooms Tournaments Video coverage
Library Billiards Kitty parties
Film shows Facilities for parties
& receptions
The service or services which you offer must be targeted at specific market Product and Pricing
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.


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 Telecom Airlines Food Hotels Pvt. Sector Life

Services Banks Insurance

1 Reliance Indian Pizza Hut Taj Hotels ICICI Bank LIC

India Mobile Airlines

2 BSNL Air Sahara McDonalds Oberoi UTI Bank ICICI

Hotels Prudential

3 Airtel Jet Airways Café Coffee ITC Hotels HDFC HDFC

Day Bank Standard

Source: Brand Equity, The Economic Times, 17 Dec 2003 11

Services Marketing Mix 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) Define a market's segments
ii) Decide which segment to target
iii) Understand what the target consumers expect and value
iv) Develop a service which caters to these needs
v) Evaluate consumer perceptions of competing services
vi) Select an image for the product matching the aspiration of the targeted
vii) 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.).

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 Service
Admission Theatre entry
Commission Brokerage service
Fare Transport
Fee Legal service
Interest Use of money
Premium Insurance
Rent Property usage
Salary Employee services
Tariff Utilities
Tuition Education

12 Source: Donald Cowell, "The Marketing of Services" Heinemann, London

A) Pricing and Service Characteristics Product and Pricing
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 non-
uniform 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. Customer-
oriented 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
Services Marketing Mix 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) customer's ability to pay differentials (as in professional services of
management consultant, lawyers);
2) price time differentials (used in hotels, airlines, telephones where there
is the concept of season and off season and peak hours); and
3) 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
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
professionals follow this pricing strategy. Product and Pricing
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

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.)

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

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. 15
Services Marketing Mix 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
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.

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.

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.

6.1 Introduction
6.2 Place or Distribution
6.3 Methods of Distribution in Services
6.4 Promotion
6.5 Summary
6.6 Self-Assessment Questions
6.7 References and Further Readings

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.


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
Services Marketing Mix 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.


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

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
Customer choice and ability to customize Place and Promotion
Quick customer feedback
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
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, like- 19
Services Marketing Mix – Hairdressers – Amusement arcades
– Travel Agents – Employment agencies
– Car hire agencies – Hotels
– Restaurants – 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

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

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.
Key Issues Involving Intermediaries Place and Promotion
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

Agent or Broker

Agent or Broker

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
Services Marketing Mix 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, 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
infrastructure. The significance of logistics is increasingly felt in the services Place and Promotion
sector as the field of logistic is gaining importance in the manufacturing

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
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. 23
Services Marketing Mix 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-of-
mouth 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
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
24 objectives of promotion and types of promotions which a service provider can
use, emphasized that in execution of any type of consumer promotion scheme, Place and Promotion
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
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

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 word-
of-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
Services Marketing Mix 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) Ensure that service employees understand that nonverbal communication is at
least as important as verbal communication.
2) Train service employees to be sensitive to nonverbal cues through, for
example, role playing and showing videotapes of actual service delivery.
3) Provide continuous feedback and periodic reminders to staff about the
importance of nonverbal communication.
4) Offer voice training to employees who need it, so they speak with a voice
which displays warmth and trust.
5) 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.
6) Conduct periodic surveys to assess customers' perceptions of service
employees' nonverbal behaviour. Consider using mystery shoppers to achieve
a similar end.
7) Provide incentives to encourage employees to adopt the recommended
changes in nonverbal behaviour.

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
26 other promotional tools like public relations and publicity.
There are very successful examples like a medical doctor specializing in eye Place and Promotion
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
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
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:

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.


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
Services Marketing Mix 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.


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.

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
To explain the meaning and significance of ‘Process Management’ in
marketing of services and the issues involved therein.

7.1 Introduction
7.2 People
7.3 Internal Marketing
7.4 Physical Evidence
7.5 Process
7.6 Summary
7.7 Self Assessment-Questions
7.8 References and Further Readings

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 can’t 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
Services Marketing Mix 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:

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 company’s service”. The importance of customers in services
stems from the fact that most services imply active and involved customer-
organisation 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
customer’s 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 cook’s 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)

b) Customers: Customers are important because they are a source of Extended Marketing
Mix for Services
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.


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 To develop motivated and customer-conscious personnel.

Strategic Level Objective To create an internal environment that supports customer-
consciousness 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
the employees must understand why they are
expected to perform in a certain manner, or in a
certain situation, actively support a given
Services Marketing Mix
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
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 don’t 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
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?

2. 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?

3. 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?

4. Do we stress team play? Do our organizational structure, physical work

environment, training and educational efforts foster teamwork? Do our
Extended Marketing
employees understand where they fit in the company team? Do they Mix for Services
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

6. 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?

7. 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?

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

turnover Repeat emphasis on
attracting new customers

Failure to develop
customer loyalty
Low profit
margins Narrow design of
jobs to accommodate
low skill level
High employee turnover;
poor service quality

No continuity in Use of technology Emphasis on

relationship for to control quality rules rather
customer Employee dissatisfaction; than service
poor service attitude
Payment of
low wages

become bored pl Minimization of
Customer Em selection effort
dissatisfaction Minimization
of training
Employees can’t

respond to customer Cy


problems me
sotom Source:
Cus t

Source: Schlesinger and Heskett 33

Services Marketing Mix Figure 7.2: Cycle of Success

turnover Repeat emphasis on
customer loyalty and

Lowered turnover, job designs
high service quality

Continuity in
relationship with Train, empower frontline
customer Employee satisfaction, personnel to control quality
positive service attitude

y Above average
Extensive plo wages
training Em
High customer Intensified
satisfaction selection effort


er r

Cu 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
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.


Cleanliness in a doctor’s clinic, the exterior appearance and interior decor of a
restaurant, the comfort of the seating arrangement in a cinema hall, adequate
facility for personal needs at the airport all contribute towards the image of the Extended Marketing
Mix for Services
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 Airline’s 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.
Services Marketing Mix 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 customer’s awareness. The social factors relate to interactive
environment comprising of people.

Figure 7.3: Ambient, Design and Social Factors of Physical Environment


( , ,
, ,
) , .
Ð . Ð
Ð .
, .

Activity 3
For a specialty restaurant identify the ambient, design and social factors which
are important from the customer’s point of view:
Roles of Physical Evidence
The primary role of evidence management is to support the organisation’s
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
36 Figure 7.4.
Figure 7.4: Role of Evidence in Services Marketing Extended Marketing
Mix for Services

Shaping first

Managing trust
Providing EVIDENCE
sensory stimuli

quality of
Changing the 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.
Services Marketing Mix 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.

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

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?
You will appreciate that the importance of process management is that it Extended Marketing
Mix for Services
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

Table 7.3: Issues in Process Management

S.No. Area of Operations Explanation

1. Process Planning and Control Operation specifications to achieve service
output in terms of quantity, quality, delivery
and costs.
2. Operations Planning Detailed specification of each sub system.
3. Facilities Design Design, layout, locations, materials handling
and maintenance.
4. Scheduling Detailing the timings at which service
operations should be completed by agreed
delivery promises within available resources
and with their economic utilization.
5. Inventory Planning and Control Planning and controlling the inventory of
people and capacity.
6. Quality Control Quality standards are attained in each service
7. Operations Control Information flows into and out of service
systems and ensures that operations are
undertaken at specific tunes as per schedule.
8. Forecasting and Anticipating demands and forecasting
Long Term Planning capabilities that need to be inducted in the

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.
Services Marketing Mix 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 both-
complexity and divergence. Analyzing the number can identify a service’s
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 Advantages Disadvantages

Reduced Divergence – Uniformity would reduce – Inflexibility in operating
cost, improve productivity procedures.
and make distribution easier. – Lower customization and
– Increase perceived reliability, thus consumer rejection
uniform service quality and inspite of low cost.
greater service availability.
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 – Reduced complexity indicates – Reduced complexity can
a specialization strategy. also be perceived as
– Narrowing the service offering stripped down service.
makes distribution and control – It can be competitively
easier. risky if other providers
– Perceived positively in the continue to offer a
market provided it stands out. broader, more extensive
full-service alternative.
Increased Complexity – Higher complexity usually – Too much complexity can
indicates a strategy to gain be confusing as a result
greater penetration in the overall quality may fall.
market by adding more – Highly complex service
services. system may be vulnerable
– Increasing complexity can to inroads by competitors
increase efficiency by who specialize.
maximizing the revenue
generated from each customer.

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.
Activity 4 Extended Marketing
Mix for Services
Compare the relative advantages and disadvantages of “Conventional token
system in retail banking with the teller system and ATM system.”

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 employee’s 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.

Services Marketing Mix
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),
2. Christian Gronross, “The Internal Marketing Function,”Strategic
Management and Marketing in The Service Sector, Report No. 83-
104, (Cambridge : Marketing Science Institute), 1983.
3. 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.
4. V.C.Judd “Differentiate with the 5th P:People”, Industrial Marketing
Management, No 16, p.241-247.
5. Leonard L.Berry and A.Parsuraman, Marketing Services : Competing
Through Quality, (New York : Free Press), 1991, pp.152, 171-172.
6. G.Lyan Shostack, “Service Positioning Through Structural Changes,
Journal of Marketing, Vol 51, Jan. 1987, pp 34-43)
7. A. J. Mcgrath, “When Marketing Services 4Ps Are Not Enough”,
Business Horizons, May-June, 1986, pp.44-50.
8. Leonard L.Berry and A.Parsuraman, Marketing Services : Competing
Through Quality, (New York : The Free Press) p.94,1991.
9. S.Majaro, Marketing in Perspective, (London : George Allen), 1982.
10. 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.
11. R.Doswell and Paul Gamble, Marketing and Planning Hotel and
Tourism Projects, (London : Hutchinson), 1979.
12. Christopher W.L.Hart, “The Power of Unconditional Service
Guarantees,” Harvard Business Review, July-Aug, 1988 pp-54-62.
13. Donald W. Cowell, The Marketing of Services, (London : Heinemann),
1984, p.243.
14. G.Lynn Shostack, “Service Positioning through Structural Changes”,
Journal of Marketing, Vol 51, Jan 1987 p.34-43.

Extended 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,
J. Bateson, Managing Services Marketing: Text and Readings, Dryden,
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,
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,
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

Indira Gandhi
National Open University MS-65
School of Management Studies Marketing of Services


Service Quality 5
Managing Demand and Capacity 24
Customer Retention 38

Strategic Issues
Course Preparation Team*
Prof. L.M. Johari Dr. V. Chandrashekhar Prof. J.B. Nadda
FMS, Delhi University Mahindra Days Hotels & Resorts Goa University
Delhi Bangalore Goa

Prof. J.D. Singh Ms. Sudha Tewari Mr. M. Venkateswaran

IMI Parivar Seva Sansthan Transportation Corporation of
New Delhi New Delhi India, Hyderabad

Prof. P.K. Sinha Mr. Pramod Batra Prof. Rakesh Khurana

IIM EHIRC School of Management Studies
Bangalore New Delhi IGNOU, New Delhi

Mr. Amrish Sehgal Ms. Rekha Shetty Prof. Madhulika Kaushik

Bhutan Tourism Development Apollo Hospitals School of Management Studies
Corpn. Madras IGNOU, New Delhi

Mr. D. Ramdas Ms. Malabika Shaw Mr. Kamal Yadava

Management Consultant AIMA School of Management Studies
New Delhi New Delhi IGNOU, New Delhi

Prof. M.L. Agarwal Mr. Saurabh Khosla

XLRI Tulika Advertising Agency
Jameshedpur New Delhi

Mr. Arun Shankar Mr. Sanjeev Bhikchandani

Citi Bank Sanka Information Pvt. Ltd.,
New Delhi 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 Dr. Tapan K. Panda Prof. B.B. Khanna
Course Editor IIM Khozikode Director
IIFT, New Delhi Calicut School of Management Studies
IGNOU, New Delhi

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School of Management Studies IIM Bangalore Course Coordinator and Editor
IGNOU, New Delhi School of Management Studies
IGNOU, New Delhi
Prof. Rajat Kathuria
IMI, New Delhi

Print Production
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June, 2004 (Revision)

© Indira Gandhi National Open University, 2004


All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any
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2 Printed at:
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.

Course Components




1. Marketing of Services: Conceptual Framework

2. Role of Services in Economy
3. International Trade in Services, the WTO, and India
4. Consumer Behaviour in Services


5. Product and Pricing Decisions

6. Place and Promotion Decisions
7. Extended Marketing Mix for Services


8. Service Quality
9. Managing Capacity/Demand
10. Retaining Customers


11. Financial Services Issues in Social Destination

12. Tourism and Hospitality Services Marketing India
13. Health Services Marketing of Health
14. Case Study: Serving the Global Indian


15. Educational Services

16. Professional Support Services: Advertising Agencies
17. Telecommunication Services
18. Product Support Services
19. Case Studies
1. Is the Customer Always Right?
2. The Case of Dosa King.

After studying this unit you should be able to:
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.

8.1 Introduction
8.2 Reasons for Different Approach to Service Quality
8.3 Service Quality Models
8.4 Benefits of Service Quality to the Organisation
8.5 Measuring Service Quality
8.6 Communicating with Customers about Service Quality
8.7 Case Study
8.8 Summary
8.9 Self Assessment Questions
8.10 Further Readings

Quality came to the service literature at the beginning of the 1980’s. 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 1980’s 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

The conceptualization and measurement of service quality perceptions have

been one of the most debated and controversial topics in the service marketing

The term ‘Service Quality’ has been defined in different ways. Given below
are some of the definitions :
Strategic Issues 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,
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 customer’s 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.


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 can’t 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.
ii) 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.

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
6 quite opposite to goods where they are engineered, produced and quality
8.1: Service Quality

Interaction of buyer and seller

‘Service Encounter’

Production Consumption Production 123456789012


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.


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
Strategic Issues technical quality is acceptable, the process dimension, or functional quality,
frequently may be more critical to consumer’s 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.


Expected Quality Total Perceived Quality Experienced Quality


Market Communication
Customer Needs
Technical Quality: Functional Quality:
What 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 doesn’t 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 firm’s control and others only
indirectly controlled. Factors under firm’s 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 firm’s control but can be influenced. The marketers should understand
8 from this not to overpromise. Delivering on promises is an important aspect of
perceived service quality. Also, it should be appreciated that customer Service Quality
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).

Responsiveness: Willingness to help customers and provide prompt

service (example : no waitings at the hospital).

Assurance: Employee’s knowledge and courtesy and their ability to

inspire trust and confidence. (example : knowledgeable
mechanics at auto service centre).

Empathy: Caring, individualized attention given to customers

(example: specific type of room provided to the guest
based on his previous stay, acknowledges customer by

Tangibles: Appearance of physical facilities, equipment, personnel

and written materials (example: seating and air
conditioning in a theatre).

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 customer’s requests, complaints or

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 :
Strategic Issues Provider Gap 1 : Not knowing what customers expect
Provider Gap 2 : Not selecting the right service designs and standards
Provider Gap 3 : Not delivering the service standards
Provider Gap 4 : Not 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 (Customer Gap)

Perceived Service

COMPANY GAP 4 External

Service Delivery
Communications to
GAP 1 GAP 3 Customers
Translation of
Perceptions into
Service Quality
Perception of

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
4. Provider Gap 4: Not matching performance to promises: This is Service Quality
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 1 Lack of marketing research Communication with customers
orientation Conduct marketing research
Inadequate upward communication Encourage upward communication
Too many levels of management

Gap 2 Inadequate management Top management commitment

commitment to service quality Develop Service Quality goals
Perception of infeasibility Standardization of tasks
Absence of goal setting Address feasibility of customer
Absence of customer-driven expectations
Resource constraints

Gap 3 Deficiencies in human resource Teamwork, Empowerment, Role

policies clarity, Training
Failure to match supply and Synchronize demand & capacity
demand Communicating with customers
Customers not fulfilling roles

Gap 4 Overpromising Avoid propensity to overpromise

Ineffective management of Increase horizontal communication
customer expectations Managing customer expectations
Inadequate horizontal

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.


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
Strategic Issues 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 unit’s 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 wouldn’t
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

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.

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: Service Quality

Improvement Effort
Improvement Effort

Service Quality Improvement

Service Quality Improvement

Perceived Service Qualityand
Service Quality and
Customer Satisfaction
Word - of - Mouth
Word-of-Mouth Cost Reduction
Customer Retention Cost Reduction
Customer Retention
Attraction of
Attraction of New
Revenues and Market Share
Revenues and Market Share


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.

Strategic Issues
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
today’s 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.

VYSYA BANK 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.

HDFC The nature and quality of our service will

determine our reputation in the market.

Source: Business Today, 3rd Anniversary Issue, Jan 7-21, 1995 p. 238, 259 & 268


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 company’s
performance on those same dimension. When perceived performance ratings
are lower than expectations this is sign of poor quality; the reverse indicates
good quality.

A) Expectation Statements (E)
Strongly Strongly
Disagree Agree
The physical facilities at banks 1 2 3 4 5 6 7
should be visually appealing
Banks should give customers 1 2 3 4 5 6 7
individual attention
B) Corresponding Perception Statements (P) Service Quality
Strongly Strongly
Disagree Agree
The physical facilities at XYZ 1 2 3 4 5 6 7
Bank are visually appealing
XYZ bank gives customers 1 2 3 4 5 6 7
individual attention

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) To determine a company’s service quality along each of the five service
quality dimensions.
ii) To find out relative importance of service quality dimensions as
considered by the customer.
iii) To compute overall weighted SERVQUAL score, which takes into
account the relative importance of each dimension as well.
iv) To track customers’ expectations and perceptions over time
v) To compare a company’s SERVQUAL score against those of

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.
Strategic Issues
Exhibit 8.1
The “DINESERV.PER” Interview

Introduce yourself, say that you’re trying to measure the quality of the service at your
restaurant, since you’re 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 décor 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 restaurant’s 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 customer’s 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 customer’s 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
immediately after a service transaction has taken place e.g. survey of Service Quality
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.


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
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 organization’s 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. 17
Strategic Issues 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
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.


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
80’s and known for its indifference to passengers to the highest profit making
airline in the world in 90’s and famous for its excellent quality of service, was
truly remarkable and spectacular. During this period (80’s & 90’s) 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 world’s best airline. So, what were the reasons for this extraordinary
turnaround of an ailing airline into an industry leader and how this was

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
18 themselves as service companies that happen to fly airplanes. Since most of
the airlines operate same planes, charge quite similar prices, to distinguish it has Service Quality
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. BA’s researches
confirmed this, finding that a customer’s 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
Programmes undertaken
The first major initiative taken in early 80’s 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 19
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 BA’s image as world’s favourite airline. The significant aspect
of all its communication was the credibility. BA delivered what it promised to
the customers.
BA’s 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.”

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,
Zeithaml and Berry have been discussed. Gronroos models suggests that the Service Quality
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 customer’s 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.


A) Objectives Type Questions

i) Multiple Choice Questions

1) According to Gronroos, Service quality can be broken into
a) Internal and External Quality
b) Technical and Functional Quality
c) Goods and service quality
d) 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) Assurance
b) Empathy
c) Reliability
d) Responsiveness
3) The gap between expected service and company perception of
consumer expectations can be because of
a) poor service design
b) failure to match demand and supply
c) inadequate marketing research orientation
d) overpromising
4) Which of the four service provider gaps can be closed in the
marketing function alone?
a) Gap 1
b) Gap 2
c) Gap 3
d) Gap 4
ii) True or False
5) Technical quality refers to the outcome whereas functional quality
refers to the process.
6) Customer’s expectations are influenced by word-of-mouth, personal
needs, past experience and external communication

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?

1) b 2) a 3) c 4) a
5) True 6) True 7) Tangibles 8) Reliability
9) Empathy 10) Responsiveness

B) Discussion Questions

1) What do you understand by the term Service Quality? What are the
underlying themes of service quality?
2) Define the five dimensions of service quality. Give suitable examples of
each dimension.
3) Briefly describe the gaps model and explain the significance of the five
gaps that the model identifies.
4) 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?
5) Is good service quality a cost or a revenue producer? Discuss with the
help of examples.
6) Using SERVQUAL scale, create a questionnaire for a service firm that
you patronize or are familiar with.


1. Cronin and Taylor ,” Measuring Service Quality: A Reexamination and

Extension”, Journal of Marketing, July 1992.
2. Gronroos, “Strategic Management and Marketing in the Service
Sector”, Swedish School of Economics and Business Administration,
Finland, 1982.
3. Kurtz & Clow, Service Marketing, John Wily & Sons, 2002.
4. 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
5. R.D. Buzzell and B.T. Gale, “The PIMS Principles”, Free Press NY,
6. Rust, Zahorik and Keningham, “Return on Quality - Making Service
Quality Financially Accountable”, Journal of Marketing, April, 1995,
7. Zeithaml, Berry and Parasuraman, “The Behavioural Consequences of
Service Quality,” Journal of Marketing, Vol.60, April 1996, pp.31-46.
8. Zeithaml and Bitner, “Service Marketing”, Tata McGraw Hill, 2nd Edn.
2000, New Delhi.
9. Zeithaml, Parasuraman and Berry, “Delivering Quality Service - Service Quality
Balancing Customer Perceptions and Expectations,” Free Press, NY,
10. 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.

Strategic Issues
After studying this unit, you should be able to
Explain the importance of managing demand and capacity for service
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.

9.1 Introduction
9.2 Understanding Demand Patterns
9.3 Strategies for Matching Capacity and Demand
9.4 Yield Management
9.5 Managing Customer Waiting
9.6 Managing Demand and Waiting Lines : Case of an Amusement Park
9.7 Summary
9.8 Self Assessment Questions
9.9 Further Readings

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 organization’s 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

1980’s) 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
24 difference across different types of services firms with regard to this problem.
Perception of demand fluctuation as a somewhat serious problem appeared to Managing Demand and
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?


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
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
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:

Demand Exceeds Capacity

(business lost)
Maximum Available
Demand Exceeds Optimum
Capacity (Service quality
Optimum capacity
Ideal Use

Excess Capacity (wasted

resources, may send bad


(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
26 pinpointing underlying causes of demand fluctuations and in identifying certain
peaks of specific customer categories. This may help you in identifying certain Managing Demand and
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.


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
organization’s capacity constraints. The strategies to be adopted can be broadly
divided into two categories :

1) Changing demand to fit supply (capacity) – marketing mix strategies

2) 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
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 doesn’t mean that you should take
business from any segment that is available.
b) 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
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.
d) 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.
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
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
b) 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.
c) 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
employee may move from ticketing to gate counters. This helps in Managing Demand and
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


High Demand/Slack Supply Slack Demand/Over Supply

Managing Demand Educate customers to Modify service offerings

(Changing demand to curtain usage during peak Offer discounts, sales
fit capacity) periods (through signages promotion schemes
or advertising)
Offer incentives for usage Modify hours of operations
during non-peak periods Bring service to the customers
Charge full price–no
discounts or premium
Take care of regular
customers first

Managing Capacity Hire part-time employees Schedule training of employees

(Changing capacity to Keep employees overtime Maintenance, repairs,
match demand) Cross train employees renovations
Outsource, rent facilities/ Schedule employee vacations
equipments Take on subcontract work


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 = Actual capacity used X Average actual price .

Potential revenue Total capacity X Maximum Price

It is a measure of the extent to which an organization’s 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
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 doesn’t 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
30 well as its operation and how its affects their jobs.
Also in order to make the yield management successful a strong information Managing Demand and
system within the organization as well as commitment from the top
management is essential.


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 consumer’s
evaluation of service. While reducing waiting time is important for marketers, it
is equally if not more, important to reduce the customer’s 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 multiple-
queues 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

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
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.


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 customer’s perception of it. Maister has proposed
following eight principles that you can use as service marketers to influence
customer’s 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 consumer’s 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 customer’s sight.
7) Try to reduce pre-service waiting by transferring some of the pre-service
32 waiting to the service encounter phase. For example, menu cards may be
provided to the customers while waiting, to decide on their orders, medical Managing Demand and
information may be collected from the patient prior to actually meeting the
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
bank’s 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 America’s Path breaking
Experiments,” Harvard Business Review, April 2003, p.76-77.


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 Sammy’s
Dreamland in Bangalore also coming up. 33
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 don’t even think it’s 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
side’s 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
ii) Chief Marketing office of a leading bank:
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.
iii) A former CEO of large Airlines:
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

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
time. At the specified time they come back and bypass the waiting line saving Managing Demand and
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.

i) Economic Times, New Delhi – Dec 16, 2003 – “Foreign majors eye amusement
park industry” by Rahul Sachitanand.
ii) Harvard Business Review, Nov. 2001, HBR Case Study “ Are Some Customers
More Equal Than Others ?” by Nunes and Johnson, pp 37-50.
iii) “Marketing for Hospitality and Tourism”, 3rd edn., by Kotler, Bowen and
Makens, Prentice Hall, 2003 – page 418, 459-460.
iv) “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.

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
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 Managing Demand and
normally slow. This strategy is employed because service are
a. perishable
b. variable
c. inseparable
d. intangible
1. c 2. b 3. c 4. b 5. d
6. d 7. a
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
4. Explain the term ‘Yield Management’. Identify some of the managerial
issues to be taken into account while implementing a yield management
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.
Stefen Thomke, “R & D Comes to Services: Bank of America’s
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.

Strategic Issues
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.
10.1 Introduction
10.2 Importance of Customer Retention
10.3 Customer Switching
10.4 Complaining and Service Recovery
10.5 Service Recovery Strategies
10.6 Service Guarantees
10.7 Summary
10.8 Self Assessment Questions
10.9 Further Readings

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 can’t 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, you’ve got someone who does that
every year and you’re happy with them. I see,” says Ramesh solemnly.

“There’s nothing else needs doing that they don’t do? OK, Well, maybe I’ll call
again next summer to see if you’re 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 can’t let you walk out without
saying something. I was a salesman for twenty years and a good one.”

“And I tell you, you’ll get nowhere making one call and giving up. You need
a list of numbers and you work your way through them. You’ll never get
the work of Mrs. Gupta house or anyone else’s with the attitude you’ve got.”

“Thanks for the advise” says Ramesh to PCO owner. “But, it’s OK. Really.
You see, I already do A.C. maintenance services at Mrs. Gupta’s house”.

(Based on an anecdote of Don Peppers at

Services marketers understand that having customers, not merely acquiring

customers is crucial for service companies. There is a direct link between
38 customer retention over a period of time and profitability and growth. Further,
customer retention to a great extent depends on service quality and customer Customer Retention
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.


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.


Customer Satisfaction

Customer Retention and Quality Services

Increased Profits

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
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

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

“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 year’s 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 Southwest’s systemwide average one-way

fare of $58 :
$287 (profit per flight) Customer Retention
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.
That’s how valuable each Customer is to Southwest and you!”

Source: and Kevin Freiberg & Jackie Freiberg, “NUTS!

Southwest Airlines’ Crazy Recipe for Business and Personal Success”)


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,
e) Response to service failures (negative response, no response, reluctant
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 organization’s
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.

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 can’t 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 don’t 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
frequent flyer schemes offered by airlines which reward customers with a free Customer Retention
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 Shopper’s Stop), Jet Privilege programme (of Jet Airways),
Taj’s Inner Circle are all examples of programmes which offer incentives for
customer loyalty.


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 doesn’t 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
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 : Customers should know where to complain
b) Accessibility : Customer should know how to complain. As a
rule of thumb, the more formal the system for
Strategic Issues lodging complaints, the less accessible it is to
c) Responsiveness: Complains need to be dealt with quickly. The
quicker the complains are dealt with, the higher
the customer satisfaction.
d) Customer-focused A service provider who adopts customer
approach: focused approach invites complaints and
indicates commitment to resolving complaints by
its words and actions in all fairness.
e) Accountability: Someone in the organization has to take
responsibility for complaint handling.
f) Continuous This is about looking at the root causes and
improvement: fixing them.

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 :


Complaint Complaint Process Financial

culture processes improvement performance

Employee Employee
attitude retention

Source: Robert Johnson, “Linking Complaint Management to Profit,” International Journal of

44 Service Industry Management , Vol. 12, Nov. 2001
the intervening variables i.e. satisfying and retaining the customer /employee Customer Retention
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 organization’s complaint culture.”
Activity 3
Contact any service organization and find out the mechanism through which it
encourages customer feedback and complaints.


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 customer’s 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. 45
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,” You’re right”, “ It, shouldn’t 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

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
can’t 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 customer’s concerns. Let him know that you sincerely care
about his problem even if you don’t agree with his comments.
APOLOGIZE even if you are not the cause of problem. When said sincerely, the
words “I’m sorry” can diffuse as much as 95% of most people’s 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
doesn’t 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 person’s 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
value of failure. Customer defection is a unit of error containing nearly all the Customer Retention
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 June 15, 2004

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 – didn’t 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. He’s 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 I’ll go elsewhere for my requirements.

A. Roy
Vice- President


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) Implementing a guarantee forces a company to focus on customers.
ii) 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.
iii) It encourages customers to complain and provides the opportunity to the
organization to make amends, thereby retaining the customers.
iv) 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
v) A well designed service guarantee can lead to increased service quality
expectations, lower perceived risk and increased purchase intent.
vi) Service companies have a greater opportunity than manufacturers to
differentiate themselves through a guarantee .

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



Advertising featuring People invoking the

the guarantee guarantee +

- Increased sales
Increased sales Increased from positive word
from advertising repurchase of mouth

+ +
+ Market share and

Source: Rust, Zahorik and Keiningham, ‘Service Marketing’, Harper Collins, 1996, p.204
The above figure highlights that with a guarantee, advertising is more effective, Customer Retention
which attracts more customers.
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 company’s promise to meet all of its customer’s
expectations. For example, a hotel guarantee states ‘if you are not completely
satisfied, we don’t 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) Unconditional: A guarantee should not have “ifs” , “and”, or “buts”. It
should make the promise unconditionally.
ii) 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.
iii) 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.
iv) 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
Activity 5

a) Identify a few service providers who offer a service guarantee. Evaluate

these guarantees on the characteristics of an effective guarantee discussed

b) Critically evaluate the following service guarantee offered by a Delhi based

multiple chain restaurant for its home delivery
...................................................................................................................... 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 can’t 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.


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 subscriber’s 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)!


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
50 their research done in Singapore, have given the following findings in this regard.
Service provider with a good but not outstanding reputation for service Customer Retention
quality has much to gain from the introduction of a well-designed service
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.

Retaining customers is of great significance for a service company’s 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 company’s 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 company’s 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.
1. (c) 2. (b) 3.(d)
4. False 5. True 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.

Indira Gandhi
National Open University MS-65
School of Management Studies Marketing of Services


Financial Services 5
Tourism and Hospitality Services 23
Health Services 46
Case Study: Serving the Global Indian 62

Sectoral Applications-I
Course Preparation Team*
Prof. L.M. Johari Dr. V. Chandrashekhar Prof. J.B. Nadda
FMS, Delhi University Mahindra Days Hotels & Resorts Goa University
Delhi Bangalore Goa

Prof. J.D. Singh Ms. Sudha Tewari Mr. M. Venkateswaran

IMI Parivar Seva Sansthan Transportation Corporation of
New Delhi New Delhi India, Hyderabad

Prof. P.K. Sinha Mr. Pramod Batra Prof. Rakesh Khurana

IIM EHIRC School of Management Studies
Bangalore New Delhi IGNOU, New Delhi

Mr. Amrish Sehgal Ms. Rekha Shetty Prof. Madhulika Kaushik

Bhutan Tourism Development Apollo Hospitals School of Management Studies
Corpn. Madras IGNOU, New Delhi

Mr. D. Ramdas Ms. Malabika Shaw Mr. Kamal Yadava

Management Consultant AIMA School of Management Studies
New Delhi New Delhi IGNOU, New Delhi

Prof. M.L. Agarwal Mr. Saurabh Khosla

XLRI Tulika Advertising Agency
Jameshedpur New Delhi

Mr. Arun Shankar Mr. Sanjeev Bhikchandani

Citi Bank Sanka Information Pvt. Ltd.,
New Delhi 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 Dr. Tapan K. Panda Prof. B.B. Khanna
Course Editor IIM Khozikode Director
IIFT, New Delhi Calicut School of Management Studies
IGNOU, New Delhi

Prof. Madhulika Kaushik Dr. Rupa Chanda Dr. Kamal Yadava

School of Management Studies IIM Bangalore Course Coordinator and Editor
IGNOU, New Delhi School of Management Studies
IGNOU, New Delhi
Prof. Rajat Kathuria
IMI, New Delhi

Print Production
Mr. A.S. Chhatwal, Asstt. Registrar (Publication),
Sr. Scale, SOMS, IGNOU

June, 2004 (Revision)

© Indira Gandhi National Open University, 2004


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 University’s Office at Maidan Garhi, New Delhi-110 068.

Printed and published on behalf of the Indira Gandhi National Open University, New Delhi,
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Paper Used: Agro-based Environment Friendly

Laser Composed by: ICON Printographics, B-107 Fateh Nagar, New Delhi-110 018

2 Printed at:
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.

Sectoral Applications-I MS-65: MARKETING OF SERVICES
Course Components




1. Marketing of Services: Conceptual Framework

2. Role of Services in Economy
3. International Trade in Services, the WTO, and India
4. Consumer Behaviour in Services


5. Product and Pricing Decisions

6. Place and Promotion Decisions
7. Extended Marketing Mix for Services


8. Service Quality
9. Managing Capacity/Demand
10. Retaining Customers


11. Financial Services Issues in Social Destination

12. Tourism and Hospitality Services Marketing India
13. Health Services Marketing of Health
14. Case Study: Serving the Global Indian


15. Educational Services

16. Professional Support Services: Advertising Agencies
17. Telecommunication Services
18. Product Support Services
19. Case Studies
1. Is the Customer Always Right?
2. The Case of Dosa King.

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.

11.1 Introduction
11.2 Buyer Behaviour for Financial Services
11.3 Branding of Financial Products
11.4 Channels for Distribution for Banking
11.5 Pricing of Banking Products/Services
11.6 Promotion of Banking Products/Services
11.7 Insurance
11.8 Summary
11.9 Self Assessment Questions

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
Sectoral Applications-I Commercial Loans
Leasing and Hire Purchase
Credit Cards
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

Activity 1
Visit a commercial bank in your city and enlist the financial services offered
by it.


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
Many other contrasts in the behaviour of people could be noted such as Financial Services
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
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) Their preferences have been changed.
ii) Their buying patterns have changed.

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.

Sectoral Applications-I Table 11.1: Family Life Cycle and Banking Needs

Stage Financial Situation Banking Needs

Young Bachelor Stage Few financial burdens, per capita Credit Cards, auto loans, low
income high,income low as cost banking services
compared to future prospects
Full Nest I Married Home buying a priority, liquidity Mortgage, Credit cards,
with young children low, may have working couples Overdraft saving
situation accounts Housing and
durables loans
Full Nest II Older Income stabilized. Good financial Home improvements loans
married with older position. Mid career, comfortable Equity investment, certificate
dependents children position, money involving matters of deposits, money market
deposit accounts, fixed or
flexi-deposits, other
investments services
Empty nest - Older Significantly reduced income Social security services, few
couple, with children loan services, health
now not living at home, insurance services
may be retired.

Source: Adopted from Exhibit 6.4. The family life cycle and Banking needs "Marketing of
financial Service", Ann Pezzullo, American Bankers Association, McMillan.


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, Citibank’s “City” – schemes, Canara Bank’s “Can”-
schemes. 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, Citibank’s
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., Citibank’s
“Citihome, “Citimoble”, and LIC’s “Jeevan Dhara”, “Jeevan Akshay”etc.

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 investor’s 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 competitor’s 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 company’s 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
8 preference is already there.
Branding of financial products has arrived in India in a big way. The first Financial Services
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 Petro-
Chemical’s “Khazana”, Deepak Fertilizer’s “Mahadhan” and others. Most of
the major issues of 1989 were branded - Bindal Agro’s “Goldmine”, Usha
Rectifier’s “Usha Lakshmi”, Essar’s “Steel Bonds” and Larsen and Turbo’s
“L&T Vision”. Banks too have gone in for umbrella branding in big way. For
instance, we have a series of Canara Bank’s schemes like, “Canpep”, Canstar”
and “Canstock”, or, the series of Citibank’s 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 product’s 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 brand’s
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 over-
used. 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 bank’s
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
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.
Sectoral Applications-I
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
Bank’s 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 bank’s 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:

The mass (retail) market: Standard products, relatively inflexible in Financial Services
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 ATM’s, 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
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 bank’s 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.
Sectoral Applications-I
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

12 the pricing and price level.
B) Pricing Methods Financial Services

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) Perceived value pricing
ii) Psychological pricing
iii) Promotional pricing
iv) Skimming

i) 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.
ii) Psychological Pricing: In many pricing systems, pricing is based on
prestige – and can be kept higher to promote the idea of status and
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) Promotional Pricing: This is used for promoting high level of sales or
to clear excess stock which although is with a reduced profit margin.
iv) 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
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.


Promotion is a generic term used for the communication efforts of the firm that
are directed towards achieving the objectives of a marketing strategy.
Sectoral Applications-I The promotion efforts include the marketing communication through
Sales Promotion
Personal Selling
Bank’s 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 Bank’s conscious communication efforts
towards integrating its marketing strategies with business plans. Promotion thus
means the Bank’s 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

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 (Bank’s) 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,

customer’s 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
14 particular. Advertising is significant both as a social and economic force.
Advertising serves as a ‘mouthpiece’ for the organisation’s objectives to be Financial Services
made public.

In simpler words, advertisement makes use of communication process with in-

built psychological and sociological contents which influence the buyer’s
behaviour in advertiser’s 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

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 buyer’s
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

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. 15
Sectoral Applications-I 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 it’s 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

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

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

The publicity handouts or press releases are the commonest form of publicity.
Such a press release must
i) give specific facts
ii) not give any sales promotion suggestion
16 iii) be accompanied by photograph
iv) be prepared/sent well in advance of the function/event. Publicity normally Financial Services
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 bank’s image.

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

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.

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
Sectoral Applications-I – 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 insurance’s 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
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
h) The marketing of insurance services would take together new shape once
banking services, insurance selling and fund management are all inter-
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

c) Strategies for Effective Marketing Financial Services

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

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) Widowed mothers
ii) Un-married mothers
iii) Single parent family
iv) Multipurpose products

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

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 19
Sectoral Applications-I 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
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
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.

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 organisation’s 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.

Sectoral Applications-I 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
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.

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.

12.1 Introduction
12.2 Factors Governing Tourism Demand and Supply
12.3 Segmentation in the Tourism Market
12.4 The Hotel Market
12.5 The Hotel Product
12.6 Hotel Pricing and Distribution
12.7 Communications
12.8 Extended Marketing Mix for Hotels
12.9 Marketing Consortium or Cooperatives
12.10 Summary
12.11 Self-Assessment Questions
12.12 References and Further Readings

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 sub-
industries. 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
Sectoral Applications-I 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 Tourist Industry Travel destination

influenced by: Intermediaries influenced by:
rising incomes travel agents historical
increased mobility connections
tour companies
improved transport
hotel companies
nature of tourist
marketing companies
search for foreign

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
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.


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
a) Income Levels Tourism and Hospitality
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 self–esteem, 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.
Sectoral Applications-I 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
i) Explorer: Very limited in number, these tourists are looking for discovery
and involvement with local people.
ii) Elite: People who favour special, individually tailored trips to exotic
iii) Offbeat: These are filled with a desire to get way from the usual
humdrum life
iv) Unusual: Visitors who are looking forward to trips with peculiar
objectives such as physical danger or isolation.
v) Incipient Mass: A steady flow, travelling alone or in small organized
groups using some shared services.
vi) Mass: The general packaged tour market, leading to tourist enclaves
vii) 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
ii) Diversionary: When the visit is a true escape from the boredom and
routine of home life.
iii) 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.
iv) Experimental: When the tourist wants to experiment with lifestyles
other than his own.
v) Existential: The type describes a tourist who actually acquires a new
spiritual centre as a result of the travel experience.

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 Tourism and Hospitality
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.


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: 27
Sectoral Applications-I Table 12.1: Some Major Tourist Segments and their Main Marketing Characteristics

Main Tourist Segments

Marketing Holiday Tourists Business Tourists Common
Characteristics Interest Tourists

1. Typical Destination Resort-orientated Big City Visit friends,


2. Seasonality High, marketing mix No seasonality Partial seasonality

can assist however in
spreading demand

3. Length of Stay Could be influenced Normally short and Prefer long stay.
by promotion/ cannot be prolonged This will be
communications by advertising prolonged if the
costs of additional
stay are

4. Mode of Transport Varied mode(s) of Airplane invariably. The cheapest

transport. Time Objective is to mode of transport
spent on the way reach the destination
to destination is as soon as possible
part of the holiday
or package tour.

5. Hotel Accommodation Yes. Normally at Yes, normally Only to a very

User un-expensive hotels expensive hotels limited degree

6. Requires Entertainment Very much so. Yes, but to a limited No

Normally the degree
entertainment is part
of the tourist package.

7. Price Sensitivity Very sensitive Low price elasticity Sensitive

(high price elasticity of demand
of demand)

8. Role of Advertising/ Very important Rather limited Quite important,

Marketing particularly sales
Communication promotions are

9. Tour Package(s) Of great interest and Of no appeal at all Limited appeal

Importance demand

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.

b) Psychographic Segmentation: Using lifestyle and personality variations Tourism and Hospitality
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


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
ii. Displacement demand arising from
the clientele for other hotels where
the customers’ needs are not fully
met by the market package offered.
Secondary level i. 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
ii. Futuristic demand which may occur
at sometime in the future, due to
certain socio-economic or socio-
psychological 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.

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 29
Sectoral Applications-I 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
Traveling businessmen.
Visiting personnel, i.e., business or
industrial employees for whom
travel is an occasional part of their
Organised tours.
Conventions, conferences,
workshops, meetings, where the
location is pre-fixed by the
Social visitors, i.e., guests to
weddings or other social functions.

Catering Occupant customers staying in the

Transit or change customers-
people 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
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.


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.

Philip Kolter has identified 5 levels of a hotel product. These levels are: Tourism and Hospitality











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

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 hotel’s 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.

Sectoral Applications-I Table 12.4: Hospitality Product Augmentation

Accommodation Food and Beverage

Reservation system convenience Speed of food service
Reservation system simplicity Ordering convenience
Acknowledgement of reservations Telephone
Lift attendants Advance orders
Room service Order-taking table staff
Standard of housekeeping Complaints procedures
Courtesy Advance reservations
Procedures for handling overbooking Reliability of food/beverages quality
Information service Customer advice on wines
Customer recognistion Provision of special foods
Credit provision Cooking to order
Baggage handling Acceptance of credit cards
Pet/child care Variations in portions
Provision for disabled Home deliveries
Group accommodation Extent of non-available menu items
Discounts on club referrals, etc. Fiber /calorie information
Cleaning/laundry Provision of doggy-bags
Courtesy care Function-catering facilities
Willingness to bill later Quality of table appointments
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.


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.
Hotel distribution relies on interdependence with other industries serving
travellers and tourists such as the transportation industry (airlines, railways,
roadways, shipping lines), travel agents and tour operators, national and state Tourism and Hospitality
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 franchisee’s properties. At
the same time, the franchiser’s 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.

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 hotel’s 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
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..

Sectoral Applications-I 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 advertiser’s product or

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 guest’s 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:
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 Tourism and Hospitality
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

Toincrease 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,

To 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
– 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

To 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

To effectively counter wrong impression created by:

– Competitors
– Media
– Public Opinion

To educate guests/customers on:

– Conveniences
– Atmosphere and general finesse
– New facilities/services provided

To create favourable image of hotel:

– Good employer
– Good corporate citizen
– Role in the community
– Foreign exchange earner
– Developing and supporting ancillary-supplier industries/business
Sectoral Applications-I Determining and Creating Specific Advertising Message
With a penetrating knowledge of the consumer’s wants and the product’s
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
kind towards advertising expenditure. A fourth method is to achieve competitive Tourism and Hospitality
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 industry’s 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 off-
season 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-of-
sale material, i.e., posters, show cards, display units, etc., help keep in
perspective the view that one can’t 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. 37
Sectoral Applications-I 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 Example

1. Price-off Promotions Special terms for specific clients at specific
time; e.g., off-peak discounts: discounts
for specific departure/hotel stay dates or
times, etc.
2. Premium Offers 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.
3. Couponing 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.
4. Contests (consumer) Prizes awarded to consumers winning
special contests, e.g., free holdings/stays.
5. Contests (trade) Prizes awarded to travel trade winning
special contests, e.g., free holidays/stays,
or other articles, usually products of the
destination country concerned.
6. Loyalty Schemes “X” sum of money off next booking if
done within a certain period of time; “Give
away” to loyal customers.
7. Trade Incentives/Discounts Offered to retailers/wholesalers for
achieving specified sales volumes, e.g.,
bonuses, override commissions, quantity
or volume discounts, etc.
8. Guarantees Money-back guarantees in case of
cancellation of flights, tours failures, bad
weather, etc.
9. Credit Schemes 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.
10. Cooperative Advertising Allowance or financial assistance given to
a tour operator or travel retailer
advertising specified hotel/product.

Tourism and Hospitality
11. Training Schemes Free familiarisation tours for travel agents/ Services
tour operators; training seminars and
briefings for sales personnel, etc.
12. Merchandising Support Free display material and other selling aids
offered to retailer/wholesaler as a part of
the special campaign.
13. Quiet Weekend 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.
14. Welcome-cocktail 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.
15. Honeymooners Return Trip 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.
16. Discount for Agents and Airlines’ Travel sales promotional efforts help in
Crew developing good relations with the travel
trade and may help in getting favourable
17. Free Ticket for Sound-n-Light Some of the hotels give free tickets to
Show their guest for sound and light shows
conducted in their hotels. This promotional
effort helps in developing and cementing
good guest relations.
18. Sun-n-shine Guarantees 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.
19. Consumer Contests Some hotels in collaboration with
consumer goods organisations, organise
contests for joint promotion.

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
Sectoral Applications-I 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 don’t 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, one’s effort to create consumer satisfaction may very well be
frustrated. So another area to exercise good public relations is employee Tourism and Hospitality

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 organisation’s 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

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. 41
Sectoral Applications-I 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.


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
Table 12.7: Servicescape and Other Tangibles in a Hotel

Servicescape Other Tangibles

Facility exterior Business cards
Exterior design Stationery
Signage Billing statements
Hotel gate area Reports
Landscape Employee dress
Parking Uniforms
Surrounding environment Brochures
Internet/Web page
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

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
42 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 Tourism and Hospitality
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 can’t 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


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.

Sectoral Applications-I 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.

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.

Tourism and Hospitality

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.

Sectoral Applications-I
After going through this unit you should be able to:
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.

13.1 Introduction
13.2 Types of Health Services
13.3 Pricing of Health Services
13.4 Implementing the Pricing Policy: Strategic Considerations
13.5 Service Quality in Health Care
13.6 Marketing Communication for Health Care Services
13.7 Case Study
13.8 Summary
13.9 Self Assessment Questions
13.10 Further Readings

The Indian Health Care Market is more of seller’s market. The demand far
outstrips the supply. As in case with any other product or industry in a seller’s
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.
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
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.


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. 47
Sectoral Applications-I 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